dm#1663183 - 2012-0064-1 - app - sxmc - 2012-01-19 - doc03 - appendix d - supplementary brief -...

7/31/2019 DM#1663183 - 2012-0064-1 - APP - SXMC - 2012-01-19 - Doc03 - Appendix D - Supplementary Brief - REDACTED

1/33

APPENDIX DSUPPLEMENTARY BRIEF

JANUARY 19, 2012


2/33

TABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................................................................................. I

A) INTRODUCTION & LICENCE FRAMEWORK ..............................................................1

B) SIRIUS XM CANADAS FIRST LICENCE TERM ACHIEVEMENTS..........................4

a) Expenditures on Canadian content...........................................................................4b) Exhibition of Canadian content ...............................................................................5

C) COMPETITIVE THREATS TO SIRIUS XM CANADA ................................................10

D) FINANCIAL PERFORMANCE & OUTLOOK...............................................................13

E) A SINGLE REQUEST AN APPROPRIATE CCD RATE ............................................18

a) Inappropriate Proxy ...............................................................................................18b) Equity & Consistency ............................................................................................19c) CCD Contribution Policy.......................................................................................22

F) CONCLUSION..................................................................................................................24

Table 1: Sirius XM Canada Projected & Actual CCD Contributions....................................4Table 2: Audio Programming Regulatory Comparison .........................................................5Table 3: Canadian Content Comparison ................................................................................6Table 4: New Music & Emerging Artist Comparison ...........................................................6Table 5: Sirius Market Penetration and Canadian Population Distribution...........................9Table 6: Financial Performance of the Commercial Radio Industry (in $000s) ..................13

Table 7: Financial Performance of the Pay Audio Industry (in $000s) ...............................13Table 8: Comparative PBIT Margins...................................................................................13Table 9: Financial Performance of Sirius XM Canada (in $ millions) ................................14Table 10: Sirius Market Penetration Trend............................................................................16Table 11: Sirius XM Canada Projected PBIT Margins by CCD Contribution Rate..............17Table 12: Comparative CCD Contributions...........................................................................20Table 13: CCD Contribution Rate of Canadian Commercial Radio (in $000s) ....................21Table 14: Comparative Financial Health and CCD Contribution Rate..................................23

SCHEDULE 1 RISK FACTORS IN SIRIUS XM CANADAS 2011 ANNUAL

INFORMATION FORM ...................................................................................................27


3/33

i

EXECUTIVE SUMMARY

i. This Application seeks the renewal of the licence held by Sirius XM Canada Inc. (SiriusXM Canada) to operate a satellite subscription radio undertaking. This is the first renewalfor such a service in Canada, and in keeping with Commission policy it is appropriate tolook both forward and back in calibrating the obligations to be required by theCommission during the renewal term.

ii. Looking forward, Sirius XM Canada is in the process of completing the Canadianchannel line-up that it plans to move forward with in the next licence term. That line-upwill include compelling, relevant audio content showcasing the best in Canadian music,news and information, sports and comedy. And it is being created in a way that blends allthe elements of listener preferences, contractual requirements, satellite bandwidthconstraints and, of course, our conditions of licence. The outcome will be exciting,substantive content ranging from introducing emerging artists and new releases to aNorth American wide audience to the drama of the Stanley Cup playoffs to the discoveryof Canadas next top comic. Sirius XM Canada will have this new line up available forthe Commissions review prior to the renewal hearing.

iii. The record over the first licence term demonstrates substantial overachievement in anumber of areas. Satellite radio has attracted more than 2 million subscribers of which 1.4million are self-paying. As a result of the conditions of licence imposed on it, it hasenabled the distribution to those subscribers of previously unheard of levels of newCanadian music, of music by emerging Canadian artists and of Canadian spoken wordcontent. This content has been in both English and French and has been at its mostsuccessful in small Canadian communities that are underserved by other forms ofregulated audio content. And, as a result of its arrangements with Sirius XM Radio Inc. inthe United States, these Canadian artists have enjoyed continent-wide exposure.

iv. By the end of its first licence term this August, the satellite radio sector will also havecontributed more than $52 million in Canadian content development (CCD)

1

expenditures. This amount significantly exceeds the $41.5 million amount projected in2004 at the first licence hearing, a hearing at which the concern was aboutunderachievement rather than overachievement of these promises.

v. By any regulatory measure, satellite radio has delivered on its conditions of licence andhas made significant contributions to Canadian content, both with respect to exhibitionand to expenditures. However, this has come at an enormous financial cost. Contrary toprojections made at the time of licensing, satellite radio has never been profitable in

Canada. In fact, on a combined basis, Sirius XM Canada has lost close toin its first 6 years of operation.

vi. The Commissions CCD policy is clear. As it said in its 2006 Commercial Radio Policy,it sets CCD contributions that are commensurate with the financial health of the sector.And the financial health of the satellite radio sector is not good. It has a cumulative

1 The acronym CCD will be used in place of Canadian Talent Development (CTD) throughout this Supplementary Brief. A2006 change in the Commissions Commercial Radio Policy changed the name from CTD to CCD.


