BEFORE THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION

BROADCASTING NOTICE OF PUBLIC HEARING CRTC 2010-498, ITEM 2

APPLICATION BY SHAW COMMUNICATIONS INC TO TAKE OVER EFFECTIVE CONTROL OF CANWEST GLOBAL COMMUNICATIONS CORP.

COMMENTS

OF

TELUS COMMUNICATIONS COMPANY

23 August 2010

Table of Contents

Executive Summary - 2 - Introduction - 5 - Unprecedented Vertical Integration and Market Power - 8 - A true evaluation of Shaw’s market power - 11 - The Canwest acquisition is driven by vertical benefits, not efficiencies. - 14 - Possible Remedies to Counter Pitfalls of this Unprecedented Vertical Integration - 15 - Strict prohibition on exclusive content arrangements - 17 - Handling of complaints of undue preference - 20 - Suspension of VFS regime for vertically integrated broadcasters - 22 - Structural separation - 23 - Tangible Benefits that Fit this Transaction and the Existing Policy - 25 - Shaw has understated the value of the transaction - 26 - Shaw’s benefits package must total at least $200 million of new benefits - 27 - The proposed $23 million for conversion of transmitters is not a tangible benefit - 29 - Incrementality of obligations - 30 - Shaw has made no effort to benefit any third parties - 31 - Conclusion - 32 - Appendix 1: Nordicity Study on International Practices in Safeguarding Against Anti- Competitive Practices in Broadcasting Distribution - 35 - Executive Summary

Regulatory approval of the application by Shaw Communications Inc. (Shaw) to effectively acquire all the broadcasting assets of Canwest Global Communications Corp. will make Shaw the largest vertically integrated media company in Canada. This has serious implications for the Canadian broadcasting system given the potential for self-dealing and anti-competitive behaviour which may negatively impact access and diversity. Given the unprecedented scope of vertical integration which would be created in the approval of this transaction, TELUS submits that the CRTC must adopt, as conditions of approval of this transaction, safeguards to limit any abuse of market power and anti-competitive behaviour by Shaw and its affiliates, particularly with respect to matters such as agreements with non-affiliated producers, programmers and broadcast distributors on linear and new distribution platforms. These safeguards must take the form of clear, unequivocal and enforceable rules.

Moreover, TELUS submits that the Commission must proceed with caution as it approves this transaction which will significantly alter the landscape of the Canadian broadcasting industry. Accordingly, as further discussed in a parallel submission filed by TELUS today with respect to the renewal of Shaw’s cable licenses, TELUS submits that the Commission must retain its powers to make amendments to conditions of license and thus it should renew Shaw’s cable licenses for a two-year term only. This prudent approach would follow that taken in A group-based approach to the licensing of private television services in which the Commission indicated that it would renew for a one-year term only the broadcasting licenses of all television licensees controlled by a designated group in order “to allow the broadcasting industry to adapt to both the new group-based approach set out in this regulatory policy and the Commission’s determinations resulting from the additional proceedings

With respect to tangible benefits, both Shaw’s assessment of the value of the transaction and Shaw’s proposal for a “pseudo” benefits package makes a mockery of the Commission’s policy which was established to ensure contributions to the broadcasting system as a tradeoff for the concentration that flows from such merger and acquisition activity. For all intents and purposes, Shaw’s application contains no tangible benefits package at all (as will be further explained below). While Shaw argues that the Commission should look at the so-called “intangible benefits” of this transaction, TELUS submits that this argument is severely flawed and that a full and proper tangible benefits package is warranted in this case to help offset the reduction in diversity that will result from the approval of this transaction. Without such tangible benefits, there would seem to be little value and considerable risk in approving this transaction.

Canwest’s recourse to creditor protection has skewed the reality of a very lucrative deal. The problems in which Canwest found itself were mostly the result of its crippling debt load as we entered the worst recession since the 1930s. The demise of the former ownership group had nothing to do with the profitability of Canwest itself, especially as it started to reap the benefits and synergies resulting from the acquisition of the Alliance Atlantis specialty services. Rather, it had everything to do with bad timing, high leveraging of assets on the eve of a global economic crisis and, among other things, the coincident collapse of advertising revenues.

Shaw saw a great deal in buying Canwest and made a strategic investment in doing so. Shaw cannot be begrudged for making a possibly smart business decision (buying highly profitable but undervalued assets at a distressed price) but it should not be given special exemption from a long-standing and cornerstone Commission policy that supports the greater broadcasting system for having done so. This acquisition of very profitable broadcast properties, which we estimate at over a $2 billion value, must entail the payment of a full and proper benefits package, that amounts to at least $200 million, and exception must not be made based on the proposition that the so-called rescue of Canwest is benefit enough.

TELUS’ recommendations to the Commission in approving this transaction can be summarized as follows: • Establish safeguards by way of conditions of license which should include at a minimum: • The strict prohibition on content exclusives on all platforms • A reverse onus for handling complaints of undue preference and interim relief such as providing access to content pending resolution of a complaint. Also establishment of a policy of taking into consideration the cumulative effect of multiple instances of preferences granted to an affiliate, undue or not. • Filing of all existing affiliation agreements between Canwest and Shaw in order to set a baseline for the purposes of assessing undue preference and a requirement to file all future affiliation agreements between Shaw and its affiliated programming undertakings. • Enable either party to elect to use commercial arbitration in the event of difficult negotiations to ensure access to content by competitors without undue delay. • A moratorium on any value-for-signal regime for integrated broadcasters for two years after which time rates for Canwest Global would be set through commercial arbitration at rates which do not exceed rates paid carriage of CTV for same terms and conditions. Moreover, in order to guard against self-dealing. payment would be made by all distributors, including Shaw, into an independent production fund which would manage the money on Canwest’s behalf. • Full structural separation between carrier and programming operations to prevent any sharing of board members or employees between any of the Shaw affiliated companies.

• The Commission should renew Shaw’s cable licenses for a two-year term only in order to retain the power to make changes to conditions of license in the short term as needed due to the quickly changing environment and the unknown potential consequences to the broadcasting system of this transaction. • The Commission should require that Shaw consent to a full and appropriate tangible benefits package: • It must be based on the full value of the transaction which is valued at over $2 billion; • It must not include as part of the 10% calculation any benefits which were previously obligated under the Canwest/Alliance Atlantis transaction but Shaw must be obligated to perform those prior obligations in addition to the new benefits • At least 75% of the benefits must be dedicated to third party initiatives such as independent production. • The Commission should impose strict obligations on Shaw with regard to the auditing and reporting of all planned expenditures.

