Montreal: Sparring between the telephone companies and the cable industry is predictably vigorous as both sides prepare for an extended crtc hearing on new broadcast distribution regulations scheduled to begin Oct. 7.

Private broadcasters and independent producers are keeping a wary eye on both, according to first round interventions filed mid-July. Round two is due Aug. 15.

While the hearings are intended to establish ground rules for a more competitive Canadian broadcasting system in the future, both cablecos and the telcos have drawn battle lines extending beyond television to include the provision of local Internet access and telephone services.

Both Stentor Telecom Policy, representing Canada’s major phone companies, and the Canadian Association of Broadcasters have come out firmly against cable’s plan to split future program contributions, while the Canadian Association of Broadcasters is threatening legal action as a result of the crtc’s elimination of an acquisition benefits test for cable, but not broadcasters.

On the telecom side, there’s deep-seated suspicion cable will use its leverage to restrict free access by programmers, a mirror conviction matched by cable, which says it is solidly opposed to reselling extra capacity to the telcos.

cab president Michael McCabe says the telcos have yet to firm up their entry plans but have ‘a strong ally in the minister of industry. I think at this point they (the telcos) are playing a masterful game of not providing too much detail.’

And both the cab and the cftpa are asking for a major overhaul and expansion of existing simulcast and substitution rules.

All parties are calling for fair competition, but the good fight will be about money.

Cable is facing an investment of between $5 billion and $6 billion as it introduces dvc over the next five years, while the telcos have pegged their investment in a broadband network at $8.5 billion over 10 years.

Currently, on a yearly basis, the telcos have about $6 billion in pretax earnings and $2 billion in free-cash flow (dividend spending) and $1 billion in profits.

The cable companies have much less money.

Canadian Cable Television Association president Richard Stursberg pegs pretax (plus interest and depreciation) earnings at $858 million a year, and says cable has a negative free-cash flow of over $250 million and profits of $48.6 million.

Return on equity for the telcos is more than double that of the cable industry.

Stursberg says there isn’t a lot of borrowing room left and the cable industry is aggressively exploring the American high-yield bond market.

Resale of capacity

At this point, the telcos may have to rely on government policy obliging cable companies to resell or lease capacity.

Stursberg says the telcos want to cross-subsidize their entry into the broadband business by ‘jacking up local telephone rates.’

‘We don’t have any available wire space,’ he says. ‘They’re talking about leasing 60 channels. That’s crazy.’

‘It’s not a matter of goodwill but of regulatory policy,’ says Sarah Anson-Cartwright, national director, government relations, Stentor Telecom Policy. ‘Resale as a notion is kind of a given on the telecom side, especially if government expects some balance between telephony and cable and real competition in broadcast distribution in the near future.’

The crtc may view the household cable hookup in the same way it characterized telephone lines in homes, she says, ‘as a bottleneck facility that be made available and otherwise can’t be duplicated. That’s the only basis on which true bundling of services can happen.’

Resale, essentially the rebilling of an existing cable service, would allow for early market entry and competition during the medium and long-term building of a proprietary telecom broadband network, says Anson-Cartwright. ‘It’s an interim opportunity to provide competition.’

Anson-Cartwright says one of the primary concerns for Stentor is ‘monopoly operators’ (cable) who will use their considerable leverage to develop exclusive relationships restricting programmers and broadcasters from signing on with the competition.

McCabe says there should be ‘unfettered access’ to all distribution systems and ‘broadcasters will press for full access.’

Says Anson-Cartwright: ‘Think of the words of John Malone, head of the largest cable company in the world (TCI Telecommunications), who said, `The first line of defense against competition is programming. It’s an obvious approach.’ ‘

She says ‘a prohibition against exclusive arrangements’ has been adopted by fcc regulators in the u.s., adding cable in Canada has even higher levels of concentration. ‘It’s naive to think cable operators won’t resort to the same competitive strategy.’

