Академический Документы
Профессиональный Документы
Культура Документы
PUBLIC VERSION
STATEMENT OF CASE
OF THE
~~~~~~YC~]~i:~a~_ll~7~~~~~_~~~L~~~[K~~ ~4 ~ xiY~~il_a~~
Table of Contents
PART I -OVERVIEW
Irr[RODu~TfoN
THE MARKETPLACE PETER GRANT A~FD FORUM RESEARCH
A.
Time Shifting
B_
HD Signals
9
10
10
r'~.
Background
Ia
F3.
11
~.
t~tl8~~`51S
1?
D.
A Realit}~ Check
14
15
.A.
Background
l5
B.
1b
C.
.4nalysis
1ti
18
A REVISED RATE
l8
19
21
VI'ITNiFSSEs
?1
EXHBITS
22
PART I -OVERVIEW
1.
2.
The royalties payable under the tariff are a part of the statutory retransmission regime
established under the CopyrRh~ Act. That arrangement permits braadeast distribution
undertakings ("BDUs"~ to retransmit over-the-air broadcast signals b~~ capturing,
packaging and selling them to their subscribers without tfie consent ofthe broadcasters or
the owners of the broadcast programs_ As a condition of the compulsory licence regime,
where the retransmitted signals are "distant" signals`, BDUs must pay fair and equitable
royalties set by the Copyright $oard_3
3.
A retransmission tariff was first certified in 1990 after an extensi~~e hearing. At that time
the a4~erage cable subscriber received 4.56 distant signals. The highest royalty rate ~ the
rate paid by~ the largest BDUs was set at 74 cents per subscriber per month for a sen~ice
retransmitting at least one distant signal, regardless of the number of distant signals
actuall~~ transmitted.`
4.
~l~hc rate was Icft unchanged in 199 after a second contested ticarin~_ There has not bier
a contested hearing on the rate since that time, Pursuant to a series of agreements
between the Collectives and BDUs,the highest rate has risen gradually to the 2013 rate of
98 cents per subscriber per month.
5.
Thus the current proceeding marks the first time in o~~er 20 years that the r~:tr~~ns~tiissiot~
rovaltr~ rate will be examined in depth in the context of a contested hearing. ~~ith ~x~.~ert
~~ridenee and interrogatory response data available to the Board.
remises".
There is a low flat rate far "s~ralt" BDUs,and discounted rates far BDUs of fewer than 6,U(l0 subscribers and in
inspect of certain categories of subscriber.
b.
This is also the first time in aver a decade that BDUs have had to respond to the
Collectives' interrogatories_ The BDUs'responses are the most comprehensi4~e ever, and
proc~ide detailed economic information abo~~t the new and hi~,hly lucrative ways they
have developed to sell distant signals to their subscritaers and how they profit firom that
exercise.
7.
As discussed below, the Callectiv~s propose royalty rates far the 2014.2018 tariff period
based on signal carriage data de~~elaped jointly ~~ith the BDUs participating in this
proc+~eding, together with evidence provided in the BDUs' interragatary~ responses and
expert industry, consumer ar~d economics e~~idence.
significant changes ha~~e occurred since the last time the Board ruled on these issues
fallowing a contested hearing in the early 1990s.
(a)
There has been a dramatic increase in the number distant signals retransmitted by
BDUs. The a~~era~e BDU subscriber, who r+eceir~ed x.56 distant signats in 1990,
receives more than ten times as many today, recei~ing 5~.3 distant signals in
2014,
{b)
The nature of distant signals has changed. The relati~~ely new' phenomenon of
`atime-shifting" means that many distant signals duplicate local signals but from a
different time zone, giving subscribers highl}r valued additional opportunities to
view their favorite programs.
(c)
8.
These changes have dri~~en a massive increase in tb~ overall value of distant signals to
6 ]Dint Mediastats [nc. Report, Exl~ibi[ Collectives-b ("1Miediastal Report"). The a~rerage subscriber received 54
distant signals in 2013.
_ ,; _
9.
In the inaugural 1990 decision and the subsequent 1993 decision, the Baard set the
retransmission royalty rate based on the adjusted wholesale price of the U.S. specialty
sen=ices A&.E, which was deemed to be a proxy for a distant signal.
l0.
The BDUs' interrogatory responses in the current case have now made it possible to
conduct for the first time detailed expert eeo~tomic analysis of not ot_y the value of
"proxy" signals (fallowing the Baard's apgraach in 199{l and 1993) but, mare
importantly, the direct market value of distant signals. In particular,
(a)
First, aci examination of the retail prices charged to subscribers for distant si~,n~ls
sold by~ BDUs and a correlation between the retail and w~tiolesale price$ of
signals~~sen~ices re~~eals that, in a market environment, the a~~erage wfialesale
market Brice of each distant signal would be R.2 cents. Under the current tariff,
the effeeti~~e average w~hal~sale price of a distant signal is only 1.8 cents. Given
that the average subscriber received 5~# distant signals in 2013, this real-world
direct market analysis supports a roy~alt~ aF~4.97 per subscriber per month.
