Cogeco 2010 Annual Report Download - page 21

20 COGECO CABLE INC. 2010 Management’s Discussion and Analysis (MD&A)
Risks pertaining to operating costs
Cogeco Cable applies itself to keeping its cost of goods sold in check so as to secure continued operating margin growth. The two largest
drivers of cost of sales are network fees paid to audio and video programming service suppliers as well as data transport and connectivity
charges, mostly for Telephony and HSI traffic.
The market for audio and video content services in Canada is already characterized by high levels of supplier integration and structural
rigidities imposed by the CRTC’s regulatory framework for broadcasting distribution. While Cogeco Cable has been able to conclude
satisfactory distribution agreements with Canadian and foreign programming service suppliers to date, there is no assurance that network fees
will not increase by larger increments in future years. There is also no assurance that programming service suppliers will not change other
material terms of distribution agreements or extend preferences for the distribution of their content to competing distributors, or push for the
distribution of their content over the Internet in the future.
The level of horizontal and vertical integration of the television and broadcasting distribution industries in Canada is likely to increase
significantly in the current fiscal year with the recent approval by the CRTC of the acquisition of CanWest Global Communications Corp.’s
television stations and specialty television services by Shaw Communications Inc., and the proposed acquisition of
CTVglobemedia Inc. (“CTV”) by BCE Inc. (“Bell”), for which regulatory approvals are currently pending. Shaw, the largest broadcasting
distributor in Canada with approximately 3.2 million basic wireline and direct-to-home satellite customers, will ultimately control a national over-
the-air television network, some 36 English-language specialty television services, as well as pay television and VOD services. Should the
acquisition of CTV by Bell be approved, Bell, the third largest broadcasting distributor in Canada with approximately 2 million wireline and
direct-to-home satellite customers, would control a national over-the-air television network, some 28 English and French-language specialty
television services, including sports channels TSN and RDS, as well as pay television and VOD services. Cogeco Cable is required to distribute
licensed Canadian over-the-air, specialty and pay television services to its Cable Television customers. The affiliation agreements for the
programming services provided by CanWest and CTV respectively are subject to renewal in the current fiscal year. The affiliation agreements
for the services provided by the Astral group of companies, another major program service supplier with some 11 English-language and
5 French-language specialty and pay television services, are also subject to renewal in the current fiscal year. It is not possible at this time to
quantify the impact of these affiliation agreement renewals on cost of sales. The CRTC has initiated a separate policy proceeding to review the
regulatory framework relating to vertical integration in the Canadian broadcasting system, with a public hearing scheduled to commence on
May 9, 2011.
In Portugal, there is also a significant degree of vertical integration between programming content and the distribution or theatrical exhibition of
programs, with the largest cable, satellite and theatrical program distributor ZON controlling or having equity interests in various programming
services distributed by Cabovisão, including premium pay television sports and movie programming services.
Since the markets for data transport and connectivity remain very competitive in Canada and Portugal, Cogeco Cable and Cabovisão have
negotiated cost effective arrangements in the past for voice and data traffic. However, as overall traffic increases and capacity on existing
broadband telecommunications facilities becomes more widely used, the Corporation may not be able to secure further cost efficiencies in the
future.
Risks pertaining to information systems
Flexible, reliable and cost-effective information systems are an essential requirement for the handling of sophisticated service options,
customer account management, internal controls, provisioning, billing and the rollout of new services. The Corporation uses different customer
relations management tools and databases for its operations respectively in Ontario, Québec and Portugal. There is however no assurance that
these or other information systems will be able to adequately meet future business or competitive requirements.
The implementation of a new version of the Oracle financial management and accounting system in order to implement the transition from
Canadian GAAP to IFRS has been successfully completed in September 2010 and is now fully operational.
Risks pertaining to disasters and other contingencies
The Corporation has disaster recovery and business continuity plans for dealing with the occurrence of natural disasters, quarantine, power
failures, terrorist acts, intrusions, computer hacking or data corruption. Cabovisão is presently developing its disaster recovery and business
continuity plan with a completion target date of the end of fiscal 2011. Cabovisão’s insurance coverage has been integrated into Cogeco
Cable’s insurance coverage. Cogeco Cable is not insured against the loss of data, hacking or malicious interference with its electronic
communications and systems, or against losses resulting from natural disasters affecting the cable or fibre network. In Canada, it relies on in
house and third-party service providers for data protection and recovery systems. In Portugal, similar arrangements with third parties have not
been implemented as yet. The Corporation completed the implementation of a comprehensive business continuity program and five tests on
the implementation of this plan were completed in Canada in 2010. The emergency plans and procedures that are in place cannot provide the
assurance that the effect of any disaster can and will be mitigated as planned.
Financial risks
Cable telecommunications is a very capital-intensive business that requires substantial and recurring investment in property, plant, equipment
and customer acquisition. Cogeco Cable depends on capital markets for the availability of additional capital that it must deploy to support its
internal and external growth. There is no assurance that future capital requirements will be met when needed, or that the cost to secure such
needed incremental capital will not increase the Corporation’s weighted average cost of capital. The Corporation entered into cross-currency