Deregulation threshold

The telecos are also ‘concerned’ with the crtc’s proposed ‘10% availability standard for (rate) deregulation’ because it sets ‘too low of a threshold’ and could lead to either higher prices for consumers, assuming an effective monopoly, or a low-ball or anti-competitive price strategy aimed at sinking the competition in key urban markets.

‘In the long-distance market, for example, we have lost close to 30% market share and the commission has yet to decide to relieve us of regulation,’ says Anson-Cartwright.

Stursberg says the 10% standard is relatively tough as cable will face competition (from dth) as early as next year.

The broadcasters are seriously unhappy with the crtc policy announcement relieving cable companies of an acquisition benefits test.

McCabe says there was no hearing, and anyway, there’s much more competition in broadcasting than distribution.

Stursberg replies the cable industry is largely consolidated, and as such, has already paid out the benefits.

He says the report of a $1.2 billion ‘gift’ to cable (based on not paying benefits) is an invention of The Friends of American Broadcasting, an organization he says is fronting the entry of u.s. broadcasting into Canada.

‘The truth is The Friends of American Broadcasting are busy arguing that companies like B.C. Tel, which is controlled (51%) by gte in the u.s., should be able to hold Canadian broadcasting licences.’

The Friends of Canadian Broadcasting have called for an across-the-board 10% production fund tax on distributors, including cable.

The cable industry intends to relaunch the community channel, which it calls its ‘most under-utilized resource.’

In a wide-ranging executive summary, the cftpa says it can accept contributions of between 1.7% and 2% (of gross revenues) for community programming, but points out the government’s dth directive to the crtc says distributors ‘should include a financial contribution of more than 5% of gross annual revenues to the production of Canadian programming.’

The cftpa does not want cable funds taken from primetime Canadian programming and diverted to ‘a service that (cable) has now identified as a competitive advantage.’

‘The real need is the primetime programming and dividing resources makes no sense whatsoever,’ says McCabe. ‘We’ve argued further that the community channel should be seen as a competitive advantage for cable if cable is going to compete with the telephone company. It’s not an obligation, it’s a competitive marketing tool.’

McCabe says the solution is for more local co-operation between broadcasters and cable. ‘I think the commission is still suffering from cable hangover, there are parts of this that are still soft on cable,’ he says.

The telephone companies accept the 5% funding level proposed by the crtc but want funding rules applied fairly to all applicants, says Anson-Cartwright.

‘ccta is clearly deviating from what the commission has proposed. They’re (cable) saying they would like at least 2.5% of their 5% contribution to go to community programming. That’s not appropriate from our point of view.’

Anson-Cartwright says many of the (1996-69) submissions ‘take great exception to the way the cable operators have been using the community channels for their own marketing and branding and other purposes.’

Community programming

Stursberg says it’s essential to have both primetime Canadian programs and community programs and points to the widespread misconception community programming is not watched by Canadians.

Stursberg says the community channels have ‘as much audience as most of the specialties.’

‘But the plain fact of the matter is that the community channels (air) 250,000 hours of programming a year on 220 different channels for an extremely small amount of money, and this is fundamental to most communities,’ he says.

Stursberg says most of the local private tv stations ‘produce nothingand moreover, most of the private broadcasters are withdrawing from local into regional, it’s their euphemism for abandoning people at the local level.’

McCabe says the crtc should set up a 1.5% funding ‘guideline’ for community programming outside the obligation to direct 5% of gross revenues to a program fund, if and only if, there is no effective competition in a particular market.

Both cab and the producers associations want a major extension of existing simulcast rules and the introduction of new substitution rules.

McCabe says the simulcast rules should be extended to all (smaller) class 2 distributors as well as modifications allowing for the substitution of different episodes of a strip program within a given series cycle.

McCabe says distributors should be required to choose u.s. network signals for distribution in their markets from the same time zone, adding current losses to u.s. border stations are in the $40 million to $65 million a year range.

The other distribution undertakings who’ll take part in the October hearings include dth (Expressvu, Homestar and possibly Power DirecTv), over-the-air cable or wireless cable (mmds).

Government has called for lmcs licence applications from promoters apparently ready to invest many millions of dollars, excluding cable operators from the first round.