(b)
price ae[uall~~ paid br~ BDU`s' for those sen,~ices are at least X2.06 per subscriber
per month. Thus a proxy approach Supports the conclusion that a la~a~er b~c~und tU
the rovalt~~ paid by BDI~s fur the use of distant signals should be at last ~2 per
subscriber per month.
1 1.
The Collecti~~es' proposed tariff for the v'ears ?01~- 018 vas filed with the Board in
h4arCh ZOl3.R Since then, ho~~~er~er, the interrogatary~ process has gi~~en the Call~ctives,
and their experts, access to critical confidential information regarding the actual value of
distant signals and analogous sen~ices that ~~~as not previously available, in any' farni.
As noted in Professor Church's mpon the c<~I~~lation is based on inCornk~tion pro~~ded by 6 of the ~3Dt~s.
$ As rewired by s. '+ 1 of the f'n~~ri~ht ,pct, the proposed TarifCw~~s filed by the Collecti~es on March 28, 2U13 and
published in the Cattatk~ Gazette on June I ,?013. On December 19, 2013, the Bo<~rd extended, on an interim basis
the application ofthe 2[109-?U13 R~transniissian of Distan[ Radio and Television Tariff, to remain in force witil the
proposed "!'ariff is ccrtifieci.
-~-
The Callecti~es are only now in a position to better, and mare accurately, estimate the
value ofdistant signals to Canadian BDt1s.
12.
Accordingly, the Collectives seek a royalty rate for the largest BDUs of 52.00 per
subscriber per month for 2014, with annual inereas~s for predicted inflationary factors
oFer the remaining years of the tariff through to 2018y
l3.
This amount represents a law estimate of the value of the bundle of distant signals as
presented in the two economic analyses of the a~~ailable data. It reflects a mare accurate
lower bound estimate of the actual ~~alue of distant si~iats to BDUs than has ever before
been possible. Such a rate ~~~ill generate the fair and equitable royalties that constitute the
BDUs'side of the statutory retransmission bargain.
In its inaugural decision in 194Q, the Board outlined a number of principles and
abjecti~~es rele~~ant to setting the myalty to be paid by BDUs far retransmitting distant
signals. "Those principlzs and objectives remain relevant in this proceeding_
1 ~.
First, the Board outlined six principles which it scate~i the tariff Should reflect~10
9 As in prior tariffs the C:ollecn~~cs propose to contimie the various discounts previously set by the Board including
for example, for small retransmission systems, large retransmissions systems serving less than 6000 subscribers and
Francophone markets.
10 File 1989-1, Retransmission of Distant Radio and Television Signnals, Qctober 2, 199U {199U Dacision) at p. 2223.
-5 -
A fair and equitable taritT must =`impose a ray~alt~~ consonant ~,r~ith the benefits
retransrnitters receive from the rise of distant signals", and "retransmitters should
pay to cvpyTight owners no less than the ~~alue ofthe harm caused tee them by~ the
use of their works*' Sach a tariff mad treat retransmitters in different
circumstances ditTerently~ given differences in size and location.
(b)
A fair and equitable tariff should treat all Canadian subscribers in a similar
fashions should not amplif~~ existing ~arianGes in cable fees paid by subscribers
r~nc~ ~hc~uld not hamper the ~~bj~cti~~e of providini~ equal access tc~ services.
(c)
A fair and equitable tariff should generate appropriate compcnsati~r~ for the
Collectives and distribute it fairly amongst them.
-6 -
17.
Unlike the present situation, in 1990 there was no observable mArket for distant signals.
In other words, distant signals were not sold by BDUs to subscribers in a v~~ay that made
the amounts charged visible ar amenable to economic analysis.
1$.
As a results. the hoard adopted a proxy or coniparabl~ services approach to set the royalty
rate. The Board first determined that the U.S. specialty senice A&E was reasonably
comparable to distant signals as a wfiole, and thus a useful proxy. It then identified the
"wholesale" rate paid by~ BDUs to A&E. After making adjuscrn~nts to the wholesale rats
to account for certain dif~'erences between the proxy(A&E)and distant signals? the Board
multiplied tie adjusted monthly per subscriber proxy rate of $0.15 (the prig) times the
a~~erage number of 4.56 distant signals per subscriber (the quantity} to determine the
overall monthly ger subscriber royatt}~ amount of X0.70.~'
19.
