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13 March 2003 Mr. Alex Himelfarb Clerk of the Privy Council and Secretary to the Cabinet Langevin Block 80 Wellington Street Ottawa, Ontario K1A 0A3 Dear Mr. Himelfarb: Subject: Canada Gazette – Notice No. DGTP-001-03 Petition to the Governor in Council from Quebecor Média inc. under Section 12 of the Telecommunications Act in regard to the following CRTC Decision: Quebecor Média inc. – Alleged anti-competitive cross-subsidization of Bell ExpressVu, Telecom Decision CRTC 2002-61 These comments are filed on behalf of BCE Inc. and Bell Canada in response to the petition by Quebecor Média inc. (“Quebecor”) to the Governor in Council regarding Telecom Decision CRTC 2002-61 (“the Decision”). In its application of 4 April 2002, filed with the CRTC pursuant to Part VII of the CRTC Telecommunications Rules of Procedure, Quebecor alleged that BCE has been using profits generated by Bell Canada to anti-competitively cross-subsidize the entry of Bell ExpressVu Limited Partnership (“ExpressVu”) into the Quebec broadcasting distribution market. Quebecor argued that mechanisms put in place by the Commission to prevent cross-subsidization of ExpressVu by Bell Canada be activated in order to prevent Bell Canada, the dominant player in local telephone service, from becoming the dominant broadcasting distribution undertaking (“BDU”). In its Decision of 8 October 2002, the Commission found that Bell Canada was not, in fact, inappropriately cross-subsidizing ExpressVu, and furthermore, that ExpressVu was not the dominant BDU that Quebecor warned about: [T]he Commission remains of the view that the existing mechanisms, including those recently modified in Decision 2002- 34, are appropriate and sufficient to prevent inappropriate cross- Bernard A. Courtois Executive Counsel BCE & Bell Canada

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Page 1: CRTC Telecommunications Rules of ProcedureFILE/bce-bell.pdfrejected an application by Quebecor Média inc. (“QMI”) for the Commission to carry out various actions to address what

13 March 2003 Mr. Alex Himelfarb Clerk of the Privy Council and Secretary to the Cabinet Langevin Block 80 Wellington Street Ottawa, Ontario K1A 0A3 Dear Mr. Himelfarb: Subject: Canada Gazette – Notice No. DGTP-001-03

Petition to the Governor in Council from Quebecor Média inc. under Section 12 of the Telecommunications Act in regard to the following CRTC Decision: Quebecor Média inc. – Alleged anti-competitive cross-subsidization of Bell ExpressVu, Telecom Decision CRTC 2002-61

These comments are filed on behalf of BCE Inc. and Bell Canada in response to the petition by Quebecor Média inc. (“Quebecor”) to the Governor in Council regarding Telecom Decision CRTC 2002-61 (“the Decision”). In its application of 4 April 2002, filed with the CRTC pursuant to Part VII of the CRTC Telecommunications Rules of Procedure, Quebecor alleged that BCE has been using profits generated by Bell Canada to anti-competitively cross-subsidize the entry of Bell ExpressVu Limited Partnership (“ExpressVu”) into the Quebec broadcasting distribution market. Quebecor argued that mechanisms put in place by the Commission to prevent cross-subsidization of ExpressVu by Bell Canada be activated in order to prevent Bell Canada, the dominant player in local telephone service, from becoming the dominant broadcasting distribution undertaking (“BDU”). In its Decision of 8 October 2002, the Commission found that Bell Canada was not, in fact, inappropriately cross-subsidizing ExpressVu, and furthermore, that ExpressVu was not the dominant BDU that Quebecor warned about:

[T]he Commission remains of the view that the existing mechanisms, including those recently modified in Decision 2002-34, are appropriate and sufficient to prevent inappropriate cross-

Bernard A. Courtois Executive Counsel BCE & Bell Canada

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subsidization of ExpressVu by Bell Canada, at the expense of users of telecommunications services.

The Commission also finds that there is insufficient evidence to substantiate Quebecor's allegation that Bell Canada's cross-subsidization of ExpressVu's activities is permitting ExpressVu to become the dominant player in broadcasting distribution. In this regard, the Commission notes that Quebecor's subsidiary, Vidéotron ltée, remains the dominant player in broadcasting distribution in the province of Quebec, with approximately 1.5 million basic service subscribers.

Quebecor responded to the Commission’s Decision by filing, on 6 January 2003, a petition to the Governor in Council, taking issue with the CRTC’s conclusions while persisting in its arguments already rejected by the Commission. Quebecor requests that the Commission reconsider Quebecor’s complaint, that it conduct a public inquiry into BCE’s cross-subsidization of ExpressVu, and that it recommend to the Government how best to deal with what Quebecor calls “this problem”. It is BCE’s contention that Quebecor’s allegations are false or misleading and entirely unfounded. In its written response to Quebecor’s petition, BCE demonstrates that: the Petition reflects a fundamental misunderstanding of the cross-subsidy

issue. The issue arose in the days of rate of return regulation, when mechanisms were required to ensure that losses on the competitive side of the business would not be made up by price increases on the regulated side in order to achieve the allowable rate of return. The CRTC has had mechanisms in place for years to prevent such cross-subsidization. Today, Bell Canada’s regulated operations are subject to a price cap regime where the possibility and incentive for such cross-subsidization have been eliminated. The pricing regime is set for a four-year period, and any losses or investments in competitive operations inside of Bell Canada, let alone in separate operations like ExpressVu, are for the account of shareholders and cannot be used to justify increases in regulated prices;

