BOARD OF TRADE OF METROPOLITAN MONTREAL
REMARKS BY MR. LOUIS AUDET
PRESIDENT AND CHIEF EXECUTIVE OFFICER, COGECO INC.
TUESDAY, JANUARY 27TH, 2004
"THE INTERNET, VIDEO ON DEMAND AND RISING CONSUMER POWER"
Thank you Robert for your kind introduction.
Mr. President of the Board of Trade of Metropolitan Montreal,
Distinguished guests,
Dear friends,
Good afternoon!
It is truly a pleasure for me to be here to share Cogeco's point of view with you on "The Internet, video-on-demand and rising consumer power".
Today, I suggest we take a look at the trends in the world of communications, which, beyond ever-increasing competition, have placed the balance of power into the hands of consumers. I will suggest avenues available to post-industrial economies such as ours, Montreal being a living microcosm, that must wager their prosperity on intellectual property.
First, let us talk Internet.
Stemming from the 1966 packet-switching theory, Internet truly took off after 1991 following the development of the networking concept created by the United States' Department of Defense. The growth of Internet is mainly driven by Moore's Law which states that, based on the rate of discoveries resulting from applied research, the cost of complex operations is cut by half every 18 months. In turn, this has resulted in bringing down the cost of servers, computers, storage devices and cable modems. By the way, this exponential curve has been progressing during the past 40 years and Intel expects that it will continue to do so at least throughout the end of this decade. Finally, availability of optical fiber and capital has paved the way to the implementation of a North American and worldwide long distance links that greatly facilitates exchanges.
Also, it must be said that, at this point in time, with the existing technology, no more than 3% of the world's transmission capacity is being used, which points to the enormous future growth of Internet use at reasonable costs, for a long, long time
Today, we estimate that there are close to 700 million Internet users on the planet. Canada ranks 14th with a penetration rate of 53.1%; of its 16,800,000 users, half use High Speed Internet. In this regard, we rank second in the world, after South Korea. Forrester Research predicts that, by 2008, approximately 80% of Canadian homes will be using High Speed Internet!
In fact, Cogeco Cable is proud to announce that, as of today, specifications for our Standard Internet services are being increased to 5.0 Mbps for download speeds and to 640Kbps for upload speeds, which is by far superior to the offering of telephone companies. Specifications for our High Speed Pro services are also being increased to 10 Mbps for download speeds and 1 Mbps for upload speeds, leaving our competitors in the dust. Furthermore, the rates for these services remain unchanged at $44.95 and $69.95 per month respectively. I am not talking about what we intend to do, but rather what we are doing right now! I would also invite you to visit the Internet site www.broadbandreports.com: where you will be able to see that our clients are surfing the Internet day after day at average speeds that are three times faster that our main competitor's average speed. Clients who use this site give Cogeco Cable the highest satisfaction rating among all Internet access providers in Canada. This is not at all surprising considering they have the advantage of surfing the Internet on one of the world's 10 fastest networks, week after week!
Since the arrival of the Internet in 1991, customers have grown accustomed to surfing the Internet wherever they please in the world and whenever they desire. They have free access to powerful search engines, unbelievable databases and a large range of photographs as well as audio and video clips. And, slowly but surely, the idea set in that everything is available instantly and, above all
at no cost.
Thus, the consumer's Internet experience contributes to defining and increasing his expectations towards video services, thereby precipitating the introduction of television on demand.
At the same time, the rate at which access to content equipment becomes available to consumers has never ceased progressing. The storage capacity of content has also progressed tremendously. Memory capacity, which allows for the storing of several hundreds of feature films on servers located in each of our cable networks, has been available since 2002, at very affordable costs. This is what allows us to offer video-on-demand. The consumer can then choose a movie on simple impulse by using his existing digital box remote control.
This revolutionary service, which was at the project stage not so long ago, has now become a reality. VOD is a cable exclusive service and 85% of Cogeco Cable clients can access it. Comparatively, in the United States, only 41% of cable clients have access to VOD services. The emergence of this service is only the tip of the iceberg announcing a profound change in consumer television habits. We are witnessing a slow and inevitable shift from scheduled television viewing (at fixed times) to on-demand television viewing (when the customer is ready to watch). Within the next few years, it will no longer be several hundreds of feature films that will be available, but rather several thousands of hours of programming!
We can already predict that many television channels that offer programming that is not attractive or not differentiated will simply disappear. Only the channels that offer added value and bank on immediacy or exclusiveness will continue to prosper.