In 1993, the Board was asked to change the ro~ralt~ rate set by its 1990 decision. l~~tany~ of
the participants also urged the Board to depart from the prox}~ analysis it had used in
1990. The Board declined to do so, poring as follows nth respect to the use of proxies:"
First, once a prise has been set using a praxy~ market analysis: it is not
necessary that it be tethered to fluctuations in the price of the proxy used
in arri~ring at it. It can gain a life of its own, without strict regard to its
origins.
(The proxy market] Ana15~sis has to be perfarn~ed peria~dically in any
regulated market, to help trace the ~volutian of prices in $irnilar markets
and minimize inconsistencies in the price paid for similar good.
Third, and most important, there is less need to use a proxy when an
existing price, even an administered price, can be used as a starting point.
This is especially true v~~here information is available to de#ermine whether
'
' The &uird then provided for a sliding sca{e in the ro}~~alty rate far large retransmitters ofbet r~een ltx)() ~~nd f
subscribers. Finally, a number of other disrnunts were introduced to recluse the ro~~alty note in Francophone markets
and in cases inhere the onty~ distant signal carried br~ ~ retr~nsmitter w~~s a duplicate neiv~ork signal. For srn~ill
systems of less than 1~c10 subscribers, the Board set the royalties to be paid for such systems at S t iH1 per annum for
each sill retransmission system.
Pile 199i-1U, Retrans~nissian of Distant Radio and Television Signals, January 14, 1993 { 1993 Decision) ai p. 3637.
,.
or not the existing price is appropriate, and whether or nit any adjustments
ought ro be made to account for changes in circumstances.
20.
T'he Board could not at that time engage in an analysis of the economic market for distant
signals, since unlike at present, there was no market in which the value of distant si~,nAls
was directly quantifiable_
The r~tr~nsmission tariff was last sei for 7UU8 to 2013 as the result of a settlement_
However, the Board has been alert to the dander of assessing a roy~alty far one period
only by reference to chan~,es since the tariff was last set_ Such an approach is "restricted"
and "limiting", and runs Xhe risk offai(in,~ to deal with longer term change. U Ig98, the
Board expressl}~~ criticized and r~e~~ersed the prior panel far talcin~ such an incrementalist
approach in the context of tel~~~ision performing rights:'a
The Board respectfull~~ di~agre~s c~=ith this pr~viaus position. It finds this
interpretation restricted and limiting. A valuation of this sort should be set
in relation to the hole time during which the tariff has existed. Some
account should be taken of changes that occurred incrementally o~~er that
whole period in the use of music ands as a result, in the value ofSOCAN's
licence to broadcasters_ The Board al$o finds that,. to date, the account
taken of these changes has been insufficient_ The reduction in the rats
manifests this hr~ader approach.
IntraducNon
22.
In this proceeding se~~eral Collectives retained experts to analyze the marketplace far, and
the economics of, the retransmission ofdistant signets:
(a)
CBRA and CRC' retained industry expert Peter Grant to consider changes in
retransmission patterns since 1990,. with an eve to the Board's original approach
~~ I~ttD_~;~~v~vw.Cl?-Cda-QC.Ca~dGCisipnS+1~8,'1998U13(1-ni-b.UdfaE p. 1?
-R -
to setting the retransmission taritT and to what makes certain distant signals
attractive to subscribers. These Collectives also commissioned consumer rese~r~ch
thrau~h Forum Research Inc., which is presented by Mr_ Grant as part of his
expert report.
(b)
CCC retained Dr. Gerry Wall and Professor Jeffrey Church to conduct separate
economic analyses df the value of distant signals to BDUs. Dc Wall directly
estimates this value, while Professor Church employs a proxy approach.
23.
The Collecti~~es' expert evidence, and tF2e conclusions to which it ic.ads, arc SU171I11c~FtZCd
below_
In 1990, when the aWerage subscriber received 4.56 distant signals, mast were signals
from the US border stations associated v~ith the .ABC, CBS, NBC and PBS networks
(kno~~n as the "3+1"for the three commercial networks plus PBS). ~Uaut a quarter ofaU
distant signals were Canadian. The same was true when the Board last considered
r~etransmissian royalties on a contested basis in the 1993 Decision_
2~.
The number of distant sigrals has risen dramatically since then. For the pwposes of this
hearing, the ~pllecti~~es and BDL.Ts joimly commissioned a Mediastats study to pro~~ide
information on the average numbers Qf distant signals per residential subscriber for the
period from 200~~ to 2U14. The stt~dy~ reports that the a~~erase number of distant signals,
which stood at x.56 in 1990, had risen to 25.2 per subscriber by 20~ and to 55.3 per
subscriber by 201~.