BCE is investing in ExpressVu, not cross-subsidizing it. As recognized by

Quebecor, in a capital-intensive business like satellite television, it is not possible to enter the market without incurring significant losses in the early years. The effect of what Quebecor is seeking would be to prevent such competition and restore Vidéotron’s monopoly;

ExpressVu is delivering major benefits to consumers and the broadcasting

system. With Star Choice owned by Shaw Cable, ExpressVu is the only

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effective, non-cable- owned competitor to the incumbent cable companies. Government and Commission policy supports competition in the delivery of multi-channel television services. Without the investment that BCE has made in ExpressVu, competition in this market would essentially not exist;

Quebecor is presenting a selective and distorted picture of competition in

Canadian communications. In broadcast distribution, there are essentially three competitors in any given market, with only one, ExpressVu, being independent of cable. At this time, the cable companies such as Vidéotron remain the dominant players in broadcast distribution, as the CRTC found in response to Quebecor’s complaint;

by contrast, in telecommunications, all parts of the business are open to competition from multiple players and technology platforms. Competition is pervasive and much more advanced than in broadcast distribution. First, the sector is undergoing a secular change, with data (where there are many competitors) overtaking voice traffic, and wireless (where Canada has four national operators) increasingly substituting wireline traffic for both local and long distance. Even within the traditional wireline voice segment which is now in decline (and where Canada has five competing national networks), Bell Canada has lost considerably more market share in long distance and even in local services for business customers (at 15%) than cable has lost to all of DTH (at 10%). In the market for local residential voice service, where competition had been slowest to develop, prices for telephone companies are regulated and frozen, whereas cable companies are implementing price increases for both basic and optional cable services; and

as BCE’s response demonstrates, cable companies are growing much more

strongly than incumbent telephone companies in Canada. Revenues and earnings growth are substantially higher for cable companies than telephone companies. It should be remembered that ExpressVu competes across the country against the combined resources of all Canadian cable companies.

In essence, the Petition asks the government to intervene to undermine the one successful alternative to the cable company-controlled distribution networks that has been established since Government and CRTC policy endorsed competition in the broadcast distribution sector seven years ago. It is based on the allegation that the CRTC is lacking in the ability to identify and prevent anti-competitive cross-subsidization. With the Commission having over two decades of experience in this regard, it is arguably the most knowledgeable regulatory tribunal in this area in the country. It has rejected Quebecor’s allegation. So too has the Competition Bureau.

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For these and other reasons developed in this submission, BCE Inc. and Bell Canada respectfully request that the Governor in Council reject all requests made by the Petitioner. Yours truly,

Bernard A. Courtois Executive Counsel BCE and Bell Canada Attachment

c.c.: Mr. Larry Shaw, Director General, Telecommunications Policy Branch, Industry Canada

Mr. Pierre Karl Péladeau, President and Chief Executive Officer, Quebecor Inc.

In electronic format to: [email protected]

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Canada Gazette, Part 1, 1 February 2003

Telecommunications Act Notice No. DGTP-001-03

Petition of Quebecor Inc. to Her Excellency the Governor in Council

Dated 6 January 2003

Telecom Decision CRTC 2002-61

Quebecor Media inc. – Alleged anti-competitive

cross-subsidization of Bell ExpressVu

Response of

BCE Inc. and Bell Canada

13 March 2003

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Floor 14 110 O’Connor Street Ottawa, Ontario K1P 1H1 Telephone: (613) 785-2180 Facsimile: (613) 785-2182 e-mail: [email protected]

1. Introduction 1. On 6 January 2003, Quebecor Inc. (“Quebecor”), on behalf of its subsidiary Vidéotron ltée, filed a Petition with the Governor in Council asking that Telecom Decision CRTC 2002-61 (“Decision 2002-61”) be overturned. In Decision 2002-61, the CRTC had rejected an application by Quebecor Média inc. (“QMI”) for the Commission to carry out various actions to address what QMI alleged was unfair cross-subsidization of Bell ExpressVu (“ExpressVu”) by Bell Canada Enterprises (“BCE”). 2. Pursuant to the Canada Gazette, Part 1, 1 February 2003, Telecommunications Act Notice No. DGTP-001-03: Petition to the Governor in Council, this is the response of BCE and Bell Canada (“Bell”). 3. For all of the reasons presented below, Quebecor’s Petition should be rejected: • Government and CRTC policy fully supports competition in the broadcast

distribution sector. With Star Choice owned by Shaw Communications, ExpressVu is the only independent and effective competitive alternative to the cable company-owned broadcast distribution networks;

• ExpressVu is delivering major benefits to consumers and the Canadian

broadcasting system; • the broadcast distribution sector is very capital-intensive. BCE has had

to make major investments in ExpressVu to establish the company as a viable alternative to the cable companies. Such investments are no different from those that cable companies have made to enter new lines of business, such as high-speed Internet access;

• funds used to invest in ExpressVu come from a variety of sources. BCE

raises funds through selling new equity and debt, selling assets and from dividends from subsidiaries, such as Bell Canada. Bell’s revenues also come from competitive services, where market forces determine prices, and from services whose prices are regulated. In the case of regulated services, the CRTC has put in place rules, such as the freezing of local residential rates, which limit price changes; and

• Vidéotron remains the dominant provider in the markets that it serves,

notwithstanding the fact that it is having difficulty adjusting to competition in a market that it previously served for decades as a monopoly.

