Proceedings of the Subcommittee on
Communications
Standing
Senate Committee on
Transport and Communications
Issue 3 - Evidence
OTTAWA, Monday, December 2, 1996
The Subcommittee on Communications of the Standing Senate Committee on Transport and Communications met this day at 2:00 p.m. to study Canada's international position in communications.
[English]
Senator Marie-P. Poulin (Chairman) in the Chair.
[Translation]
The Chairman: Mr. Ménard, welcome to the Subcommittee on Communications. What will enable Canada to remain in the international forefront of communications in the year 2000 or, in other words, tomorrow? Even though this is a complex and rapidly evolving area, we will look at four aspects of the subject, namely the technological aspect, the human aspect with regard to present and future resources, the cultural aspect with regard to our message content, and finally our commercial alliances.
My colleagues have been held up a bit. Senator Rompkey, whom I'm awaiting from Newfoundland, is stuck in a snowstorm in the eastern part of the country, and Senator Spivak, who is coming from Manitoba, has been caught in a storm in the west. I have just come back from Sudbury. In Northern Ontario, we always have good weather, so we can't complain.
I am pleased therefore to welcome you here. I would ask you to introduce your team and to go ahead with your presentation. We could take about 45 minutes. My clerk tells me that what you have to tell us is so important that you can have an hour and a quarter. We will be with you until 3:15 p.m.
Mr. Gilles Ménard, Deputy Director, Investigation and Research (Civil Matters), Industry Canada: Madam Chairman and Senators, it is a pleasure for me and my colleagues to appear before you and your committee today on behalf of the Director of Investigation and Research, under the Competition Act. Ms Rachel Larabie-LeSieur is Deputy Director of Marketing Practices. She is responsible for those provisions of the Competition Act dealing with misleading advertising and issues related to telemarketing. David McAllister is a senior officer in the Civil Matters Branch. He has been extensively involved in the bureau's communications related activities over the past three years. I am Gilles Ménard and I am responsible for the civil provisions of the Competition Act and also for regulatory interventions by the Director of Investigation and Research.
On behalf of the director, we welcome this opportunity to participate in your public consultation on Canada's international competitive position in communications. I have a few opening remarks and look forward to responding to your questions.
The Competition Bureau is responsible for the administration and enforcement of the Competition Act. The bureau's communications work is threefold.
First, intervening before the CRTC with respect to competition issues; second, enforcing the criminal and civil provisions of the Competition Act; and third, providing competition policy advice within Industry Canada and to the government generally.
To help the members of the committee better understand the positions taken by the bureau on the major competition issues facing Canada's communications sector, we have provided copies of a number of public statements, including the bureau's more recent submissions to the CRTC and the government.
These submissions deal with various aspects of convergence policy, long-distance and local communications competition, regulatory forbearance, and the future of Teleglobe's mandate. I don't wish to burden your record unnecessarily, but I hope these submissions will serve as useful background and reference material for our discussion today.
[English]
There is virtual agreement that advances in communications hold the key to Canada's prospects for investment, economic growth, job-creation opportunities and international competitiveness. There is also widespread acceptance of the fact that competition and market forces are far more effective than regulation in bringing economic benefits to consumers of communication services.
Effective competition forces prices towards their costs, induces firms to produce goods and services desired by consumers, and spurs innovation in new technologies, products and services.
The most remarkable feature of the communications sector is the rapid pace of change and innovation brought about by technology and the computer revolution. For example, since last December, four PCS licenses and two LMCS licenses have been granted by Industry Canada. ClearNet and Microcell are now selling PCS services. Meanwhile, CellularVision and MaxLink are preparing to roll out their LMCS networks.
Last month, several cable companies announced introduction of Internet services. Some have indicated their desire to offer telephone services. Long-distance carriers, such as Sprint and AT&T Canada, have also indicated that they will be entering local markets.
MMDS, a new form of wireless cable television has commenced commercial operations in Brandon, Manitoba, only a few weeks ago. Similar licenses are likely to be granted for southern Ontario and Saskatchewan. At some point, it is hoped that we will also have Canadian DTH services.
In the time available today, I want to offer the Competition Bureau's perspective on the fundamental principles which we believe should govern the transition from monopoly to competition in the delivery of local communication services in Canada.
As you know, the Canadian government is currently involved in negotiations at the World Trade Organization as the nations of the world are trying to further open telecommunications markets to competition. Meanwhile, the CRTC is completing a series of interrelated proceedings to introduce competition into the local telecommunications and broadcasting distribution markets.
One of the issues in the WTO negotiations is the future of telecommunications monopolies. The Government of Canada is currently reviewing the statutory monopoly of Teleglobe Canada in respect of the carriage of international telecommunications traffic. In its submission to the government last year, the bureau advocated that Teleglobe's monopoly not be renewed when it expires on March 31, 1997.
In our view, Teleglobe can no longer be looked at in isolation from the changes that are taking place in Canadian and international telecommunications markets. In a market for international telecommunications services which is becoming increasingly global, it is difficult to justify extending Teleglobe's statutory monopoly and, thereby, denying the users of its facilities the benefits of growing international competition.
The outcome of the WTO negotiations and the CRTC's proceedings will determine the extent to which convergence and effective competition in communications become reality and not just some trendy buzz words. The bureau believes that the overriding objective of reforming telecommunications regulations should be to maximize the benefits which business and residential customers will receive from rivalry among competitive communication networks.
A major issue confronting policymakers at the moment is to determine how the transition from monopoly to competition in the communications sector should take place.
How long should the transition be? What rules and consumer safeguards should apply during the transition? To whom should those rules apply?
The term "transition" implies a beginning and an end. We at the Competition Bureau think it is inappropriate to think of the transition in those terms. The transformation of the communications sector will be ongoing, at the very least from a technological viewpoint as computerization, digitization, convergence and global competition evolves.
The Competition Bureau believes that certain fundamental principles should govern the regulatory framework for the development of competition in communication services.
In summary, these principles are: First, maximize the reliance on competition and market forces at the outset; second, minimize regulation of incumbents and avoid imposing economic regulation on new entrants; third, adopt market-based pricing as soon as possible in local telecommunications and, if necessary, introduce specific, targeted mechanisms to address social policy objectives; fourth, establish clear rules governing incumbents' obligations to provide access to their networks by competitors and adopt appropriate pricing principles to induce efficient competition; fifth, establish timely and effective dispute resolution mechanisms to ensure that incumbents do not attempt to delay access to their networks; and, finally, liberalize foreign-ownership rules to assist in the rapid construction and development of communications networks.
Foreign direct investment is becoming one of the major forces in integrating the global economy. Accordingly, foreign-ownership limits in telecommunications are an important component of the current negotiation of the World Trade Organization.
For several years, the Competition Bureau has favoured the relaxation of foreign-ownership restrictions. We have done so for two reasons. First, some have suggested that it may require as much as $30 billion to construct the Canadian information infrastructure. Foreign-ownership restrictions also impose significant cost on the domestic communications industry in terms of limiting access to financial capital resources by both incumbents and potential competitors. For example, the Canadian cable television industry has a limited financial base to support the upgrade of existing communications infrastructure and to support new entry into content and service delivery.
Second, restricting foreign enterprises leads to reduced competition in this sector relative to other areas of the economy and relative to other nations where equivalent restrictions do not apply. By reducing the pool of capital available and the number of potential competitors in the domestic market, we limit the choices, quality and prices available to Canada's residential, business and institutional customers.
There are three aspects of the evolution from regulation to reliance on market forces that I want to stress today: First, in advocating regulatory reform and greater reliance on market forces, the Competition Bureau does not question the government's social policy objectives as they relate to universality of affordable telecommunications services or the cultural objectives of the Broadcasting Act.
What we have done, however, is question whether various policy instruments which were developed during a time of regulated monopolies are compatible with the emergence of competition and the revolutionary advancements in technology. We are of the view that competition can play a major role in attaining social objectives. However, where some additional government intervention is required, policy alternatives which are least restrictive of competition should be chosen.
Second, we share with the CRTC a common goal of fostering the growth of competitive communications markets.
Finally, it is important to underscore that competition law is not a substitute for regulation. As markets are deregulated, it is competition in the marketplace which will replace regulation. The Competition Bureau does not regulate and has no legislative power to so do. Rather, our mandate is to enforce the criminal and civil provisions of the act.
With competitive markets evolving and the Commission increasingly exercising its forbearance powers under the Telecommunications Act, the Competition Bureau is becoming less involved in the regulatory interventions and increasingly involved in enforcing the substantive provisions of the Competition Act in the telecommunications sector.
As an example, in the past year, the bureau has been called upon to address competition issues in several network industries undergoing profound technological change -- including telecommunications, broadcast distribution, banking, electricity, postal delivery services and, yes, even the ultimate network, the Internet. As a regulation is being phased out, we are increasingly being called upon to examine complaints alleging anti-competitive conduct.
The challenge for the bureau in enforcing the Competition Act is to ensure that incumbent firms do not use their market power to hold back the tide; that is, to stifle technological progress or otherwise impose restrictions that deny innovators and consumers the opportunity to reap the benefits of competitive process.
At the same time, we must be careful not to misread market signals and interfere with the healthy competitive dynamics that prevail in those industries undergoing rapid technological change.
Our expectation is that competition issues in the communications industry will involve both the civil and criminal provisions of the Competition Act. This will include provisions dealing with mergers, abuse of a dominant market position, and exclusive dealing. The test for the Competition Tribunal to issue an order under those sections is whether the business conduct or merger in question "is or is likely to result in a substantial prevention or lessening of competition".
In particular, we will be examining mergers among actual or potential competitors, such as a proposed merger involving cable companies and telephone companies. In addition, we expect to receive complaints about the conduct of vertically integrated companies from other firms which compete with them at only at one level of the industry.
The manner in which competitive telecommunications services are being marketed has raised issues under the misleading advertizing and deceptive marketing provisions of the Competition Act. The Competition Bureau has received consumer complaints numbering in the thousands concerning "slamming", which is the switching of long-distance service providers without proper authority. I should clarify that slamming, per se, without misleading representations, is not covered by the provisions of Competition Act.
While the volume of these complaints has stabilized at roughly 50 per month, it is expected that they will rise again with the advent of competition in local telephone services. The Competition Bureau has launched a number of examinations which may result in referrals to the Attorney General for prosecution. The bureau will continue to monitor and enforce misleading advertising and deceptive marketing practices provisions in this area.
Lower long-distance rates have facilitated an expansion of telemarketing activities. Unfortunately, this has been accompanied by an increase in deceptive telemarketing practices involving representations to promote the sale of products that either do not exist or are valued at grossly inflated prices.
In order to escape enforcement of the law, dubious telemarketing firms are extremely mobile and often operate from another jurisdiction or country using a variety of long-distance service providers. Consequently, investigating fraudulent and deceptive telemarketing schemes and prosecuting individual operators is a difficult and very resource-intensive exercise.
To ensure a high level of deterrence in deceptive telemarketing, the Minister of Industry recently tabled Bill C-67 to amend the Competition Act. The proposed amendments include new provisions dealing with deceptive telemarketing. These new provisions will require telemarketing firms to make certain specific disclosure as to the nature and purpose of their calls and the identity of the telemarketer. A number of creative provisions are included in Bill C-67, including the prohibition from offering products at grossly inflated prices where delivery is represented to be conditional on prior payment.
The cross-border nature of telemarketing has contributed to the need to develop and improve international cooperation and coordination for enforcement activities. In August 1995, a Canada-U.S. agreement was signed with respect to competition policy and deceptive marketing practices. The two countries have agreed to use best efforts to cooperate in the detection of deceptive marketing practices and to inform each other of investigations and proceedings involving deceptive marketing practices.
[Translation]
In conclusion, Madam Chairman, it is clear from the direction in which the rest of the world is moving that Canada must proceed quickly to develop competitive and efficient communications markets if it is to compete effectively in the international markets. The experience in Canada in opening communications markets to competition compares favourably to what is occurring elsewhere.