Introduction

• Regulatory approval of the application by Shaw Communications Inc. (Shaw) to effectively acquire all the broadcasting assets of Canwest Global Communications Corp. (Canwest) will make Shaw the largest vertically integrated media company in Canada. This has serious implications for the Canadian broadcasting system given the potential for self-dealing and anti- competitive behaviour which may negatively impact competition in both the programming and distribution markets, and thereby diminish access and diversity in the broadcasting system. TELUS commends the CRTC for noting such concerns in its Notice of Consultation and for requesting comments on the potential for abuse of market power resulting from this takeover.

• Given the unprecedented scope of vertical integration which would be created in the approval of this transaction, TELUS submits that the CRTC must adopt, as conditions of approval of this transaction, safeguards to limit any abuse of market power and anti-competitive behaviour by Shaw and its affiliates, particularly with respect to matters such as agreements with non- affiliated producers, programmers and broadcast distributors on linear and new distribution platforms. These safeguards must take the form of clear, unequivocal and enforceable rules.

• Moreover, TELUS submits that the Commission must proceed with caution as it approves this transaction which will significantly alter the landscape of the Canadian broadcasting industry. Accordingly, as further discussed in a parallel submission filed by TELUS today with respect to the renewal of Shaw’s cable licenses, TELUS submits that the Commission should renew Shaw’s cable licenses for a two-year term only in order to retain its powers to make amendments to Shaw’s conditions of license. This prudent approach would follow that taken in A group-based approach to the licensing of private television services in which the Commission indicated that it would renew for a one-year term only the broadcasting licenses of all television licensees controlled by a designated group in order “to allow the broadcasting industry to adapt to both the new group-based approach set out in this regulatory policy and the Commission’s determinations resulting from the additional proceedings announced herein.”

• With respect to tangible benefits, both Shaw’s assessment of the value of the transaction and Shaw’s proposal for a “pseudo” benefits package makes a mockery of the Commission’s policy which was established to ensure contributions to the broadcasting system as a tradeoff for the concentration that flows from such merger and acquisition activity. For all intents and purposes, Shaw’s application contains no tangible benefits package at all (as will be further explained below). While Shaw argues that the Commission should look at the so-called “intangible benefits” of this transaction, TELUS submits that this argument is severely flawed and that a full and proper tangible benefits package is warranted in this case to help offset the reduction in diversity that will result from the approval of this transaction. Without such tangible benefits, there would seem to be little value and considerable risk in approving this transaction.

• The CRTC should be skeptical of Shaw’s position on the issue of paying tangible benefits and has rightfully raised concerns in the Notice about the benefits proposed by Shaw when it states that

The Commission may also wish to discuss the proposed benefits package in terms of incrementality, acceptability and proposals in respect of any benefits that may be found to be unacceptable to the Commission. The Commission in applying its benefits test, has been consistent and rigorous in requiring that (1) expenditures proposed as tangible benefits be truly incremental; (2) such expenditures be directed to projects and initiatives that would not be undertaken or realized in the absence of the transaction; and (3) as generally required, applicants demonstrate that expenditures proposed as tangible benefits flow predominantly to third parties, such as independent producers.

• While Shaw argues that its “rescue” of Canwest Global constitutes a significant intangible benefit to the broadcasting system, the reality is that the Canwest broadcasting assets are profitable and there were other buyers for Canwest. Some of these other potential buyers took Shaw and Canwest to court to argue against what they considered to be an unfair process which ultimately froze them out of the bidding.

• Canwest’s recourse to creditor protection has skewed the reality of a very lucrative deal. The problems in which Canwest found itself were mostly the result of its crippling debt load as we entered the worst recession since the 1930s. The demise of the former ownership group had nothing to do with the profitability of Canwest itself, especially as it started to reap the benefits and synergies resulting from the acquisition of the Alliance Atlantis specialty services. Rather, it had everything to do with bad timing, high leveraging of assets on the eve of a global economic crisis and, among other things, the coincident collapse of advertising revenues.

• Canwest’s most recent profit report shows that

[t]elevision operations, including CW Media’s specialty television operations, reported third quarter revenue of $287 million, up 5% compared to the same period in the previous year. On a comparable basis, excluding revenue from the Company’s second conventional television broadcast network from the prior year, third quarter revenue was up 14%. Operating profit in the third quarter was $101 million, up 39% compared to $73 million for the same period in the previous year. Excluding the results from the Company’s second conventional television broadcast network from the prior year, third quarter operating profit was up 31%.

• Shaw saw a great deal in buying Canwest and made a strategic investment in doing so. Shaw cannot be begrudged for making a possibly smart business decision (namely buying highly profitable but undervalued assets at a distressed price) but it should not be given special exemption from a long-standing and cornerstone Commission policy that supports the greater broadcasting system for having done so. This acquisition of very profitable broadcast properties, which we estimate at over a $2 billion value, must entail the payment of a full and proper benefits package, that amounts to at least $200 million, and exception must not be made based on the proposition that the so-called rescue of Canwest is benefit enough.

Unprecedented Vertical Integration and Market Power

• With the approval of this transaction, Shaw will become the largest vertically integrated company in the broadcasting system. It is relevant to repeat this fact because it brings the Canadian broadcasting system to a tipping point in terms of the balance between concentration and diversity. The level of concentration and reduction in diversity brought about by this transaction would have been unthinkable five years ago when the CRTC struggled with issues of concentration with respect to major takeovers by CTV and Canwest, in regard to the CHUM and Alliance Atlantis properties.

• Unprecedented vertical integration, absent strong safeguards to protect independent players and maintain diversity and choice, stifles competition by limiting the number of players and upsetting the balance in the eco- system of carriage and content.

