OCTOBER 26, 1993

I would like to thank you for the opportunity to address you today. I would like to discuss emerging trends in communications.

As I will be speaking from the viewpoint of Rogers Communications please allow me to give a very short background.

Rogers Communications is a major supplier and also a major user of telecommunication products and services in Canada. Rogers Cantel is Canada’s only national provider of wireless communications with more than 540,000 cellular subscribers and 105,000 paging customers. Cantel provides service in competition with the cellular affiliates of the telephone companies and other paging companies.

Rogers has a 32% interest in Unitel Communications which provides long distance telecommunications to the business and residential market in competition with Canada’s telephone companies.

Rogers Broadcasting owns and operates 10 AM and six FM radio stations and CFMT, Canada’s only multilingual television station, The Canadian Home Shopping Network and holds minority interests in YTV and Viewer’s Choice Canada, the pay-per-view network.

Rogers Cable provides entertainment services to 1.9 million customers in Ontario, Alberta and British Columbia. Through a regulated subsidiary -Rogers Network Services – we provide local private line voice and data services, and satellite uplinking services to the business community.

How will the telecommunications environment in Canada change over the next four to seven years?

To begin, it is important to understand not only what will change, but also what will stay the same in telecommunications and why. We need to separate the hype, positioning, and promotion from what changes are really practical over the next four to seven years.

There is a risk that in all our enthusiasm and optimism for the future that we will forget that the “information highway” will have many “potholes” and even the occasional “washout”.

First, let me talk about what is changing in cable television and how this will affect the future.

One of biggest areas of change is in the basic enabling technology.

It is now cost effective for cable companies to make extensive use of fibre optic cable in the basic network architecture. Rogers Cable was one of the pioneers in the use of fibre optics in cable television. Today our network architecture is being followed by cable television companies all over North America. The biggest advantages of fibre for cable television is clearer pictures, more channels and a more reliable service with less interruptions.

The second major development is the impending arrival of digital video compression (“DVC”). Digital video compression lays the foundation for the 300 channel universe we have all heard so much about. DVC works by squeezing six to 10 television channels into the space previously occupied by one television channel.

By using fibre for our distribution trunks and by using digital video compression we can, at a relatively small cost, provide all of the new services for subscribers that want them. This is in contrast to “communications highway” plans advanced by telephone companies. These would cost telephone subscribers billions of dollars in order to provide services that have not yet been clearly identified.

In March of this year the CRTC held a major hearing to prepare the Canadian broadcasting industry for the 300 channel universe in a way that was consistent with the public policy objectives of the Broadcasting Act.

One result of the hearing is that the CRTC has encouraged the cable industry to take advantage of new technology like DVC to provide new services, and to give our customer the ability to pay only for the services that he/she is interested in. DVC allows us to do this.

Some of the new services that we expect to be offering in the four to seven year timeframe include:

• near video-on-demand, a service in which popular movies are offered every 30 minutes;

• video-on-demand, a service that allows customers to select movies from a “video jukebox” and has VCR features like pause and rewind;

• multimedia services such as interactive banking, shopping and games; and

• data access services such as working at home Ethernet accesses, LAN access and information services.

New technology provides us with the opportunity to launch new multimedia and interactive services, but some of this new technology is also available to our competitors.

The most significant new competitor to the cable industry is direct broadcast satellite or “DBS”. U.S.-based DBS services such as the General Motors-backed DirecTV will offer 150 channels of competitive services including 80 channels of pay-per-view.

We also believe that both cable companies and telephone companies will compete in the overlapping, new areas between our traditional businesses. We expect to compete with the telephone company in the area of information and interactive services such as home banking and interactive services.

Before I get into too much detail about future areas of competition with telephone companies, it is appropriate to stop for a moment and consider what will not change in the next four to seven years.

We have all heard a lot about convergence recently, the coming together of television, computers and telephones. However, upon close inspection it is clear that most of the convergence is really occurring on the investor side with telephone companies in the U.S. buying cable companies. Very little convergence is actually occurring on the technology side. Telecommunications networks are still designed and optimized for a particular type of telecommunications traffic.

The proponents of providing multiple services over common networks tend to ignore, or at least downplay, the significant disadvantages of trying to accommodate voice and video, for example, on the same network. There are diseconomies, not economies when trying to build a “one size fits all” network. These networks are not optimal.

For example, the local telephone company network is optimized for voice traffic. A voice call requires very little bandwidth, but it must be symmetrical, or in other words equal amounts of information travelling in both directions. Customers will tolerate an occasional crackle on a voice call but they will not tolerate any delay. Some of you may have experienced satellite delay on international voice calls which can be very irritating. Finally, voice traffic requires low bandwidth switches. The switching equipment the telephone companies have today would have to be upgraded at tremendous expense in order to be able to switch video. It would almost be like building a network from scratch.

On the other hand, the cable network is optimized for video services including point-to-multipoint broadcast video, and video-on-demand. Video requires immense bandwidth compared to voice and, unlike voice, our video customers will not tolerate any noise bursts that reduce the visual quality of the video.

Therefore over the next few years local telephone service and cable video service will tend to stay the same. The telephone companies will continue to dominate local telephone service and the cable television companies will remain the primary video service to the home.

One of the reasons is that they each have a high quality network optimized for their particular service. While it may be technically possible at some point in the future to offer voice services over cable, the cable network was not designed for two-way voice and the inherent limitations tend to preclude cable companies offering significant competition to the local telephone company. The same is true for the telephone company providing cable television video service.

