Background
On March 23, Rogers Communications and Shaw Communications announced that they would swap certain cable TV properties resulting in Rogers controlling most cable customers in Eastern Canada while Shaw will dominate the west. Rogers Communications Inc. announced on February 7, 2000 that it will acquire Groupe Videotron Ltée. This resulted in the creation of Canada’s largest cable company and the seventh largest in North America, with Rogers providing service in Canada’s four largest cities (Toronto, Montreal, Vancouver and Ottawa) as well as two other top ten markets (London and Quebec City). The new arrangement transfers Vancouver to Shaw while Rogers picks up the former Fundy Cable territory in New Brunswick owned by Shaw as well as Shaw’s ownership position in Cogeco (roughly 10%), allowing equity based interest for Rogers in the portions of the Toronto/Niagara region that it does not own. Shaw picks up Rogers’ stake in satellite operator CanCom. Rogers ends up with about 3.5 million customers clustered together in Canada’s two most populous provinces, all interconnected by fiber. Shaw will have close to 2 million clustered customers in Western Canada.

Feeding Internet Content
The companies are merging @Home Canada and Excite Canada to form Excite@Canada – a broadband portal for 500,000 Canadian cable modem customers. Rogers and Shaw will jointly build a national broadband internet backbone company, using Shaw’s newly acquired cross Canada dark fibers acquired and Rogers plans to share in the Shaw investment in 360 Networks.

Competing with the phone companies
The move will permit greater consistency of network offerings for the former islands of franchises. By consolidating their territories, both Rogers and Shaw will improve their ability to broadcast marketing messages over mass media. As both companies move to increase the level of bundled services – combining offerings from the various operating units (such as @Home internet, Rogers AT&T Wireless) – the geographic consolidation eases the work for both firms in reaching their core customer bases. The role of AT&T Canada in adding voice services remains the open question for analysts. We expect to see AT&T reaching out to touch Shaw in the near future.

Background

Rogers Communications Inc. announced on February 7, 2000 that it will acquire Groupe Videotron Ltée. This will result in the creation of Canada’s largest cable company and the seventh largest in North America, with Rogers providing service in Canada’s four largest cities (Toronto, Montreal, Vancouver and Ottawa) as well as two other top ten markets (London and Quebec City). Rogers becomes the main provider of cablevision services in Canada’s two most populous provinces, Ontario and Quebec – the home market of Bell Canada. Rogers plans to repurchase some of its outstanding shares using funds from the sale of so-called non-core assets. Such assets were said to include Rogers’ $2B holdings in AT&T Canada and Videotron’s $275M share of Microcell (a competitor to Rogers’ wireless unit). The deal, billed as creating “Canada’s largest broadband communications company” is expected to close in April subject to regulatory approvals.

Competing with Bell

Cable companies appear to be winning the battle to provide broadband residential access to the Internet. DSL has been rolled out much slower in Canada than in the US, largely due to delays in negotiating fair access for DSL collocation (a log-jam recently fixed in an industry wide settlement in late January). The consolidation of Videotron with Rogers will likely help cable maintain its lead through more consistent national branding and engineering.

Videotron is more advanced in its rollout of cable-based telephony products. It would appear that there is a regulatory loop-hole which permits long distance calls originating on an Internet Protocol integrated cable network to avoid costly local service subsidy charges – helping the economics of local phone service. Further, the residential lines provided by the cable companies will in certain cases be eligible to be on the receiving end of such subsidy payments from competing long distance companies – clearly bound to raise the ire of the incumbent Bell Canada.

Videotron represents a strong channel for Rogers AT&T Wireless services. Rogers offers a bundled VIP program in its other territories, enabling customers to benefit from subscribing to Rogers cable and wireless services. We expect Rogers AT&T Wireless to begin bundling with Videotron cable resulting in an increased share of the Quebec wireless market.

Rogers and AT&T

AT&T Canada sold its residential long distance base to Primus last year, in a move designed to shed its unprofitable business under the local subsidy scheme which saw large percentages of revenues being paid to the incumbent Bell Canada. Rogers’ close alignment to AT&T represents a new entry point to the residential market – with a very different set of economics. Rogers’ shedding its interest in AT&T Canada likely foreshadows AT&T Corp. increasing its direct holdings in Rogers. There is no need for Rogers to hold an interest in AT&T Canada when AT&T will be more closely aligned by its holdings in Rogers.

Background
“Contribution” is the term used in Canada to refer to the subsidy from long distance services towards basic dial tone. The level of Contribution varies by province, however, it is generally in the order of 0.5¢ to 2¢ per minute per end of the call, charged in addition to switched access or egress charges.

The CRTC has updated Contribution rates for the year 2000, and has ruled against AT&T Canada and Call-Net’s applications to lower the subsidy even more due to the effect of increased volumes of minutes stimulated by flat rate calling plans. New rates are set out in the table below.

