Cable initiatives set stage for competition

Atlantic Canada is known for its ingrained sense of community spirit and welcoming elan, two excellent qualities for a community set to host Cableroute ’95, the 38th annual Canadian Cable Television Association convention.

More than 1,500 delegates from across Canada and the u.s. are expected to attend the four-day convention and Cablexpo trade show, being held at the World Trade Convention Centre in Halifax, May 28-31.

‘The convention is a big event in Halifax. There are lots of excited people here and more than 200 local volunteers have turned in a stellar performance,’ says Cableroute ’95 host chair Charles Keating, chairman of Access Cable Television, Dartmouth, n.s.

Keating says the annual ccta confab, set in many of the locales reserved for the G7 leaders meeting in early June, serves to rejuvenate the industry and brings delegates up to speed on the many vital issues now facing the cable industry.

But it’s not just business.

Halifax’s historic waterfront is a great place to sit back and have a drink with friends and colleagues, and Keating says the ccta has planned tours and parties throughout the week, including a lobster bash and a champagne brunch.

Keating says the business and technical issues confronting the cable industry have never been more crucial.

Topics on Cableroute ’95’s agenda include the rapid move towards competition with direct broadcast satellite services and the telephone industry, the advent of advanced cable services and new business opportunities, cable’s entry into Canadian classrooms, the January specialty channel launch, and the fast-approaching rollout for dvc-based network architecture.

Challenges & achievements

At the convention’s opening-day national report session, new ccta president Richard Stursberg and chairman Pierre Simon will be joined by some of the top names in the industry – Rogers Communications’ Ted Rogers, Shaw Communications’ J.R. Shaw, Groupe Videotron’s Andre Chagnon and Fundy Cable’s Bill Stanley – as they highlight cable’s challenges and achievements.

crtc chairman Keith Spicer is also scheduled to address the convention’s opening session, bolstered by a keynote speaker lineup that includes CTV Television Network president John Cassaday, Heritage Minister Michel Dupuy and Industry Minister John Manley.

By far the main challenge facing the cable industry is the complex issue of competition, firstly, against the new dbs services and, down the road, against the much richer telephone companies.

Stursberg says cable’s position ‘is very simple: yes to competition, but no to any unfair advantages.’

He says the telcos should not be allowed to compete in core cable services until cable companies can effectively compete in local telephony, with no economic advantages to the telcos, including subsidizing local telephone service through long-distance revenues.

According to Stursberg, a former executive vice-president with Unitel, ‘the telcos want to appropriate Canada’s cable system and monopolize both systems.’

Stursberg says letting the telcos use existing cable systems under certain conditions ‘is not a good recipe for competition.’

‘If they want to get into the cable television business they should build their own systems,’ he says.

Former ccta president Ken Stein, now senior vp corporate development and regulatory affairs at Shaw, says the cable industry favors more competition. But, he adds, ‘we are concerned about the telephone companies. We don’t believe they believe in competition. They want a mega-monopoly. They want to rob it (the cable system) from us.’

Shareholders should pay

If the telcos are determined to deliver core cable services, they’ll first have to invest between $4 billion and $15 billion to build their own broadband system, says Stursberg.

And cable intends to press the crtc with great vigor to ensure the telcos’ Beacon Initiative is financed by shareholders and not by subscribers.

This key issue is under discussion at this month’s crtc split-rate base hearings.

The hearings were called to examine how to split the telephone companies’ rate base between competitive and utility segments, and rate rebalancing in local telephony, a key requirement for competition, says Stursberg.

Stein says cable is concerned the telcos will build their entry on the backs of subscribers.

‘Shareholders should pick up the tab,’ he says, adding there are ominous warning signs subscribers may be asked to pay the bill, not the least of which is the request by the telcos for a hike of up to 50% in local telephone rates.

The ccta wants the telcos’ broadband activities to be subject to ‘structural separation,’ and it wants price-cap regulation to replace rate-base and rate-of-return regulation. From an accounting perspective, the ccta says the rate-base rules are ‘subject to abuse by the telcos and provide both the incentive and opportunity to cross-subsidize their proposed Beacon plans.’

