Proceedings of the Subcommittee on
Communications
Issue 8 - Evidence - October 7, 1998
OTTAWA, Wednesday, October 7, 1998
The Subcommittee on Communications of the Standing Senate Committee on Transport and Communications met this day at 3:35 p.m. to study Canada's international competitive position in communications generally, including a review of the economic, social and cultural importance of communications for Canada.
Senator Marie-P. Poulin (Chairman) in the Chair.
[Translation]
The Chair: Thank you for accepting our invitation. I believe you are going to speak to us about our Canadian identity within the context of the exploding communications field. It seems that we are not the only ones to be greatly interested in this issue. In fact, the CRTC has been holding hearings into this matter for several days now. Please proceed with your presentation. There will certainly be questions for you later.
Mr. Richard Stursberg, Chairman, Canadian Cable Television Association: I am very pleased to be here with you this afternoon. I have several comments to make concerning the future of Canadian culture and the Internet, but with your permission, I would like to speak English. The cultural problems facing Canada's anglophone community in the future are more serious given the proximity of the United States. It is different in Quebec because of the language barrier. Anglophones feel more pressure from their neighbours to the south. For these reasons, I will focus on the situation facing English-speaking Canadians. If you insist, though, I could also discuss francophone culture.
[English]
I want to talk a little today about the Internet. While everyone, including this committee, I suppose, has heard more than they want to about the Internet, I would like to look at it from an unconventional point of view, namely its implications for Canada's cultural life and the future of Canadian electronic media.
As Bill Gates once said about the Internet, in the short term, we have overestimated its impact, while, in the longer term, we have dramatically underestimated it.
Over the last 30 years in Canada, we have built a formidable set or arrangements for the creation and dissemination of Canadian electronic content. Through the policies of the CRTC and the Canadian government, we have focussed aggressively on ensuring that Canadians can see and hear themselves on radio and television networks owned, controlled and managed by and on behalf of Canadians.
The government has insisted that Canadian broadcasters should offer a minimum number of hours and spend a minimum number of dollars on the creation of Canadian programming. It has insisted as well that the cable industry be required to support the development of Canadian television services by packaging and carrying them in a way that maximizes their availability to Canadians.
The result of these efforts has been extraordinary. In English Canada, we have increased the number of television services from two in the 1960s, the CBC and CTV, to numerous conventional television services along with almost 40 cable services, like YTV, the sports network, and the movie network, and so on, this year. That is a greater variety of domestic services than anywhere in the world outside the United States.
At the same time, we have poured money into the development of Canadian productions. I actually have the pleasure of being the Chairman of the Canada Television Fund, which spends about $200 million a year supporting the development of television production in French and English in this country. Canada has now become the second most important producer of television in the world, again after the United States. That is remarkable. English Canada is, after all, not a big place by global standards.
In regulating and building this industry, the government has adopted two kinds of rules. The first focuses on the creation of direct support measures. It includes things like subsidies to the CBC and the creation of the $200 million per year Canada Television Fund that I just mentioned, which is far and away the biggest financier of television production.
The second focuses more on what I would call limitative rules and they seek to control the behaviour of the broadcasters and the cable industry. The Canadian content rules, which is the requirement on broadcasters to carry a certain percentage of Canadian programming at specified times of the day, is the best known of these. Others include the counterpart requirements on the cable industry to carry all the programming services licensed by the CRTC and not to carry U.S. services unless they are on the CRTC's authorized list.
At root, what these limitative rules seek to accomplish is to maintain the geographically distinct Canadian broadcast market. They seek really, to the maximum extent possible, to reinforce Canada's boundaries and not permit the Canadian broadcasting industry to be submerged in the free play of North America-wide economic forces. They have been very successful and have allowed us to create one of the most vibrant and dynamic media cultures in the world.
Now, along comes the Internet. The Internet really stands the conventional broadcasting model on its head and, with it, the rules we have traditionally used to support Canadian content. It stands the model on its head in a number of important ways.
First, broadcasting is a mass medium. As the name suggests, it casts broadly. The Internet, however, does not broadcast. Users search out the specific information, stories or amusements they want. The Internet is not a mass medium. It is the opposite. It is a personalized medium.