4. In essence, the Petition asks the Government to undermine the one successful alternative to the cable company-controlled distribution networks that has been established since Government and CRTC policy endorsed competition in the broadcast distribution sector seven years ago. It is based on the allegation that the CRTC erred in rejecting Quebecor’s complaint because it did not properly examine the allegation of anti-competitive cross-subsidization. In fact, it is Vidéotron that fundamentally misunderstands the issue of cross-subsidization. With the Commission’s having over two decades of experience in developing and implementing a range of safeguards to prevent improper cross-subsidization, it is arguably the most knowledgeable regulatory

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tribunal in this area in the country. It has rejected Quebecor’s complaint. More recently, the Competition Bureau, after an extensive review, rejected a similar allegation. 2. Vidéotron Faces Competition in Accordance with Government Policy 5. The Government and the CRTC endorsed competition for the broadcast distribution sector in the mid-1990s. Over the next several years, necessary changes were made to policies, laws and regulations to create a competitive environment. 6. In response, various companies entered the market to compete with the incumbent cable companies. The number of entrants, however, was limited because of the high capital costs involved and the anti-competitive behaviour of the incumbents. 7. The first new entrants were satellite companies. One of the first of these was Alpha-Star, which quickly went bankrupt. Star Choice and ExpressVu were the next to launch. Shaw Communications (“Shaw”) then obtained a broadcasting licence for its satellite company – Homestar. However, before Homestar was launched, Shaw changed strategies and bought Star Choice. As a result, the distribution market has only one independent provider, ExpressVu. 8. Early on, it appeared that terrestrial wireless might prove to be an important competitive alternative to cable, but the level of subscribers receiving service from companies using this technology peaked several years ago and has been falling ever since. Today, terrestrial wireless has less than 1% of the Canadian market and shows no signs of ever becoming an effective alternative to cable. 9. Not counting the U.S. DTH grey and black market options, most, but not all1, customers in areas served by cable companies generally have two realistic alternative multi-channel subscription TV providers – ExpressVu and Star Choice. The two Canadian DTH providers launched in 1997. Cable companies have, as a result, faced a small number of competitors for a little over five years. Effective competition, however, did not start until some time later since, in their first years of operation, the DTH companies offered a limited line-up of channels and provided service primarily to customers in areas not served by cable. 10. It should also be noted that Star Choice, which supplies 40% of the DTH customers, is owned by Shaw Communications, which in turn owns Shaw Cable, the second largest cable company in Canada. Therefore, in Shaw territory, which represents approximately 25% of cable lines, ExpressVu is the only real competitor.

3. ExpressVu is Delivering Major Benefits 11. In addition to providing a competitive alternative to cable, ExpressVu is delivering important and substantive benefits to consumers, the Canadian broadcasting system and the overall economy. Prior to the launch of DTH in 1997, the vast majority of rural residents did not have access to multi-channel TV service from a Canadian distributor. Cable service essentially was never deployed in rural areas. 12. Starting in the 1970s, some Canadians in these areas installed large satellite dishes to obtain multi-channel TV. In the early 1990s, with the launch of U.S. small-dish

1 Close to one-third of Canadians live in multiple unit dwellings. For a variety of reasons, most

of these households do not have access to DTH service.

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satellite TV service, some of these Canadians in rural areas exchanged their large satellite dishes for small ones. Others who could not afford the large dishes installed the less expensive small ones to receive U.S. signals. In addition, in some smaller towns where the channel capacity of the cable system was very limited, consumers were attracted to U.S. satellite services in order to obtain a wider selection of channels. Canadian DTH dramatically changed this situation by providing all Canadians, no matter where they lived, with the option to subscribe to Canadian distributors offering the full line-up of Canadian and foreign services. 13. The benefits to the Canadian broadcasting system have also been substantial. The DTH companies have significantly increased the number of Canadian households subscribing to multi-channel TV above what would have been the case if DTH had not launched. The total customer base for licensed Canadian multi-channel subscription TV was growing by 1% prior to the launch of DTH2. After launch, that growth more than tripled. ExpressVu estimates that, since its launch in 1997, Canadian DTH has increased the number of subscribers to licensed Canadian multi-channel TV services by approximately 1.1 million above the level that would have existed if only cable served the market. This represents over 10% of the current total market. 14. These additional customers have contributed an incremental $1.5 billion to the Canadian broadcasting system. Of this amount, approximately $780 million has been received by Canadian specialty and pay services, which in turn have invested $285 million of these additional funds in Canadian programming.