Contribution on DALs
As reported in the July 24, 1999 update, traffic sent over Dedicated Access Lines (DALs) continues to be exempt from paying contribution, and carriers will continue to apply a “DAL” surcharge on switched traffic charges. Further, at that time, the Commission determined that carriers which do not use DALs at all should be exempt from the surcharge. The surcharge was determined in Telecom Decision CRTC 99-20, released December 15, 1999.

International Issues
Western Canadian telephone companies had complained that international traffic patterns had been distorted because low contribution rates in Bell Canada territory created an incentive for traffic to use Ontario and Quebec as border crossings (thereby saving up to 2.5¢ per minute). In response, the CRTC has determined that all international traffic will attract the Bell Canada rates (about half a cent per minute), effective January 1, 2000.

Summary
As we have reported before, per minute access and contribution charges continue to be a significant issue challenging profitability for Canadian carriers. The competitors for voice services have not been able to convince the CRTC that there is a problem and there are signs of a credibility gap for the industry in presenting numbers to the Commission. There is a continuing proceeding to review the “per-minute” approach to contribution as well as the overall level of funding required to maintain affordable local service.

Background
Frustrated by what the CRTC perceived was industry-wide foot dragging, on September 14, 1999, in Telecom Decision CRTC 99-11, the CRTC ordered Canada’s cable companies to give Internet Service Providers (“ISPs”) wholesale access to high speed internet connections within 90 days. Alternatively, the cable companies were ordered to provide resellers with a mandatory 25% discount off their best available retail rates for cable internet service in order to provide the ISPs with the opportunity to offer similar services on a resale basis.

Issues
The Decision raises some very interesting policy and operational issues. The Commission did not appear to have costing evidence from which to derive its 25% discount level, nor did the Commission give guidelines on what it would use to distinguish Internet resellers from consumers. On the surface, it would appear that individual consumers could declare themselves to be resellers to benefit from a lower price. The Commission also did not specify whether the customer premises equipment (modems and network interface cards) would be included. The CRTC considered that Canada suffers from an inadequate supply of high speed Internet access services. While Canada enjoys among the highest penetration rates for cable modem Internet access, it has among the lowest penetration rates of DSL technology. Cable companies in Canada have had difficulty properly engineering their networks to meet the monopoly levels of demand and had not yet been prepared to open their networks for competitive access.

Summary – who won?
This decision appears to represent the CRTC venting its frustration on the Cable companies – and cable company stock prices have suffered as a result. Investors are left questioning aspects of Canada’s regulatory regime in the wake of this decision and have pulled back from Canadian cable stocks as a result. Given that cable companies will be left with new ISP sales channels while retaining 75% of the revenues, it is hard to tell if the ISPs really won and the cable companies lost. There is still an outstanding complaint by the ISP community against the phone companies, seeking similar concessions. It will be interesting to see if the CRTC takes the same position in its decision on a similar file in respect of ISP access to telephone company DSL services.

Background
The CRTC has recently issued a number of decisions and letters of interest to providers of long distance services in Canada. This Update will touch on some of the most relevant matters.

Contribution on DALs
Contribution is the term used in Canada to refer to the subsidy from long distance services towards basic dial tone. The level of Contribution varies by province, however, it is generally in the order of 0.5¢ to 2¢ per minute per end of the call, charged in addition to switched access or egress charges. Dedicated Access Lines (DALs) have not attracted Contribution and on July 20, in Telecom Decision CRTC 99-9, the Commission has agreed to continue this exemption, and will continue to apply a surcharge on switched traffic charges. Further, the Commission agreed with London Telecom that carriers which attest to not using DALs should be exempt from the surcharge. The level of the surcharge will be set in the decision associated with a concurrent proceeding (Public Notice 99-5).

International Issues
On July 14, 1999, the CRTC issued a letter to all registered resellers in Canada, as a reminder of the requirement to acquire a license for the provision of international services.

An industry wide task force examined issues associated with the competitive provision of international services and a report was issued on June 23 to the CRTC. The report consists of non-binding recommendations to assist in applying the new rules consistently. Among the more significant issues addressed is an attempt to capture Contribution payments for voice traffic which leaves Canada over non-circuit switched facilities (such as Internet Protocol (IP) or Asynchronous Transfer Mode (ATM)). The task force recommended establishing a new Class C license for carriers of such traffic. Class C licensees would be required to measure the minutes at the point of conversion from circuit switched technology.

Until the CRTC acts on this report, IP and ATM services may continue to be used to carry traffic in and out of Canada, Contribution-free.

Summary
Per minute access and Contribution charges continue to be a significant issue challenging profitability for Canadian carriers. In recent months, AT&T Canada’s decided to exit the residential long distance market, selling its business to Primus, and Sprint Canada continues to bleed red ink associated with carrier charges. It appears clear that further changes will be required in order to rationalize the regulatory environment – providing consumers with choice while leaving profit opportunities for carriers.