As well as the technical problems there are a host of regulatory issues that prevent local competition. For example, local telephone service is heavily subsidized by long distance revenues making it impossible for competitors to match the telephone company price.

The potential for meaningful local exchange competition is low everywhere in North America, and it is even less so in Canada than in the United States.

First of all, in the U.S. the regional telephone companies (“RBOCs”) can potentially compete in the local exchange market outside their regular franchised areas. In Canada we believe that the members of the Stentor alliance have agreed to not compete in each others’ territory, which would eliminate all the experienced and well-funded sources of potential competition.

Second, long distance carriers in the United States like AT&T, MCI, and Sprint, have tremendous incentive to encourage the development of competitive local services, in order to connect their long distance networks to their customers. The telephone companies that, through Stentor, control 95% of Canada’s long distance market have no such incentive since they are, of course, the dominant supplier of local services themselves. In the U.S. the long distance suppliers do not have their own local facilities.

Cable will continue to be the primary delivery of all video services including point-to-multipoint broadcasting, multichannel PPV, and video-on-demand. The reason is not a regulatory one, but an economic and technical one.

If your goal is to provide advanced multimedia services such as video-on-demand and interactive TV, it is much more cost effective to do this over the cable plant than the telephone plant. U.S. telephone companies like Bell-Atlantic, U.S. West, and others, when given the choice, have opted to provide these services over the cable network. They chose to invest in the two largest cable companies in the United States rather than attempt to provide these services over the telephone network.

It is true that telephone companies have found a way to provide low quality video services over their telephone network using a technology known as Asynchronous Digital Subscriber Line (“ADSL”). But this technology which Bell Canada is using with much fanfare has been rejected by most U.S. RBOCs as unsatisfactory and uneconomic. Other technologies are theoretically possible – but they are even more expensive!

The burden of unwise and uneconomic investments by telephone companies in video distribution facilities will inevitably fall on ordinary telephone ratepayers. Canadian telephone companies will have both significant opportunity and incentive to cross-subsidize in order to fund their entry into the video entertainment market. If this were allowed, then a significant increase (not a decrease) in regulatory scrutiny would be required to prevent this type of abuse. As telephone subscribers, you should be very concerned that your local rates will increase to finance an expensive foray into residential video services by telephone companies. And you’d have to pay for the video on top of that — you’d be paying twice for the same thing.

Lately it’s become very fashionable for the telephone companies in this country to say they want to provide cable television service. They are very clear on that point. But what they’re not clear on is how that would work and how it might damage our means of cultural expression.

They say they should be able to carry “anything” for any customer “anywhere”. What they don’t say is what they really mean by that. If there is one thing on which our Federal governments have been perfectly consistent throughout the years, it is that our cultural industries need to be supported. This thinking is central to the existence of our Broadcasting Act and it’s the reason that the CRTC makes some rules concerning what broadcasters and cable television companies must do to support Canadian content.

Just this Spring, the CRTC held a major hearing on the future of our broadcasting system. We were told of the impending arrival of high-powered direct broadcast satellites from the U.S. beaming their signals into Canada. To remain competitive, the Canadian broadcasting industry needs to be able to offer the same programming services that the satellites will. Right now the Commission is in the middle of evaluating nearly 50 applications for new Canadian specialty services – services that would provide a strengthening in our broadcasting system.

Cable television companies operate under the CRTC rules. They distribute the Canadian services licensed by the Commission and there are rules that restrict them from offering some U.S. services. Some of these rules may be unpopular with some but without them we simply wouldn’t have any cultural industries and we might not have a distinctive Canadian identity.

Are the telephone companies proposing that these rules don’t apply to them? If the rules do apply, I can’t see the sense in competition because competition works where new services can be introduced. Where the regulator specifies all of the services, how does competition increase choice?

Or put another way, the Broadcasting Act doesn’t allow anything to be carried anywhere. The telephone companies plan, we believe, could put an end to the protection of Canadian culture, at a time in our history where the consequences could be profound.

There are many recent examples of the telephone companies publicly espousing the benefits to the consumer of open competition. But given the opportunity to put this rhetoric into action, they quickly and naturally reverted to their anti-competitive and monopolistic stance.

In British Columbia, B.C. Tel has stated it is in favour of competition. In Vancouver, B.C. Tel is involved in a huge condominium real estate development called Concord Pacific. But Concord Pacific has advised the residents in this facility will not have access to the cable television service provided by Rogers in Vancouver. Residents can only obtain communications services from B.C. Tel and its affiliates. So while B.C. Tel says they favour competition, in practice what they really want is a big monopoly over all telecommunications and cable services. Is this a portend of the super highway of the future?

In conclusion, developments in technology such as fibre optics and digital video compression will result in advanced telecommunications services such as video-on-demand, interactive services, and high-speed data access services.

The cable industry expects to compete vigorously with direct broadcast satellites to deliver broadcast video services, pay-per-view and video-on-demand to our customers. We also expect to compete with the telephone companies in providing information and interactive services such as home banking.

However, local telephone companies will continue to dominate local telephone service for many years to come.

It is very important that our policy makers do not allow the telephone companies to abuse monopoly power to fund an uneconomic entry into the video service industry. Recent developments in the U.S, for example a $2.5 billion decision by U.S. West and now a $33 billion decision by Bell-Atlantic, very clearly demonstrate that the most cost effective network architecture to deliver existing services and future video services, such as video-on-demand, is the broadband cable network, not the local telephone network.