15. Furthermore, 5% of the incremental $1.5 billion that DTH has brought into the broadcasting system has been paid directly into Canadian program production funds. This amounts to $75 million. 16. Since DTH has expanded the market significantly beyond what would have existed if only cable served the market, important macroeconomic benefits have also been generated, such as increased employment and government tax revenues. 17. More details on the benefits that ExpressVu and Canadian DTH continue to deliver to Canadian consumers, the broadcasting system and the overall economy can be found in Appendix 1. 4. ExpressVu is not Being Cross-Subsidized 18. When the BCE Board decides to make major investments in new business initiatives, it typically has looked at several ways of raising the necessary funds, since the returns from the ownership of businesses, such as Bell Canada, Bell Mobility and Aliant, have not been sufficient for these initiatives. In recent years, BCE has raised significant funds by selling the bulk of its shares in Nortel, selling 20% of Bell Canada to SBC, issuing new equity and issuing new debt. 19. Consequently, when BCE makes the decision to invest in a major new business initiative, such as ExpressVu, the funds come from a variety of sources above and beyond the dividends paid to BCE by Bell Canada.

2 Given the rapid emergence at this time of U.S. DTH as an attractive alternative to many

Canadians, this rate would likely have fallen below 1% if Canadian DTH had not launched.

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20. The broadcast distribution industry, whether wireline or satellite, is capital-intensive. BCE made the decision to invest in ExpressVu knowing that major funding would be required over several years before positive returns were realized. 21. What BCE is doing is, in fact, common in all capital-intensive industries. A new entrant must make substantial investments over many years before positive returns are realized. The cable companies themselves have followed the identical strategy in developing their high-speed Internet access businesses. Starting in the mid-1990s, Vidéotron and other major cable companies used tens of millions of dollars generated from their monopoly cable businesses to invest in the telecommunications assets that were required to offer high-speed Internet access service. They made these investments knowing that positive returns would be many years away. 22. Another example of investing in a capital-intensive industry is that of Star Choice. It was launched in 1997 and was taken over several years later by Shaw Communications. Shaw Communications has been investing in Star Choice, as BCE has in ExpressVu, for many years with the expectation that positive returns would come in the future. The principal source of revenues for Shaw Communications was for many years its monopoly cable business, a market in which Shaw remains the dominant provider in the areas that it serves. 23. Rather than building a new capital-intensive business from scratch, another approach is to buy an existing company, which is what Quebecor did in 2000 when it acquired Vidéotron. At the time, Vidéotron consisted of a large cable business, the TVA broadcasting assets and Vidéotron Telecom. After removing the price of these latter two businesses, it is estimated that Quebecor paid approximately $3,000.00 per subscriber for the cable business. The total purchase price of Vidéotron’s cable operations would therefore have been in the area of $ 4.7 billion. It is worth emphasizing that both this cost per subscriber and the total cost that Quebecor incurred in purchasing Vidéotron are significantly higher than the cost that BCE has incurred in building ExpressVu into a broadcast distributor with over 1.3 million subscribers. 5. Both the CRTC and the Competition Bureau Have Rejected this

Complaint 24. The essence of Quebecor’s Petition is that the CRTC erred in rejecting Quebecor’s complaint because it did not properly examine the allegation of anti-competitive cross-subsidization. With the Commission’s having over two decades of experience in developing and implementing a range of safeguards to prevent cross-subsidization, it is arguably the most knowledgeable regulatory tribunal in this area in the country. 25. The safeguards that the Commission has employed to prevent cross-subsidization have evolved over time, but what has remained constant is its vigilance in ensuring that they are followed. In 1998, the Commission changed from safeguards based on regulating the profit of telecom carriers to a regulatory framework based on the strict control of prices for services that are judged to be insufficiently competitive. Price regulation has been recognized by governments and regulators throughout North America, Europe and Australia as the most effective mechanism for ensuring that rates remain just and reasonable. 26. Starting in 1998, the Commission required that Bell and the other major telephone companies adjust the prices of their regulated services every year according to

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a predetermined formula. In 2002, the Commission revisited this framework, making several changes including price freezes on local residential services. Under this regime, any losses on investments in competitive operations cannot be used to justify price increases. 27. It is also worthwhile reviewing the Commission’s findings on the charge of improper cross-subsidization. The Commission:

..is of the view that it has implemented appropriate measures and constraints to ensure that rates for regulated services are just and reasonable. Given the above, the Commission considers that the revenues earned by Bell Canada, and thus the dividends paid by Bell Canada to BCE, are not generated by services with artificially high prices or by rates that are unjust or unreasonable. Accordingly, the Commission remains of the view that the existing mechanisms, including those recently modified in Decision 2002-34, are appropriate and sufficient to prevent inappropriate cross-subsidization of ExpressVu by Bell Canada, at the expense of users of telecommunications services.3

28. The Commission also quite properly pointed out that, while it has the legislative authority to ensure that the rates charged by telecommunications carriers are just and reasonable, it does not have the authority to regulate the investments made by the companies that it regulates: “the Commission notes that Parliament has not provided it with the authority to regulate the investments made by the shareholders of a regulated undertaking, including Bell Canada.”4 29. Virtually in parallel with Quebecor’s complaint to the CRTC, members of the cable industry filed a similar complaint with the Competition Bureau (“Bureau”) in the first half of 2002, alleging that BCE was subsidizing ExpressVu so that ExpressVu could price its service below cost and thereby cause serious harm to the cable companies. 30. In January of this year, after conducting a thorough review of the matter, the Commissioner of Competition concluded that the allegations would not warrant further proceedings under the Competition Act.

