Broadband Investment: The Backbone of the Digital Economy Shaw Submission

Summary

1. Shaw Communications Inc. (Shaw), on behalf of Shaw Cablesystems GP (Shaw Cable) and Shaw Direct, is pleased to provide this submission in response to the Government of Canada's Consultation Paper on a Digital Economy Strategy for Canada — Improving Canada's Digital Advantage: Strategies for Sustainable Prosperity (the "Consultation Paper").

2. Shaw commends the Government for its commitment in Budget 2010 to developing a national digital economy strategy. As one of Canada's leading communications companies, Shaw has assumed a prominent role in making Canada a global leader in the digital economy. Shaw is a diversified company whose core business is providing broadband cable television, High–Speed Internet, Digital Phone, telecommunications services (through Shaw Business Solutions) and satellite direct–to–home (DTH) services (through Shaw Direct). The Company serves 3.4 million customers through a reliable and extensive broadband network, which comprises 625,000 kilometres of fibre.

3. Although the Government has raised several issues, Shaw will discuss two themes set out in the Consultation Paper: Building a World–Class Digital Infrastructure and Digital Media: Creating Canada's Digital Content Advantage.

4. As Canada moves deeper into a knowledge–based economy, it will be critical to make additional investments in terrestrial, mobile and satellite broadband digital infrastructures, and in the provision of content services across multiple platforms to support the digital economy. In a competitive and increasingly global communications environment, Canada needs to accelerate broadband infrastructure investment as the backbone of the digital economy to strengthen our leadership position. To facilitate the expansion of Canada's digital economy, government policy and regulation should focus on supporting ongoing investments on all platforms.

5. Shaw makes the following recommendations:

• In recognition of the leadership demonstrated by Shaw and other private sector companies, Canada's continued success in the digital economy depends on industry initiatives and market–based incentives.
• Impediments to network investment — including taxation, subsidization and micro–regulation in the broadcasting and telecommunications sectors — should be gradually eliminated.
• In order not to burden broadband investment and innovation, the content sector must abandon its reliance on cross subsidization and evolve from a subsidy–based system to a more market–driven approach by eliminating wealth transfers from facilities–based providers and other sources.
• Government policy should support the ability and efforts of domestic new entrants to increase competition in the telecommunications sector. This requires the implementation of spectrum caps in upcoming auctions, effective and efficient tower–sharing rules and competitively–neutral foreign ownership rules.
• The Government should strike an expert panel to review broadcasting and digital media policy and to develop a blueprint for the digital economy based on a market–driven investment approach.

Submission

Building a Stronger Competitive Economy

6. We agree with the Government's focus on "building a stronger and more competitive economy … [that] will ensure a better quality of life for all Canadians." Broadcasting distributors and facilities–based telecommunications providers have made significant investments to build Canada's world–class broadband infrastructure. These efforts to efficiently deliver exceptional services to Canadians have supported the Government's policy objectives and exceeded our responsibilities under the Broadcasting Act and the Telecommunications Act.

7. Shaw's contributions and dedication to our customers who are the cornerstone of our business are consistent with the Government's focus. As of May 31, 2010, Shaw had approximately:

• 2.3 million basic cable customers
  • We have built capacity to support digital and high–definition services and we have developed new applications and technologies that enrich the customer experience, including pay–per–view, video–on–demand (VOD), subscription VOD, music channels, and interactive program guides.
• 1.6 million digital customers
  • Shaw offers a range of digital service tiers in all cable systems, while our largest systems offer a complete digital version of the full analog program offering.
  • Shaw Cable and Shaw Direct each now offer almost 60 HD channels.
• 1.8 million Internet customers
  • We provide customers with internet speeds up to 100 Mbps utilizing DOCSIS 3.0 technology and this year we became Canada's first provider to trial Gigabit Internet technology delivered over Fibre–to–the–Home, which will offer revolutionary speeds of 1000 Mbps.
  • We have closed the broadband gap by providing high–speed internet service to small towns like Wasa, British Columbia, Magrath, Alberta, Elie, Manitoba and Red Lake, Ontario.
  • We have launched a new broadband player that will allow Shaw customers to access VOD content on their computers.
• 1 million digital phone lines
  • We have provided significant competition to incumbent telephone companies. Only five years after launch, we now deliver digital phone to over 43% of our cable customers.
• 905,000 DTH customers
  • Through Shaw Direct, we provide a 100% digital offering to customers across Canada, including Canadians in rural and remote areas.
  • Shaw Direct has provided an important competitive incentive for terrestrial BDUs to accelerate their conversion to digital.