Before the transition to video-on-demand is completed, the well-known Tivo type digital video recorder (DVR), which can record between 80 and 160 hours of programming on a hard drive, will play a transitional role.
Certain versions, which differ from the ones we will be offering our cable clients this spring, can systematically skip commercials. Even if for now, market penetration for this type of specific device does not exceed 4% in North America, the public interest of the Canadian broadcasting system is at stake. Indeed, our system is designed so that certain general-interest channels are offered "at no cost " to the public since it is advertising that allows the production of this programming. On the other end of the spectrum, other channels rely solely on fees paid by cable or satellite clients - this is called the subscription model.
It goes without saying that if the practice of systematically skipping commercials should spread, and if the trend continued, channels that rely on advertising would have no other choice but to move to the subscription model. Many will argue that we live in a free market system, that it is inappropriate to limit innovation in electronic products and that it is up to the consumer to decide. All right then. If that is the case, then what we call "free" television could very well disappear. Is that what the consumer truly wants? Is that what we wish for our society? I believe this issue must be the subject of a public debate, at least here in North America. Indeed, this subject greatly exceeds the scope of a simple punctual consumption decision because television plays a unique role in shaping the identity and unity of a country's population. This being said, no matter the scenario that prevails, rest assured that our television companies will adapt and continue to prosper.
Speaking of general-interest television, at this point in my presentation, I simply cannot pass up the opportunity to say a few words about another aspect of consumption called Reality TV
A great number of Europeans, North Americans and Quebeckers appreciate this type of programming, which allegedly requires no intellectual participation and presents "young people focused on themselves, sharing primary pleasures ". Others criticize the intervention of television networks in the life of participants whose destinies are forever changed
As you well know, last fall with Loft Story, TQS attracted audiences of over 2,000,000 viewers at certain times, which were all time record numbers for this network. Not only did the public keep asking for more, but we also attracted viewers who discovered TQS and who stayed to watch other shows. Of course, this is a new television concept that is continuously evolving and we had to make adjustments on a few occasions. Loft Story II is currently being considered along with other projects. If we have sponsor support and decide to go forward, we will certainly, apply the lessons we have learned from Loft I.
This being said, we can ask ourselves the following question pertaining to Reality TV: Is this type of programming decadent or brilliant?
The more cynical among us will probably answer both. For my part, I have a different point of view. Our classical studies taught us that men and women like go to the theater to discover themselves, to catch a glimpse of their emotions on stage. In Antiquity, Sophocles presented the main tragic themes played out on cothurnus with masks and voice projection devices. I will spare you the " panem and circenses" of the Rome Coliseum. During the Renaissance period, Shakespeare did the same in a dramatic and poignant style. At the beginning of the modern era, Molière did it with great humor. In the middle of the twentieth century, Ionesco's theater of the absurd took us by surprise. Today, at the onset of the 21stt century, theater is available to the masses through television and it is played almost live, without a script, a text or costumes, in a loft. They say that Man likes to gaze at himself
Decadent or brilliant? Let us just say
human, for better or for worse.
But let us continue our analysis of trends.
The electronic products industry is offering, starting this year, intelligent residential multimedia centers capable of storing and transmitting all video and audio contents anywhere in the home, at one's will, through wire or wireless means.
Furthermore, we, at Cogeco Cable, will soon be launching our own high definition television services. With this technology, the consumer's television experience becomes more and more sophisticated, further resembling reality, enriched with sensations and emotions.
The cable platform is compatible with all peripherals, is open to all service providers and is secure, which is not necessarily the case for certain satellite services
Content owners can thus use the network in full confidence.
As you can tell, the cable distribution industry's sophisticated infrastructure is a great beneficiary of the evolution of technologies. Already, on the same cable, the same infrastructure and the same invoice, we offer our clients analog services, digital services, including VOD, and three flavors of High Speed Internet services: Lite, Standard and Pro. Before long, we will be announcing our Voice over IP telephony projects, which will use our existing Internet network. In addition to creating a new source of revenues for Cogeco Cable, our telephony approach will allow us to offer sophisticated video telephony services of very high quality at very low prices to families and businesses.
Let us go back to the effects of the Internet.
At the level of principles, while the evolution I previously described takes place, the democratic countries of the world have concluded, a while back, that Internet services are telecommunication services just like telephony. The confidentiality of exchanges and freedom of destinations were considered essential to the free circulation of ideas, the protection of privacy and individual liberties, as well as economic and social progress.