31. For the Government to overturn both of these independent authorities would be unprecedented. 6. Vidéotron Remains Dominant in the Markets that It Serves 32. In its petition, Quebecor presents a misleading picture of competition in the communications industry.

33. As noted in section 2, in the first few years after launch in 1997, the Canadian DTH companies provided little in the way of competition to most cable companies, particularly large cable companies with modern systems such as Vidéotron’s. This is evident in Vidéotron’s basic cable subscriber statistics. Prior to the launch of Canadian DTH, the multi-channel subscription TV market was a mature one, growing at about 1%

3 Telecom Decision CRTC 2002-61, 8 October 2002, paragraphs 27-28. 4 Ibid., paragraph 23.

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per year. Despite this low growth rate and the arrival of DTH, the number of Vidéotron’s basic cable subscribers continued to rise well after 1997 and peaked in September 2000 at 1,563,000.

34. Since then the number of Vidéotron’s basic subscribers has declined, but only modestly. As of December 31, 2002 , Vidéotron reported 1,440,000 basic cable subscribers, a decline of 123,000, or 8%, from the peak level in September 2000. Over this same period, however, the number of Vidéotron’s high-speed Internet subscribers increased by 198,000. It is worth recognizing in this context that the average revenue generated by a high-speed Internet subscriber is significantly higher than the average revenue from a cable subscriber.5 35. It is also instructive to note that, in the traditional wireline voice segment which is now in decline (and where Canada has five competing national networks), Bell Canada has lost considerably more market share in long distance and even in local services for business customers (at 15%) than cable has lost to all of DTH (at 10%).

36. With these modest declines in basic cable subscribers, and given that many of the customers served by ExpressVu and Star Choice are in rural and remote areas unserved by Vidéotron, Vidéotron remains the dominant provider of multi-channel TV in the Quebec market, as the CRTC noted in Decision 2002-61:

In this regard, the Commission notes that Quebecor’s subsidiary remains the dominant player in broadcasting distribution in the province of Quebec, with approximately 1.5 million basic service subscribers.6

37. Lastly, Quebecor mischaracterizes the broadcasting distribution market by stating that the digital distribution segment is separate and distinct from the analogue segment. This is not the case, as is explained in Appendix 2.

7. The Financial Performance of Major Cable Companies is Strong 38. Quebecor’s Petition also may leave the impression that cable companies are experiencing serious financial harm because of competition in their core business. It is revealing, therefore, to look at two key measures of the recent performance of cable companies.

39. In Chart 1, the revenue growth of the four major cable companies is shown relative to that of the telecommunications carriers. On a full-year basis, cable company revenues grew by 11.8% - an extremely impressive result in the current business climate

5 In its results for Q4 2002, Vidéotron reports an average revenue per unit (“ARPU”) of $32.81

for cable and a total ARPU of $41.85. A separate ARPU is not reported for high-speed Internet. These two figures suggest, however, that the high-speed Internet ARPU is much more than 25% higher than the ARPU for cable service.

6 Decision 2002-61, paragraph 29.

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- compared with no growth by the carriers. Looking at the most recent quarter shows that the cable companies’ strong revenue growth is continuing.

40. Chart 2 displays earnings performance and again the cable company results are truly noteworthy. While the full-year growth in 2002 of 19.5% is very impressive, the most recent quarterly results indicate cable company Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) performance is headed to an even higher level.

Chart 1: Cablecos Vs. Telcos – Revenue Growth

2002/2001 Revenue Growth

Most Recent Quarter Revenue Growth

11.8%

-0.2%

Cablecos Telcos

11.0%

-1.6%

Cablecos Telcos

Notes:• “Cablecos” include: Cogeco, Rogers (RCI), Shaw and Videotron• “Telcos” include: AT&T Canada, Bell Canada Holdings, Call-net, MTS, and Telus• 2002 Fiscal year ended Aug. 31/02 for Cogeco and Shaw; and Dec. 31/02 for all others• Most recent quarter ended Nov. 30/02 for Cogeco and Shaw; and Dec. 31/02 for all others • Source: company financial statements and Bell Canada analysis

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41. In Chart 3, the individual revenue growth rates of the four major cable companies are shown relative to that of Bell Canada Holdings (“BCH”)7, TELUS and MTS. By either measure, both Rogers and Shaw are experiencing healthy growth, far outstripping that of

7 In Chart 3, Bell Canada Holdings includes Bell Canada, Northwestel Inc., Aliant Inc.,

Télébec, and Bell Mobility Inc., but does not include ExpressVu.