8. Shaw has consistently demonstrated our commitment to expanding Canada's digital economy through investment in digital technologies and services. Since 2000, Shaw has invested over $6.5 billion to build a world–class facilities–based digital broadband cable and satellite distribution infrastructure. Additional investment highlights include the following:

• In 2008, Shaw spent $190 million to acquire wireless spectrum from the government and we will invest hundreds of millions more to build a wireless network for the benefit of the communities that we serve.
• In April 2010, Shaw Direct entered into agreements with Telesat to acquire extended Ku–band capacity through the construction and launch of a new satellite. When the new satellite, Anik G1, is operational in late 2012, it will increase the satellite capacity of Shaw Direct by 30% and enable it to remain a strong competitor in the provision of digital services to DTH customers.
• In May 2010, Shaw entered into agreements to acquire 100% of the broadcasting business of Canwest Global Communications Corp. (Canwest) for approximately $2 billion. Further to that transaction, Shaw has proposed to invest significantly in ensuring that Canwest provides content to television viewers and internet users over multiple digital platforms. The scope of our digital transition plans will be unmatched by other over–the–air broadcasters.

9. Shaw remains dedicated to building the best broadband network that delivers superior products and services to our customers — this focus drives our competitors to pursue the same objectives.

The Critical Role of Private Industry

10. Canada's facilities–based service providers have led the development and expansion of the national digital infrastructure for decades. As a result, Canadians enjoy a combination of connectivity, price, speed and choice that is unmatched anywhere in the world. Notably

• Nearly 90% of Canadian homes are covered by the cable footprint¹ and virtually every Canadian household has access to the 700–channel universe.
• Approximately 94% of Canadian households have access to landline broadband² and 91% have access to mobile broadband.³
• As described in Lagging or Leading: the State of Canada's Broadband Infrastructure:

Canadians benefit from a robust, diversified broadband infrastructure. All Canadians who want to subscribe and pay for broadband can obtain service. We have 100% availability when you consider all the technology choices available. The vast majority of Canadians benefit from a world–leading level of choice in access to broadband technologies, using twisted pair, coaxial cable, wireless (fixed and mobile) and satellite. Moreover, Canadians have access to some of the most affordable services, while also benefiting from some of the world's fastest connection speeds for both wireline and wireless broadband services. In terms of adoption, Canada continues to lead all G–8 countries in adoption of internet services, and ranks in the top ten for most international comparisons on broadband penetration.⁴

11. We agree with the statement in the Consultation Paper that international comparisons should be treated with caution. Speed, price and connectivity levels change so rapidly that by the time an international comparison is released, the data is obsolete. For instance, many 2008 national maximum bandwidth comparisons list Canada's maximum bandwidth at 16 Mbps, when in reality speeds of 50–100 Mbps were commonly available in 2008. As well, international comparisons are not controlled to accurately reflect variables such as usage levels, cost of service delivery and national geography. Moreover, broadband service pricing in Canada is lower than in the United States, France, and Australia.

12. Actual evidence demonstrates that Shaw and other communications providers have developed a world–leading broadband infrastructure that will sustain Canada's economic growth throughout the digital economy of the future:

• As observed in the Consultation Paper, Canada is home to an ICT sector that includes 31,500 firms, represents 5% of Canada's gross domestic product, and contributes "to a more productive, competitive, and innovative society."
• A key portion of the broader ICT sector, Canada's communications services providers (telecommunications, wireless, cable and satellite companies) generate $54 billion⁵ in revenues and employ more than 140,000 Canadians.⁶ Over 10,000 of those employees work for Shaw.
• Investments in wireless are not limited to amounts spent in the spectrum auction. Between 2000 and 2008, and excluding the investment in auctioned spectrum, Canadian wireless providers invested an average of US$83.3 per subscriber, second only to the United States and US$20 per subscriber more than the OECD country average.⁷ Also, as of the end of 2009 there were 38 High Speed Packet Access Plus networks in the world,⁸ three of which were in Canada.
• The dynamic competition in the Canadian broadband market is unique in the world given that it derives from competition between different kinds of service providers. Roughly 53% of Canadian broadband customers subscribe to a cable–based service, approximately 45% subscribe to a telecommunications–based service (primarily DSL or fibre) and the remainder subscribe to an alternative service, such as satellite.⁹ The only other country that can boast a comparable mix is the United States.

13. Shaw and its competitors can and, indeed, must continue to innovate and invest in the network to remain competitive. Market–led, network–based competition is pushing operators to invest billions in new wireless networks, launch new satellites, roll–out new broadcasting distribution platforms and increase Internet speeds. The facilities–based network operators' drive to maintain and attract customers and stay ahead of the competition will preserve Canada's world leadership in connectivity and bandwidth speeds.

14. While the market is pushing network investment and innovation by distributors and service providers, the Government can play a key role in fostering these initiatives by reducing and removing policy and regulatory disincentives to investment. Light–handed regulation that ensures equal access to capital and fair competition, while allowing the market to drive network coverage areas, prices, speed and content, will best serve the public interest in the development, implementation and operation of the most advanced and efficient digital network.

Reliance on Market Forces Will Spur Broadband Infrastructure Investment

15. The vast majority of broadband network investment has been driven by competition between the facilities–based providers. Shaw encourages the Government to continue to focus on promoting and enhancing this competition. Facilities–based providers consistently undertake significant capital investment projects without subsidy and at great financial risk. Canada's network operators typically invest between $8 and $10 billion in capital expenditures per year and will continue to do so to attract new customers and maintain their competitive edge. In this environment, it is critical to focus on removing the remaining barriers and disincentives to facilities–based competition. Otherwise, there is a risk that Canada may fall behind the rest of the world.

16. The Government has already taken several very important steps to incent competition and investment:

• Shaw supported — and continues to support — the 2006 Policy Direction requiring the Canadian Radio–television and Telecommunications Commission (CRTC) to increase reliance on market forces and reduce the regulatory burden.
• The replacement of the Canadian Television Fund with the Canada Media Fund recognized the importance of digital, multi–platform content and appropriately focused on criteria such as audience success and return on investment.
• The proposed amendments to the Copyright Act through Bill C–32 would exempt internet service providers from copyright liability with respect to their role as a pipeline for content, would introduce appropriate but not overly burdensome obligations on internet service providers to assist in preventing copyright infringement, and would afford exceptions, such as transfer of format, on a technology–neutral basis that is consumer–friendly.

17. The CRTC has also taken important steps to reduce regulatory barriers by beginning to deregulate services under the Telecommunications Act, introducing a more consumer–focused framework for the regulation of broadcasting distribution undertakings and implementing an approach to internet traffic management that appropriately balances the freedom of Canadians to use the Internet and the need of ISPs to manage network traffic.

18. Although significant steps have been taken, Shaw strongly recommends that the Government and the CRTC must continue to place even greater emphasis on market–based approaches to network investment and serving the needs of Canadian consumers. Specifically,

• The importance of domestic broadband investment must continue to inform Government policy with respect to regulation, taxation, foreign investment rules, copyright and spectrum policy.
• The CRTC should not risk undermining significant network investments by considering mandating certain wholesale high–speed access services through the technologically–impossible unbundling of the cable network or next–generation telecommunications networks.
• The Internet and new media technologies should be entirely exempt from regulation under the Broadcasting Act.
• Given the emergence of new platforms (including illegal and unregulated entities) and the evolution of the 700–channel universe, there should be further deregulation in the broadcasting sector.

19. In today's highly competitive communications markets, regulation is becoming increasingly irrelevant and potentially harmful. The needs of consumers and the ability of Canada to remain internationally competitive will be best–served by increased reliance on investment and competitive market forces.