26.
The increases since 1990, and subse~uently~ since 200, have arisen from a variety of
factors. These include the commencement of retransmission of the Fox network b_y
Canadian BDUs (creating the "4+1"} in 1994, the advent of direct-ta-home ("DTH")
satellite services in 1997, the availability of digital (vs analog) sen~ic~s starting in 2000,
and the emergence of Internet Protocol tele~~ision ("IPT1~"") offerings by the telephone
companies after that.
-927.
These factors, in turn, have led to the introduction of a gnawing array of time shifted
distant signals end the mare recent popularity of high definition("HD")signals.
A.
28.
Time Shifting
Time shifting refers to distant signals from one market that are retransmitted into another
market in a different time zonz. The distant signal ma}~ be (though is not always) from
the same netwroric as a station available as a local signal in the subscriber's market. Far
example, a digital subscriber in (?ttawa may receive not only the signal of the local CTV
station but also the CTV signals Fi-am ~ancou~~er, Edmonton, Winnipeg and Halifax
together ~~~ith US 4+1 stations from bath the Eastern and Pacific time zones.
29.
(b)
Time shilied network signals also after some different pros4ramming, 1'or example
dramas. local news, late eight mo~~ies and differ~e~t sports lcaeuc ~amcs on sonje
days.
(c)
E~~~n for net~vark programming that is the same from time zone to time zone,
each additional time shifted si~nat offers a subscriber an additional time at which
to ~atch. If an Otta~~a subscriber cannrat watch his or her fa~~ourite program at
8:OU pm on the local Ottawa station, the same pro~rarn is also ar~Ailable at 7:00
pm (Halifax), 9:Op pm (Winnipeg), 10:00 pm (Edmonton) and 11:04 pm
(`raneouver).
30.
Canadian Media Research Inc. surveyed Anglophone Canadians on the value of time
shifting, and found that about 76.3~a of respondents agreed ar strongly agreed that time
shifting was one of the most 4~aluabl~ services an cable or satellite TV aver the nine years
up to 2U11 {when it stopped asking that question).'S
question in the spring of 2015 and found that 75!0 of respondents continued to agree or
strongly agree.
B.
31.
HD Signals
3?.
tllthough distant HD signals transmit the same content as the SD versions of the same
cl~anncls_ they Add incremental ~~alue to subscribers arising from far higher video quality.
33.
Forum Research found that adult Anglophones in Canada ~4ho subscribe to BDUs
consider that, ~~h~n a T~~ channel is of~'ered in bath HD and SD (rather than in SD alone),
the ~~alue of that channel doubles.
A.
3~1_
Ccrn~ 1~S`ail
Krrc:k~rvund
The actual market price of distant signals represents a fair and equitable measure of the
benefits BDt~s reeeire from the use of distant signals. The Board noted in 1993 that an
actual price for the right in question u=as a good analytical starting point_ The Federal
Court of Appeal has confirmed that a fair and reasonable approximation of the market
price is a sound basis for setting a taril~ !~
~5.
As noted above, when the Beard held the first two retransmission hearings in 1990 and
1993, there was na market data from which the vafue of distant signals was directly
quantifiable. Accordingly, the Board used a proxy approach which started with the ach al
wholesale price of the A&E signal, which was considered analogous to distant signals.
16 ('anudia Assn. of'Bmadrnsters v S~ciely oj[`anrv~c~sers, tlulhnrs mrd Music Publishers of C annda (1944), SR
GPR (3d) 190 at 194 and 196 (FCA); Srmiety of C'onrpr~sers, AuthUrs nrrc~l A~i~sic Publislr~rs ~f Ccrnc~da v C,rrrradian
Assn. ~fB,Yxrdcasrc~rs (19951), 1 CPR (4th) SU {FCA) at Para 2.
Now, however, there is direct evidence of the actual retail market price of distant signals
in Catsada. This e4idence provides the most releti~ant and direct means of Waluin~ distant
signals for the purposes ofsetting a fair and reasonable retransmission royalty.
36.
The economic analysis and assessment of the value of distant signals in Canada based on
actual market prices is presented in the expert report of Dr. Gerry Wall cf 1N'all
Communications Inc." Dr. Wall holds a doctorate in E~anomics from the University of
Toronto and has held numerous positions within the braadcastin~ industry. He has
professionally advised a ~~ariety of administrati~e decision makers and regulatory
agencies including the Canadian Radice-Television and TelecoRununicatians Commission
(CR'TC), the CapyTight Board, end the Competition Bureau, Industry Canada and the
Department of Canadian Heritage. Dr. V4'all has also appeared as an expert witness before
numerous administrative tribunals and courts including the CRTG, the Copyright Board,
the Competidan Bwresu, pra~incial courts, the Federal Court of Canada and the U.S.
district courts. A copy of Dr. W'all's C1~~' is attached to his. expert report.