• As an example of our concerns, we are clearly witnessing the tipping point in Quebec. Remstar’s V stations (the former TQS stations) continue to subsist in a precarious state with relaxed Canadian content and local programming obligations. Quebecor has significant control over content in Quebec either through its conventional television network TVA, its broadcast distribution service Videotron or its video and media storefront Groupe Archambault. TELUS currently has to contend with what we have alleged to be abuse of dominance by the vertically integrated Quebecor as Quebecor refuses access to its popular TVA content to the VOD services of Videotron’s competitors. The rules here are clear and there is no ambiguity with respect to the requirement to provide VOD content rights to competitors. TELUS has filed a complaint with the Commission but while it waits for a determination, Videotron remains the only provider of TVA content on VOD. The “delay by refusal to supply” plays to the integrated carrier every time. That is why with three vertically integrated cable companies dominating virtually all markets in Canada it becomes incumbent to ensure safeguards are clear and quickly enforceable.

• It is significant to raise Quebecor as an example of abuse of dominance. Let us recall that it was Shaw and Videotron, the two most vertically integrated distributors in the broadcasting industry, which threw the broadcasting sector into a crisis when they refused to make their payments to the Canadian Television Fund, contrary to established practice and policy.

• The Commission risks losing control over the ability to exercise effective constraints on vertically integrated carriers on behalf of independent producers, broadcasters and distributors if it does not establish the necessary safeguards to protect competition not only on traditional linear platforms but also on newer platforms including VOD, Internet and wireless. The CRTC has already established undue preference rules with respect to all these platforms but there is little clarity in terms of their meaning and/or enforceability.

• Such safeguards are essential in an environment where an independent broadcaster is reliant on an integrated distributor for carriage or an independent distributor is reliant on an integrated broadcaster for access to content and channels. And it is essential if the core of the broadcast policy is to be achieved whereby independent producers and creators have access on reasonable terms.

• Shaw’s acquisition of Canwest is not about programming synergies. If it were, it would have been more logical for the Canwest properties to be held by Corus Entertainment, which operates many programming services and is also owned by the Shaw family. Instead, it is Shaw, the cable distributor, which is acquiring all the assets of Canwest. This raises significant concerns for TELUS as a competing distributor which will be faced with having to negotiate content agreements with its biggest competitor. • As a direct competitor to Shaw in western Canada, we have the following significant concerns regarding the potential for undue preference/unjust discrimination:

• In the event of a value-for-signal negotiation, there is no established precedent or negotiation history to assess self-dealing by Shaw with respect to Global Television.

• Access to content for new platforms is a competitive imperative. Shaw’s television properties could withhold content or grant exclusivities to Shaw on emerging platforms because while the CRTC has indicated that its undue preference rules apply to traditional and new media activities, the detail around these new rules are unclear and are likely to result in delays that advantage the vertically integrated carrier.

• Provision of confidential information regarding marketing plans and subscriber information required in negotiation of content agreements with Canwest will be made available to our competitor Shaw.

• In addition to these significant concerns, however, TELUS is also concerned with the cumulative effect of the incremental preferences which Shaw is likely to give itself. While each instance may not by themselves attain a level of preference which is “undue”, a number of these preferences put together could certainly have a devastating effect on competition and put together they would constitute undue preference. TELUS urges the Commission to establish a policy which would take into account cumulative effect of Shaw’s preferential activities regarding its television properties.

• Many other countries have dealt with concerns related to vertical integration. To assist the Commission in dealing with the issues raised in this proceeding, TELUS has commissioned a study by Nordicity to provide a survey of the international practices in safeguarding against anti-competitive practices in broadcast distribution. Nordicity notes in its study that BDU/ broadcaster vertical integration has the potential to negatively impact the availability of must-have programming to local markets and that exclusive dealing on online platforms is emerging as a serious concern for broadcast regulators. It is noted that regulators in other jurisdictions have placed restrictions on the actions of larger BDUs in their dealings with smaller undertakings and ensured that programming is offered to all BDUs at non- discriminatory rates.

A true evaluation of Shaw’s market power

• To fully grasp Shaw’s market power, it is necessary to paint the full picture, including their ownership of the Corus Entertainment assets which are owned by the Shaw family although administered by a separate publicly- traded company. The table below shows the programming assets of the four largest content players in Canada and clearly shows Shaw as a content leader.

• Audience share shows that the combined Corus/Canwest programming assets closes the gap with the front-runner CTV. Some of the highlights are as follows:

• Canwest generates 17% of commercial television revenues and Corus 9% for a total combined control by Shaw of 26% of the television market share. Only 3% behind the current leader CTV at 29%, both of which would be more than double the market share of any other broadcaster.

• Corus generated 16% of commercial radio revenues in 2009 and when one looks at listening hours for English-language radio, Corus came in at 21% in 2009.

• In the English-language pay, PPV, VOD and specialty services segment, a combined Corus/Canwest holds a 33% revenue share which is the same as CTVglobemedia.

• Combined Canwest/Corus held 32.1% of viewing share in 2008-2009 compared to CTV which held 33.5%. No other Canadian broadcaster comes close to this corporate hold on viewing share.

• Canwest/Corus actually hold more viewing share than CTV if you counted the services jointly held with Astral or Quebecor which include Teletoon, Teletoon Retro and HBO Canada