Unfortunately, deviations from the original intent emerged along the way. These have exotic names like KaZaA and Morpheus. The availability of audio MP3 and video DVD copying equipment at low costs allows for the recording of musical and audiovisual works without royalties being paid to the creators and owners of these works. Satellite signals are faced with the same type of problem when consumers purchase decoders on the black market to steal signals.
Already, the global record industry players were thrown into a round of forced mergers resulting from an 18% decrease in annual sales between the peak year of 2000 and year 2002 caused by Internet theft, which represented close to 1.8 billion musical pieces in 2003, worth approximately US$4.6 billion per year, according to the Recording Industry Association of America. Feature film producers fear they will face the same problems and are taking measures to protect intellectual property. Distributors, including our company, and the Canadian government take piracy very seriously and have implemented several measures to stop this phenomenon, which costs the system some $400 million annually, since approximately 700,000 Canadian homes steal satellite services. Just imagine how networks could be improved and how many additional Canadian programs could be produced with this money! As far as we are concerned, we will increase our awareness efforts to inform the population on the negative effects associated with piracy.
Lets us take a step back.
The facts speak for themselves consumers have become the ultimate masters of their entertainment and information consumption. They own high performance residential equipment at low prices. They have instant access to unlimited information resources, from anywhere in the world through Internet and video-on-demand and already, the system's foundations are being tested. Are we about to become the sorcerers' apprentices of the virtual world?
Even more preoccupying is that, according to a Decima Research study conducted in 2002, only 17% of Canadians feel that copying music through downloading on CDs constitutes a serious offense. In fact, according to Forrester, in 2003, over 50% of Canadians who surfed the Internet did it! Over a third of these people are adults. Have we become Arsène Lupins or should I say parasites of cyberspace?
As a so-called evolved society, we must act.
What can be done to counter Internet and satellite signal theft?
There is only one answer and, as you can appreciate, it is not an easy one. Along with the decision-making power comes the responsibility of consuming in an enlightened and legal fashion. For example, in November, Mrs. Terry Price, President of the Canadian Teachers' Federation, unveiled the results of a survey. 60% of grade 8 students say their parents do not supervise their use of television
In grade 7, 75% of students say they never receive any indications from adults regarding their computer or video game use. It is obvious that as parents and educators, we must guide more actively our children to help them make choices that are both judicious and honest.
Furthermore, I would submit the following idea: all economic reports indicate that China absorbs a growing part of the global production of consumer goods and that this exports increase by 40% every year. China and India, the world's two billionaire giants in terms of population, increased their GNP by between 8% and 9% in 2003. In terms of services, we have all heard about accounting and computer work being conducted in India. Economists suggest that the answer for so-called mature economies can be found through the creation of new ideas and evolved services.
So, let us ask ourselves. In the future, what will the economy of an evolved country, that banks on knowledge, be worth if its citizens steal the works of its creators? Whether it is music, films or software, the problem is the same. Along with the freedom to consume, comes the responsibility to respect what will be our economy's best chance of achieving a new global economic order intellectual property.
But what motivates consumers?
The first factor is easy to recognize, the lure of free services! The only way to beat this long-term plague is through increased awareness at school and at home as well as in corporate and governmental communications. Increased penalties to wholesalers and consumers through the Telecommunications Act would be very constructive.
The second factor is more speculative. Some say consumers are taking their revenge on big Business. Based on this theory, the consumer believes that the cost of the service is by far lower than its asking price, which unduly profits major anonymous companies and artists that are not in need. Of course, as business people, we know that is false. Thus, companies such as ours need to recreate the bond of trust, which at a point in time, existed between the consumer and his service providers.
How can this be done? I believe that the corporate world must better communicate. For example, explain that the profits generated by businesses support the value of the stocks in which are invested the retirement funds of these same consumers who are also our clients and stockholders
Obviously, transparency in corporate governance must be greatly enhanced. And of course, we must treat the consumer with utmost respect at all times. In fact, we must side with the consumer and facilitate his decision-making, rather than try to curtail his options.
At Cogeco, we are very comfortable with the idea that our clients' expectations are ever-increasing. Our business is very well positioned to meet their expectations owing to its innovation capacity on the technological level, with the industry's best performance networks, and its innovation on the creative level, with audacious and distinctive television and radio content.
As a society, we must raise our level of awareness and accountability when it comes to intellectual property.
As a society, we must review our regulatory processes and support the consumer when it comes to personal development.
That is all very easy to say and, you will have guessed that, this is where the challenge starts.
Thank you for being here this afternoon. Thank you for supporting our businesses as a partner or advertiser.
Have a great day!