Second, broadcasting, because it is a mass medium, has schedules. You receive television and radio by appointment, so to speak. Particular programs are on at particular times. On the Internet, programs are available all the time, since they reside in databases. There is no broadcast day or schedule. There is programming whenever the individual customer wants it.
Third, the Internet is impossible to restrict geographically. It flows through transparent data networks that are endlessly reconstructing themselves in new configurations. It is simultaneously everywhere and nowhere. This is, once again, the opposite of broadcasting, which is rooted in very particular cities, provinces and countries.
To understand these differences, it is useful to see what the Internet is already doing to radio. Every evening CBC closes the World at Six by noting that the program is distributed not only over the airwaves, but also worldwide on the Internet. That means that regardless of where you are on earth, by looking up www.radio.cbc.ca, you can receive the World at Six live on real audio at the same time as everyone in Canada. In a similar way, radio stations in the United States and elsewhere are making themselves available on the Internet.
What are the consequences of all that? Certainly, it calls into question the meaning of our government's ownership and licensing rules. If a U.S. or British radio station can be received in Canada through the Internet without any sort of license, then what is the value of having one? However, it gets more complicated.
A number of music-based services have begun to appear on the Internet, and if you want to see them there you can dial them up at www.spinner.com. There are channels of music in different formats made available in real time and supported by advertising. Because www.spinner.com is an online service located in the United States, like the conventional U.S. radio stations available through real audio, it is not subject to Canadian content rules. There is no requirement to play a certain amount of Stompin' Tom Connors or Great Big Sea or Leonard Cohen, and yet these services are beginning to compete with Canadian services that must respect the recently strengthened Canadian radio content rules.
More peculiar still, some services are beginning to appear that operate like vast jukeboxes. You can find them on the Internet and listen to a particular song or author or composer or singer. In most cases, you do not pay, since they are now principally used as promotions to sell CDs. They, too, raise puzzling questions. What do content rules of any variety, Canadian or otherwise, mean, when people can choose just the individual songs they want to hear?
Some people object that this sort of analysis is academic at best, since the Internet is a slow, poky sort of medium that can handle radio or text, but is irrelevant to television or movies. While that is true now, it is only a question of time before everything can move over the Net. As we speak, the cable television industry is pouring a small fortune into the deployment of high-speed modems, servers and backbones that will dramatically increase the performance of the Internet throughout North America. We can already move simple television pictures and will soon be able to move sophisticated, high-quality moving images through the Internet.
Nor will the access into the Internet be restricted to computers. Through the cable industry's R&D efforts centred at CableLabs, the largest electronic manufacturers and software companies in the world are rushing to make available advance set top boxes to permit televisions to receive not only more channels but access to the Internet. All of them -- Microsoft, General Instruments, Scientific Atlanta, the Thompson Corporation, Sony, and so on -- are applying their brains and budgets to making this happen sooner rather than later, and we expect the first generation of these boxes to be available next year.
When that happens, the regulatory challenges that we can see emerging in radio will begin to be seen in television. Perhaps the first area to confront the question will be the movie channels, since it is expected that the killer application for these new television set top boxes will be video-on-demand or VOD. That is a service in which movies are stored in big servers or databases. Customers can buy them one by one whenever they want. For example, if I want to see the new Denys Arcand or Atom Egoyan film, I will be able to call it up on my television without going to the video store, and I will get it in a format that will allow me to pause, rewind and fast forward just as I can with a video cassette.
VOD raises difficult challenges for the traditional Canadian approaches. Like online music jukeboxes, their video counterparts raise the question of what constitutes Canadian content quotas in a database environment. At best, one might be able to convince Canadian VOD suppliers to stock Canadian titles in their databases, but this would not guarantee they were ever actually seen by Canadians. Beyond that, it would be impossible to convince U.S. VOD operators to carry Canadian titles, and extremely hard to discourage Canadian consumers from buying non-Canadian offerings, when they are only the click of a mouse away.