B.
~7.
Dr. V4~'all worked with actual market data on the retail prices charged bye BDUs to their
subscribers for distant signals to deri~=e an a~~erage mari:et wholesale price to BDUs for a
distant signal based on the carrelafian of retail to wholesale prices. This information has
only been made a4ailable as a result of xhe current interrogatory process. Knowing the
average retail price charged by a BDU for a distant signal, and having calculated the
average wholesale to retail mark-up applied by BD[,Ts to sp~~ialty signals, Dr. Wall
estimates the average market w~hole~ale price to BDUs for a distant signal would be 9.2
cents. However, under the current certified Tariff, BDUs only pay an average amount of
1.8 cents per distant signal.
38.
As an average BDU subscriber received 54 distant signals in 2013,~~ Dr. Wall calculates
that the overall wholesale market price to BDUs should be 54.97 per subscriber per
" Wall Communications Inc.. ~r~ert Report' c~jDr. Cerr~' li'u11. 71re Ernno~nric Vahration ~j'tl~e Tari~J' Ralefor the
Relr~nsmissi~n ofI3istU~i! Tele~~rsio~r Srgnnlsfir X014-1fJ18, Exhibit Collectives-2.
16 Join[ Mediastats Study, Extubit Collectives-6.
- l? -
month (i.e. the estimated a~~era~e wholesale price of a distant signal (9.2 cents)
multiplied by~ the number of distant signals recer~~ed by an ac=erase subscriber in ?013
(54)). Under the current certifed tariff, the BDUs only pay 98 cents per subscriber per
month.
39.
The discrepancy between the current tariff rate And the estimated market value of distant
signals demonstrates the undervaluation cif distant signals, as illustrated by the chart
belnw.
_ _
Estimated Distant Signal Valuation (based on Actual Market Prices)
versus Current Retransmission Tariff Rate
5554
;4.97
SS OD ~.
stir :S1 N~
515u
5~ to ~- .
sr sr
Sf.no
I
S7'n
so.~
s~ ~ i
~~
~~
C
~Q
An~tysis
in explaining his a~ialysis, Dr. W'all's expert economic ~~~~idence addresses, among other
points, the following:
(a)
Dr. Wail reviews the retransmission taril~ and the underlying rnethadulogy
employed by the Board in s+ettin~ the tele~~isian retransmission rate. Dr. Wa11
concludes in his report that the hoard's approach of estimating ~ rAte based upon
price (predicted a~~erage market price per distant signals and quantity (a~erage
number of distant signals per subscriber) is an accepted economic approach to
determine the monetary value of goods.''
SIB
(b)
Dr. Wall agrees ~~ith the Board's stated proposition that the use of actual market
prices (to the extent they are available) provides an optimal methado(o~ical
means of establishing value, as actual market prices provide "real-world"
e~~idence of specific ecnsunler willingness to pay for distant signals and the value
that the retransmitters recei~~~ from the use of those signals.
41.
Dr. V~'all re~~iewed the information pro~~ided by the BDt~s in response to the Collectives'
interrogatories. The e~~~idence discloses that distant signals are found not only in every
BDL~s basic, extended basic, or premium packages, but also in discrete packages
containing o~ih~ distant signals. Prices for these distAnt si~n~l packages have been freely
set in the marketplace by BDUs_ 'These packages purchased by consumers on a
discretionary basis.
42.
Dr. V~`al1 will provide his expert opinion that the use of real utorld price data from the sale
of distant signal discretionary packages (those that contain only or predominAntly distant
signals) pro~ides the most direct means of establishing the value df those signals and
provides the clearest indicator of their value.
~3.
The evidence is that these distant signal packages typically include anytivhere from four
to 100 time-shifted Canadian and~or L.i.S. signals and range in retail price from roughly
~3 to $IO per month. Dr. ~~'all calculates that the average retail rate charged by BDL)s per
distant signal in 2013 was 30 cents.
44.
Based on actual BDU data for specialty senices, Dr. Wall calculates that the average
wholesale to retail mark-up applied by BDUs. To derive the ati~erage price of distant
signals at the ~a~holesale level of trade, Dr. Wall applies the avera~ mari~-up to the
a~~~rage distant signal price calculated at the retail le~~e1 of trade to canch~de that the
a~~erage wholesale price of a distant signal should be on average, 9.2 cents per-distant
signal.
45.