Chart 2: Cablecos Vs. Telcos – EBITDA Growth

2002/2001 EBITDA Growth

Most Recent Quarter EBITDA Growth

Notes:• “Cablecos” include: Cogeco, Rogers (RCI), Shaw and Videotron• “Telcos” include: AT&T Canada, Bell Canada Holdings, Call-net, MTS, and Telus• 2002 Fiscal year ended Aug. 31/02 for Cogeco and Shaw; and Dec. 31/02 for all others• Most recent quarter ended Nov. 30/02 for Cogeco and Shaw; and Dec. 31/02 for all others • Source: company financial statements and Bell Canada analysis

19.5%

4.6%

Cablecos Telcos

24.4%

8.4%

Cablecos Telcos

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the telcos. Vidéotron’s growth has been stymied by a multiplicity of problems of its own making, and yet still compares favourably to that of the three telcos.

42. Chart 4 confirms the strong earnings, i.e. EBITDA, performance of Rogers and Shaw, again results that are, for the most part, superior to those of the telcos. Vidéotron’s performance, while continuing to lag the others, has appeared to have turned a corner during its most recent quarter.

Chart 3: Major Players – Revenue Growth

2002/2001 Revenue Growth

-7.5%

-1.0%

0.7%

0.8%

2.1%

11.4%

22.1%

MTS

Telus

BCH (excl. DTH)

Videotron

Cogeco Cable

Rogers Cable

Shaw Cable

Most Recent Quarter Revenue Growth

-21.3%

-3.9%

-1.1%

0.9%

1.3%

12.7%

13.6%

MTS

Telus

BCH (excl. DTH)

Videotron

Cogeco Cable

Shaw Cable

Rogers Cable

• 2002 Fiscal year ended Aug. 31/02 for Cogeco and Shaw; and Dec. 31/02 for all others• Most recent quarter ended Nov. 30/02 for Cogeco and Shaw; and Dec. 31/02 for all others• Source: company financial statements

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8. Conclusion 43. The Quebecor Petition betrays a fundamental misunderstanding of the issue of cross-subsidization by mischaracterizing BCE’s investment in ExpressVu as an anti-competitive cross-subsidy. Despite the fact that regulatory safeguards are in place to ensure that no such cross-subsidization can occur, and that both the Commission and the Competition Bureau have recently ruled that indeed no such behaviour has been taking place, Quebecor persists in advancing its unfounded allegations. That Quebecor has made a similar investment in order for Vidéotron to enter the market for high-speed Internet access remain conveniently unacknowledged. 44. In fact, at the heart of the Quebecor complaint is Vidéotron’s difficulty at adjusting to a BDU marketplace that has become increasingly competitive in response to Government and CRTC policy supporting competition in the broadcast distribution sector. This despite the fact that Vidéotron remains the dominant supplier in the markets that it serves. Quebecor has elected to ignore the undeniable benefits that ExpressVu has brought to Canadian consumers, the Canadian broadcasting system and Canada itself as the only real independent, competitive alternative to cable. The evidence in this BCE/Bell submission counters Quebecor’s misleading claims and argues compellingly for a rejection of its Petition.

Chart 4: Major Players – EBITDA Growth

2002/2001 EBITDA Growth

-3.4%

-0.4%

4.9%

5.2%

9.0%

11.8%

29.4%

Videotron

Telus

Cogeco Cable

BCH (excl. DTH)

Rogers Cable

MTS

Shaw Cable

Most Recent Quarter EBITDA Growth

2.5%

3.2%

3.7%

7.8%

11.7%

17.8%

30.6%

Cogeco Cable

BCH (excl. DTH)

Videotron

Telus

MTS

Rogers Cable

Shaw Cable

• 2002 Fiscal year ended Aug. 31/02 for Cogeco and Shaw; and Dec. 31/02 for all others• Most recent quarter ended Nov. 30/02 for Cogeco and Shaw; and Dec. 31/02 for all others• Source: company financial statements

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Appendix 1

1. ExpressVu is delivering important and substantive benefits to consumers, the Canadian broadcasting system and the overall economy. Benefits to Consumers

2. Prior to the launch of DTH in 1997, the vast majority of rural residents did not have access to multi-channel TV service, since cable service essentially was never deployed in rural areas. Starting in the 1970s, some Canadians in these areas installed large satellite dishes to obtain multi-channel TV. 3. In the early 1990s, with the launch of U.S. small-dish satellite TV service, some Canadians in rural areas exchanged their large satellite dishes for small ones. Others that could not originally afford the large dishes also installed the small dishes to receive U.S. signals. In addition, in some smaller towns where the channel capacity of the cable system was very limited, consumers were attracted to U.S. satellite services in order to obtain a wider selection of channels. 4. Canadian DTH has provided a competitive alternative to cable. The result has been more choice in packaging and pricing, more promotions and incentives and improved service quality. 5. The distant signals offered by the DTH companies, which are generally not available to cable customers, also help keep Canadians in touch with their home regions. Benefits to the Canadian Broadcasting System 6. The DTH companies have also made major contributions to the Canadian broadcasting system. They have significantly increased the number of Canadian households subscribing to multi-channel TV above what would have been the case if DTH had not launched. The total customer base was growing by only 1% prior to Canadian DTH. After DTH launched, that growth more than tripled. 7. Chart 1 demonstrates the significant growth in subscriptions to multi-channel television providers since the introduction of DTH. DTH has reached households that did not previously subscribe to cable. Prior to the introduction of DTH in 1997, the number of households served by BDUs (and therefore paying subscription revenues to programming undertakings) was growing by about 80,000-90,000 per year. Since 1997, the annual growth in the number of BDU subscribers has increased dramatically. In 2001 alone, for example, the net additions, after losses by cable, amounted to 420,000 subscribers, an increase of more than four times the level experienced in 1996 and 1997 when cable alone served the market.

