Cogeco 2006 Annual Report Download - page 21

Management’s Discussion and Analysis COGECO CABLE INC. 2006 19
The CRTC has recently initiated a policy review proceeding for over-the-air television in Canada that raises the possible
establishment of fees for carriage of conventional over-the-air television signals by broadcasting distributors, including
cable, telephone and satellite distributors. The World Intellectual Property Organization (WIPO) is also considering the issue
of fees for carriage as part of its proceedings leading to the drafting of a new multilateral treaty concerning the protection
of broadcasting signals. At present, Canadian broadcasting distributors pay carriage fees to pay and specialty programming
services, but not to conventional over-the-air television services. Next year, the CRTC is also expected to launch a review of
its broadcasting distribution policies. The ultimate outcome and timing of these policy initiatives may have a signifi cant
impact on the Corporation’s cost of sales for its analog and digital services and the penetration of its various tiers of video
distribution services.
In Portugal, a broad reform of national legislation respecting electronic communications has already occurred with the
publication of Law 5/2004 (Electronic Communications Law, known as REGICOM) on February 10, 2004, in line with the basic
requirements of applicable European Commission directives. Under this new national legislation, the Autoridade Nacional
das Comunicações (ANACOM), has implemented a general authorization regime which no longer involves the issuance
of licences for wireline telecommunications activities. The telecommunications markets in Portugal are fully open to
competition since January 1, 2000, and there are no foreign ownership restrictions applying to electronic communications
service providers or the ownership of broadband telecommunications facilities in Portugal. Much of ANACOM’s regulatory
oversight is focused at present on the analysis of the competitive state of relevant telecommunications markets and the
adoption of selected measures where signifi cant market power by a competitor is found to exist in a relevant market.
ANACOM has analyzed 16 of the 18 relevant retail and wholesale markets identifi ed by the European Commission and
found that PT has signifi cant market power in most of these markets. As a result, various specifi c regulatory requirements
apply to the provision of certain services by PT companies. In addition, pursuant to Directive 2002/77/EC of the European
Commission (Competition Directive), the cable television and telecommunications network operations of incumbent
telephone companies in EU member states must be kept separate, and conducted through separate entities. TV Cabo,
Cabovisão’s direct cable competitor for video distribution and HSI services, is operated through PT Multimedia, an entity
separate from PT Comunicaçoes, which operates PT’s telecommunications network (telephony and ADSL HSI services),
and services provided by each of these entities are billed separately. The ownership and operating conditions of various
entities of PT, including PT Multimedia, may however change in the foreseeable future as a result of the pending takeover
bid by Sonae, alternative bids by other interested parties, or ownership or restructuring proposals put forward by PT itself.
There is a possible scenario of having two full triple play companies, PT Comunicações and PT Multimedia, owned by
separate groups, with the conclusion of the pending takeover bid by Sonae, with each signifi cant market power, and
possible new regulatory requirements as a result.
On June 29, 2006, the European Commission launched a broad policy review initiative on electronic communications with
a view to boosting competition among telecommunications operators of EU member states and building a single market
for services that use radio spectrum. The ultimate outcome and timing of these legislative proposals, and their transposition
into Portuguese domestic law and policies, may eventually have an impact on the future on Cabovisão’s electronic
communications activities and on the future state of competition for the provision of electronic communications in Portugal.
RISKS PERTAINING TO OPERATING COSTS
Cogeco Cable applies itself on to keeping its cost of goods sold in check so as to secure continued operating margin growth.
The two largest drivers of cost of goods sold are network fees paid to audio and video service suppliers, and data transport
and connectivity charges, mostly for Internet traffi c. The market for audio and video programming services in Canada
is already characterized by high levels of supplier integration, structural rigidities imposed by the CRTC’s regulatory
framework for broadcasting distribution, and the resulting strong bargaining position of program suppliers. The recently
announced takeover of CHUM Limited by Bell Globemedia Inc., if approved by the CRTC and the Commissioner of
Competition, would signifi cantly increase the level of concentration of Canadian conventional over-the-air, specialty and
pay television programming services in the Canadian marketplace generally, and would signifi cantly increase the market
power of Bell Globemedia Inc. The renewal of Cogeco Cable’s affi liation agreements for CHUM and Bell Globemedia
specialty services are currently under negotiation.