Cogeco 2014 Annual Report Download - page 43

42 COGECO CABLE INC. 2014 MD&A
We may not be able to pass on the incremental increases in costs of programming to our customers. This could have a material adverse
effect on our operating margins and our businesses.
The financial performance of our businesses depends in large part on our ability to drive continued operating margin by tightly controlling operating
costs. The largest driver of such operating costs is the network fees we pay to audio and television programming service suppliers. Future
increases or volatility in these fee arrangements could adversely affect our operating costs. Our business and results of operations could thus
be adversely affected in the future as affiliation agreements must be renewed.
The market for audio and video content services in Canada is characterized by high levels of supplier integration and structural rigidities imposed
by the Canadian Radio-television and Telecommunications Commission’s (“CRTC”) regulatory framework for broadcasting distribution. Following
the acquisition of several specialty and pay television properties last year, Bell currently controls about 45% of our programming service affiliation
payments for the Canadian cable operations at current wholesale rates. While we have generally been able to obtain satisfactory distribution
agreements with programming service suppliers in Canada to date, we may not be able to maintain our current arrangements, or conclude new
arrangements that are economically favorable to us, and programming service costs may thus increase by larger increments in future years.
Moreover, vertically integrated programming service suppliers may change other material terms of the arrangements, extend preferences to
themselves for the distribution of their content to competing distributors, or push for the distribution of their content over the Internet in the future.
We may be subject to future arbitrations and other administrative or regulatory proceedings relating to Canadian programming service suppliers
which could either help us obtain reasonable affiliation terms or compel us to pay increased programming fees or otherwise subject us to adverse
competitive conditions. To the extent any such increased costs cannot be passed on to our customers or otherwise adversely affect our operating
margins, our business could be harmed.
In recent years, the American cable industry has experienced a rapid escalation in the cost of programming, particularly sports programming and
retransmission of local broadcast programming. This escalation will likely continue, and we may not be able to pass on programming cost increases
to our customers which would have an adverse impact on our cash flow and operating margins. In addition, most of our programming agreements
require us to meet certain penetration thresholds, which limit our ability to offer smaller tiers and packages. Also, in order to obtain the most
popular programming services, programmers require us to carry a number of the programmers’ less popular services, further increasing our
costs. As we upgrade the channel capacity of our systems and add programming to our basic, expanded basic and digital service offerings, we
may face additional market constraints on our ability to pass on programming costs to our customers which could materially adversely affect our
profitability.
The pending mergers of Comcast with Time Warner and AT&T with DirecTV could also impact our programming costs and are generating concerns
that the respective combinations will increase each company's incentive and ability to charge other operators higher carriage fees for the vertically
integrated programming content owned by each company.
In addition, we are also subject in the United States to increasing financial and other demands by broadcasters to obtain the required consent
for the transmission of broadcast programming to our customers. We obtain most broadcast programming through retransmission consent
agreements. Most agreements require payment of a flat per customer fee for retransmission of the broadcaster’s primary signal. In some cases
these agreements involve the exchange of other types of consideration, such as limited grants of advertising time, carriage of multicast signals
or, when applicable, limited VOD launch fees. Some broadcasters are launching cable networks and are conditioning broadcast retransmission
consent on carriage of their cable networks on all systems. We expect to be subject to increased cash demands by broadcasters in exchange
for their required consent for the retransmission of broadcast programming to our customers. Over fifty percent of our retransmission consent
agreements expire at the end of 2014 calendar year, and we are currently in the process of renewal negotiations. We cannot predict the impact
of these negotiations or the effect on our business operations should we fail to obtain the required consents.
We may not successfully implement our business strategies.
Our business strategies focus on:
• expanding service offerings and enhancing existing services or bundles;
• improving the networks;
• improving customer experience and business processes; and
• keeping a sound capital management and strict control over spending.
We may not be able to fully implement these strategies or realize their anticipated results without incurring significant costs, or at all. In addition,
our ability to successfully implement these strategies could be adversely affected by a number of factors beyond our control, including operating
difficulties, increased ongoing operating costs, regulatory developments, general or local economic conditions, increased competition,
technological changes and the other factors described in this “Uncertainties and Main Risk Factors” section.
We may also be required to make capital expenditures or other investments, which may affect our ability to implement our business strategies
to the extent we are unable to secure additional financing on acceptable terms or generate sufficient funds internally to cover these requirements.
Any material failure to implement our strategies could have a material adverse effect on our reputation, businesses, financial condition, prospects
and results of operations and on our ability to meet our obligations, including our ability to service our indebtedness.
Our Canadian business is subject to extensive government regulation and policy making. Changes in Canadian government regulation
or policies could adversely affect our business, financial condition, prospects and results of our Canadian cable operations.
Our Canadian electronic communications and cable telecommunications operations are subject to extensive government regulation and
in Canada. Canadian laws and regulations govern the issuance, amendment, renewal, transfer, suspension, revocation and
ownership of broadcast programming and distribution licenses. With respect to distribution, regulations govern, among other things, the distribution
of Canadian and non-Canadian programming services, the composition of the basic cable service, distribution priorities and access to distribution,
the resolution of disputes on the terms of carriage for Canadian programming services and mandatory financial contributions for the funding of
Canadian programming. There are significant restrictions on the ability of non-Canadians to own or control broadcasting licenses and
telecommunications carriers in Canada.