If, however, Canada is to continue adapting to the changing competitive environment, the process of reforming the telephone rate structure, opening the local communications markets to competition and implementing the government's convergence policy must be completed on a timely basis. Deregulation of the communications industry will continue to produce significant benefits for the Canadian economy. The Competition Bureau recognizes that, as this occurs, it will have a vital role to play in ensuring that competition remains vigorous and effective.
With these remarks, Madam Chairman, we are available to respond to any questions from the members of the committee.
The Chairman: Thank you, Mr. Ménard. I have enjoyed your submission a great deal. Obviously, you and your team have taken the time to prepare some judicious comments at a time when we have already begun the transition period in communications.
[English]
Senator Rompkey: It is hard to know where to start with questions. The first one that comes to mind is: If competition is on the increase, does that mean that your department is growing and that your workload is growing? We have seen empires wax and wane around here -- for example, as the number of veterans declines, the Department of Veterans Affairs shrinks.
Mr. Ménard: Our workload is definitely growing. However, our resources, unfortunately, are not growing. They have been diminishing quite substantially in the last little while. It is important to recognize that the role of Bureau of Competition Policy is not the same as that of a regulator. When an industry is being deregulated, it is not the bureau that takes over as regulator; it is really the marketplace itself that will discipline the participants in the industry. The bureau is called upon to referee or to put back into the arena only those players that infringe the Competition Act and do not obey the law. For example, we will intervene only in matters of price discrimination, conspiracies, or misleading advertising by the players in the market. We rely extensively on voluntary compliance by the business community. That is the only way we can effectively enforce the act.
Within the bureau, we have put in place mechanisms to ensure that we do our job in the most effective way -- in other words, we try to get the "biggest bang for the buck". We prioritize our cases and we screen those cases that have less impact on the economy.
To answer your question, yes, we have resources. We have limited resources and we are trying to use them in the most effective and efficient manner.
Senator Rompkey: Do you have enough resources? It seems to me that even though you are not regulatory, even though you are, in a way, a court of last resort, in view of what you have said about the increase in competition and the fact that you are encouraging that competition, there must be more work coming to you. Do you wish to comment? I know that you are not supposed to tell us that you are overworked and underpaid, but you might want to. You do not have to answer the question.
Mr. Ménard: If you want to make a recommendation that the bureau should get more money, we would not be unhappy.
The Chairman: In that same vein, over and above the resources, what are the tools at your disposal to ensure that you can meet your objectives? In other words, at the end of an investigation, since you are not an arm's length agency with the responsibility of application of a given law, what tools are available to you to ensure that there is respect for the current law?
Mr. Ménard: The director has a very extensive communication policy, so we do go out to the business community and explain the terms of the legislation. We also put a lot of emphasis on voluntary compliance with the act. The director also has a program of voluntary compliance, whereby business people can come to the bureau, explain the marketing strategy or business activity that they want to put in place and seek legal advice as to whether that would be in line with the legislation or whether it would be a contravention of the Competition Act. We do try to have a positive or proactive type of enforcement of the act. This saves a lot of resources.
The Chairman: What is the value added for business to do that? They are busy doing business.
Mr. Ménard: I think that fundamentally, businesses want to comply with Canadian legislation.
As well, they want to avoid lengthy litigation. They do not want their names to be all over the papers, with news that there has been a legal case against them. Thus, there is a voluntary atmosphere of cooperating.
They usually also see the benefits of competition. Sometimes they may find themselves the target of our investigation; but quite often, they would be the complainants and they would benefit from our investigations and our involvement. It is a two-edged sword.
The Chairman: If, at the end of an investigation, there were an identification of certain activities that were not in compliance with the law, to whom would the case be referred?
Mr. Ménard: Let me give you an example of what happened in the telecommunications market recently. About a year ago in New Brunswick, NB Tel was refusing Fundy Cable access to its infrastructure. As a result, the director became involved in that dispute and achieved a voluntary resolution between the two companies. This really was the most efficient way of enforcing the act.
Let us suppose that NB Tel had refused to cooperate and voluntarily abide by the terms of the legislation. This would have been a refusal to supply, and the director would have been forced to bring the matter before the Competition Tribunal. In that case, he would be the one that files the application with the tribunal. The tribunal operates like a court. There are proceedings, followed by a decision.
If it had been some other practice that was criminal in nature -- for example, marketing practices, or conspiracies -- these cases are referred to the Attorney General of Canada, who has the responsibility of taking these cases before the ordinary courts. That is the process under the act.
The Chairman: Following up on what my colleague was saying, it seems that given the way the communications environment is evolving, you will be getting more business. If you had to make recommendations to your minister with the goal of having the tools at your disposal to ensure that all players respect the same rules, what would they be?
Mr. Ménard: As I said in my opening comments, there are presently amendments before Parliament for consideration. These amendments would definitely increase the efficiency of the act. These are the tools that we have to work with in order to ensure that there are competitive markets.
The Chairman: Are these the amendments contained in Bill C-67?
Mr. Ménard: Yes. There were also other suggested amendments that were subject to consultation which never made it into the bill. One such area is provisions which respect to exchange of information with other antitrust authorities in the world. As the market becomes global, there is an increasing need, from an antitrust perspective, to be able to exchange information with other antitrust enforcement agencies throughout the world. These provisions have not been included because of a recent decision by the Federal Court in the Schreiber case. The government decided that it was better to delay the introduction of those provisions into the house pending the outcome of the appeals in that case.
There are also other measures that we consulted on which have to do with private access to the Competition Tribunal. Right now, only the director can bring a case before the Competition Tribunal for adjudication. Some members were in favour of being able to go before the Competition Tribunal. A study has been made of that alternative, and it is being released to the public. This is certainly another major set of amendments that may be contemplated or are still on the back burner.
Also, with respect to our local competition and unbundling proceeding that is presently before the CRTC, we have recommended that the CRTC put in place alternative dispute resolution mechanisms. The CRTC could order that a firm provide access to its infrastructure and then set some time limits for the supplier and the buyer to agree on the terms. If those disputes are not resolved within the firms, there would be an appeal mechanism to the CRTC or to the courts to resolve the matter. This mechanism would impose some tight deadlines on the parties to come to some sort of agreement and let the parties themselves work out the details.
Senator Rompkey: I seem to remember, though, that when we heard from the President of <#0130>ONOROLA in Montreal, his concern was that American companies were building their infrastructure into Canada. He also said that infrastructure will not be where the action is in the future -- it will be in programming. However, he did point out that American companies such as AT&T are the big players in the Canadian market. You seem to accept that they will be and should be, that that is where we will get capital, and therefore we should not limit them. If unbundling does not happen soon, do you have any concerns about infrastructure and the ability for those American firms to access the Canadian market at the expense of Canadian firms who do not have the same access to American markets? The President of <#0130>ONOROLA said that they would be building infrastructure south, but I believe it is one of the few companies doing so.
Mr. Ménard: This is always a problem. Ultimately, we would like to have numerous networks competing against each other and have facilities-based competition in Canada. However, in the transition period, this may not be possible.
Senator Rompkey: Do temporary things not have a habit of becoming permanent?
Mr. Ménard: Yes, that is true.
The way the director has approached that is that if these are essential facilities in the market, then they should be given access to them. The terms of access should be regulated to ensure that they are fair, so that a Canadian company with those facilities benefits from that access.
I am not sure exactly how it works in the U.S. when a Canadian firm wants to have access, but they have the essential facility doctrine as well. I suppose that it is a similar type of arrangement.
Senator Rompkey: You say we have arrangements with the U.S. You talked about the arrangements we have for deceptive telemarketing -- our agreement with the U.S., for example. Do we have other agreements with the U.S., agreements which go beyond that and give comfort to Canadian firms that want to trade in the U.S.?
Ms Rachel Larabie-LeSieur, Deputy Director of Investigation and Research (Marketing Practices), Competition Bureau Policy, Department of Industry Canada: In fact, this Canada-U.S. accord to which Mr. Ménard referred is broader than dealing with deceptive telemarketing and deceptive marketing practices. It also deals with competition issues. This agreement was signed in 1995, replacing an MOU which had been in place since 1984. It establishes a framework for closer relations between the two countries in areas touching on competition and marketing practices. It will provide for improved and expanded cooperation between the law enforcement agencies of these two countries. In fact, it is a framework.
As a result, a sub-agreement came into force in September whereby the FTC and the Competition Bureau agreed to establish a joint task force on cross-border marketing practices. That is the scope of the agreement.
Senator Rompkey: Will both countries be open to the traffic of the other? Somewhat the same thing is happening in the distribution of power as is happening in the distribution of signals -- that is, unbundling and international access.
What I am getting at is the innate fear of the U.S. I wanted to ask you also about social policy objectives. At one point, you referred to social policy objectives. You state that competition can play a major role in attaining social objectives, but where some additional intervention is required, policy alternatives which are least restrictive of competition should be chosen.
I am not sure what that means. I want you to elaborate on that. It seems to me that it is relevant to the other question I asked about the access that one country's products have to the other.
Mr. Dave McAllister, Senior Commerce Officer, Civil Matters Branch, Competition Bureau Policy, Department of Industry Canada: Senator Rompkey, to touch on your question regarding foreign ownership, this is all tied into the World Trade Organization negotiations right now.
You are quite right. There is an element of reciprocity involved in the removal of these foreign ownership or foreign investment restrictions. One the one hand, you are opening up your own market, but in return, you may be getting greater access to another market.
Last week, Mr. Sirois, the Chairman of Teleglobe, gave a speech calling for the removal of foreign ownership restrictions. He made the comment -- and I think it is a good one: Why would he want protection in his own small pond if it will cost him access to the whole ocean? In a nutshell, those are some of the trade-offs which must be considered in that sort of scenario.
Senator Rompkey: What about social policy objectives?
Mr. McAllister: One good example is the objective under the Telecommunications Act of universality of affordable telecommunication services. In Canada, 98.5 per cent of homes have a telephone. Right now, the rate structure for local telephone service is somewhat artificial in the sense that low local rates are the result of substantial cross-subsidies between long distance rates and local rates. This leads to a number of complications.
We think that competition in local telecommunication services will put enough pressure on rates that you can rely on competition or you certainly will be able to rely on competition to a greater extent to ensure that goal of universal service at affordable rates. The problem with the current rate structure is that local rates are subsidized. That represents a barrier of entry for new competitors wanting to come into the local market. It perpetuates regulation because the long distance companies have to pay contributions to the Stentor companies to offset this shortfall in local service. There are a lot of complicating factors.
The cross-subsidy was an effective mechanism during the period of monopoly of the Stentor companies, but now that long distinction and local markets are subject to competition, these policies cannot be sustained much longer.
Your comment may be, yes, rely on competition to the maximum extent possible. If further subsidies are needed, perhaps it would be best to provide a direct subsidy to low-income people who cannot afford a phone or a universal subsidy fund for rural and remote areas.
The universal subsidy that we have presently, regardless of your income, will not carry on much longer in the changing environment. That is what we were getting at. That is a long answer, but it is a complicated issue.
Senator Rompkey: It touches on another question that we have been asking throughout this matter, namely, what the new technology does to the Canadian social structure. We have seen a number of stories recently about how technology is creating a new class structure in Canada. That applies to telecommunications, as well. I am particularly concerned about the north and rural areas -- whether we will simply exacerbate the gap that exists at the present time, and what we should do about that.
You touched on this issue to a degree. Perhaps you could elaborate on what special policies might be thought of for the north.
Mr. Ménard: We are questioning neither the foundation nor the necessity of those social objectives; but we are questioning the means by which they are attained. The basic principle that we are putting on the table is that whenever the government intervenes, it should do so in a way that is least restrictive of competition itself.
For example, instead of creating monopolies in some markets and using the monopoly rent that is generated by those companies to cross-subsidize some remote areas or some service, we are proposing some sort of revenue collection via general tax or some other means. A fund should be created so that the people in those remote areas will then have money available to them to benefit from the services that are offered.