Shaw (includes CTVglobemedi Shaw/Corus/ Rogers Quebecor Astral Canwest) a • City TV stations Canwest Global CTV Network and and • TVA • Two OTA TV A channels OMNI OTA Network Network multi- stations cultural stations Deja View Fox Sports World Canada MovieTime XStreme Sports TVtropolis (66.67%) Mystery (50%) MenTV (49%) History Television Independent Film CTV News Channel MTV Canada Channel Canada BNN Showcase TCN Showcase Action Travel + escape Showcase Diva ESPN Classic Slice Canada (80%) Fine Living RDS (80%) (80.24%) RIS (80%) HGTV Canada TSN (80%) (80.24%) Animal Planet BBC Canada (80%) (64%) Canal D BBC Kids (80%) Discovery Channel Canal Vie Discovery Health (64%) CINEPOP Network (80%) Discovery ARGENT VRAK.TV National Biography Channel LCN Civilization (64%) Ztele Geographic Discovery HD Rogers Sportsnet Mystere Historia (50%) Channel (64%) G4TechTV Prise 2 Specialty Food Network (64%) OLN MenTV (51%) Musimax NHL Network MusiquePlus Services Canada (57%) TVtropolis (33.33%) Mystery (50%) Historia (50%) (17.14%) Rogers Pay Audio Les idees de ma Series+ (50%) Book Television Teletoon (50%) Series+ (50%) Setanta Sports maison Dusk (49%) Bravo! (53.4%) Canal Evasion Teletoon retro CourtTV Canada English (50%) One: The Body, (8.31%) Mind & Spirit (38%) Fashion Television Teletoon retro Channel French (50%) The Score (22%) TreeHouse TV MuchLoud MuchMoreMusic W Network YTV MuchMoreRetro MuchMusic CMT (90%) Discovery Kids MuchVibe CablePulse 24 (80%) PunchMuch Sky TG24 (50.5%) MTV2 Telelatino (50.5%) SPACE Teletoon (50%) Star! TV Teletoon retro TV Land (80.1%) English (50%) Teletoon retro French (50%) MaxTrax (Pay Audio) VIVA Cosmopolitan TV (67%) Sundance Channel W Movies Family Channel Encore Avenue Rogers Sportsnet Mpix Movie Central Viewers Choice PPV Super Ecran Pay/PPV Shaw PPV (19.96%) Viewers Choice Canal Indigo TMN Shaw Satellite PPV (24.95%) Viewers Choice (50.1%) • Shaw on • Rogers • Illico sur VOD On demand Demand Demand e • 48 radio stations (exclude s stations which have been acquired • 38 radio • 55 radio • 89 radio Radio by stations stations • stations Cogeco and pending Commis sion approval for the transfer). Shaw (includes CTVglobemedi Shaw/Corus/ Rogers Quebecor Astral Canwest) a • City TV stations Canwest Global CTV Network and and • TVA • Two OTA TV A channels OMNI OTA Network Network multi- stations cultural stations Deja View Fox Sports World Canada MovieTime XStreme Sports TVtropolis (66.67%) Mystery (50%) MenTV (49%) History Television Independent Film CTV News Channel MTV Canada Channel Canada BNN Showcase TCN Showcase Action Travel + escape Showcase Diva ESPN Classic Slice Canada (80%) Fine Living RDS (80%) (80.24%) RIS (80%) HGTV Canada TSN (80%) (80.24%) Animal Planet BBC Canada (80%) (64%) Canal D BBC Kids (80%) Discovery Channel Canal Vie Discovery Health (64%) CINEPOP Network (80%) Discovery ARGENT VRAK.TV National Biography Channel LCN Civilization (64%) Ztele Geographic Discovery HD Rogers Sportsnet Mystere Historia (50%) Channel (64%) G4TechTV Prise 2 Specialty Food Network (64%) OLN MenTV (51%) Musimax NHL Network MusiquePlus Services Canada (57%) TVtropolis (33.33%) Mystery (50%) Historia (50%) (17.14%) Rogers Pay Audio Les idees de ma Series+ (50%) Book Television Teletoon (50%) Series+ (50%) Setanta Sports maison Dusk (49%) Bravo! (53.4%) Canal Evasion Teletoon retro CourtTV Canada English (50%) One: The Body, (8.31%) Mind & Spirit (38%) Fashion Television Teletoon retro Channel French (50%) The Score (22%) TreeHouse TV MuchLoud MuchMoreMusic W Network YTV MuchMoreRetro MuchMusic CMT (90%) Discovery Kids MuchVibe CablePulse 24 (80%) PunchMuch Sky TG24 (50.5%) MTV2 Telelatino (50.5%) SPACE Teletoon (50%) Star! TV Teletoon retro TV Land (80.1%) English (50%) Teletoon retro French (50%) MaxTrax (Pay Audio) VIVA Cosmopolitan TV (67%) Sundance Channel W Movies Family Channel Encore Avenue Rogers Sportsnet Mpix Movie Central Viewers Choice PPV Super Ecran Pay/PPV Shaw PPV (19.96%) Viewers Choice Canal Indigo TMN Shaw Satellite PPV (24.95%) Viewers Choice (50.1%) • Shaw on • Rogers • Illico sur VOD On demand Demand Demand e • 48 radio stations (exclude s stations which have been acquired • 38 radio • 55 radio • 89 radio Radio by stations stations • stations Cogeco and pending Commis sion approval for the transfer). • Moreover, unlike CTV, Shaw also holds the largest shares of the broadcast distribution and cable carrier markets in Canada. • Shaw is the top Canadian broadcast distributor with 3.2 million subscribers between its cable and DTH operations. Well above its closest rival Rogers at 2.3 million. • Shaw has an Internet subscriber base of 1.68 million, and Internet penetration continues to be one of the highest in North America at over 73%.

• Shaw held 830,000 digital phone lines in 2009 and service is now available to more than 94% of Shaw’s basic customers with penetration rates of 38%.

• In 2008, Shaw participated in the Canadian Advanced Wireless Spectrum (“AWS”) auction and was successful in acquiring 20 megahertz of spectrum

across most of its cable footprint.

The Canwest acquisition is driven by vertical benefits, not efficiencies.

• As noted above, Shaw’s acquisition of Canwest is not about programming synergies. Rather, by bringing Canwest into the Shaw Cable fold, as opposed to placing these programming assets together with their Corus programming assets, Shaw will seek to leverage the Canwest assets to further increase its dominance of the distribution market.

• With Shaw’s control of the Canwest assets, Shaw will have access to the terms in affiliation agreements with other BDUs in areas such as subscriber information and marketing and packaging plans. Access to this otherwise confidential information provides Shaw with an inappropriate competitive advantage.

• In addition to gaining access to competitively sensitive information, Shaw may use the acquisition of Canwest to give itself undue preference on access to content in order to benefit its own platforms. Specifically, TELUS notes that Shaw will soon be launching a wireless service and may seek to leverage exclusives of Canwest content to boost its launch.

Finally, it is highly likely that Shaw will seek to leverage its content acquisition by raising the cost of content for its competitors. While this is an immediate concern regarding the specialty services owned by Canwest, it is potentially an even greater concern if the value for signal regime proposed by the Commission comes to pass. Under a VFS regime, Shaw would be in a position to significantly entrench its market dominance as the payments received from other BDUs for distributing Canwest would more than offset any costs paid by Shaw to CTV. Further Shaw and other vertically integrated BDUs are in a position to mutually self-deal by minimizing VFS payments to each other while, over-inflating the price paid for Canwest Global, CITY and TVA etc by BDUs competing with the top three vertically integrated cable companies. Such self-dealing would enable Shaw and others to provide its basic service at a much lower cost than competing BDUs and thereby squeeze their competitors’ margins. Possible Remedies to Counter Pitfalls of this Unprecedented Vertical Integration

• In order to ensure that Shaw’s acquisition of Canwest does not cause undue harm to the Canadian broadcasting system, TELUS considers that at a minimum, in approving this transaction, the Commission should implement each of the following safeguards:

• Establish by way of condition of license a clear and strict prohibition on content exclusives and preferential content agreements on all platforms. The Commission should provide explicit guidance that any exclusive content arrangements or preferential treatment in relation to content agreements on new platforms, e.g. VOD, new media and wireless platforms, constitutes an undue preference.