Convergence — The Need to Eliminate Subsidies

20. The convergence of telecommunications and broadcasting distribution has profound implications for the digital economy. All the major service providers are competing to deliver television distribution as part of their triple– or quadruple–play. Facilities–based providers are now network specialists, dedicated to providing the quality of service, speed and reliability demanded by today's convergedmedia consumer. Competition is driving investment in the broadband network. However, an important barrier to incremental investment for all distributors is the degree to which they are required to cross–subsidize content producers.

21. The level of taxes and subsidies to fund Canadian television content is both staggering and unsustainable. This sector receives over $2 billion each year from CBC Parliamentary appropriations, federal and provincial tax credits, the Canada Media Fund and CRTC–mandated contributions to other programming funds. However, these subsidies or hidden taxes come at a cost by harming innovation and investment by integrated communications companies.

22. Subsidies are increasingly unnecessary in the digital age as new technologies have lowered barriers to entry for content creators, allowing them to reach audiences around the world relying solely on their creativity, ingenuity and broadband connection. The combined innovation of network operators and creators has changed the way Canadians think about content. Increasingly, Canadian producers are using the Internet to bring content to viewers in an innovative, creative and profitable way. A regulatory regime based on subsidies, scarce spectrum and foisting content choices upon Canadians is clearly obsolete.

23. The taxation and subsidy regime, which damages productivity and stifles innovation, is inconsistent with the Government's goals for a digital economy. As network operators are increasingly responding to the demand for greater broadband capacity and services, it is counterproductive to increasingly tax their customers to subsidize content. More importantly, it is inconsistent with how content is actually being produced, accessed and demanded by Canadians.

Supporting Competition

24. The Consultation Paper asks, "What steps should be taken to ensure there is sufficient radio spectrum available to support advanced infrastructure development?" The role of the Government is to ensure spectrum availability and access. The Government must maintain its timelines for the release of the 700 MHz spectrum, the 2500 MHz band and all other spectrum relevant to broadband use.

25. Once spectrum is available, spectrum caps should be put in place to facilitate new entry and provide a level playing field for competition. Spectrum caps have been used in Canada in the past, most notably to establish a third national carrier. The use of spectrum caps in the coming years would accelerate the rollout of new services by both new competitors and incumbents. Spectrum caps will also avoid spectrum hoarding or auction gamesmanship by incumbent carriers.

26. Spectrum caps additionally promote the expansion of rural broadband services and increase efficiency. The UK regulator Ofcom has proposed implementing spectrum caps as a means to ensure the spectrum best suited to delivering rural broadband would be used for that purpose.¹⁰ As providing multiple broadband sources to the 6% of Canadian homes not passed by cable or DSL becomes a critical issue, caps to promote efficient spectrum use provide an important light–handed regulatory solution.

27. Overall, the most effective regulatory measures to provide an environment conducive to incenting investment and competition will be light–handed. The majority of Canada's facilities–based providers entered one or more of their network–based businesses (Internet, telephony, wireless or television distribution) in an era of unprecedented competition. Shaw's wireless entry will be similar to our prudent but highly successful entry in the telephony market.

28. Shaw supports the Government's goals for increased wireless competition. The best approach to achieving this objective is to establish conditions that support domestic entry. These include spectrum caps as described above and the establishment of clear rules for effective and efficient tower–sharing arrangements. If incumbents are permitted to maintain barriers to tower access, competitive entry will be delayed.

29. A third important policy initiative is the implementation of competitively–neutral foreign ownership rules. As Shaw will explain in our submission in response to Opening Canada's Doors to Foreign Investment in Telecommunications: Options for Reform, Shaw is opposed to any inequitable changes to the foreign ownership rules that benefit only foreign entrants, small firms or telecommunications companies with no broadcasting assets. Shaw supports increasing the limit on direct foreign investment for all broadcasting and telecommunications companies to 49%.