This could be in the form of vouchers, for example, which could be used to obtain services from any of the service providers -- that is, not only one of them but any one of them. That way, you protect the competition that exists in that market.
Senator Rompkey: Have you put forward that suggestion through official channels, or would you be interested in doing that?
Mr. Ménard: Yes, we did that. We proposed measures similar to that before the CRTC.
Senator Rompkey: Do we have a copy of that notice; is it something we are aware of?
Mr. Ménard: Yes. Actually, the director has deliberated on this proposal. I cannot remember the exact number, but I think he has eight criteria. They include the fact that it must be transparent; the final consumer should have a choice of spending the money among the service providers, and so on. There are a number of provisions on the list that should be put in place to ensure that the social objectives are attained without limiting competition unduly.
Senator Rompkey: I wish to ask about wireless cable television. That intrigued me. On page 3, you say that long distance carriers such as Sprint and AT&T Canada have also indicated that they will be entering local markets. There is also MMDS, a new form of wireless cable. Will you tell me more about that? It has only been in operation in Brandon for only a few weeks. Similar licenses are likely to be granted for Southern Ontario and Saskatchewan. I should like it find out more about MMDS and DTH, and any other acronyms you think should be included.
Mr. McAllister: MMDS is microwave multi-point distribution systems. It involves wireless technology which replicates or expands the cable service that you traditionally receive over a coaxial cable. It involves receiving signals over the air through a set-top box.
Craig Broadcasting in Brandon has an MMDS licence and rolled out a commercial service in late October. It links into your earlier question about rural and remote areas. If it is possible in rural Manitoba -- that is, around Brandon -- it is possible almost anywhere.
Senator Rompkey: Did they have cable previously?
Mr. McAllister: Yes, they did.
Senator Rompkey: What is the advantage of having this, then?
Mr. McAllister: First, it will service the areas in the rural farm communities to which cable does not extend and it will provide direct competition in the urban market to the cable service.
Senator Rompkey: So there is cable and MMDS service, is there?
Mr. McAllister: Yes. You will hear from CellularVision later this afternoon that they have the ability to provide a wireless cable service of their own.
Senator Rompkey: How are licences granted?
Mr. McAllister: Because they use the electromagnetic spectrum, they are issued through Industry Canada; similarly with PCS service and cellular service.
Senator Rompkey: What is DTH service?
Mr. McAllister: DTH is direct-to-home satellite broadcasting, which uses the small and very controversial pizza-size dishes that you might see in your neighbourhood, if you look carefully.
Senator Rompkey: I see.
The Chairman: If you had to make a recommendation on the level of foreign ownership which you felt would be acceptable for the objectives that you outlined in your presentation and for the objectives of this study, what would they be?
Mr. Ménard: Negotiations are ongoing at this time on a world-wide scale regarding those sorts of things -- reciprocal-type negotiations. We are enunciating a policy.
Basically, it should be relaxed as much as possible and it should go as high as is possible.
In a speech that he gave approximately a month ago, the Chairman of the FCC in the U.S. said, "Who cares about the source of capital? What we should be concerned about is the behaviour of capital." Also, I think a member of the Information Highway Council made similar remarks. For example, Quebec Telephone and BC Tel are foreign owned. Certainly, their behaviour could be controlled. I have never heard complaints that they are not behaving like other Canadian telephone companies. Perhaps rules could be applied to ensure that they abide by the Canadian rules.
The Chairman of the FCC also made another important comment. He said that once the infrastructure is in the ground, foreigners cannot leave. Infrastructure is not mobile. Once capital has been invested in infrastructure, it is in the country. Therefore, they have a vested interest in behaving the way that the host country wants them to behave.
The Chairman: In other words, you would not see any problem with having services that are linked to the distribution totally owned and operated by foreigners. What about the services that are linked to the content?
Mr. Ménard: I am speaking purely from a competition policy point of view. The government may have other objectives, and we are not commenting on those.
The Chairman: Competition is one of the important factors that we are looking at. Bearing that in mind, what would be your recommendations?
Mr. Ménard: Frankly, from a competition policy point of view, we would welcome investment, wherever it comes from. It will bring competition. There are no concerns about where the capital comes from.
However, the government may have other policy objectives. These are the sorts of things that your committee will have to take into consideration.
The Chairman: I want to ensure that I understand you. Are you saying that even though a service provider -- and I mean in terms of content, not distribution -- was totally foreign-owned, the government could have certain cultural rules -- for instance, on content -- that would permit the foreign owners to respect certain rules set up by the government, but that the capital investment itself would not have an impact on the content?
Mr. Ménard: Yes, I think this reflects accurately what I said.
The Chairman: Let me go a step further. Do you find that potential owners who are Canadian would be disadvantaged because of the fact that certain capital owners from other countries have more resources at their disposal?
Mr. Ménard: At the present time, the problem is that some Canadians are being disadvantaged because they do not have the necessary capital to put in place the infrastructure they need to enter some markets. Therefore, foreign capital certainly would assist them in being more vigorous competitors in Canada.
As well, because there are some reciprocal aspects with other countries because of this, there are certain companies, such as Teleglobe, which, if the foreign investment limits were completely lifted, could compete in other markets to which they presently do not have access.
There are pros and cons to all this. From a purely competition policy point of view, the source of capital is not really a matter for concern.
The Chairman: Let me go a step further, then. My question relates to the one asked by my colleague about less populated regions. Because both my colleague and I come from a less populated region of the country, we are concerned about Canadians who live outside the large cities of Montreal, Toronto and Vancouver. Would it be possible to develop regulations with respect to which one of the terms and conditions could be that totally foreign-owned distributors would have to serve electronically, distribution-wise, certain areas of the country that would not be as financially viable as others? Based on your experience in competition, how do you view this? How would it be accepted by foreign owners?
Mr. Ménard: Our experience is that such rules should not be imposed on foreign companies. The way the market system works is that if it costs more to deliver a signal in remote areas, there should be a subsidy to those areas so that they can afford the price which they are being asked to pay to receive the signal, for transportation or for whatever the service is. There should be some money available in those areas so that the people living there can afford the service. Then, any company which provides the service could compete to get into those markets.
The benefits of competition will allow these companies to find inventive ways to reduce costs and develop the most efficient technology to serve those markets. Rather than come from the premise that those markets are not viable and no one would supply the service, you say that although the price will be higher in those remote areas, if there is a way of giving money to those people in those areas, they would be able to afford those services.
We would prefer to see direct subsidies to the regions, as opposed to imposing regulations on service providers. They should charge a higher price to their customers in Montreal and Toronto but deliver the signal or provide the service in remote areas. This is an issue of cross-subsidization.
The Chairman: I do not understand why.
Mr. Ménard: If there is competition in Montreal and Toronto, for example, there is no monopoly rent. Companies cannot have extra profits in those areas in order to subsidize a service that is offered in a region at prices that are below cost. If the price in Montreal and Toronto is higher than marginal cost, which is the test under microeconomics theory, then new companies will enter the market and ensure that the price will be lower than the marginal cost. Therefore, the service providers in those competitive markets will not have the money to supply service in areas where they would provide a price lower than cost. The idea is to ensure that each market operates where the price equals marginal cost.
Because of the fact that in those remote areas the price could be a little too high for those who live there, there are some social objectives to ensure that those people receive the same services. We are saying that there should be a way of subsidizing those people directly, through some form of voucher system or otherwise.
There was quite a bit of deregulation in the transportation industry, for instance. Similar approaches have been made with respect to people who live in the north. As a result of increased competition in transportation, instead of having a Boeing 747 fly to Rouyn-Noranda, for example, you will probably see a propeller aircraft service that area. They may receive better and more efficient service with different aircraft because it may be more attuned to their needs.
Mr. McAllister: I should like to clarify one thing. The electromagnetic spectrum is a public good. In the licences which have been granted for LMCS and PCS, there is requirement that the firms that have these licences roll out these services across the country within a specific time frame, although perhaps not to the most northerly areas. The government is ensuring that these services are brought out as widely as reasonably possible, which is important.
Second, in the area of satellite-based service, there is probably no concern because the satellites lay down such a large footprint that people in the rural area will be able to get those services.
Finally, to get back to your original question, if terms of service are to be set out in the licences, it is not wise to have one set of requirements for foreign owned firms and another for domestically owned firms. The rules should be the same for everyone. You do not want to disadvantage a foreign-based firm by making them supply everyone in the market and have another rule for domestically owned firms. It should at least be competitively neutral.
Senator Rompkey: The problem I have with subsidies in general is that we would be bucking a tide. The subsidy tide has gone out. I do not think it is on to try to convince Paul Martin, especially going into an election, that he should build a subsidy into his budget. It would have to be hidden in some way.
There is a precedent in the Post Office. It gets money from Ron Irwin to subsidize food which is flown into parts of the north. That comes out of the budget of Indian and Northern Affairs. I do not see the same thing happening in transportation.
For example, Marine Atlantic is going. Government is getting out of all the services it provided and subsidized, as a general rule. I cannot see anything that is taking its place.
You are right that the pattern of aircraft has changed somewhat in the north. However, I am wrestling with how you come to grips with this. I am not sure a subsidy would fly.
A company could not build into its rate structure for the whole country enough to supply that good or service in the north as well. I do not know how vouchers would work either. The infrastructure has to be in place to begin with. Satellites are not a problem, but when a company actually has to build something on the ground or provide some infrastructure, I do not know how vouchers would work.
Mr. Ménard: On the question of tax, the money is already in the system. Transfers are being made right now. The difference is that those transfers are within the control of each firm. Cross-subsidization is happening right now.
Senator Rompkey: You are speaking of from long distance to local?
Mr. Ménard: Yes, and from the business rate to the individuals. So the money is already there. The advantage of a tax or direct subsidy is that it is more visible. These rates from which the money now comes will be going down and the government can pick up that money and create a fund with it.
With respect to providing service in remote areas, alliances may be formed among service providers to use the infrastructure on a "most efficient" basis. These alliances would not be contrary to the Competition Act or to the merger provisions of the act. This sort of thing is contemplated in the Competition Act. There might be ways of achieving those things in a most efficient manner as well.
The Chairman: We have spoken of foreign ownership for services in Canada. We know that many Canadian firms are accessing global markets with their products and services, both in telecommunications and broadcasts. What additional initiatives could the federal government take on to ensure that our Canadian firms remain and become even more competitive in offering services, be they technological services or human services or content services to other countries?
Mr. Ménard: Our input in this regard would be only from a competition policy point of view. We do not have views on other matters. When we do have personal views, they are not necessarily those of the director.
The Chairman: You are being very diplomatic.
Mr. Ménard: Competition brings down cost. Telecommunications is a very important cost to the business community. By lowering their cost of operation in Canada, they are certainly put on a more competitive footing when they compete at home against foreign companies or when they go abroad and compete in foreign markets.
Competition policy forces the firms to be more innovative, to reduce costs, and to introduce better services and products. This is all positive in terms of competitiveness of Canadian business abroad.
Senator Rompkey: Does the Competition Bureau have a position with respect to the auction of spectrum? Is there a concern that auctions could be anti-competitive?
Mr. McAllister: In principle, we think an auction system for spectrum can be a very good approach. It is market-based. If you have an auction, presumably it will result in bids that will place the highest use on the facilities or the spectrum in question. In principle, yes.
One has to have certain safeguards, though. One would want to ensure that, for example, if you eliminate foreigners from participating in the auction, you have reduced the pool of potential bidders. One would want to ensure that the spectrum will be used; that a dominant firm already in the market does not buy the spectrum to sideline it and keep it off the market. In principle, an auction is the way to go. It is the most market-based way of allocating spectrum.
The Chairman: Do you find that large companies such as Bell Canada would not outbid others since we are very young in the telecommunications age?
Mr. McAllister: If I look at the example of LMCS, the government recognized that and precluded the Stentor companies and the cable companies from the first round of spectrum allocation which was not done by auction. However, they will be allowed to compete in the upcoming auction.