• Establish a separate complaints handling mechanism for handling complaints of undue preference against any of Shaw or its affiliated companies which would reverse the onus of proof to the vertically integrated entity and also provide for interim relief such as providing access to content pending resolution of a complaint. The consideration of complaints would also take into consideration the cumulative effect of multiple preferences given to itself. Also require the filing of existing and future affiliation agreements between Shaw and its affiliated programming undertakings.

• Enable either party to elect to use commercial arbitration in the event of difficult negotiations to ensure access to content by competitors without undue delay. Industry Canada’s process with respect to the AWS auction serves as a reasonable model to use. Industry Canada’s Arbitration Rules and Procedures, CPC-2-0-18, November 2008, were developed following a public consultation and amount to a comprehensive code for dealing with disputes between parties where commercial negotiations have failed to result in agreement upon the final terms and conditions for site-sharing or roaming agreements. The same model could be inexpensively and expeditiously applied to disputes over access to content which are unresolved through commercial negotiations. Of particular note, the Arbitral Tribunal is directed to have regard to market information and relevant economic data in Canada and may have regard to similar information and data from other jurisdictions.

• Establish a moratorium on the payment of value-for-signal to the vertically integrated Global Television for a period of two years after which time rates would be set through commercial arbitration and paid by all distributors, including Shaw, into an independent fund such as the Canadian Media Fund or the Local Programming Improvement Fund.

• Require structural separation between the Canwest properties and Shaw’s distribution services to protect sensitive confidential information of competing distributors.

Strict prohibition on exclusive content arrangements

• Shaw’s vertical integration with Canwest opens the door to content exclusives or more favourable access to content than its competitors. Where there is opportunity there is motivation. Such self-dealing is harmful to consumers and competition, especially at this time when business models are being tested on new platforms.

• In the U.S., the Federal Communications Commission and Congress has been very concerned with the impact of vertical integration which would result from the merger of the large cable distributor and internet service provider Comcast with the media powerhouse of NBC Universal. As noted in the Nordicity study appended to this submission,

While this case remains before the FCC and US Department of Justice for review, some recommendations have been made to limit the possible negative effects the JV may incur. To that end, in August 2010, Rep Rick Boucher, a member of the US Congress’ House Energy and Commerce Committee released his suggested conditions to the merger, which if left unchecked he feared held “the potential for consumer harm”. These measures (which follow) are all intended to limit the ability of the combined company to engage in anti-competitive practices in terms of web TV:

• Programs made available on NBC.com should not be permitted to migrate exclusively to any online platform(s);

• The combined company should not be permitted to enter into exclusive contracts that restrict the availability of online video programming to any online platform in which it has an interest;

• The combined company should not be permitted to keep competitors from offering programming not affiliated with Comcast (i.e. it should not be allowed to enter into exclusive agreements regarding content in which it does not have an interest that is available on an online platform);

• All high value sports events (e.g. NBA, NFL, MLB, etc.) distributed by the combined company should not be distributed exclusively on the company’s pay cable networks or diminish the OTA distribution of such events to such an extent as to effectively deprive the public free access to these events (and limit the commercial viability of local NBC affiliates);

• The combined company should not prevent any Internet-enabled device from displaying any online programming service in which the combined company has an attributable interest of an agreement (i.e. device interoperability should be maintained where possible).

• All of these safeguards proposed above could be applied to Shaw with respect to Canwest.

• Similarly the DirectTV merger in 2003 with News Corp Inc (owner of Fox, FX and the Fox-Sports regional sports networks) was said to “threaten to harm meaningful competition between media companies … [which] will mean that control of media that Americans rely upon most for news, information and entertainment could eventually be placed in the hands of a few powerful media giants.” As noted in the Nordicity survey, in order to mitigate the likelihood of abuse, the FCC applied a number of conditions to the DirecTV sale, including:

• News Corp was required to offer its existing and future cable programming (i.e. broadcasting) services on a non-exclusive basis and non-discriminatory terms and conditions.

• News Corp must enter commercial arbitration for disputes over retransmission consent of its broadcast stations and carriage of its RSNs. During such negotiations, the aggrieved BDU will be allowed to continue carriage of the broadcast signals or RSN pending resolution.

• Arbitration is available for “first time” requests for carriage.

• In the UK, the merger of British Satellite Broadcasting with Sky television to create BSkyB led to concerns over predatory pricing which ultimately resulted in OfCom having to set rates for such services as Sky Sports but concerns remain with respect to other programming such as movies where Ofcom stated that it is “concerned in particular that the way in which these movies are sold and distributed creates a situation in which Sky has the incentive and ability to distort competition … [where] the end result for consumers is less choice, less innovation and higher prices.”

• In Canada, carrier exclusivities relating to content are even more contrary to the public interest. The content ecosystem which is regulated to ensure the funding and promotion of Canadian content would be set off-balance if any distributor were allowed to keep content to itself. The CRTC has created significant advantages for Canadian broadcasters to obtain content rights which can then be sub-licensed to carriers for VOD or other platforms, the ability to insert advertising in content obtained from a Canadian broadcaster is a case in point. Its policies therefore create a market for content which is funneled through Canadian programming licensees and while this may benefit the Canadian broadcasting system overall, it creates significant concerns about vertical integration in Canada.

• Accordingly, TELUS submits that in order to protect access to a diversity of content and competition amongst carriers, Shaw should not be allowed to enter into any exclusive agreements in relation to content to be displayed on non-traditional platforms such as VOD, mobile or the Internet, or any new emerging platform, whether or not this content was also broadcast on any of the traditional linear programming services controlled by Shaw, its affiliates or family members.

