Cogeco 2002 Annual Report Download - page 6

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Cogeco Cable Inc.
On October 2, 2002, Cogeco Cable launched the
Internet Pro service in Ontario at $69.95 per month for
yet greater downstream speeds of up to 4 megabits per
second (Mbps) and upstream speeds of up to 640 kilobits
per second (Kbps) (the regular Cogeco Cable high-
speed Internet service operates at 2 Mbps per second
down and 400 Kbps up, for $44.95 per month). The
Corporation is pre p a red to offer an Internet Lite service if
competitive circumstances re q u i re it.
In early September 2001, Cogeco Cable launched
50 new digital TV programming services to its digital
customer base in Ontario. As of August 31, 2002, 27% of
Ontario digital customers had subscribed to at least one
new digital service, adding $10 to the average monthly
revenue per subscribing digital service customer.
Overall, the digital launch has been a success with the
public. However, we anticipate that some digital ser-
vices may not be meeting their revenue targets and
may face long-term survival challenges.
During May 2002, the Quebec Division of Cogeco Cable
launched the 28 most popular new English-language
digital services. This was followed by the launch of four
new French-language European services in early June
2002. The free three-month viewing period ended in
September 2002. We believe that these services have
positioned cable very positively in consumers’ minds.
Despite these positive developments, the number of
basic video service customers has decreased by 4.8%
year over year. We have lost 15,941 or 6.2% of our basic
service customers in Quebec, and 26,457 or 4.2% in
Ontario. Fortunately, the trend points to fewer losses with
each passing quarter, starting with 1.5% in the second
quarter, 1.3% in the third and 1.0% in the fourth. High
sales and promotion costs associated with a $20 rebate
for each of the first five months of the Cogeco Cable
high-speed Internet service were in line with prevailing
market conditions in the Fall and Spring, and have
caused high-speed Internet service growth to essentially
compensate for basic cable service revenue losses.
Basic analog service customer losses can be attributed
to two root causes: the appeal of licensed Canadian
DTH satellite services that are unnecessarily aggre s s i v e l y
priced, particularly at Bell Expre s s Vu, and the growth of
the “black market” in Canada for the theft of both US-
based and Canadian DTH satellite services. We estimate
that licensed Canadian DTH satellite services continue
to lose collectively around $240 million in operating
income before depreciation and amortization per year
and, at current prices, with growing customer acquisition
costs, will likely never reach break-even, much less
p rovide a re t u rn on the capital invested by their
operators. We can only hope that these operators will
eventually be forced to adopt more realistic pricing and
customer acquisition cost structures. Illegitimate satellite
services are 90% “black market” based, according to
management’s estimates. Further to the favorable ruling
by the Supreme Court of Canada on April 26, 2002, there
appears to be an increasing trend away from US-based
pirated systems towards the theft of Canadian satellite
signals in the “black market” segment, with the pro g r a m
services off e red being either totally or partially stolen.
Despite its positive contribution to society, the Internet
has brought with it the perception that music and
movies can be enjoyed for free without due regard for
intellectual property. It would seem that this unrealistic
expectation has spilled over to satellite programming.
Cogeco Cable is a member of the Canadian Alliance
Against Satellite Theft dedicated to the protection of
program rights in Canada. At this stage, the Film and
Video Security Office has taken concrete actions in
various Canadian cities to curb the activities of
distributors who produce and sell illegal decoder cards.
The number of prosecutions will likely increase, and this
form of reception will be increasingly difficult for “black
market” consumers to enjoy, as improved system
controls and signal security measures are implemented
by satellite operators.
Cogeco Cable has applied for and been granted rate
deregulation status by the CRTC for its Class 1 systems in
Quebec and Ontario. As a result, 100% of its basic
service customers are now rate deregulated. In
Quebec, in excess of 20% of customers who subscribe to
the basic service only, and who had not incurred a
basic rate increase for many years, have seen their
basic service monthly rate increase by about $2.50,
effective August 1, 2002. The Corporation has not yet
finalized its plans with regard to the rate structure of its
services for its Ontario customers.