More broadly, the emergence of a high-speed Internet presages the development of wholly new cultural products. Online games, advanced multimedia novels and entertainment, interactive live action learning materials, very sophisticated net-based textbooks and courseware. These products will be as culturally important as television or radio, but, like VOD and the new music services, it will be difficult, if not impossible, to utilize any of the traditional limitative regulatory strategies to support the development of Canadian content for these new products. They will be transmitted through the Internet, without reference to Canada's geographical boundaries or our conventional concerns about Canadian content.
The Internet dramatically restricts the use of all limitative style regulation. It erodes not just Canadian content quotas, but also the U.S. authorized services lists, and with them the whole machinery of tiering, linkage, and general management of the importation of U.S. products.
When we think about the future of Canadian content and the Internet, therefore, it is important to recognize that the only viable way to support Canadian products will be through supply-side measures. While we have done some work in this area in the past through things like the subsidies to the CBC and the Canadian Television Fund, we may have to begin to think more radically about the structure of the electronic media industries in Canada, and how their structure affects the economics of developing and distributing new content. We will have to focus less on keeping American content out than on ensuring our industries can produce content that is sufficiently vital and inexpensive that Canadians will enthusiastically buy it through their net-enabled televisions and computers.
In thinking about this, it is useful to reflect on how the major U.S. media companies are reorganizing themselves to deal with the new challenges facing them. There we see a pattern of increasing consolidation and integration. Traditional program producers like Disney are moving into broadcasting with the purchase of ABC. Broadcasters like Fox, owned by Rupert Murdoch, are part of the same group as his satellite services. Big cable operators like Time Warner and TCI are deeply involved in specialty television programming services and the ownership of studios. Broadcasters like NBC are partnering with Microsoft in MSNBC, and all of them are moving heavily into Net-based content activities.
Two broad currents are common to all these efforts. First, the major media companies are increasingly integrating production of content and its distribution. Broadcasters and production studios are co-owned with cable, satellite and Internet distribution assets. This is being done to both reduce the risks associated with the launch of new products and to ensure content creators understand the new distribution architectures they are working in.
Second, the media companies are vertically integrating so that multiple content properties are owned under one roof. A major group like Time Warner owns book publishers, magazines, television productions, film studios, and a major Internet content creation company called "RoadRunner". The reason for this vertical integration is to maximize the value of a piece of intellectual property by re-purposing it through all of the available windows and media. A book becomes a movie, and a TV program, and the world is supported by proprietary Web sites. Web.
The major U.S. media companies hope that these consolidated entities will permit them to drive greater efficiencies and more effectively manage the risks of content creation in Internet-based environments.
This is exceptionally risky stuff. As yet, nobody knows where the money on content will be made in the Internet. In Canada we have not been able to build media companies with the same level of integration as those in the United States. This is because Canadian public policy has been designed to restrict the development of media conglomerates. Broadcasters are discouraged from owning production studios; and cable companies are discouraged from owning broadcast assets.
The net effect of this is to compound the economic disadvantages Canadian media companies always have in competing with their U.S. counterparts. Not only are they smaller, they are not permitted to obtain the same synergies or pursue the same economies as their competitors across the border.
I am not suggesting we should abandon all limitations on media cross-ownership. Clearly, we must continue to maintain rules to limit self-dealing and encourage diversity of voice. These are essential to the maintenance of a lively marketplace of ideas and underpin our democracy.
What we must do, rather, is explicitly consider how to eliminate the restrictive prohibitions we currently have on the formation of Canadian media companies. If we do not, we will find ourselves with companies which are artificially weaker than they need to be, and less capable of rising to the challenges of creating Canadian content in the world of the Internet.
If this sounds a little gloomy, that is certainly not my intention. As we think about the future, we need to remember we have risen to parallel challenges in the past and that we enter this new era with strong and vibrant companies committed to speaking with a vigorous Canadian voice. We are well positioned as a country. We can do brilliantly. However, we must recognize that the future will require solutions different from those of the past.
These solutions must be founded on greater openness and greater daring. The fact that limitative regulation will not work should not discourage us. There are other ways of approaching these challenges. In particular, we need to build the companies that are required to compete effectively in the future. We need to have confidence in our own abilities, our capacity to manage the new technologies, and the increasing demand of Canadians to see and hear their own voices.