Handling of complaints of undue preference

• The vertical integration of Shaw is likely to give rise to concerns of undue preference which may not fit the existing framework for handling complaints. The Commission must therefore establish conditions of license for both Shaw and Canwest which would provide for handling of all complaints of undue preference from other broadcasters, producers or competing BDUs. • In 2008, the Commission established a reverse onus on broadcasting complaints, in keeping with practices held in the telecommunications industry, finding that, "in most cases, BDUs are in sole possession of key information without which complainants cannot fully argue their cases". Accordingly, section 9(2) of the Broadcasting Distribution Regulations state that "In any proceedings before the Commission, the burden of establishing that any preference or disadvantage is not undue is on the licensee that gives the preference or subjects the person to the disadvantage".

• More recently, in its Review of broadcasting in new media, the Commission considered that "the ownership structure within Canada's wireless industry suggests that the potential for unduly preferential treatment needs to be addressed because the industry structure comprises vertically integrated companies with ownership interests in content providers". The Commission goes on to provide guidance on the type of situation that could give rise to an undue preference in the new media environment, offering the example of "a new media broadcasting undertaking engaged in programming distribution that acquires content from an affiliated programming undertaking either to the exclusion of non-affiliated programming undertakings or on more favourable terms or conditions that those applicable to non-affiliated programming undertakings."

• As such, the Commission determined that allegations of undue preference in the new media environment should be subject to the same reverse onus provision as elsewhere in the broadcasting system", such that "[t]he party alleged to have engaged in preferential behaviour will generally be in the best position to provide information on its own practices." Thus, once a complainant establishes the existence of a preference or disadvantage, the onus shifts to the allegedly infringing licensee to demonstrate that its actions were not undue.

• TELUS agrees with the Commission's concerns that vertically integrated companies, particularly those with broadcasting distribution and programming undertakings, are in a position to use their affiliations to their own advantage and, more importantly, to the disadvantage of their competition. TELUS submits that, for the purposes of any complaints process, the onus should always be on the vertically integrated company to prove that its actions do not result in a preference that is undue.

• Moreover, as noted above, TELUS is also concerned with the cumulative effect of multiple small preferences which Shaw will undoubtedly seek to confer unto itself. TELUS submits that the effect of a widespread discriminatory treatment can be just as devastating on competition as a single instance of undue discriminatory action. Accordingly, the Commission should establish as a policy that it will consider complaints of undue preference against vertically integrated companies contextually, with regard to any cumulative discrimination which might be occurring and will not seek to separate allegations and consider each in a vacuum. In addition to preferential rates and terms in relation to content obtained from affiliated companies, there is also the concern with respect to delays associated with the launch of new content and services, for which Shaw would benefit from being first to market. Even small delays related to negotiation of content agreements with Shaw and its affiliates should weigh heavily in favour of being considered an undue preference. Accordingly, the Commission should explicitly state that it will grant interim relief with respect to complaints of undue preference and which would include requiring the provision of content pending the resolution of a complaint.

• Further, in order to assist in the assessment of discriminatory pricing and terms with respect to the specialty services controlled by Shaw, its affiliates of family members, the Commission should require that Shaw immediately file on the public record all existing affiliation agreements it has with Canwest properties. This will serve to establish base rates of fees and terms determined by an open market, prior to the vertical integration taking place and it will assist in assessing discriminatory treatment. In addition, the Commission should require that Shaw file all future affiliation agreements between Shaw and its affiliated programming undertakings.

Suspension of VFS regime for vertically integrated broadcasters

• The value for signal regime proposed by the Commission, if approved by the Federal Court of Appeal, will require good faith negotiations between BDUs and broadcasters. For Rogers, Quebecor and Shaw, each of which will own a conventional television network, the potential to simply “trade-off” each others’ fees may have the impact of artificially raising rates for unaffiliated broadcasters and BDUs resulting in widespread overpayments and undue preference for the vertically integrated carriers.

• Negotiation of value for signal for conventional television broadcasters has no history in Canada and therefore there is no baseline from which it could be determined whether Shaw is engaging in self-dealing. Given the lack of any precedent to negotiate the value for Canada’s “priority” television services which have been shaped by the regulatory framework into the cornerstones of the traditional broadcasting system, it would be inappropriate to inject an additional uncertainty by allowing the vertically integrated carriers to skew the negotiations.

• Accordingly, TELUS submits that those broadcasters which are fully vertically integrated with a broadcast carrier, such as Canwest Global in this transaction, should be excluded from participating in the VFS regime for at least two years. Once a history of negotiations has been established with independent conventional television broadcasters such as CTV, the Commission can review whether to allow vertically integrated broadcasters to participate in this additional revenue source.

• After two years, TELUS submits that the fees to be paid by all BDUs for the carriage of Canwest Global should be set by arbitration at rates which do not exceed the rate paid to CTV for the same terms and conditions. Moreover, in order to prevent self-dealing by Shaw, the Commission should require that payments for the carriage of Canwest Global be paid by all BDUs, including Shaw, into an independent production fund such as the Canadian Media Fund or the Local Programming Improvement Fund, which would manage the money on Canwest Global’s behalf.

Structural separation

• TELUS considers that structural separation between the operations of Shaw’s distribution service and Canwest’s programming services is an essential component to ensuring that negotiation for content can occur in a somewhat fair environment. Shaw’s distribution service should not be able to benefit from inappropriate access to information from competing BDUs.

• TELUS notes that Shaw has had to deal with structural separation in the past and has been found in non-compliance of the requirements relating to this structural separation. Specifically, in relation to the structural separation of StarChoice and Cancom (now Shaw Direct), the Commission determined that, “as a result of the influence that Shaw could have on the merged entity, the continuation of conditions of license creating structural separation is necessary” to “prevent the possibility of undue preference and disadvantage that Shaw could confer, due to its dominant position in the cable distribution sector and its vertically- and horizontally- integrated corporate structure, which includes both programming and cable distribution arms”.

• In that decision, the Commission required as conditions of license that

• The DTH undertaking to be carried on by the licensee shall remain at all times an entity that is independent of and legally separate from Shaw and any of Shaw’s subsidiaries, affiliates or related companies

• None of the members of the licensee’s board of directors shall be persons who are members of the board of directors of Shaw or who are members of the board of directors of any of Shaw’s subsidiaries, affiliates or related companies licensed as cable undertakings;

• No employee of the DTH licensee, or any individual providing services on a contractual basis to the DTH licensee, shall, at the same time, be employed by Shaw or by any of Shaw’s subsidiaries, affiliates or related companies licensed as cable distribution undertakings or as programming undertakings, or any direct or indirect holding companies or entities thereof.