If one looks at the telephone companies, they are big. However, as a matter of principle, they have resources and expertise and want to participate in the markets. Therefore, I am not sure that excluding large companies just because they are large is necessarily in the public interest. They may take that spectrum and do something very competitive and dynamic with it. One has to be careful when setting up the rules of an auction to ensure that you cover all contingencies.
[Translation]
The Chairman: Do you have any further comments? We have enjoyed your presentation and your answers very much. Thank you for appearing. Our research team may contact you to ask some more questions.
Thank you for coming to testify before the Subcommittee on Communications and to answer the question of how Canada can remain in the international forefront of communications in the year 2000. Even though this is a complex issue, it is a very rapidly evolving area.
We would like to look at four aspects of the issue: first, the technological aspect; second the aspect of our human resources, both present and future; third, content, that is, the cultural aspect, the reflection of our identity, our capacity to reflect our cultural identity in other countries; and fourth, commercial alliances.
Mr. Macerola, I would ask you to present your submission and then we will go on to the question period.
Mr. François Macerola, General Director, Telefilm Canada: Madam Chairman, I didn't prepare a written submission since I thought that the questions and answers were the important part.
However, I could remind you that Telefilm Canada is a cultural agency whose mandate is to use industrial and commercial means of promoting the establishment of the Canadian film and television industry, its consolidation, and also to ensure that Canadians have the opportunity to see top-quality audiovisual products. That is Telefilm Canada's mandate.
To get back more specifically to the international issue, we at Telefilm Canada think that the price to be paid for penetrating the international markets is to be quite thoroughly Canadian. There was a time in Canada when programs were set up with the aim of increasing the production volume, and very often the result of this was films or television programs that were pale reflections of American or European productions. We realized at Telefilm Canada, after examining the issue, that the price to pay for penetrating the international community and ensuring that the Canadian cultural production and distribution industry finds its international niche was to be quite thoroughly what we are.
That is still lacking, however. I will not repeat the example of Céline Dion. We have found our sound in music, in ballet, in theatre. In film and television, we're still seeking our sound. This is more striking in television, where we are recognized increasingly as a country that exports top-quality products.
With regard to technology, I do not think Canada should try to compete with the Americans and the Japanese. I think that Canada, while attempting to maintain a major technological niche, should become what it is slowly becoming, thanks primarily to a dynamic private sector and secondarily to enterprising government programs and the resources that go with them. Agencies such as Telefilm Canada help all that along.
I think that Canada should receive greater recognition as a country with content. This does not mean that we should not occupy the space we are entitled to. I am thinking of new technologies, multimedia, and companies such as Softimage.
There is, however, one area in which Canada is weak, and that is the area of satellite distribution. I think there could be more emphasis to ensure that people are confronted with other realities, with full respect for Canadian culture.
As for market fragmentation and market globalization, all that helps us as a country. It provides us with access to more niches and more quality. Film and television are areas in which it costs very little to create a job, about $35,000, whereas in aeronautics, it costs about $150,000. We have recognized, highly skilled technicians in Canada. The proof is that some one billion audiovisual documents are shot by Americans on Canadian soil, using our talent.
All that to say that, in my opinion, Canada's record in the international audiovisual environment is more than positive. We will have to go on making contacts, meeting natural partners, whether Americans or Europeans. We will have to join the large geopolitical groups, like the European Commission, the European Union, so that Canada can shed its observer status and become a full member.
We'll have to pay the price. The Canadian government will have to show imagination to try and find the funding. Sheila Copps has just given us an example of imaginative thinking by creating a new fund for producing top-quality Canadian television programs.
I just wish to add a word about Telefilm Canada. On behalf of the Canadian government, we manage co-production agreements. We manage 30 -- I wouldn't like to mislead you -- I have the figures here, 36 agreements with 44 different countries. These agreements generate activities worth about $300 million annually in co-productions. Furthermore, for Canada, if we look not only at sales, but also at co-productions, the guaranteed distribution minimums and finally all the Canadian economic activity abroad, we are talking about close to $1.3 billion a year, which is almost twice the amount of previous years.
All of Canada's audiovisual activities abroad connected with the sale of products, the use of Canadian technicians on foreign productions, purchases in the form of guaranteed minimums and not direct purchases for television, or finally joint ventures, all these purchases or this international involvement amount to $1.3 billion annually.
My figures are from 1993 and 1994. In 1992-93, it was $800 million. In one year, the figures have doubled. That tells us something.
A while ago, when I was saying what we should consider, I was thinking of pre-sales, distribution advances, guaranteed revenue, foreign production in Canada, foreign funding, and so on.
The Chairman: Can you send us your figures? They would certainly be of interest.
Mr. Macerola: Well, in a few words, that's my presentation. I have attempted to situate Telefilm Canada for you in international terms, and I am ready to answer all your questions.
The Chairman: Before Senators Spivak and Rompkey take the floor, we are all aware that a rather significant report was recently published on Canada's three major cultural institutions, which produce significant levels of content.
If you had the power to implement three of the recommendations -- there were 168 -- right away, which ones would you begin with?
Mr. Macerola: That's a very good question. For me, Radio Canada/CBC is the most important organization for ensuring the survival of the country.
With deregulation, market fragmentation, tomorrow morning, if we get satellite distribution in Canada, you will have access to -- last week we were talking about 500 channels -- now we're talking about 1,200 channels. The CBC has a very important role to play in putting the two cultures, the citizens of this country, in touch with each other. There's a price to pay. This doesn't mean that there aren't any difficult decisions to be made at the CBC. Management is certainly qualified to make them.
If I had a magic wand -- this is Christmas time -- I would strengthen the CBC. As for the National Film Board, I used to be the Chairperson. I could hardly say anything other than that the country needs a public producer like the National Film Board, not a producer that tries to please, but one that challenges the country's citizens, governments, elected officials and the political structure.
This is the National Film Board's raison d'être. As for Telefilm Canada, the only recommendation is that we be given the tools that will allow us to remain a relevant partner for private enterprise in Canada.
This means imagination, new ways of interacting with the private sector and also additional funds. Additional funds don't necessarily have to come from government. Imagination is required to find the money where it can be found.
There are countries that do business in Canada. These people go home with many millions of dollars in their pockets. They could drop a few of them here so that we could set up production funds for Canadian programs and films.
[English]
Senator Spivak: I wish to start with the financing. From listening to you, it seems that Telefilm has changed its role over the last five years or so and is interacting more with the private sector.
The super fund that the minister has established, as I understand it, is approximately $200 million.
Mr. Macerola: Yes. That is over a three-year period. It is not $200 million, I am sorry. It is $150 million of new money.
Senator Spivak: That is because $50 million is taken from your budget?
Mr. Macerola: It will come from my budget, yes.
Senator Spivak: How does that help you?
Mr. Macerola: At a certain point, the government must design new alternatives and new ways of distributing public money in this country. It was important to establish an objective of an improved relationship between the public and the private sector.
At a certain point, we met in Ottawa with the minister. We arrived at the conclusion that it would be interesting to reach these two objectives and to add another one, which is to integrate the television activities or financing through one organization, the cable and television production fund.
There was $100 million of new money, $50 million administered by the cable industry and $50 million administered by Telefilm Canada, but without any kind of consultation or synergy between these two components.
We decided to establish a matching program. For $1, you will get $1 of new money. In that way, we will recycle $100 million, $50 million from the cable industry, and $50 million from Telefilm Canada, and the minister added $100 million, for a total of $200 million.
Senator Spivak: There has been a great deal of criticism in the past regarding the cable industry administering their funds. Does this mean they will have less ability to administer? I do not understand the relationship. I would like you to be more specific in explaining it to me.
I know we have to deal with the private sector in every way possible. However, in private television, they have not lived up to their commitments. They are busy, as you said, being a pale reflection of American television for the most part.
I am mixing up two questions. First, I want to know how the administration of this fund will work and how you will deal with the private sector.
Then I would like to have your frank evaluation of the following. If we are to maintain a very valuable public presence in television in Canada, why are we putting such an emphasis on privatization? I understand the need to help independent producers, but I do not understand the need to get closer to the private sector.
Mr. Macerola: As to the administration of the $200 million, we have established the following components. One is equity, meaning investment and repayment, and that portion will be administered by Telefilm Canada.
Senator Spivak: Explain that. If someone wants to produce something, you will invest seed money and they will have to go out and get more money?
Mr. Macerola: Yes. We will invest up to 49 per cent of the overall budget. In order to come to Telefilm Canada, if it is a television program, they will have to have a licence paid by a private or public broadcaster; and if it is a feature film, they need a minimum guarantee paid by a Canadian distributor.
We will administer that equity portion using a selective approach. We will say "yes" or "no" according to the cultural or financial viability of the proposed projects.
The cable industry will look after another $100 million. That $100 million will be only the licence fee complement, meaning that they will complement the licence fee that the broadcaster will have to pay in order to buy rights on a particular television program. They will not be selective. It will be a first-in-first-served approach.
We have met three or four times because the government has established a board of directors. For the time being, I do believe that it is a wise move because we are trying to harmonize the different policies from the equity component and the licence-fee component.
Senator Spivak: My memory is not great, but it seems to me that we have heard in many presentations that not only did the players in the industry or the community ask for a non-administration of any fund by the cable companies, but they also asked for it to be greatly increased. What sort of solution is this then? Is this a half measure? If you had your druthers, would you have come up with this solution for this kind of money?
Mr. Macerola: I can only say that at a certain point, the government had in mind to increase the financial resources available to the television producers in this country. They were looking for private partners ready to inject or to invest some money, and the only organized group that was ready to inject some money was the cable industry.
I personally believe that the cable fund has done a good job.
Senator Spivak: So you are not one of the people who criticize the cable fund or think it should be increased. We got that message very strongly. After all, the cable companies are not doing this for their health. They are getting a substantial privilege in this country.
Mr. Macerola: Which is what? To have access to public money?
Senator Spivak: No. They have had a monopoly. They will not have it much longer but they have had one.
Mr. Macerola: Yes. The CRTC has also played a very important role by inviting and welcoming the cable distributors to invest some money. I was in the private sector before joining Telefilm Canada. It was very useful to have access to that $50 million, which is a lot of money.
On the other hand, when the government decided to create that new environment of cooperation between the private and public sector, what they had in mind, I am quite sure, was the 5 per cent of revenues which will be generated by distribution which might come in in six to nine months and which will eventually generate $200 million or $300 million. That money will be redirected into production of feature films and television programs.
Senator Spivak: I am rather encouraged by what you are suggesting is increased participation of Canadian activities in the international market.
Do you think that the way to increase production of Canadian content is the way we have been doing it, or do you see other policies which should be recommended? I ask that particularly in view of the fact that the public sector here is under siege; there is no doubt about that.
Mr. Macerola: But I do believe that the private and public sectors should be working together. The fact that this new fund has been established and that $100 million of new money has been found for the private sector does not mean that it will not help the public sector. Radio-Canada/CBC is getting at least $65 million of that $100 million. Is it enough? I do not know; I am not there. I can only say that I do not believe that the private sector and the public sector should be placed this position. I think we should develop policies to allow these two entities to work together.
With that particular fund, we have said that we must earmark some money for Radio-Canada/CBC. More than that, we have given to Radio-Canada/CBC $12.5 million to help them pay licence fees for the television programs they are receiving. It is a plus.
On the other hand, I believe that Telefilm Canada should be working a little more with the private sector. Radio-Canada/CBC should be responsible for information such as news and public affairs. However, at the end of this century, I am not sure that we will need an infrastructure of technical services. I do not know how many thousands of people are working in the production of television programs. I am trying to say that Radio-Canada/CBC should be invited by the government to work in a closer relationship with the private sector, commissioning to the private sector and farming out to the private sector.
Canada has a very strong private sector. We are a small country; we have not invested billions of dollars in the development of the film and television industry. Yet, Canada is recognized as the second best exporter in the world.