I am optimistic about the capacity to harness the Internet to Canadian goals and dreams. We have always managed to use new technologies to bind the country together and to claim our place in the world. We are known internationally for the vibrancy of all aspects of our communications industry, and I have every confidence we will succeed here as well.
The Chairman: Your presentation is very appropriate since what we are looking at as a subcommittee is what measures can be taken by this country so that Canada may remain at the leading edge as we approach the year 2000. You have given us a very appropriate analysis.
We know that you represent cables companies in Canada who make up the largest cultural industry owned and controlled in Canada by Canadians. There are about 200 cable countries in Canada of which the nine largest serve over 85 per cent of the cable subscribers. The four major companies are Rogers Cable TV with 29 per cent of the customer base, Vidéotron with 20.2 per cent; Shaw with 18.5 per cent; and Cogeco with 9 per cent. Those are today's figures, and they are subject to daily changes.
In the United States, the FCC is examining whether cable companies should offer non-discriminatory leased access to competing Internet access providers. The phone companies here already do this. Do you think cable companies should be subject to the same rules?
Mr. Stursberg: The commission has already mandated access to the cable company networks by the Internet service providers. There are two issues associated with doing this. One is a technical issue. Technically, it cannot be done right now. We have been doing a (null)lot of work with Cisco for the creation of policy-based routers that will allow this to happen, and we have been working with the Internet service providers to put up some technical trials to allow that to happen.
The second is: How will this work? We have already proposed to them a system that, once we can sort out the technical issues, will allow them to do precisely that. We have guaranteed them access to the network and told them that we will send a customer a bill for the local access part of the bill, and they can send the bill for the long haul Internet service part. They do not want that. They would like to bill the customer from beginning to end, including the local transport component, which is what we would provide to them.
In effect, the Internet connection would go over the cable facilities from the customer's premises up to what is called the cable headend, which is the central part of the network, and then would be handed off to the Internet service provider. They would bundle our local access, plus everything else that they do, and provide one bill to the customer. They have said that that is what they want to do. They do not want us to have anything to do with the customer as far as service is concerned. We told them that we were prepared to look at that, too.
We are having ongoing discussions with the Internet service providers. In fact, I think we have another meeting with them next week, to talk about it further and sort our way through it.
We are more advanced in Canada on this matter than they are in the United States. We have already committed to providing access to the Internet service providers. We are already working with them on the technical issues associated with how to do it. We are exploring these two different models as to what is the most appropriate way to do it. We will then have to finalize the price.
We have agreed to that already and we have been negotiating with them for some time to sort it out.
The Chairman: What do you project as the cable revenues from Internet access service, as a percentage of revenues, over the next 5, 10, 15 years?
Mr. Stursberg: That is difficult to do. When I consider the speed with which people have taken up the high-speed cable modem offer to have access to the Internet, I would say that the response in the areas where we have been able to offer it has been very good. People like it for obvious reasons. It is fast, it is always on, so you do not have to dial to gain access.
Two things are happening in our business that will lift those penetrations even faster. The problem with the Internet is that even if you come out on a cable modem at very high speeds, moving as fast as you can, when we drop you off into the public Internet, it is only as fast as its slowest link. Suddenly the whole thing grinds to a halt. You have that terrible effect where you are waiting at your computer for little trickles of information.
The solution to this problem is to build a parallel Internet and to build into it large servers, which are big databases that house all this stuff. We will cache into the big servers the most popular Web sites. We will make the decision about what are the most popular sites by counting what it is that people are using.
For example, if we found that people are very interested in the Senate Web site, we would put the Senate Web site directly into our server so that it is replicated. Alternatively, we would cache it, which means that every night we would take all the information from the Senate Web site and drop it into our own server.
The request comes out from the house quickly on the cable, goes to the headend -- the network switching centre of the cable industry -- and then is put into the high-speed parallel Internet, goes into the server and pulls out the applicable information, which then comes back to the user. It never leaves this managed high-speed infrastructure. Suddenly you can do things in a way that you could never do with a conventional Internet.