• Shaw was found in non-compliance of these conditions of license requiring structural separation and was given a short-term license renewal as a result. In its decision, the Commission stated: “The conditions related to structural separation […] are very clear. The concurrent appointment of a person to the boards of Shaw and Cancom, or the sharing of employees between these companies, even on an interim basis, is not appropriate under any circumstances.” The Commission further stated that it “views with great concern the contravention of these conditions and reiterates the importance of them by imposing a short-term licence renewal.” • While the Commission then relaxed these rules a year later by replacing the strict structural separation rules with a condition requiring only the maintenance of separate sales, marketing and customer service functions, combined with an undertaking to require the confidentiality of affiliation agreements. This decision was the subject of a scathing dissent which rightfully disagreed with granting this request given the finding of non- compliance less than a year prior.

• In this case, the unprecedented level of vertical integration requires utmost caution and therefore the most strict conditions relating to structural separation. TELUS submits that rules similar to those imposed on Cancom/ StarChoice in 1999 should be imposed on Shaw/Canwest as a condition of approval of this transaction.

Tangible Benefits that Fit this Transaction and the Existing Policy

• It is longstanding Commission practice to order that 10% of the full value of the transaction be assigned to tangible benefits when assessing and approving ownership and control transactions. In an ownership transaction, “an applicant is expected to propose a specific package of significant and unequivocal benefits that will yield measurable improvements to the communities served by the broadcasting undertaking and to the Canadian broadcasting system.” In this case, Shaw has made a complete mockery of the Commission’s policy. Not only does it seek to undervalue the proposed transaction by more than three quarters of the publicly announced purchase price, none of the “benefits” proposed by Shaw fit the Commission’s policy for incremental tangible benefits and should not be counted.

Shaw has understated the value of the transaction

• In an Information Bulletin issued in 2008, the Commission set out its practice with respect to the determination of the transaction value in changes in effective control of broadcasting undertakings. None of Shaw’s arguments to support its proposal of a value of the transaction of less than $2 billion are supported by this Information Bulletin.

• Based on an average of enterprise value to EBITDA of trading multiples of similar broadcast entities, combined with TD Newcrest’s 2010 analyst forecast issued after Canwest’s latest quarterly results, TELUS assesses the value of the Canwest entity to be $2.4 billion.

• At the very least, the transaction must be valued at Shaw’s purchase price reported at $2 billion.

• Shaw’s initial filing with the Commission indicates a value of the transaction at $475 million but that was prior to Shaw’s complete buy-out of the debts and assets held by Goldman Sachs. The full purchase price paid for complete control of Canwest was just over $2 billion as reported by Shaw. • Rather than accept the valuation of the transaction at the purchase price, Shaw then attempts to convince the Commission that no “change of control” occurred with the purchase of Goldman Sachs interests. According to Shaw, the value of the transaction should be set at $506 million. Shaw argues that “benefits should be imposed only in respect of the transaction which constituted a change of effective control” and that “the interests acquired from Goldman Sachs do not confer upon Shaw any transfer of control.” Shaw argues that “[t]he fact that Shaw has agreed to now address the remaining interests of the bondholders and Goldman Sachs is not determinative of the issue of change of effective control”, given that Goldman Sachs is a non-Canadian, and as such “it is appropriate to apply the benefits policy based on the value of the transaction which triggered the acquisition of effective control.”

• TELUS submits that it would be a perversion of the Commission’s tangible benefits policy to allow Shaw to avoid the more significant benefit package requirement because of a multiple step transaction. Clearly Goldman Sachs had some measure of control in its interests in the Canwest assets. The purchase of Goldman Sachs’ interests, which more than doubles the full purchase price in this transaction, are transferring an additional measure of control to Shaw, namely all the rights which Goldman Sachs held including veto rights, nomination rights, etc.

• It is interesting to note that it was never argued that Goldman Sachs investment in the acquisition of Alliance Atlantis should be discounted from the value of that transaction when Canwest went before the Commission to seek approval of its purchase of the Alliance Atlantis properties. There is similarly no foundation in fact or law to discount the value of the transaction here as Shaw has proposed.

Shaw’s benefits package must total at least $200 million of new benefits

• Clearly, the value of this transaction must be set at $2 billion or more which should result in a benefits package of at least $200 million. Shaw however has proposed only a meager package of $23 million alleged tangible benefits package (the merits of which are disputed below).

• Shaw recognizes that $23 million does not even add up to 10% of the initially smaller transaction valued at $475 million. Indeed, Shaw’s initial benefits proposal represents less than 5% of the total value of the initial $475 million transaction. Shaw submits that it shouldn’t be required to pay any more in tangible benefits given what it argues are the “intangible benefits” of rescuing Canwest from bankruptcy.

• In defense of its reduced benefits proposal, Shaw has outlined the Commission’s policies with regard to foregoing benefits requirements for unprofitable radio undertakings and television stations owned by independent small market broadcasters. Yet not one of these examples given by Shaw can be considered a precedent to the current application. The Canwest services being acquired by Shaw are profitable, and some are in fact highly profitable.

• Moreover, when assessing transactions, the Commission considers not only the profitability of the broadcasting undertaking, but the financial resources of the purchaser.

• And it should be recalled that there were other bidders for the Canwest properties, some of which feel very aggrieved with the manner in which the auction of the assets was held. In the circumstances, it is even more incumbent that Shaw provide very tangible benefits. As noted by the Commission, “The purpose of the Benefits Policy is to ensure that applicants have filed the best possible proposal under the circumstances and that the benefits proposed in the application are commensurate with the size and nature of the transaction, given that the Commission does not solicit competing applications for the transfer of ownership or control of broadcasting undertakings.”

The proposed $23 million for conversion of transmitters is not a tangible benefit

• Not only does Shaw’s proposed benefits package not even come close to the required amount, what is proposed for this $23 million does not come within the purview of a tangible benefit to the public within the guidelines of the Commission because the conversion of analogue transmitters is a cost of doing business. It is a calculated assessment that all OTA broadcasters are making to determine whether the investment in conversion is worthwhile or whether they are willing to risk lost viewership by going dark in August 2011.