Independent Expert Panel

30. Shaw recommends the implementation of an independent expert panel to provide a blueprint to guide government policy in a digital economy and to put in place a market–based framework for broadcasting and content production. As recently observed in Scrambled Signals: Canadian Content Policies in a World of Technological Abundance:

The principles in the federal policy directive issued under the Telecommunications Act are still appropriate for telecom companies and ISPs. Furthermore, they should also apply to cable and satellite companies … Since technology will be the driving force of competition in the converged world, there is no reason why similar principles should not be adopted under the Broadcasting Act.¹¹

31. The Telecommunications Policy Review Panel (TPRP) and Competition Policy Review Panel (CPRP) helped pave the way for the government to substantially deregulate the telecom sector. Unfortunately, the need to similarly deregulate the broadcasting sector has not been sufficiently addressed despite the fact that the TPRP stated:

[T]echnological and market forces that drive the need for changes in telecommunications policy also generally apply to Canadian broadcasting policy … The policies should recognize that all these industries are developing increasingly powerful and integrated broadband networks. These networks will all be able to deliver a wide range of content and applications, irrespective of their current classification as "broadcasting" content. Consumer demand will increasingly replace government regulation as the prime driver in the evolution of these advanced networks and of the content they provide. Canada's future broadcasting policies should recognize these technological and market trends. Canada should develop sustainable policy and regulatory approaches to ensure that its cultural and content production communities can take advantage of technological and market trends and not be undermined by them. To this end, the Panel proposes a comprehensive review of Canada's broadcasting policy and regulatory framework. It proposes that this review should be conducted by an independent group of experts. One important goal of the review should be to develop a more consistent and competitively neutral regulatory approach to the rapidly converging broadcasting and telecommunications industries.¹²

32. The CPRP further observed:

The commercial reality of cultural businesses is changing. Scale and the ability to export Canadian cultural products are key competitiveness factors for the future. At the same time, the Internet is undermining business models and creating new markets and competitive pressures. Maintaining a "closed" regulatory system for the creation, distribution and consumption of cultural products is no longer feasible in the Internet age. Accordingly, Canadian cultural policies require urgent and systematic review in light of the changes wrought by new technology.¹³

33. Clearly, both the TPRP and CPRP understood the importance of modernizing and streamlining the regulatory approach to the broadcasting and broadcasting distribution sectors. Conversely, maintaining an outdated approach based on subsidies and regulatory intervention will have lasting negative economic and cultural consequences.

Conclusion

34. Through our investments, innovations and desire to compete, Shaw has been a major contributor to the development and transition of the broadcasting and telecommunications sectors to a highlycompetitive digital environment. However, the preservation of an approach based on subsidies and micro–regulation will detract from the industry's ability to make the investments necessary to continue to build digital broadband networks that are as sophisticated and advanced as elsewhere in the world. For these reasons, Shaw recommends:

• continued reliance on industry initiatives and a market–based approach with further deregulation of the broadcasting and telecommunications sectors and elimination of unnecessary subsidies,
• development of wireless competition through spectrum caps, effective tower–sharing rules and competitively neutral changes to the foreign ownership limitations, and
• the establishment of an expert panel to create a market–based policy blueprint for the digital economy.

35. Shaw appreciates the opportunity to provide the Government with these comments and recommendations.

¹ CRTC, Communications Monitoring Report [CMR] 2009, August 5, 2009 at page iii.

² Ibid at page 223.

³ Ibid at page 224.

⁴ Mark H. Goldberg & Associates Inc. and Giganomics Inc., Lagging or leading? The state of Canada's broadband infrastructure, 2009 at page 4.

⁵ Supra note 1, CMR 2009 at page i.

⁶ Supra note 4, Lagging or leading? at page i.

⁷ Canadian data from Statistics Canada; US data from CTIA; data for other countries from International Telecommunications Union.

⁸ Marketwire, "HSPA Acceleration: HSPA+ at 21, 28, 42 and Now 84 Mbps", February 10, 2010. at paragraph 4.

⁹ Supra note 4, Lagging or leading? at page 81.

¹⁰ Reuters, Government may cap spectrum ownership (May 13, 2009)

¹¹ C.D. Howe Institute Commentary, "Scramble Signals: Canadian Content Policies in a World of Technological Abundance" (No. 301, January 2010) at page 30.

¹² Telecommunications Policy Review Panel Final Report 2006, at pages 13 and 14.

¹³(Competition Policy Review Panel Final Report June 2008 – Compete to Win) at page 36.