Dr. Wall confirms the reasonableness of his estimate of the average ~holesale price of a
distant signal through the use of BDUs' information relating to basic and extended basic
tiers. Dr. Wall concludes that the estimated wholesale cost of distant signals in basic and
l~-
extended basic tiers brackets the predicted a~~erage market w~halesale price of 9.2 cents
per distant signal calculated based on distant signal packages achially sold by BDUs_
~G.
Dr. 1~ra(1 next explains that the estimated market price that a BDL~ would pay for the use
ofthe fatal number of distant signals pro~Pided to the average subscriber can b~ calculated
by multipl}ring the estimated a~~erage w(iolesale pricy of distant signals by~ the average
number of distant Signals used by BDL1s.
calculates that the average wholesale cost of distant signals pro~~ided to subscribers is
x.47(92 cents x 54 distant signals} per subscriber per month.
D.
~7.
A Re~rlety Check
It is evident from Dr. Vi~rall's analysis that the current highest tariff rate of 98 cent: per
month per subscriber significantly unden~alues distant signals. This is immediately
apparent ~~~hen the amount now paid by' a BDLJ for the use of all distant signals is
compared to the re~~enues earned by the same BDU through the sale of those distant
signals to subscritrers.
48.
.This
But TE.LUS a(s4 reported that it deli~~ered a packa~,e of distant signals for which _
(i.e. only ~~o) of its subscribers pay $9.00 per month for total proceeds of about$_. [n other words, T~.LUS earns more than ~ times its entire annual
retransmission ro}salty obligation lay deli~~ering distant signals an a single tier, to ~nl~~
~fo of its subscribers. And this does not take into account all of the additional ~~alue
generated far TELUS by the deli~~ery of distant signals on its basic and other
discretionary tiers to all of its other subscribers.
-15-
50.
While not the basis on which he recommends that the Board value distant signals today,
Dr. Wall also presents another analysis based on a continuatio~i of the Board's 1990
proxy analysis updated with data ranging frarn 2009 to present.
51.
Dr_ V1+"all calculates the annual growth rate of the wholesale price of :~hE. (the proxy
service used by the aoard in the 1940 Decision) to be ~~o per year from 200 to 2013,
and the annual ~rawth rate of the a~era~e number of distant signals received by
subscribers to be 1 I.610 per year across the samz period.
5?.
r'ipply~ing the combined annual growth rate to the highest 2013 tariff rate of98 cents, and
projecting that grow~kh forward over the ~Oi~ to ?O18 tariff period, results in a royalt}~~
rate of$~ b~~ 2418. V4'hile a far less useful approach to distant signal ~~aluation ~i~~en
the robust economic information no~v a~~aitable throu}~h the interrogator} process, the
updated 199fls prox~~ anal}Isis demonstrates that the rates found in the last certified tariffs,
as ell as those in the proposed taril~ filed by~ the Collectives in I~tarch ?013, are far too
low to be "fair and equitable".
~.
53.
Background
5~.
i~in the world in the Directory ofCornpeti~ion Economists in The Int~ri~atio~lal Who 's Who
of Campetitiorr Lm+yFers and Economists and has been qualified as an expert witness
before a variety of administrative decision makers, regulatory agencies, and Courts
including the Competition Tribunal, National Energy Board, Alberta Energy Utilities
Board, the CRTC,Federal Court of Canada, Supreme Court of British Cotumbia, and the
Federal Court of Australia. A copy of Professor Church's CV is attached to his expert
report.
B.
55.
Professor C'hurch's proxy market Walue approach estimates the ~~alue of distant signals
based on ttte value of a comparable asset for which the price is set in the competiti~~e
marketplace. In particular, Professor Church determined that the per-subscriber payments
made by Canadian BDUs far U.S. specialty senices is an appropriate proxy for the value
of the bundle of distant signals in a competitive market. Working +~~ith the BDUs' data,
he eonclud+es that a consen~ati~~e lower bound of the economic ~alue of distant signals in
the aggregate is at least $2.00 per subscriber per month.
C..
56.
Anat}psis
Professor Church starts by explaining that, from an economic perspective, the persubscriber price paid by BQUs for the bundle of U_S_ speciality s~nrices (including, far
example, A&E) is a sound proxy for the minimum price that n~auld be paid b~~ BDUs for
distant signals in the marketplace having regt~rd to the fc~llc~wing:
(a)
(b)
In the a~re~ate, both U.S. speciality services and distant signals contain a ~~ariety
and mix of cornpar~ble programming;
{c)
The price paid by BDUs for the U,S. specialty services is set by the market; and
1^+
(d)
57_
Hac~~ing established that U.S. speciality ser~~ices are comparable to distant signals,
Professor Church analyses ati~ailable data concerning the BDUs' r~~holesale pricing and
subscribership to calculate the per-subscriber price paid far the entire bundle of U.S.
speeialtMF ser~~ices. I{e finds that the monthly per-subscriber price paid b_y VDUs for U.S.
specialt~~ senices is at least $2.OG per subscriber per month.