And scale is important, too, says Stursberg, adding that the telcos have annual revenues of $13.5 billion and a free cash flow of $3 billion, while cumulative annual revenues for cable are pegged at $2.2 billion and free cash flow at between $300 million and $400 million a year.

Cable’s core positions

In its strategy document for the information highway, Canadian Vision of the Information Highway, the ccta outlined three central positions:

– There should be at least two strong and competitive networks linking all Canadian homes, businesses and communities;

– Competition in all non-broadcasting and telecommunications should begin immediately;

– All the licensing rules applied to broadcasting should be fully applied to the telcos if and when they begin to compete in the delivery of broadcast services.

Stursberg says the cable industry provides important support to the Canadian broadcasting system through linkage and tiering regulations as well as simultaneous substitution and through its support of community cable channels and production funds.

‘Anyone who wants to distribute broadcasting services should make the same contributions,’ he says.

In general terms, Stursberg says cable’s investment in the broadcasting system beyond capital costs incurred by simulcast substitution include $250 million over five years through the Cable Production Fund, and 5% of basic service revenues, used for community program channels, ‘a key training area for the Canadian production industry.’

And the ccta has joined a wide spectrum of broadcast and production industry interests opposing submissions made by Stentor, Telus and the Director of Investigation and Research under the Competition Act, specifically the telcos’ and the Director’s call for a reduction in support rules for the Canadian broadcasting system and allowing foreign interests to hold broadcast licences.

‘The economics of Canadian television production show that the addition of channels without any Canadian content requirements will lead only to an increase of cheap, readily available u.s. programming,’ says the ccta.

DTH competition

‘We have no problem with competition from direct-to-home, but it’s very important that we don’t wreck the Canadian broadcasting system. We’ve built a terrific system under great difficulty because of our proximity to the United States and everyone has to play with their cards on the table,’ says Stursberg.

As for the Power DirecTv bid, Stursberg says: ‘We’ve never really seen a licence from these people. It’s a bit like the dance of the seven veils. The government says these services have to be licensed, that’s a good start.’

DVC rollout in fall ’96

Stursberg says cable would like the dvc rollout to take place as soon as possible, but set-top boxes are not yet available in commercial quantities.

Harris Boyd, ccta vice-president, communications, says Canada’s largest cable companies, including Rogers, Shaw, Videotron, Cogeco and CF Cable, reached an agreement earlier this month on a standard for set-top boxes.

u.s. company General Instruments will manufacture the boxes, ‘about two million of which are needed for a viable commercial rollout.’

The commercial rollout will begin in the fall of 1996, says Boyd.

Sooner is better than later as far as the cable industry is concerned, says Stursberg, ‘because it would allow us to compete with the new direct-to-home guys and create channel capacity for new services.’

Stursberg says cable will take aim at the higher and lower ends of the market – big-city subscribers interested in premium pay-tv and pay-per-view services as well as underserved subscribers, often in isolated rural communities.

Marketing new services

It is not clear whether the cable industry has developed a consensus on negative-option marketing, but tied-selling practices appear to be a thing of the past.

Stursberg says negative-option marketing was successful in the past, ‘because firstly, it’s less expensive for subscribers who only have to say, `no thanks,’ and secondly, it facilitates better penetration by the new specialty channels.’

Paul Gratton, station manager at Bravo!, says specialty services probably need a year of operation before penetration levels can be properly evaluated.

‘The subscriber level changes every month when the (cable) bill comes,’ he says.

A la carte myth

Gratton says the media has helped perpetuate ‘the a la carte myth’ – the notion that complete consumer choice, as opposed to program packages, is somehow cheaper.

‘If the specialty services were delivered only on an a la carte basis, the cable bill would actually be more. (The consumer) is still better off buying the package,’ he says.

And at $2.65 for six new channels, Gratton says it’s a bargain – cheaper than the cost of a single video rental.

Gratton says the market seems highly volatile but the trend is upwards.

He says consumers were more opposed to tied selling than negative-option marketing.