We are in the process of dropping this type of a parallel Internet architecture into the cable networks. It is up and running right now. It is called @Home.
Second, we are creating open cable boxes, which are very sophisticated boxes that go on your television set, that will have built-in modems, so your television screen will become like a computer screen. You will be able to access the Internet at high speeds through these proprietary backbones and architectures, whether through your television set or computer. Suddenly, there will be a whole series of things that you will be able to do -- because it is high speed and it is on your television set -- that you could otherwise never do.
The present penetration of computers in Canada is about 30 per cent, and the penetration of television sets is about 99 per cent of the population. So suddenly, the vast majority of the population who otherwise would never have access to the Internet as a technical matter will be brought into the Internet environment. These two things will weigh heavily in term of driving our numbers up.
There have been efforts made by various financial houses. We have not attempted to project these numbers ourselves. Toronto Dominion Securities has done a lot of work on this. They project penetrations that are astonishing. They expect that 30 to 50 per cent of households will be penetrated with high-speed cable-based Internet services over the course of the next 10 years.
The Chairman: Cable penetration is at about 70 per cent, correct?
Mr. Stursberg: It varies a little between the English and French markets. In the English markets, it is slightly higher, almost 80 per cent. The French market is about 66 per cent. It averages about 75 per cent across the country.
The average customer today spends about $25 a month on cable service. These services are being sold at $40 a month. If you have penetrations of 30 to 50 per cent of your total base, you can see that the Internet-based service would become an enormously large part of future revenues.
The Internet service becomes the platform as well for the cable industry to enter a whole series of other kinds of telecommunications services, whether it is telephony, video telephony, video mail, or any of those kinds of services. Hence, we anticipate that there will be an opportunity to lever off that into telecommunication services.
I will be happy to provide the committee with the Toronto Dominion Securities projections.
The Chairman: Thank you; we would like to see some estimates.
Some have suggested that television will be available over the Internet, perhaps as a huge menu of individual shows instead of the current set of channels. Do you think this will happen? If so, when do you think it will happen? Will television over the Internet destroy the ability of the CRTC or any other organization to regulate content in Canada?
In your opinion, what does the future hold?
Mr. Stursberg: It will have an impact on certain kinds of programming genre in the not too distant future. The first genre to be impacted will likely be films. The first important application will be video-on-demand.
When a studio produces a film, it is released through what are called "windows". Currently, the first window is to the cinema houses; the second window is to the video stores; the third window is to Pay Per View; the fourth window is to conventional pay television; and the fifth is to syndication of one variety or another. For VOD to be successful, the windows will have to be moved.
The important thing for video-on-demand service is to be able to receive the same window, or very close to the same window, as the video stores. If that happens, it will be a dynamite service. No one will bother with the video stores anymore. Why would you, if you could stay home and watch a particular movie whenever you want to, rewind it, fast forward it and do the whole lot?
A lot of this will depend on the negotiations with the distributors and the level of clout brought to bear by video stores. I do not know what the outcome will be. Almost inevitably, over time, it will drift into VOD, and video stores will be old-fashioned technology. Inevitably, it will drift over, and we will eventually have that window.
How fast that will happen, I do not know. It will be very difficult for the CRTC to regulate VOD services -- which will have important implications for Canadian film.
Over the last number of years, increasingly the specialty channels, the niche channels, have taken more and more of the audience. I presume that that trend will continue. General interest broadcasters -- CBC, CTV, Global, among others -- have seen a substantial decline in their audience share over the last 10 years.
I notice today that ABC, CBS and NBC have all have announced very substantial cuts to their workforces, attributable to the fact that they, too, are finding that general-interest programmers are having trouble holding share and therefore having trouble holding revenue.
I presume that trend will continue. How fast it will happen, I do not know. I presume that some of that will drift onto the Internet.
There is some evidence to the effect that television viewing time for kids is actually being impacted in a significant fashion, a measurable fashion, by the displacement of eyeballs from television screens to computer screens. It looks like a lot of what they are doing is on the Internet.
The Chairman: Will news and current affairs programming be impacted?
Mr. Stursberg: Yes, I think so.