The Chairman: Mr. Macerola, when you say that Canada has the required private infrastructure to produce non-news programming, do you think it applies to both English Canada and French Canada?
Mr. Macerola: I guess so.
Senator Spivak: I do not have a problem with what you are saying, Mr. Macerola, but I do have a question. Sure, we have a private sector, but look at the content -- it is American. We are a country living next to a colossus which wants to homogenize the world. That could be good, but it is often bad.
It is not just a question of the private sector. Our public sector has given us something unique and our private sector, by and large, has not. That is my point. It has not. It is giving us the cheapest American stuff it can find. I think that is pretty close to the truth. Yes, they are required by the CRTC to do certain things. It may be that because the technology is changing so rapidly, we will not be able to do anything about it. That is what I am asking you.
Mr. Macerola: I agree that the private sector is very important in this country. But let us not forget that the private sector has been involved with The Decline of the American Empire and Anne of Green Gables. I can provide you with a list of high-quality television programming supplied by the private sector. We know that the Americans are there. However, at a certain point, we must make some courageous and difficult decisions.
One decision may be to invite, on a voluntary basis, these foreign producers, who have almost taken over this country's production and distribution, to contribute to the production fund. I am not saying that that money should go directly to private sector. Part of that money should go to Radio-Canada/CBC; part of the money should go to the NFB.
As I said before, I personally believe that in this world of the fragmentation of different markets, Radio-Canada/CBC will be very useful.
On the first day of my appointment, I met with my minister. He said, "By the way, you have a $51 million cut to look after over a three-year period." There is that reality, but, nevertheless, there is a lot of money in the system.
Now the cable people, who have enjoyed a kind of monopoly for I do not know how many years, have injected $50 million. Why do we not invite the telecom people to do the same thing? Why not invite the foreign producers and distributors, who are occupying 95 per cent of the screens in this country, be they television, theatre or schools, to contribute something to this country, such as France or other European countries do?
Senator Spivak: Of course, the situation is different in Quebec than in the rest of Canada because Quebec is thriving in terms of its home-grown production and culture. It is not as susceptible to the heavy hand of Uncle Sam. I think there is probably in imbalance there.
Mr. Macerola: The problem is the same in Quebec, strictly speaking. In 1989, the Quebec government adopted a bill which forced the Americans to make a version in French with a two-week delay. They are under the same influence; the difference is that it is not in English, but in French.
The Chairman: You refer to the cable fund and say that the cable broadcasters voluntarily contribute to this fund. Historically, how is this set up? I thought it was a levy set up by the CRTC on each subscriber.
[Translation]
Mr. Macerola: No, not on every subscriber. The cable operators were supposed to refund a certain amount of money to subscribers. After discussing it with the CRTC, it was decided that, instead of returning the money -- this was capitalization money -- a production fund would be set up.
The Chairman: So, this fund consists of public money.
Mr. Macerola: Part of the fund is public money.
The Chairman: So it is a form of tax, decided by a regulatory body.
Mr. Macerola: A major part of the fund is private. I think that, whatever people say, this gesture by the cable operators is generally quite exemplary. Afterwards, other forms of funding have to be considered. There are companies that have made billions of dollars without ever giving any thought to this at some point.
The Chairman: Do you think that the government or an agency could get other companies to make such exemplary gestures?
Mr. Macerola: Yes.
The Chairman: How?
Mr. Macerola: Earlier I mentioned that the government had to make some difficult cultural decisions. I am not a politician, I am just a public servant, who does not have any opinions, except occasionally for my minister when she asks me for one. I think there are some difficult cultural decisions to be made, including Telecom and the export of capital. Is it right for companies that have been heavily subsidized by the Canadian government to inject huge amounts of money outside Quebec and, when they make a profit, for the money not to be reinvested in our infrastructures? There are a lot of questions to be asked. I am not an expert, but obviously the government could sometimes be a bit firmer with some of its partners.
[English]
Senator Rompkey: You said that the CBC is the most important organization to ensure the survival of the country. You also said that it brings the cultures together. That is what I want to discuss for a little while.
After having been on Parliament Hill for 24 years now and having listened to the CBC, not only as an avid fan, but also as a strong supporter of the CBC both nationally and regionally, I still do not understand what is happening in Quebec.
I think I understand some of the things happening in Western Canada because that is part of the English-language network. But, as a Canadian who has lived in Ottawa for 24 years, I am not sure that I understand what is happening in the province of Quebec.
Can you comment on maintaining the CBC as is and the effectiveness of the CBC as is, having a French-language and an English-language network and whether that has brought the country together? It is hard to assess that. It is like nailing jelly to a wall. It is hard to assess who has brought the country together and how.
I should like to know more about what is happening in Quebec. I am not sure that the CBC does that for me.
Mr. Macerola: As I said before, there is room for improvement at CBC/Radio-Canada.
Senator Rompkey: How would you do that?
Mr. Macerola: Perhaps a half-day of programs already broadcast on Radio-Canada.
When I was at NFB, I remember meeting with all of my French and English filmmakers -- the NFB is a microcosm of the country -- and saying, "Why not produce together?" They responded that it was impossible because some did not speak English and some did not speak French, that they were from different cultures, and so on. But we did succeed. Quite a few half-hour films were co-produced by French and English filmmakers at the NFB.
In fact, I was told that the Film Commissioner has succeeded in having a film on the referendum co-produced by the French- and English-speaking filmmakers at the NFB.
Radio-Canada/CBC should have that will at a certain point. When I refer to difficult and courageous decisions, I am not referring only to the government. The heads of the cultural agencies should do the same thing. The CBC should invite the employees of Radio-Canada to program half-a-day on the CBC, and vice versa. This is not wishful thinking; it is possible. For the first year, the ratings may drop to as low as 25,000 people. I do not care. At a certain point, within three or four years, approximately 200 or 300 English-speaking Canadians will be watching the French reality, and vice versa. That is the role of the cultural agencies. Otherwise, we execute our mandate, but some component is missing.
The Chairman: How often do the CEOs of the cultural agencies involved in production meet?
Mr. Macerola: Approximately two or three times per year with the deputy minister, Madam Hurtubuise, and twice a year with the minister, Madam Copps.
The Chairman: How often do you meet amongst yourselves?
Mr. Macerola: Very often. With Perrin Beatty, it is on a regular basis.
If Perrin Beatty reads what I have said, he will say, "That is easy to say." He will then ask how to implement that concept. We will then have a drink or lunch together and we will go forward. It is always easier to have the solution when you are not personally involved with the decision or the implementation.
I believe that the CBC and Radio-Canada should be doing more. But they have done some things. For example, they broadcasted The Decline of the American Empire. In Quebec, we had access to Anne of Green Gables and North of 60. They had access to Les Filles de Caleb. I think we should be able to do more.
Senator Rompkey: Not only in the production of films but also in news production and commentary?
Mr. Macerola: Certainly, but that is more tricky than film and television production.
Senator Rompkey: What did you mean, then, when you said that CBC was the most important organization in the survival of the country?
Mr. Macerola: Because when I am in Quebec, the only contact I have with my culture is through Radio-Canada. More than that, the reality is that the national screens of this country -- that is, theatres, televisions and schools -- are occupied by foreign materials at a level of 95 per cent. To be able to arrive home and have the choice to access your own culture and identity is very important.
I remember making a presentation to the parliamentary culture and communications committee. I said that we should be proud of Radio-Canada/CBC. But there is a lot of room for improvement. There are difficult decisions to be made, such as the one we just discussed, but Radio-Canada/CBC is an important tool for the development and the survival of this country.
In one year, perhaps we will have access to 1,000 channels. I would like my children to have access to more Canadian content. I want them to have access to our own culture, not the American culture. But that is difficult. They have access to Walt Disney and every American cartoon. Later, they go to theatres; they have access to the Blockbuster chain, which is American. We must tell them that we live in a country whose culture is different from the Americans.
In Quebec, the same problems apply. We must tell them that we are not "Francais". It is different.
Senator Rompkey: You also said: "Give us the tools that we need." What do you mean by that? What tools do you need to do the job that you do not have now?
Mr. Macerola: If I refer to Telefilm Canada, what I need tomorrow morning is an amendment to the international treaty that our country signed with the European Union, because they forgot to include an audiovisual clause in that treaty.
I have been lobbying now for at least one and one-half years; meeting with people in Brussels, Strasbourg and Ottawa, trying to tell them that it is important for this country to have access to programs administered by Media II. These programs are founded by several European countries. They administer a program called Cartoon for animation production, as well as others. We do not have access to these programs.
I met with these people and they agreed to welcome us aboard. I wrote a cheque for $1 million to become a member.
Then we found that there was no audiovisual clause in the treaty we signed with the international body, so we had to start again. However, it is a plus for Canada to be not only an observer, but also a full member of that institution.
I referred to tools, and that is one tool which I need. We need more collaboration and synergy between Telefilm Canada and Foreign Affairs. That is very important. I have been told that the foreign policies have three pillars: culture, economy and trade. At Telefilm Canada, we do administrator, on behalf of the Canadian government, some co-production treaties which amount to approximately $300 million. The private sector is injecting $1.3 billion, and I have never been invited to a meeting.
Senator Rompkey: Perhaps that makes the point that people do not see the arts in Canada as an industry; that you cannot make money in the arts; that you cannot export the arts; that it is not a commodity. Perhaps that has not sunk in to the upper levels of bureaucracy.
You said that it is not expensive to create jobs in the film industry. Yet, last night on the CBC, I believe, a panellist was complaining that we spend too much time in Canadian universities teaching humanities and not enough time teaching engineering. We spend measurably more time than Japan, for example, teaching the humanities in university.
I believe that that is relevant. There are some contradictions here. On the one hand, we are saying that people are not aware of the arts as a commodity. On the other hand, you are saying we can create jobs in the arts fairly inexpensively.
What about the education system in the country? Is it graduating the kind of people you need to create these inexpensive jobs?
Mr. Macerola: We have a certain number of professional institutions, such as the National Screen Institute in Alberta, the Film Centre in Toronto and the INRS in Quebec. Those are the kinds of organizations that we need in this sector. We need on-the-spot training. We need someone who will be able to produce or direct a 10-minute film.
The problem is that the training at the universities is very often disconnected from the reality. We need two levels of training. I would put the emphasis on the professional institute.
On the other hand, we all know that there is a problem of jurisdiction between the federal and the provincial governments. It is a mixed jurisdiction. It is problematic to find the money that we need every year to deliver to the marketplace 100 good technicians -- which we need.
For example, in Vancouver, where we produce $400 million to $500 million worth of production every year for the Americans using Canadian talent, we must import technicians. In Quebec, we will need to import competent technicians. We have some decisions to make. It is a priority; it is labour-intensive; and it does not cost a lot of money to create a job.
That is very important. Discussions will have to take place between the federal and provincial governments on that issue.
The Chairman: You referred to an audio-visual clause. To what accord were you referring?
[Translation]
Mr. Macerola: This is the accord Canada signed with the European Union. I could send you all the documentation, which deals with everything except audiovisual considerations.
The Chairman: Is it a bilateral or multilateral accord?
Mr. Macerola: Multilateral, and it's not necessarily the GATT. It arises from the GATT, but it is the individualized accord between Canada and the partners. I'll send you the statistics with a copy of the correspondence exchanged in this connection. It comes under the GATT umbrella, yes.
[English]
The Chairman: Mr. Macerola, Senator Taylor is from Alberta.
Senator Taylor: We are not a full member of the European Union yet, but I think we have been accepted as an observer. That may be the clause you are talking about.
With the rise of self-government for aboriginal peoples, native leaders will push to communicate not only with each other but also with the rest of Canada on self-government.
Your problem with the Inuit will be fairly simple, as they speak a common language. However, North American Indians do not.
What are your thoughts on this?
Mr. Macerola: Telefilm Canada has received a mandate from the new fund to which I just referred to administer a production and distribution program for the aboriginal people of this country. We do not know precisely what we will do. We will start a consultation process with them.