‘We were all distressed at the shenanigans of tied selling, but we (program suppliers and cable companies) are all hitched to the same goodwill train. We’re certainly ready to get behind any telemarketing efforts, and we’ll help in all possible ways,’ he says.

Access Cable’s Keating says his company hired 30 telemarketers for a positive marketing campaign aimed at 40,000 subscribers. The program was a success, he says, with penetration at the 70% level.

‘Here’s the bottom line,’ says Keating, ‘I don’t think you’ll ever see negative marketing again.’

Keating says specialty channels can no longer be forced into homes, ‘and that broadcasters better understand (a new service) has to have a sustainable demand in the world of competition.’

According to Stein, the worst problems for the specialty channel launch in January occurred in b.c. and the Toronto area where ‘the typical Canadian attitude of `If it’s Canadian it can’t be good’ was at the root of consumer discontent.’ In Quebec and Atlantic Canada, he says, the launches were quite successful.

Cable Production Fund

The cable industry’s most important initiative, and the basis of its new-found peace with producers and broadcasters, is its five-year, $250 million Cable Production Fund, which officially came online earlier this month.

The ‘first come, first served’ fund will work as ‘a top-up to broadcast licence fees,’ and there is wide consensus cable has made a smart move in hiring executive director Bill Mustos to manage the cpf.

Mustos came on board in December and spent the following two months talking to 500 broadcasters and producers in eight Canadian cities. The experience was ‘a real eye-opener,’ he says, and resulted in a number of rule modifications, including changes to certain licence fee thresholds.

Mustos says the cpf is projecting $40 million in disbursements in the next 12 months, but it could go as high as $50 million.

According to Mustos, major cable companies have demonstrated goodwill by providing early projections for their contributions. The contributions to the fund are ‘voluntary’ and are tied to a sunset capital expenditure/subscriber pass-through formula called capex. ‘They were under no real obligation (to ante up) until the formula is settled,’ he says.

The cpf has already pinpointed an anticipated $20 million worth of probable applications based on informal talks with selected producers, says Mustos.

Increased flexibility

One of the major concerns expressed by the production industry is the eight out of 10 point requirement for admissible programs, which effectively excludes most international coproductions.

Micheline Charest, ceo of Montreal’s Cinar Films and an active coproducer, says the crtc requirement is another example of the lack of cohesiveness in Canadian audio-visual policy.

‘This in itself is, in my opinion, a misguided decisionÉit has de facto eliminated just about every coproduction from being eligible as they cannot qualify under that rule at a time when producers need this money. This not only contradicts efforts made in other departments to facilitate coproductions, but once again presumes that accessing foreign partnership compromises Canadian programming,’ says Charest.

Mustos says he understands the crtc’s concern that only ‘truly Canadian’ projects have access to the fund, and promises the cpf will monitor results carefully.

He says the fund will apply criteria used by Telefilm Canada’s coproduction office in Montreal, ‘a more flexible, holistic approach to coproductions.’

That means the cpf will not use cavco’s strictly domestic calculation, but will do its own independent point assessment, splitting points where feasible for directors, writers and talent.

‘It will allow those truly Canadian official treaty coproductions to have access to the fund and still maintain the crtc’s ruling,’ says Mustos.

Market-driven fund

But the biggest stumbling block to date is a lack of understanding by broadcasters that the cpf is designed as a top-up fund and that broadcast licence fees quoted in applications must reflect the total licence fee, including the cpf portion, says Mustos.

‘I think one of the things we really want to show is that cpf is a market-driven initiative,’ he says.

The cpf contribution is maximized via high licence fees and its primetime scheduling requirement for drama.

Says Mustos: ‘It is the broadcast market that dictates what has value by licence fees and scheduling.’

He says broadcasters have been somewhat shy ‘because some of them still don’t understand that they are on the hook for only the cash portion (and not the entire licence fee).’

And he says producers will benefit because of the top-up application.

This approach has ramifications for both the federal and the various provincial tax credits and rebate programs, and means the cpf contribution will be admissible on credit claims.