Cogeco 2009 Annual Report Download - page 22

Management’s discussion and analysis COGECO CABLE INC. 2009 21
dedicated channels and to any local head end would adversely affect the capital requirements for cable networks and their efficient
operation.
The CRTC has also initiated a telecommunications proceeding to review the large incumbent telephone companies’ support
structure rates. Cogeco Cable makes significant use of support structures owned by federally-regulated telephone companies within
its network footprint in Ontario and Québec. Access to these essential facilities is provided under the terms of tariffs approved by the
CRTC. The large incumbent telephone companies are mainly seeking to obtain substantially higher rates for this service.
In Portugal, Cabovisão has prevailed in its complaint to Autoridade da Concorrência (“AdC”) against the anticompetitive practices of
PT concerning access to support structures and ducts of the incumbent telephone company. AdC has imposed a fine of €38 million
to PT, but the AdC decision has since been challenged in court and the matter is still pending. More recently, following complaints
by other parties, AdC imposed a further record-breaking €45 million fine to PT as well as an €8 million fine to its former subsidiary
Zon for abuse of dominance and margin squeezing of competitors in the broadband Internet access market in Portugal. PT and Zon
have both decided to challenge this AdC decision in court. Cabovisão has filed with AdC complaints against Zon that raise further
issues of abuse of dominant position by that incumbent cable, satellite and content service provider. In the absence of any
significant remaining ex ante regulation of Portuguese incumbents by Autoridade Nacional das Communicações (“Anacom”), the
effective enforcement of the decisions issued by AdC, the Portuguese competition watchdog, is essential to discipline the dominant
Portuguese incumbents. Of further concern is the fact that the dominant Portuguese incumbents have been given access to funding
from the European Investment Bank for debt-financing at favourable terms with the backing of the Portuguese government, with the
stated objective of helping these dominant Portuguese incumbents to further deploy fiber optic next generation networks (“NGN”) in
Portugal.
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 goods sold 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. In Portugal, the
negotiation of suitable arrangements with program suppliers for the offering of digital and HD television content has been largely
concluded, but certain additional linear services and VOD content, which are still under negotiation, will eventually add to overall
programming costs.
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 operation 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.
Cogeco Cable will need to implement a new version of the Oracle financial management and accounting system in order to
implement the transition from Canadian GAAP to IFRS. The operational risks and final costs of this transition cannot be fully
determined at this time.
RISKS PERTAINING TO DISASTERS AND OTHER CONTINGENCIES
The Corporation has a disaster recovery plan for dealing with the occurrence of natural disasters, quarantine, power failures,
terrorist acts, intrusions, computer hacking or data corruption, but the operations and facilities of Cabovisão are not yet integrated
into this plan. Cabovisão’s insurance coverage has been integrated into Cogeco Cable’s insurance coverage. 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.
Cogeco Cable is not insured against the loss of data, hacking or malicious interference with its electronic communications and