I have received proposals from some aboriginal organizations. The next step is to appoint someone at Telefilm Canada to be responsible for that dossier, to travel the country, to meet with these people and to design a program that will meet their needs. I am considering asking these people to administer that program, perhaps as a joint venture with Telefilm Canada for a year or two, and after that, on their own. That is the way in which I would like to handle that program.
I do not know what amount of money we will earmark for that, but it will be a significant amount.
The Chairman: Mr. Macerola, we do not have before us the annual report of Telefilm. What is its the annual budget?
Mr. Macerola: This year it is in excess of $200 million.
The Chairman: What percentage of that budget is currently used for the management of the mandate of Telefilm?
Mr. Macerola: Of the new fund, it is 5 per cent. For the other activities, including production, distribution and festivals, it is 8.7 per cent. On April 1, 1997, it will go down to 6.9 per cent.
The Chairman: It is extremely efficient.
Mr. Macerola: Our objective is 5 per cent overall. When we took over two or three years ago, it was close to 14.5 per cent.
The Chairman: I have a question for you based on the Juneau report and the management of cultural projects.
As my colleagues were saying, we know that public funds are becoming very scarce. We also know that, before everything else, public funds should be invested in the end product, that is, service to the public. That includes programming at the CBC, joint projects at Telefilm and film at the NFB.
Some people were expecting that in the Juneau study, there would be recommendations concerning the structure of cultural institutions. There are two schools of thought in this regard. The first is that big is bountiful, and the second is that small is beautiful.
In other words, people thought it would be recommended that there be a public broadcaster for radio, television, the Internet and joint services for the NFB; or an umbrella organization under which these cultural services would be brought together. After your experience in private industry, the NFB and Telefilm to which school of thought do you belong?
Mr. Macerola: I believe that we need an umbrella organization under which the different programs or divisions can be brought. I have made such a recommendation publicly to my minister. I believe that we should have one board of trustees, including Telefilm, NFB and Radio-Canada/CBC. In that way, everyone would be invited to work in a closer relationship.
The Chairman: Under that umbrella organization, how would you include organizations that are totally responsible for distribution? Radio-Canada/CBC is involved in both production and distribution.
Mr. Macerola: I would say that 60 per cent of the production companies in this country are responsible for distribution. I do not see a problem in that area.
It goes without saying that we will have to put a lot of thinking into the development of such an umbrella organization. However, if there is the will on the part of the government to do so, I am sure that we will find the appropriate solution.
Senator Taylor: In terms of such an umbrella organization, do you see a place for the provinces? We have had Access in Alberta, TV Ontario and Radio Ontario. I do not know about the other provinces. They seem to be backing out of the responsibility of trying to promote Canadian culture. It seems that it is more important to get new washrooms or a couple of miles of pavement.
Is there any way to encourage the provinces to get in, perhaps by matching a portion of the funds they spend on cultural activities in the field of radio or television? We could pass some federal money over to them. They are really being decimated.
Mr. Macerola: I believe that the provinces should have a seat on the umbrella organization. With respect to the day-to-day relationship, we will have to rethink the definition of "organization" in terms of Telefilm Canada, for example.
I was appointed to my position a year and one-half ago. I do not remember where I delivered my first speech, although I remember that it was not in Montreal or Toronto. I said that I did not want Telefilm Canada to be identified as a Montreal- or Toronto-based organization. I have had to make some difficult decisions since then. I had to decentralize.
At a certain point, I believe that the people in Alberta and B.C. have a right to access public funds. I do not know how we will achieve this objective. I believe it is slowly becoming a priority for everyone.
Senator Taylor: Have you thought of matching funds or giving them a financial incentive as well as a cultural pat on the back?
Mr. Macerola: That is a possibility.
[Translation]
The Chairman: Mr. Macerola, thank you very much. We really appreciate your presence, your openness, and your candour. Our researchers will be in touch with you. We have some other questions for you, and we really appreciate your cooperation.
Mr. Macerola: We will send you the figures as well as the annual reports.
[English]
The Chairman: Ms. Scheuneman, would you introduce your team, please?
Ms Suzanne Scheuneman, Spokesperson for CellularVision Canada Ltd.: I am pleased to be here today. I have with me Lorne Abugov, our legal counsel from Osler, Hoskin & Harcourt.
I am here on behalf of CellularVision Canada Ltd., a new subsidiary of WIC, Western International Communications Ltd., of Vancouver. CellularVision Canada was incorporated in March of this year to be a new full service provider operating as a new wireless entity in the local telecommunications business. I think you will find our business to be of considerable interest to your study because it represents an important new area in communications, one in which we are proud to say Canada is now leading the world.
It is not only in our own interests to retain this world lead, but we are also keenly aware that our own Canadian manufacturers and experts stand to gain much by exporting their knowledge and products abroad.
In addition, other benefits will accrue to Canada as a result of its position as a world leader in telecommunications. notably, those associated with improving the competitiveness of Canadian businesses in general -- reduced costs, increased productivity and innovation.
CellularVision Canada is a newly licensed operator of local multi-point communication systems, known as LMCS.
On October 29, 1996, Industry Canada awarded CellularVision 33 LMCS licences across Canada, from Vancouver, Edmonton and Fort McMurray, to Toronto, Quebec City and Charlottetown.
Another party received 33 licences for the other large service areas, and a consortium which includes Canadian Satellite Communications, or Cancom, also a subsidiary of WIC, received licences to serve 127 smaller communities across Canada.
It was a difficult but sound decision on the part of government. We had explained our need to have a nation-wide presence and we had demonstrated the requirement for 1 full gigahertz in order to provide a full complement of service offerings.
Although we have received licences in half of the markets for which we applied, which gives us access to roughly 3.5 million homes and businesses, Industry Canada clearly stated that the remaining 2 gigahertz which they set aside for LMCS will be made available in 24 months and through a competitive bidding service.
We intend to serve all markets in Canada and will again be at the table in two years. I will be addressing the implications of auctioning with spectrum on our business plans later on.
Let me explain a bit about LMCS. First of all, it is not a mobile service; it is fixed. In other words, it does not provide you with the ability to watch TV while driving a car. Some people think that. It is not competition to cable, although reporters love to call it "wireless cable" or "cable in the sky". CellularVision Canada's system is much more than that. It is high-speed digital broadband communication. It is significant that it is called LMDS in the United States, or local multi-point distribution systems, which implies one way.
In Canada, we recognize that a 28 gigahertz band is capable of much more than one-way distribution of programming. This is reflected in the term, LMCS, or local multi-point communication systems, which implies two-way capabilities.
Our technology is capable of high-speed, digital transmission of video, audio, voice and data, as well as Internet access, two-way and multimedia applications. Industry Canada has dubbed LMCS the third force in a local market, alongside the wireline cable and telephone industries.
We expect that LMCS will prove to be an important new competitive stimulus. The economies of our wireless technology give us the ability to price our services very attractively. However, it is important to note that we applied to serve Canada on a common carrier basis. This means that we will provide fair and non-discriminatory access to our services. We would be as happy to lease capacity or sell our services to a telephone or cable company as we would to a long distance competitor or Internet service provider.
In terms of providing competition to cable, an explanation is due, since there is much misunderstanding about our role in this area. We are quite unlike an MMDS operator who constructs his or her infrastructure in order to compete with a local cable company. Although we are also a wireless local operator, we are building our systems across Canada to provide local telecommunications service, and that is all we have been authorized to do. If anyone wishes to use our facilities to offer packaged programming services to the public in competition with cable, they will require a broadcasting distribution undertaking licence from the CRTC. We expect the CRTC to award these licences after a public and competitive process and will be prepared to lease capacity to the successful licensee in each market area that we serve. Our presence in the marketplace, then, will enable the creation of a whole new industry -- local broadcast redistributers who are essentially resellers, since they are not facilities-based themselves.
Of course, there is much more to our business than simply carrying broadcasting signals on behalf of others. The department gave rise to the true possibility of creating a third force in Canada when they allocated LMCS licensees with 1 full gigahertz of spectrum. One gigahertz allows us to provide a wide range of service offerings, which will increase competition, stimulate demand for broadband services, and enable and inspire the creation of innovative new services.
Our company, for one, has proposed an innovative new service through our firm commitment to the creation of a "public highway". This was in response to the expressed need by many public interest groups for free access to important electronic services. In all of our service areas, we are setting aside 16 megahertz of capacity free of charge in the form of four public lanes: one lane for community access through a public bulletin board service; two lanes for education and job training; and one lane for medical purposes. We received strong support for this unprecedented commitment, and we hope it will serve as a model both for other communications companies in Canada and for other countries around the world.
Regarding the history of our company, and, in general terms, where we are headed, when WIC first began to explore this area in 1992, few had heard of LMCS and even fewer believed that the 28 gigahertz spectrum was usable. WIC took a U.S. concept which was suitable for the one-way transmission of analog broadcasting signals and applied significant capital resources, together with Canadian talent and energies. The result is a digital, local telecommunications system which is second to none.
Canada is leading the world in two respects. First, Canadian pioneers have developed a proven digital technology in LMCS. Second, the Canadian government has licensed LMCS operators across the country. This world lead provides tremendous export opportunities for Canadian entrepreneurs. We are particularly proud to have worked closely with Canadian manufacturers and experts in advancing LMCS in Canada.
We are currently negotiating contracts with a number of Canadian-based companies to help us in our very aggressive roll-out. Our partners include CPI of Georgetown, Lockheed Martin of Kanata, IMT of Winnipeg, and Unique Systems of Markham. These and other companies expect to enjoy significant benefits from their relationships with us, and we are delighted that we have been able to foster an internationally superior base of LMCS products and expertise in Canada. The more our equipment suppliers produce, the lower our unit costs will be, so it is in our interest as well to help them succeed in their export efforts.
This is, quite simply, a high-quality, affordable and responsive means of broadband access for homes and businesses. The receiver dish which I have here is only six inches in diameter and can be placed on your home or roof top. It compares favourably with a satellite dish. Our network of cells allows us to provide flexible and highly responsive service options. One cell has a radius of four to five kilometres. Our services can be tailored on a cell-by-cell basis to accommodate pockets of interest which may be cultural, social or economic. For example, we can deliver Spanish programming on a very cost-effective basis only to the Spanish-speaking community. What is important in this model is that we are not imposing one way of doing things on our customers; rather our customers can benefit from our ability to address the very specific needs of businesses, communities and individuals.
In short, it is our intent to operate as an enabler for others. Businesses and consumers want choice and reliable, affordable services. To stay competitive, most businesses recognize that they need innovative and affordable solutions to meet their needs. We have committed to working with our customers from the very outset of our implementation to provide such service.
I will close with a few words on a subject I expect this committee has examined -- that is, auctioning the radio spectrum. We are not categorically opposed to auctioning. We do, however, have some serious concerns about it, in particular since we will be directly and quite possibly negatively affected by auctioning in a second round of LMCS licensing which the government has stated will be conducted through a competitive bidding process.
Auctioning holds immediate appeal for the large returns it may bring to the public coffers. This is a good thing, and any taxpayer would agree. That the net effect of auctioning is in the public interest, however, is far from clear. Canada's system of spectrum allocation has worked remarkably well, and we should not move rashly to alter it. Where there is more demand for spectrum than supply, it has been Canada's tradition to allocate spectrum in accordance with how well an applicant's proposal advances public policy objectives. These may include pro-competitive and economic benefits, job creation, social benefits, and research and development plans.
It is true, of course, that following an auction, government can still set minimum social and economic requirements. However, minimums typically become maximums. I suggest that it is not good enough to simply require licensees to adhere to defined minimums such as a minimum level of R&D spending.
Moreover, this approach does not encourage innovation, such as the public highway commitment I outlined earlier. That was a commitment we made in the context of our application, and it was a comparative selection process. It is the type of benefit which, as opposed to auctioning, is encouraged and rewarded through the comparative selection process.