The Chairman: How do you see it?
Mr. Stursberg: I do not have any related studies to share with you.
However, let me give you an anecdote. I have an 18-year old son who is doing a project on the destruction of Congo. We were looking on the Internet. The whole of South Central Africa is at war now -- all the troops from Angola, Namibia, Zimbabwe have invaded -- Rwanda and Uganda in the north. You cannot follow this on Canadian news. It is astonishing to me that there is a gigantic, important war occurring in a very important place, and there is no Canadian coverage of it. You can follow the war in detail on the Internet, through the local papers -- troop movements, everything. All that news is available. Now, if that does not have an impact on news coverage, I do not know what will.
The Chairman: Are you in favour of vertical integration of carriage and content?
Mr. Stursberg: Yes, very strongly in favour of that.
The Chairman: Do you agree that certain safeguards are necessary to prevent cable companies from offering preferential access to channels they own?
Mr. Stursberg: Yes, I do.
The Chairman: What are the safeguards?
Mr. Stursberg: It depends on whether it is an analog or digital world, in terms of channels. Currently, a bunch of safeguards in place; they are referred to as the Access Rules. I will be very surprised -- except in the French markets -- if any additional analog channels are licensed by the CRTC.
When you talk about a digital world, the problem becomes quite different. In a digital world, we will start with a subscriber base of 6,000 or 7,000 households. The difficulty here is to convince the television companies to launch digital services into those kinds of numbers. The television companies say that those numbers are not big enough to sustain the service. So, if they do not launch the service, then nobody will buy the digital boxes and put them on their TV sets or rent them from their cable company because there is nothing to watch. It is a chicken and an egg problem.
The other difference is that, in the past, we typically had more services than we had capacity, so a lot of people are now knocking on the doors of the cable companies wanting to get in, and we do not have enough capacity to put them on.
In a digital world, all that is stood on its head. There will be fewer services and lots of capacity. Our difficulty will be to convince people to launch. We will be out there knocking on their doors asking them to please launch some services, because if they do not nobody will take digital television from us.
Therefore, the issue of capacity will be a non-issue. We will find ourselves short of services, not with them in oversupply. It would be a good idea to let the cable industry own services. That is one of the ways to break the chicken and egg problem. We are prepared to take the risk to throw them on, and if there is no shortage of capacity to accommodate others, then it is to everyone's interest to actually do so. The question of self-dealing and access becomes very different in a digital environment and must be thought about differently.
The Chairman: The cable and other distributors pay 5 per cent of revenues to the Cable Production Fund; correct?
Mr. Stursberg: Yes.
The Chairman: Should web-based services be taxed to provide funding for content creation also?
Mr. Stursberg: I do not know yet. We will likely discover that the production of Canadian web-based content suffers from the same kind of thin market problems as the production of conventional television. I do not know that for a fact, but it would not surprise me that the economics would be more or less the same. The costs of producing high-quality Web content are high, and they are rising, just as the cost of producing quality television program is rising. If you can only amortize those costs over a small base -- for example, over the Canadian base because they are for Canadians -- we will find ourselves in the same problem vis-à-vis the Americans as we have with television. The Americans can amortize large costs over a substantially greater base of customers than we can. I will be surprised if we do not discover that there are the same kind of economic problems about the creation of Canadian Web content.
The CRTC is now holding hearings on new media. Several filings have been made. It will be interesting to discover people's views as to whether this is true or not.
Whether we should raise the money by taxing Internet service providers, I do not know. When you tax them, you depress demand. There are two competing goods here. We would like to see people take up the Internet quickly in Canada. We do not want there to be impediments to its usage or acceptance. Taxing them will depress demand by making it more difficult for lower-income people to have access to it. Something may have to be done about supporting Internet content, but we do not want tax to do it. We want to do it some other way.
The Chairman: If we have any additional questions, would you agree to having our research crew contact you?
Mr. Stursberg: Certainly.
I will send you a pamphlet that describes how the different architectures for the new Internet work along the lines I was describing -- how you access TVs and what their parallel backbones are.
The Chairman: Thank you very much, Mr. Stursberg.
The committee adjourned.