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Chart 1

Canadian BDUs:Annual Growth in Subscribers

DTH cable MDS & STV

88.2 81.5 56.2 36.3

-19.6

-220.9-235.2

216.1303.3

360.7

639.5

441.4

3

7.718.2

51.2

1.5

-26.1-300

-200

-100

0

100

200

300

400

500

600

700

1996 1997 1998 1999 2000 2001 2002

addi

tiona

l sub

scrib

ers

(000

s)

Source: CRTC for 1996-2001. Bell ExpressVu estimate for 2002.Data are as of August 31 of the year indicated. Prepared on 5 December 2002.

pre-DTH post-DTH

88.2 84.5

280 357.8392.3 180.1

420.1

8. Chart 2 represents the net additional growth in subscribers resulting from DTH. In other words, it shows the growth that would not have occurred had DTH not launched. For example, in cumulative form in 1998, absent the introduction of DTH, it is estimated that cable would have continued to add 80,000 to 90,000 subscribers. Thus, the incremental growth specific to DTH is estimated to be 187,000 subscribers in 1998. In 1999, the 1998 net additions are added to the further 250,000 subscribers added in 1999, for a cumulative of almost 440,000. Adding the net increment each year, it is demonstrated that DTH has contributed over 1,140,000 net new households to the system. Each of these subscribers pays over $500 per year to the distributors, a large portion of which, as will be seen, flows through to the production community.

Chart 2

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Cumulative Net New BDU SubscribersResulting from Canadian DTH

Source: Bell ExpressVu estimates based on CRTC data.Data are for the broadcast year ending August 31. Prepared on 7 January 2003.

186.7

437.5

691

1021.7

186.7

250.8

253.5

330.7

119.8

0

200

400

600

800

1000

1200

1998 1999 2000 2001 2002

addi

tiona

l sub

scrib

ers

(000

's)

total from previous years net new subscribers

1,021.7

691

437.5

1,141.5

9. The increase in the number of BDU subscribers has resulted in significant revenue growth for the pay and specialty sector of the broadcasting system. As shown in Chart 3, in the years 1998-2001, the revenue of the specialty sector grew by 17.5%, 23.2%, 22.5% and 17.3%. At the same time, however, the revenue of the conventional private broadcasters grew very slowly: only 0.7% in 2000 and 1.3% in 2001. 10. The success of pay and specialty services is highly affected by the penetration of cable and DTH services, since they cannot be received over the air as conventional broadcasters can. Moreover, they receive a subscription fee from viewers receiving their service, in addition to advertising revenues, while private broadcasters receive advertising revenues alone.

Chart 3

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Canadian Broadcasters: Revenue Growth

6.4 6.9

2.30.7 1.3

7.9

17.5

23.2 22.5

17.3

6.8

108.9 8.4 7.7

0

5

10

15

20

25

1997 1998 1999 2000 2001

% g

row

th ra

te

private conventional pay & specialty totalSource: CRTC

Data are for the broadcast year ending August 31. Prepared on 8 January 2003. 11. Chart 4 shows the growth in specialty and pay revenues resulting from the net additional subscribers that DTH has added to the broadcasting system. Factoring both subscription and advertising revenues, the pay and specialty sector, by broadcasting year end 2002, had received cumulative net additional revenues resulting from DTH of approximately $800 million.

Chart 4

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Cumulative Net New Revenue for Canadian Pay & Specialty Services Resulting from Canadian DTH

subscription revenue advertising revenue

10.2 58.3163.9

333.9

546.2

4.325

71.4

144.5

235.8

0

100

200

300

400

500

600

700

800

900

1998 1999 2000 2001 2002

addi

tiona

l rev

enue

($m

illio

ns) 782

478.4

235.3

83.314.5

Source: Bell ExpressVu estimates based on CRTC data.Data are for the broadcast year ending August 31. Prepared on 7 January 2003.

12. Growth in pay and specialty revenues has a direct impact on investments in Canadian programming. Most pay and specialty services are obliged under the terms of their licence to spend a percentage of their revenues on program production. The growth in spending on Canadian programming by the specialty and pay sector is shown in Chart 5. For example, in 1999, spending on Canadian programming increased by over 40%; in 2001, by almost 15%. It is clear that much of this extra revenue for programming was generated by incremental subscribers on DTH.

Chart 5

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Canadian Program Expenditures by Pay, PPV and Specialty Services

Source: CRTC.Data are for the broadcast year ending August 31. Prepared on 8 January 2003.

14.1

41.6

16.814.2

27.8

6.3

12.7

17.217.3

32.6

16 14.8

0

5

10

15

20

25

30

35

40

45

1998 1999 2000 2001

% g

row

th ra

te

English French Total

13. As shown in Chart 6, the cumulative net increase in expenditures on Canadian programming by the specialty broadcasters because of Canadian DTH is $285 million.