Another important point to keep in mind is that high licence fees imposed through auctioning not only pose a barrier to entry for worthy companies, but also are certain to translate into higher prices for consumes. What appears, at first glance, as a gain to the public purse comes out of the individual's pocket in the form of higher prices for service.
Another often-touted benefit to auctioning is made on pro-competitive grounds. Auctioning, it is held, allows the marketplace to decide and gives access to the spectrum to those who most value it and will make the most of it. Well, perhaps in laboratory conditions. In reality, we are concerned going into the second round of LMCS licensing that those with the deepest pockets will outbid us. The reality is in that in an auctioning scenario, the spectrum goes to the one or the few who can outbid the others. This is not necessarily the company that will provide the best service or the company that has plans to innovate. It may be that the highest bidder simply plans to thwart competitive advances, in which case auctioning serves only to entrench the positions of dominant players rather than to enable real and sustainable competition.
These are the types of issues I encourage you to examine. To be conducted in a manner which best serves the public interest, the introduction of auctioning in Canada must be done with care. I am not at all convinced that it can be done simply or quickly.
Thank you for the opportunity to introduce CellularVision Canada to you and to share our thoughts. Please look at the packages we have provided. I would be happy to provide any further information you require and to answer any questions you may have.
The Chairman: Thank you, Ms Scheuneman.
You have touched upon issues which were raised with other witnesses. I know my colleagues have many questions.
Senator Spivak: My first question is regarding auctioning. This committee took a trip to Washington, where we heard a very compelling presentation on the auctioning process. Of course, the experience there, as I am sure you know, is that it simply went to the biggest companies. Your point about competition is well taken.
Do you know whether the government has given any indication whether they will restrict it to Canadian companies, and what would that mean, if they were?
Ms Scheuneman: They would only be able to award common carrier licences, or licences under the legislation governing the CRTC, to Canadian companies.
Mr. Lorne H. Abugov, Legal Counsel to CellularVision Canada: I agree. The Canadian companies would have to comply with the foreign ownership rules contained in regulations under that legislation. Right now, that would be 20-per-cent voting shares at the operating level and 33-per-cent voting shares at the holding company level.
Senator Spivak: Is there not some indication that those numbers will change?
Ms Scheuneman: I have heard rumours to that effect, but such a change would require a legislative amendment.
Senator Spivak: You showed us that dish, or whatever it is. I do not quite understand what services it will provide. Will it be able to pick up the 1,000-channel universe? What is its function?
Ms Scheuneman: This is a receive dish, so it will pick up whatever is not encoded or whatever it has been descrambled to receive.
Senator Spivak: So it is in direct competition with the satellite dishes?
Ms Scheuneman: Yes, among other things. But we are a local system, so we would also have the ability to carry local broadcasting stations.
Senator Spivak: It can receive everything a satellite can carry, as well as local stations?
Ms Scheuneman: Yes, everything that has been authorized by the CRTC for carriage.
Senator Spivak: It does not sound from your presentation that you will be applying to the CRTC for a broadcasting licence. If you are not, can you tell us why not?
Ms Scheuneman: We got into this business with a view to getting into telecommunications. While it has not been ruled out, the idea is to allow others to benefit from this technology. We will have our hands full putting this system in place.
If there is a lack of interest in some areas in using the spectrum, it would only make sense for us to seek a licence in those areas, in order to make sure that the technology is being used.
Senator Spivak: Unlike your competition, then, you do not want to be both a broadcast and a telecom operator?
Ms Scheuneman: Of course, the parent company is in the broadcasting business, but if you mean the broadcasting distribution business, the cable-like business, that has not been our intent. I realize that it is the intent of others.
Senator Spivak: You mentioned that you will be very cost-competitive. Why is that? Can you give me some indication of how you will do that? Will you be offering telephone service?
Ms Scheuneman: Not initially. We would need switches to provide telephone service, but we can provide dedicated lines fairly simply. To give you a sense of the numbers involved, costs for the telephone and cable companies to upgrade their existing networks in order to get into each others' business range from $1,000 to $4,000 per household.
We can cover our households at under $250 or $150 per household, and that number is decreasing, just to provide them with this initial service.
Senator Spivak: Which service are you talking about? In order for people to broadcast through your service, would it be the same sort of service as cable? You would make your money out of being the carrier?
Ms Scheuneman: That would be one component of what we do. We would also provide Internet service providers with access to the home. We could provide T-1s for businesses, phone lines. It makes sense initially for businesses to get into this area.
The potential applications for the transmission of multimedia are quite wonderful, because we have enough bandwidth with this system to do that, which is not currently the case with competing technologies.
Senator Spivak: Can you explain that a little more?
Ms Scheuneman: You need a lot of bandwidth to transmit video, and interactive requires even more bandwidth.
Senator Spivak: Are you talking about computer to computer?
Ms Scheuneman: Yes.
Senator Spivak: Plus the ability to get on the Internet at high speeds and faster?
Ms Scheuneman: That is right.
Senator Spivak: That will be your bread and butter business.
Ms Scheuneman: Our bread and butter is providing the whole range. No one service makes sense by itself. It is because we have 1 gigahertz that we can provide the whole complement. That is why we call ourselves a full-services provider. Down the road, we may consider getting into the local telephone market. Currently, that does not make sense. There is no profit margin there. However, we can enable others to do that.
Senator Taylor: I have not read this in enough detail. I am somewhat confused. I notice you have set up your advantages against cable and against the phone companies. However, you do not seem to mention the advantages you have over satellite TV, which, as you know, is a little like sex used to be: You are not supposed to talk about it in Canada any more. It is the so-called "grey market". We are not supposed to subscribe to what the Americans are putting out, for some reason or another.
I would like a technical explanation. Please do not be too technical; it has been years since I received my engineering degree. What is the difference between this and satellite TV with a 10-inch dish? You are providing the same things plus some more?
Ms Scheuneman: This is a terrestrial system, and it is local. We do not use a satellite anywhere in the system. We can, if need be, to import signals, but we are authorized to operate only locally. That is why we have 33 licences across the country rather than one.
Senator Taylor: Is this line-of-sight, like microwave?
Ms Scheuneman: One of the advantages of our system is that it does not require line-of-sight. The signal can bounce 3 to 7 times without signal degradation. We can also put up gap-filling repeaters.
Senator Taylor: Do you want the same thing that the cable industry wants, which is for the government to continue to disallow satellite TV?
Ms Scheuneman: No. We are not trying to keep anyone out of anything. We are there to help those who want to get into the communications business or to expand their role.
Senator Taylor: Having this much grey hair, I can remember Canadians starting to give licences, whether to radio or TV or cable, and once Canadians have given a licence, those companies feel they must sit around and try to protect themselves against any competition.
I read something rather interesting about the satellite industry last night. They think they can move into this field with satellite signals, with broadband, providing access to the Internet and other things. Right now it is forbidden because, somehow or another, we feel that because we gave cable licences out 10 or 15 years ago, and the companies have not made enough money, we should not have interference from cable coming in.
Will this happen again in five or ten years? Will you come in dabbing your eyes, wiping away tears, to try to keep out dirty old American competition? How will this work? Why do you need a licence? Is there only so much space in the air waves, or what?
Ms Scheuneman: With respect to LMCS, the government has set aside three gigahertz in each market. We have only one of the three. There will be competition within LMCS in two years?
Senator Rompkey: Am I the only one who does know what a "gigahertz" is?
Ms Scheuneman: It is 1000 megahertz, which is a huge spectrum of radio frequency.
Mr. Abugov: I will give this a try, but I am not technically oriented.
I am told that distributing 150 television channels would consume half of one gigahertz. That would free up another half of one gigahertz for perhaps telecommunications services. That gives you an idea. We talk about the 500-channel universe. That may be a bit high. Perhaps 120 to 140 TV channels would consume half that spectrum, leaving the rest for other services.
Senator Taylor: Eighty per cent of our population lives within 100 miles of the U.S. border. What is going on? These little gigahertz will not stay north of the 49th parallel. They do not even know where the 49th parallel is. What will happen? I am having trouble understanding. Will Mr. Manley or someone get up and say, "We might be pinched if someone peaks in the window and catches us listening to the wrong gigahertz"?
Ms Scheuneman: We do not have a footprint extending beyond our border, which is often the problem with a satellite footprint. There can be interference. We set up cells and each cell only radiates out about five kilometres. We will not reach beyond 5 kilometres of the last cell. We will not be anywhere near the border. It is very local.
Senator Spivak: You have the same channels being broadcast at the same time through this LMCS. They are being broadcast through satellite and through cable. Will it look like the sky over Beirut or Iraq? What is going on?
Ms Scheuneman: The spectrum that we have been authorized to use was not used before. We are not interfering with anyone's activities.
Senator Spivak: I understand that.
Ms Scheuneman: There is too much out there; is that what you are saying?
Senator Spivak: Technically, it is possible for everyone to be transmitting the same broadcast through different methods; is that correct?
For example, Seinfeld is on at 7 o'clock. At 7 o'clock, some people will receive it through satellite, some will receive it through cable and some will receive it through LMCS.
The Chairman: Just so we are all on the same wavelength --
Senator Taylor: Pardon the pun.
The Chairman: -- could we say that the specificity of your service is that you will permit Senator Spivak in Winnipeg, Manitoba, to access all the local services from your service?
Ms Scheuneman: Yes.
The Chairman: In other words, if she had a dish for a satellite, she would get Seinfeld, but she would not get her local news or the Internet. You permit local access to all services, but part of those services are also national.
Ms Scheuneman: Yes.
Senator Spivak: Then it is a package. I do not want to buy 20 packages from different companies. That is the point. How will this competition take place?
Ms Scheuneman: To be honest, from the beginning, we will not be in the business of selling directly to the home. The Internet service provider will be responsible for getting his or her customers. The one who holds the cable licence will be responsible. Once a customer has a dish in their home at a cost of less than $150, it is much simple for them to add another service at their option. It they get their cable through this service, it is easier for them to add on an Internet service as well.
Senator Taylor: Can they get satellite through this?
Ms Scheuneman: No. It is not configured to pick up satellite signals.
Senator Taylor: But the satellite goes to the cable, which will then put it through that anyhow.
Ms Scheuneman: Through a head-end, we can bring in satellite services and then distribute them to be picked up through this, but they will not get them directly through the satellite.
Senator Taylor: You cannot do it now because Canada does not allow it; but if it ever became open, you could bring it in.
I am beginning to understand better. It is strictly a transmission service. What you put in at the other end, whether from cable, satellite, local programming or from the Internet, is up to the consumer. A consumer tells you what they want transmitted.
Ms Scheuneman: That is right. In some areas, it is conceivable that no Internet service provider wants to lease capacity from us to get to the customers in that area. That is possible. We are not in the business of being a gatekeeper or ensuring that all content is available. In large part, that will depend on demand in those areas.
Senator Taylor: I still have trouble understanding this. Years ago, they used to try to control the old-fashioned a.m. radio. They gave up because of powerful stations. At night, when the Northern Lights were bright, you could hear all the way to Quito, Ecuador, and in the middle of the day, you could only hear what the CBC and the federal government decided you should listen to. Where I was raised in southern Alberta, you could only hear the CBC broadcast from a little town called Watrous, Saskatchewan.
According to you, it is only five kilometres, but if you have a signal that bounces back into gigahertz, these things will be going off in the States and everywhere else.
How are the Americans licensing their broadcasters? Are they restricted to power?
Ms Scheuneman: They are licensed on a geographic basis, and they get into serious trouble if they violate the terms of their licence.
Senator Taylor: Do they put it up for a competitive bid?
Ms Scheuneman: They have given a pioneers' preference licence to one of our partners, a group that we first began to work with. That group is located in the New York area.
Senator Taylor: The cellular phone system we have here is entirely different than that in Europe. Does the European cellular phone system tie into this?