58_
T'he BDUs did not provide complete information with r~speet to ap pavcnents
made to U.S. speciality programs_ As a result, the total amount that Professor
Church calculated was paid bye BDUs is an underestimate. 1f an estimate t~f
payments likely made by~ BDUs for L1.S. specialty sen~ices provided to its
subscribers but nut reported in their interrogatory responses is included, the
monthly per-subscriber royalty could increase from approximately X2.00 to
approximately $2.50.
(b}
To account far differences in the penetration rats of U.S. specialties and distant
signals, Professor Church has adopted the ~ons~rvative assurnptian that the
specialty sen~ices would achieve 100~o penetration, without ar~i~ additional
~~~holesale payment being made. ~~s a result* the calculated monthly per-subscriber
fie paid by BDLJs for the bundle of U.S. specialty sen~ices (proxy) has been
significantly reduced from its actual market price.
IR
(c)
An analysis of the market suggests that there may be buyer side market power
(i.e. BDU market power) that would suppress what would otherwise be
competitive prices and thus drive down the amounts actt~alty paid for US specialty
services. This market distortion su~~sts that the value of U.S. specialty services
to BDUs and to their subscribers is greater than the wholesale price would
indicate.
S9.
On the basis of his analysis, Professor Church concludes that a conservative lower bound
of the pre$ent day economic value of the bundle of distant signals as an aggregate in the
Canadian marketplace is X2.00 per subscriber per month. As noted above, with more
complete inforinatian from the BDfJs and b~~ applying less conservative assumptions, the
monthly per subscriber ~~alue would 6~e significantly higher_
As noted at the outset, the Collectives filets proposed tariffs in I~tarch X013 seeking a
lame retransmission system rate increasing annually from the old 2.013 rate cif 98 cents
per subscribzr per month to a new rate of $1.38 by the end of the new tariff period in
201$.
61.
These proposed rates were r~e~uested before the Coll~ctia~es had access to critically
relevant information on the actual current value of retransmission rights which w~~as on1~r
obtained throu~th the subsequent interrogatory process.
(
i2.
There has not been a contested hearing an the rate since 1992. Before the current tariff
proceedings, and except for long obsolete interrogatory responses delivered in 200.4,
there was no source of detailed information available to the Collectives about exactly
how the BDUs distribute signals or sen~ices or, mare importantly, how much they charge,
pay and profit from that distribution. This infarn~ation was confidential business
information to which the Collectives had no access.
19
63.
That changed in 201 . The BDUs responded to a range of Callective interrogatories that,
for the first time in over a decade, made available on a confidential and highly
confidential basis the data required to co~iduct both a direct assessment of distant signal
value and a far more robust proxy analysis than was possible in 199p. Two leading
economists and a renowned industry expert were retained to analyze that data. The
results ire now a~~ailable and are sumcnariz~d above. They reveal that the Collectives'
requested royalties set out in the proposed tariff filed in l~iarch 201 ~ are far too low.
64.
r'~ecordingly, the Collectives hereby re~~ise their proposed royalty ratzs to seek a lame
retransmission system royalty rate (subject to a ~~ariery of discounts, discussed below} of
X2.00 per subscriber per month for 201 _ ~s this is a prospecti~~e tariff that is set as a
"penny" rate rather than as a percentage of revenue? it requires upward adjustments each
~,~ear. The Coltecti~~es submit that the appropriate annual adjustment factor is 4.~~'o, the
average annual increasQ in the cost ofa basic cable subscription (analog and digital} from
2010 to ~OI4, leading to a large retransmission system royalty rate of $2.38 per
subscriber per month in ?018.
65.
Thy financial and eeonnmie data related to the market ~~alue of distant signals were
alwap^s known b}r the ~iDUs, but could onl}~ be disco~~ered by the Collectic~es through the
interro,~atory process. The real value of distant si~nais should not be a surprise to BUUs.
66.
The Collectives propose a blanket licence regime whereby a BDI~ pays a set monthly
royalty for each subscriber who eecei~~es one or more distant tele~~ision signals.
67.
For small rztransmission syst~ms (those with fewer than 2x00 subscribers) the
~ogecti~~es propose to continue the ~ 100 dollar per-year flat rate ra~~alty that has been in
place since 1990. As ~4ith past retransmission tariffs certified by the Board, an exception
is made for systems with 2000 or fewer subscribers that are located within the sen~iee
area of other systems with more than 2000 subscribers.''0 The Collectives also propose to
~"r~s provided far in suhs~ction ?(~) of tl~e proposed tariff, and subsection 6(;) of the retraiuriussion tariff certitieri
far 20~~1-2U 1 z, sy~stenu with ~uUU or fewer sub~crih~rs that are located ~vidun il~e sc~r~~ice area ofother swsteins with
zo continue the discounts for retransmission systems that serve francophon~ markets, and in
respect of T~~~ and certain nan-residential premises_
68.