• TELUS submits that the only advantage of digital conversion in these instances is to Shaw’s benefit. That is, if the Commission allows Shaw to use its proposed tangible benefits package of $23 million to convert its analog transmitters, Shaw will be able to take advantage of negotiations under the new value for signal regime (in the event that such a regime obtains approval from the Federal Court of Appeal), thus recouping the costs of the conversion. Moreover, allowing Shaw to use monies from this benefits package to the Canwest transmitters in non-mandatory areas creates a disincentive for Shaw cable to provide a “free local package” to viewers who don’t subscribe to a BDU service. If the Commission does approve conversion of these transmitters a tangible benefit then it should mandate shared use of these converted transmitters to enable other local stations to also be available over the air in these markets. If conversion of transmitters is accepted as a benefit, then this shared use should be provided free of charge to other local stations in the transmission area.

• The more appropriate response to Shaw’s proposal however is to reject the cost of converting transmitters as a cost of doing business. Past Commission practice has been to reject normal capital expenditures. “Proposed expenditures that fall within the parameters of what can be considered normal capital expenditures are also generally rejected by the Commission as benefits of a transfer…Capital expenditures for items such as replacement transmitters are also usually viewed by the Commission as being part of a normal capital expenditure program. If replacements are needed, they are required irrespective of a transfer; if they are not needed, there is no discernible benefit to the public.

Incrementality of obligations

• Following much prodding by Commission staff, Shaw added additional benefits to its package, the bulk of which constitute payment of the outstanding benefits obligated to Canwest in its purchase of Alliance Atlantis. This is an unacceptable proposal because the Commission has always indicated that a tangible benefits package must be incremental to any existing obligations:

The Commission currently expects the purchaser of an undertaking to fulfil any benefits commitments that the current licensee of the undertaking has not fulfilled. The Commission considers that benefits commitments are part of the obligations of a licensee and should be implemented regardless of ownership changes. The Commission will therefore maintain its practice of questioning the prospective purchaser in a transaction on its intentions with respect to the seller's unfulfilled benefits commitments. The Commission notes that commitments to carry out such unfulfilled benefits are not considered to be benefits on the part of the purchaser.

• Accordingly, the assumption of outstanding tangible benefits pursuant to the earlier Canwest /Alliance Atlantis transaction, approximately $95 million, cannot be counted as part of this benefits package.

Shaw has made no effort to benefit any third parties

• The Commission, in applying its benefits test, has also consistently stated that applicants demonstrate that expenditures proposed as benefits should flow predominantly to third parties, such as independent producers, and that they must be directed to projects and initiatives that would not be undertaken or realized in the absence of the transaction. Shaw’s benefits proposal makes no attempt to direct any funding to projects and initiatives outside of those which would solely benefit Shaw.

• While after much prodding, Shaw has proposed additional programming content as part of its benefits package, namely new scripted programs for a total of $24 million and new media content innovation for a total of $18 million, they provide such little detail around this proposal that it would be impossible to distinguish these expenditures from their other mandated obligations to produce Canadian content.

• Shaw’s refusal to provide an acceptable benefits package as part of its application for transfer of control of Canwest should militate in favour of third party administration of the benefits package which will ultimately need to be provided at the hearing if the Commission is going to approve this transaction. The Commission will need to be vigilant in accepting any last minute benefits proposal presented at the hearing because interested parties will not have had an opportunity to fully assess the proposal. The Commission should not feel compelled to approve the transaction unless it is accompanied by a benefits package meets the following criteria

• It must total 10% of the transaction which is valued at over $2 billion

• It must be based on the full value of the transaction which is valued at over $2 billion;

• It must not include as part of the 10% calculation any benefits which were previously obligated under the Canwest/Alliance Atlantis transaction but Shaw must be obligated to perform those prior obligations in addition to the new benefits

• It must be predominantly dedicated to third party initiatives such as independent production.

• In addition, the Commission should impose strict obligations on Shaw with regard to the auditing and reporting of all planned expenditures. This obligation should include an independent third-party audit, performed at least annually, which outlines and explains the incremental nature of the expenditure, when and where the expenditure was made. These audits should be made publicly available.

Conclusion

• This transaction which will result in unprecedented vertical integration between carriers and programming undertakings must be handled with extreme caution. At the same time, the Commission must be vigilant in ensuring that its policies are upheld. This transaction is a strategic business decision by Shaw which requires safeguards and no compromises.

• TELUS’ recommendations to the Commission in approving this transaction can be summarized as follows:

• Establish safeguards by way of conditions of license which should include at a minimum:

• The strict prohibition on content exclusives on all platforms

• A reverse onus for handling complaints of undue preference and interim relief such as providing access to content pending resolution of a complaint. Also establishment of a policy of taking into consideration the cumulative effect of multiple instances of preferences granted to an affiliate, undue or not. • Filing of all existing affiliation agreements between Canwest and Shaw in order to set a baseline for the purposes of assessing undue preference and a requirement to file all future affiliation agreements between Shaw and its affiliated programming undertakings.

• Enable either party to elect to use commercial arbitration in the event of difficult negotiations to ensure access to content by competitors without undue delay.

• A moratorium on any value-for-signal regime for integrated broadcasters for two years after which time rates for Canwest Global would be set through commercial arbitration at rates which do not exceed rates paid carriage of CTV for same terms and conditions. Moreover, in order to guard against self-dealing. payment would be made by all distributors, including Shaw, into an independent production fund which would manage the money on Canwest’s behalf.

• Full structural separation between carrier and programming operations to prevent any sharing of board members or employees between any of the Shaw affiliated companies.

• The Commission should renew Shaw’s cable licenses for a two-year term only in order to retain the power to make changes to conditions of license in the short term as needed due to the quickly changing environment and the unknown potential consequences to the broadcasting system of this transaction.

• The Commission should require that Shaw consent to a full and appropriate tangible benefits package:

• It must be based on the full value of the transaction which is valued at over $2 billion;

• It must not include as part of the 10% calculation any benefits which were previously obligated under the Canwest/Alliance Atlantis transaction but Shaw must be obligated to perform those prior obligations in addition to the new benefits

• At least 75% of the benefits must be dedicated to third party initiatives such as independent production.

• The Commission should impose strict obligations on Shaw with regard to the auditing and reporting of all planned expenditures.

• All of which is respectfully submitted by TELUS.

Appendix 1 Nordicity Study on International Practices in Safeguarding Against Anti-Competitive Practices in Broadcasting Distribution

[filed as separate attachment]

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