Chart 6

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Cumulative Net New Canadian Programming Expenditures Resulting from Canadian DTH

Source: Bell ExpressVu estimates based on CRTC data.Data are for the broadcast year ending August 31. Prepared on 8 January 2003.

5.3 32

88

175.7

285

0

50

100

150

200

250

300

1998 1999 2000 2001 2002

addi

tiona

l rev

enue

($m

illio

ns)

14. In addition to generating additional revenue for the pay and specialty sector, which has driven the increase in their expenditures on Canadian programming, DTH has also contributed directly to program production. Under the current regulatory regime, DTH providers are required to remit 5% of their revenues to authorized program production funds, such as the Canadian Television Fund (“CTF”). Chart 7 shows the total cumulative net contributions of more than $76 million to the CTF and other independent programming funds that would not have existed without DTH.

Chart 7

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Cumulative Net New Canadian Programming Fund Contributions Resulting from Canadian DTH

Source: Bell ExpressVu estimates based on CRTC data.Data are for the broadcast year ending August 31. Prepared on 9 January 2003.

1.7 8.5

23.3

46.7

76.2

0

10

20

30

40

50

60

70

80

90

1998 1999 2000 2001 2002

addi

tiona

l rev

enue

($m

illio

ns)

15. Canadian pay services were moribund prior to the launch of DTH. DTH revitalized this important sector, which is an important contributor to the production of Canadian movies. 16. Competition from DTH has also prompted cable companies to deploy digital set-top boxes faster than otherwise. This in turn has allowed for the launch of more Canadian specialty services sooner than otherwise. 17. It had been a long-standing Government objective to provide all Canadians with access to the full range of licensed and authorized programming services. Canadian DTH satisfied this objective and provided all Canadians, regardless of where they live, with the full range of programming services delivered through a state-of-the-art all-digital distribution system, as well as providing consumers with a choice of providers. Thus, an anglophone in Rimouski, Quebec has access to the same program line-up as a Torontonian or Vancouverite. 18. It has also been a long-standing Government objective to increase the range of French-language services all across the country and to expand the range of English-language services within Quebec. Cable companies never accomplished this. DTH has. For example, a Francophone in Gravelbourg, Saskatchewan now has access to the full range of licensed and authorized French-language services, something that would never have happened without DTH. 19. Another Government objective has been to expand the availability of ethnic broadcasting services. DTH has accomplished this in two ways. First, in delivering a

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wide range of ethnic services to all parts of the country, DTH is bringing these services to households that had no access to these services previously, either because there was no cable service available or because the local cable company carried no ethnic services. The second way was by prompting cable companies to accelerate their expansion of digital capacity which enables systems to carry more services, including ethnic services. Macroeconomic Benefits 20. In addition, DTH has made a significant, positive impact on overall economic activity. Since, as noted earlier, DTH has expanded the multi-channel TV market above what would have existed if DTH had not launched, these are net gains to the economy that are not simply offset by losses incurred by cable companies. 21. ExpressVu alone employs 1,500 people and has invested over $1.5 billion in its satellite delivery system. Government revenues have also been increased through a range of tax programs

22. Small businesses have also been important beneficiaries. A large number of DTH customers are resident in small towns and rural areas. The demand for service in these areas has resulted in significant benefits to small businesses through the revenues generated by the sales and installation of satellite systems.

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Appendix 2

1. In addition to the many critical flaws in Quebecor’s appeal that have already been identified, it is also worth highlighting the major mistake that Quebecor makes when it attempts to define “digital broadcasting distribution” as the relevant market for analysis of its petition. In reality, the relevant market is for the delivery of multi-channel subscription television, regardless of the technology that is employed.

2. From a consumer perspective, while there are quality benefits to be realized from receiving digital signals, they are not sufficient to make the choice of whether to subscribe to analogue cable a separate decision. In other words, consumers typically decide whether to subscribe to a multi-channel television service, then select either cable or DTH. For some consumers, that same decision would involve an assessment of whether to subscribe to digital cable. At the end of the decision-making, if the average consumer decides to subscribe, he or she will pick only one of analogue cable, digital cable or DTH. Consequently, the question of market share must be addressed by including all cable subscribers and all DTH subscribers in the relevant geographic market. On this basis, as the CRTC concluded in its decision on Quebecor’s original complaint, Quebecor remains the dominant provider in the markets that it serves:

In this regard, the Commission notes that Quebecor’s subsidiary remains the dominant player in broadcasting distribution in the province of Quebec, with approximately 1.5 million basic service subscribers.8

3. Even if one were to look at only the number of multi-channel TV subscribers that receive digital signals, it is clear that an objective assessment would not portray the situation in the misleading way that Quebecor does. There are currently approximately 3.3 million multi-channel TV subscribers that receive digital signals. ExpressVu accounts for 1.3 million of these. Cable companies and Star Choice, which is owned by Shaw Cable, account for 2 million. Moreover, the number of non-ExpressVu digital subscribers is now growing faster than the number of ExpressVu digital subscribers.

8 Decision 2002-61, paragraph 29.