Similarl}~, the Collecti~~es propose to continue the discaunts previously set by the Board,
including for large retransmission systems that sense fer~~er than 6000 subserib~rs. Those
discounts were set in the 1990 decision at fi~~e cents per subscriber per month for each
500 subscribers fewer than 6000 subscribers in a s~~stem, an amount that has been more
or less maintained since that time. The ColleCfi~es propose to maintain both the fi~~e cent
discounts and, except fQr the smallest category, thz 500 subscriber i`steps"_
69_
The changes no~ proposed b}r the Collecti~~es to the royalty rates for BDI.~s are set out
belo~.~~:
lumber
premises
~~tonthl~ Rate for each premises receiving one or more distant signal
of (cents)
201~i
2015
216
2017
2018
t.r'p to 1500
I ~0
I ~9
l68
178
188
1 ~Q 1-200U
15~
I6~
173
183
193
20(}I -2100
16U
169
178
1$8
198
~~U1-3U00
165
17~#
183
193
?03
30Q1-300
170
179
188
198
2p8
3~' O 1-~0(}0
17~
1 S~
193
X03
Z13
4001--500
1$0
189
198
?03
?18
a;a~-5oao
18?
I9~
203
213
?23
5001-5 00
190
149
X08
218
?28
5~Ol-60(}0
195
204
'? 1 ~
2~3
?33
X0(}0+
200
2U9
?1 S
228
238
more Ch m 2~~0 subscribers insist pad rates greater thin ~ i gip, as prescribed in the tariff, Note that although
subsection 7{3) ofthe proposed t~riffset$ out the proper r~~ting apprcki~h Cor systems with ?D00 ur Fewer sulxscribers,
the t.ible of rayaUies set out in section 9 of the proposed tarit~' inadvertently omitted specifying the rates far such
systems. "Chat oiussion has bec~~ corrected in die table of prppased royalties set out below.
~~
70.
The proposed Tariff also addresses the allocation of the royalties as l~tween the
Cotlecti~es until December 31, 2015. By agreement of the Collectives, end direetian of
the Board,'' issues as to the allocation Qfthe royahies from January 1, 2016 to December
31, 2018 are not to be addressed in this proceeding, but will be determined separately.
1~1~`itnesses
'
` Notice of chc Board, d~~tc:d ~loveaiber 7, 201 .
~.~
Exhibits
Uescriution
C~llecti~~es-1
Collectives'
Statement of
COI~FIDE1~iTIAL information)
Collectives-2
Collrctivcs-3
Gollectir~es-4
Collectives-5
Collectives-6
Collectives-6?I
Collectives-7
Ca,sc
[Contains
AIGHLY
Collecti~~es -7/Q~
Collectives -7,~'QS
Collectives -71Q8
Collectives -7,~Q9
~~ e
Exhibit Number
Collectives -71Q17
Collectives-8
CoUeedves-8/Q4
DcscrintiUn
Appendix 17(H) (August 20, 2014) to Response to Collectives
Interrogatory 1?
Rogers Responses to Collectives' Interrogatories 4,5, 15, and 17
(HIGHLY GONFIDEI~TIAL Version)
Collectives-S1Q5
Cogectives-8lQ15
Collectives-8/Q17
C'ollccti~~cs-~1
Collectives9/Q1Q2Q4
CO1~F[DENfTIALj
Collecti~~es-91Q5
Collectives-9~Q17'
Collectives-10
Collectives-1UlQ4
Collectives-lOfQS
Collectives-11
-za-
Eahibit Number
Collectives-11/Q4
Collccti4~cs-r 1,'QS
Collectives-111Q9
De~cciotion
Appendix 4(b),4(c}, and ~4{d)(August 2U, 2014)to Response to
Collectives Interrogatory 4[HIGHLY COI~iFIDENTIAL]
Appendix 8(August 2d,2014)and Supplementary Appendix S
(December 5, 2414)to Response to Collectives Interrogatory 8
[HIGHLY CONFIDENTIAL]
Appendix 9(August 20,2014)to Response to Collectives
Interrogatory 9(HIGHLY COI~YFIDE~ITIAL~
Gollecdves-12fQ4
Collectives-~2/QS
Collecti~es-13
Collectives-13,rQ9
Cullccti~~cs-IS
-?S