Ms Scheuneman: To my knowledge, this has not even been conceived of in Europe. We are so far ahead of the other countries, including the United States where they are doing this on an analog basis, that we are clearly the world leaders in LMCS.
Senator Spivak: You have the space. You are a wholesaler, but I am a customer. Will I have people coming to me saying, "For so much per month, you can have the Internet, computer services and 150 channels, as long as you get rid of your dish and your cable"? Is that how it will happen?
Ms Scheuneman: That is one way of doing it, yes. Some could approach it that way.
Senator Spivak: Otherwise, I do not know how the competition will work out. Most people at the moment have cable. Then they hook up their computer, and they get a service provider for the Internet. Many have a cellular phone as well. Why would I change? I have already invested in a dish. I am spending so much per month for it. Why would I invest with you, unless you give me ease of service or a monetary saving? How will this competition work?
Ms Scheuneman: We can carry more services because of the spectrum that we have. You would be able to get, for example, more pay-per-view, or truly on-demand services which have not previously been offered in Canada.
You may be perfectly happy with your basic cable package and choose to stick with that, and take CellularVision for something else, for example, only Internet or for some dedicated line to your office. There may be some marginal use that interests you.
Senator Spivak: That is a commercial situation.
Senator Taylor: The digital signal would be better, but it must still be fed in digitally. Why would a cable company give you something to broadcast if they have already laid out their lines and have their cable customers? Why would they allow you to transmit the signal when they already have the customers?
Ms Scheuneman: It would not necessarily be the cable companies but the broadcasters and whoever is licensed to compete with the cable companies in those areas. They would be doing the packaging.
Senator Spivak: But how does that work? We are doing this for competition but, believe me, those people will not sit around and let you take over their market.
Ms Scheuneman: We know that.
Senator Spivak: How will the rules be established?
Senator Taylor: You must read the brief.
Senator Spivak: Who will charge for the entrance into the house? That is the whole game. How will people make money off us from that so that everyone has access for which they can compete? That is what the government is trying to do but I cannot visualize it in terms of real competition. Especially if you use auctioning, all the big players will be in there. They will buy up the spectrum and compete in Winnipeg, for example, with their gigahertz. I do not understand that. Will there be a lot of casualties before this gets sorted out?
Ms Scheuneman: The numbers that we have run suggest that there is room for everyone who is currently there, as well as us. We only need a little slice of a lot of different services to have a good business. We do not need to take over the whole cable business.
Senator Spivak: You are talking about the commercial side. But there will be consumer revolt in the home, because how many things can you have going on? For example, I do not want to have one more phone call telling me how much I can benefit by switching to another phone company. That kind of competition is not a good situation until people get knowledgeable about what it is they are doing.
Ms Scheuneman: It does not make sense for people to market too aggressively. That is not the best way to go. Consumers have been clear before the CRTC. They want choice and we are there to enable it.
The Chairman: Your company has decided to be a wholesaler in that service?
Ms Scheuneman: We would not limit ourselves to that, but that is the initial application.
The Chairman: The two other applicants which have been granted licences will be dealing with the consumer, as referred to by Senator Spivak, on an individual basis. Therefore, they will be in competition with the cable companies.
Ms Scheuneman: That would place them more directly in competition, although the regional division consortium plans to work with the local cable and telephone companies.
The Chairman: Why did you choose to be mainly in wholesale rather than be in the same situation as the other two companies?
Ms Scheuneman: First, we see quite a business in leasing capacity to the wire line companies.
Right now, the telephone companies do not have the facilities to provide the cable-like services that they would like to offer. This is a cheap way for them to get into that business and provide a whole package to their customers.
Mr. Abugov: We have seen unsuccessful LMCS applicants indicate that they will be coming to cable companies like CellularVision to do just that. Even though they are not licensed on a facilities basis to deal directly with the customers, they will acquire facilities from CellularVision. We are already seeing that happening.
Ms Scheuneman: This is a truly pro-competitive model. We are not using our own facilities; we are allowing others to use them to compete wherever they see a market demand.
Senator Rompkey: One of the other licence-holders is Cancom, is that right?
Ms Scheuneman: Cancom is a partner in a consortium. RegionalVision is the name of the company.
Senator Rompkey: Where do they operate?
Ms Scheuneman: They have 127 communities. Which province are you interested in? They are right across Canada.
Senator Rompkey: What about Newfoundland and Labrador?
Ms Scheuneman: In the Atlantic, they are in Amherst, Antigonish, Bathurst, Bridgwater, Campbellton, Corner Brook, Gander, Grand Falls, Kedgwick, Labrador City, Newcastle, New Glasgow, St. Stephen's, Stephenville, Summerside, Wolfville, Yarmouth, and so on.
Senator Rompkey: They are not competing with local cable companies there, are they?
Ms Scheuneman: I cannot speak for them, but it is their plan to work with the local cable companies to augment their service offerings.
Senator Rompkey: How does that give the consumer any options? Presumably, the cable company becomes the gatekeeper who decides what the consumer will be able to access.
Ms Scheuneman: Suddenly, consumers have access to more services.
Senator Rompkey: But does not the cable company decide what they get and what they do not get?
Ms Scheuneman: The only reason they would strike up a partnership with RegionalVision would be to enlarge their offerings to their consumers.
Senator Taylor: You could have more than one cable company, too, could you not?
Ms Scheuneman: I cannot explain RegionalVision's business model to you.
Mr. Abugov: From a competition standpoint, other delivery modes could conceivably be available, for example, satellite and MMDS technologies, that will give consumers a choice, through different technologies. The small cable companies are saying that CellularVision can extend their reach and reach new consumers that are off the cable system, conceivably, and help them to compete against other technologies such as satellite, which will be an effective competitor at some point in time.
Senator Taylor: I can see where the competition was coming up. That is why I went back to the government's policy of trying to restrict satellite. Yet, at the same time, there is a collision course. If you will be carrying cable and satellite is going after the same consumer, cable will do it through your service while the satellite delivery does it directly through their system. I see a bit of a conflict there. With elections coming up, these things have a chance to resolve themselves.
Senator Spivak: Cable companies can compete with this service, too.
Senator Taylor: You have a five-kilometre reach.
Ms Scheuneman: That is per cell. We will have a network of cells in each city.
Senator Taylor: Will there be a tendency to ensure that this will only exist where there is a good concentration of customers? In other words, this technique will not apply rurally or in the far north; it will only be in the major cities and down near the U.S. border. It will not be worth putting cells out there, will it?
Ms Scheuneman: Whitehorse is on the map to get service.
Senator Taylor: How does your signal get to Whitehorse, though?
Ms Scheuneman: It depends what is being offered there. The licensee for Whitehorse, RegionalVision, will set up its cell. That is likely just a one-cell site. They will provide local transmission for whatever is demanded. Some things will be pulled in by satellite; some will be local data transition.
Senator Taylor: Hooking up to your system does not mean you will have access to Vancouver, unless the cells have access to each other.
Ms Scheuneman: There is right. There is no interconnection between markets.
Senator Taylor: Cellular phones work much better in the city than they do in the country. Would you say your coverage would be about the same as for cellular phones?
Ms Scheuneman: It is slightly different because they have corridors along highways. It is important for their customers to be able to use their phones while driving. We are in market centres, but in some areas we extend beyond where cellular phones do.
Senator Taylor: So you may have thousands of these cells, not necessarily connected to each other, but transmitting whatever is done on the local radio station or by the Internet provider via cellular to the customers. It is not a connected system; those gigahertz have been protected for you regardless of where you set up in Canada.
Ms Scheuneman: That is right.
Senator Rompkey: The problem I see is that there is still a gatekeeper for the local area. If you are only transmitting in the local area, someone is deciding what people will see and what they have access to. For example, in terms of TV, there are many channels being pulled down from the satellite and broadcast in the local area. Presumably that will not change. If the cable company is a partner of RegionalVision, they will continue. I know you cannot answer for them.
The problem which Senator Taylor is talking about in remote areas is that there will still be a local gatekeeper who decides what people will see and what they will not see.
Ms Scheuneman: On the content side, and with respect to broadcasting matters, when the CRTC is granting licences to these new broadcasting distribution undertakings, it will look at issues such as whether it is worth granting a licence to these people based on what new service they will provide to the system and what the price points will be. Issues such as whether there will be an attractive discount for customers will be addressed in a broadcasting hearing.
Senator Rompkey: Will each licence go through the CRTC?
Ms Scheuneman: To provide packaged broadcasting services, they would have to get a CRTC licence.
Senator Rompkey: I can see how a local company would bring on the Internet, and perhaps other services, but I am not sure that that would change the choice people would have in terms of what they watch.
Ms Scheuneman: It could, because this system has the ability to offer video-on-demand. You could have access, for the first time, to a server that houses all the NFB films, museum pieces and so on, to which you never had access from your home before.
The Chairman: Would the server have to be local?
Ms Scheuneman: Not necessarily. The provider could interconnect using <#0130>ONOROLA, Sprint Canada or Bell, among others, to get to the location, if it is distant.
Senator Spivak: How will this be cheaper when a number of organizations must make profits in the long run?
What sort of capitalization is required to enter this field, and how are you financing it?
Ms Scheuneman: It will cost us hundreds of millions of dollars to put this infrastructure in place.
Senator Spivak: How many millions?
Ms Scheuneman: That will depend partly on the outcome of our negotiations with manufacturers, which are currently ongoing. We are expecting it to cost between $300 million and $500 million.
Senator Spivak: How will you raise that capital?
Ms Scheuneman: That issue is before the WIC board.
Senator Spivak: It looks as though there will be a number of intermediaries in the provision of services. For example, who will be the server? Who will provide the NFB films? It might be the cable companies.
Ms Scheuneman: It certainly could be. We are not, as a common carrier, obliged to provide non-discriminatory access. We have no say in the matter, nor should we.
Senator Taylor: How do you protect privacy in this system?
Ms Scheuneman: It is at a different frequency and it is digital.
Senator Taylor: The smart young fellows going to school now will probably be able to intercept your signals with a piece of wire and a soldering iron.
Ms Scheuneman: It is in everyone's interest that we encrypt our signals from the point of origination.
The Chairman: You mentioned that Canada is on the leading edge in this area. Do you plan to offer your service internationally in the next 3 to 10 years?
Ms Scheuneman: It is not necessarily our intent to do that, although we have not ruled it out. Our manufacturers are very excited about it. They have already begun to establish relationships and sell their services in other countries as a result of their relationship with WIC and CellularVision.
The Chairman: Could you tell us what kind of manufacturers work closely with you to provide you the products?
Ms Scheuneman: Lockheed Martin, based in Kanata, makes a transceiver for us which is suitable for Internet access; two-way access. It is twice as big as this. This is a receive dish. Theirs has a receive and transmit dish.
CPI makes a power amplifier which is about half the cost of a cell. That is a very important component. They have worked with us right from the beginning in 1993. They are in Georgetown, just outside of Toronto.
The Chairman: And the CellularVision technology?
Ms Scheuneman: These are all components which are integrated into our system. The whole system is called CellularVision technology.
The Chairman: Is it patented in Canada? How does it work?
Ms Scheuneman: It is patented in Canada. It is very difficult to explain how it works.
The Chairman: Where does it come from?
Ms Scheuneman: The concept came from the United States. It was an analog concept which is still used there only for the one-way transmission of analog broadcasting signals. In the New York area, it is being used successfully to provide customers with 49 broadcasting signals. We have developed it here well beyond that and have created a digital system.
The Chairman: Does that mean that there is a portion of CellularVision which has been involved in research and development for the products required?
Ms Scheuneman: Yes. Much R&D has been done in Canada on this.
The Chairman: Where is CellularVision located?
Ms Scheuneman: It is scattered across the country. Components are made in various places. We are currently working with a number of countries on cell integration, which is a whole process in itself.
The Chairman: Thank you very much, Ms Scheuneman and Mr. Abugov. We would like to ask you a few additional questions through our researchers later. If you have any additional information, please do not hesitate to contact us.
The committee adjourned.