4/33

ii

deficit of and last year, its best year ever (and a year that included at least apartial year as a single merged undertaking), it recorded a PBIT. Andwhile the future does not look quite as grim, it is not going to be clear sailing either. Themerger was a reaction, not a panacea. There are many storm clouds on the horizon of thisbusiness, and certainly more than there are for any of the other audio businesses that the

Commission regulates.

vii. Moreover, Sirius XM Canada has a high variable cost structure which other regulatedservices need not incur. A dollar of revenue from an OEM subscriber will incur a 15%licence fee to Sirius XM Radio Inc. in the United States, a 5% CCD contribution,approximately 6% for copyright royalties payable to Canadian Copyright collectives and

This isbefore any costs incurred by Sirius XM Canada to subsidize the cost of the radio,programming, marketing and administrative costs.

viii. Sirius XM Canada also has two significant licence agreements with Sirius XM Radio Inc.that come up for renewal during the next broadcasting licence term in November 2015and August 2017, respectively. It is possible that Sirius XM Canada may only be able torenew or extend those agreements with Sirius XM Radio Inc. on economic terms lessfavourable than current terms.

ix. Licence renewals present the Commission with the opportunity to recalibrate theobligations of its licensees. In this case, notwithstanding all of the negative financialpressures in the past, present and future, Sirius XM Canada is only asking for one changeto its licence going forward. It wants the Commission to amend its CCD contributionfrom 5% to 0.5% of revenues. This will still be more in actual dollars than what is paidby every commercial radio licensee in Canada.2

x. The evidence in this Supplementary Brief shows why the Commission should make thischange. It shows that the 5% was first imposed in 2005 as it was seen to be the samepercentage as was paid by BDUs. The Commission however, has determined that satelliteradio undertakings are not BDUs. Nor do BDUs pay CCD in any event. There is nolonger a policy justification for the 5% figure.

xi. Like commercial radio licensees competing in a competitive call for applications, the twosatellite radio licensees in 2005 agreed to elevated levels of CCD for their first licence togain the Commissions favourable ruling. Unlike those commercial licensees, however,satellite radio does not have an automatic reduction to 0.5% at the end of the first licenceterm. It has to ask for it and that is what this Application requests.

xii. To deny it would be inequitable. In fact, as is demonstrated in the Application, even ifsatellite radio had not lost any money in the first licence term, this is a change theCommission should make. The evidence compares the obligations of other Commissionlicensees and finds that satellite radio is clearly the outlier, and that it has far moreonerous regulatory obligations.

2 Sirius XM Canada is not requesting the $1,000 flat fee on the first $1,250,000 of revenue that every commercial radiostation benefits from.


5/33

iii

xiii. And that is just with respect to regulated undertakings. The Commission has determinedrepeatedly that new media undertaking with whom Sirius XM Canada competes areexempt from regulation.

xiv. The evidence also debunks any suggestion that the 5% was meant to compensate in someway for substandard exhibition conditions of licence. No other licensee has anyrequirement to air new Canadian programming. No other licensee has any requirement toair selections by emerging Canadian artists. And of course unregulated competitors haveno obligations at all.

xv. Yet, Sirius XM Canada has been living for an entire licence term already with conditionsthat require that 25% of the musical selections on its Canadian channels be by emergingCanadian artists and that 25% of Canadian musical selections also be new Canadianreleases. Moreover, the Canadian content level on each Canadian channel is 85% formusic channels and 85% for spoken word on talk channels. The corresponding figures are35% and zero for conventional radio.

xvi. As well, the fact that Sirius XM Canadas conditions of licence require that its French-language music channels air 85% Canadian selections as well as 65% French-languageselections means unprecedented opportunity both nationally and internationally forCanadian francophone artists.

xvii. These are significant exhibition figures, and there can be no suggestion that an excessiveCCD figure is required for the next licence term to compensate in some way for aninsufficient battery of exhibition requirements. Indeed, the Commission first licensedSirius XM Canadas predecessor companies with a requirement for 8 Canadian channelswhich has now grown to 12 Canadian channels branded Sirius and another 13 brandedXM.

xviii. Moreover, this Canadian content is delivered by satellite radio to places that commercialradio generally chooses not to serve. The satellite radio sector helps the Commissionachieve its objective of bridging the digital divide. While satellite radio has apenetration rate nationally, it is disproportionately distributed. Sirius XM Canada is luckyto reach penetration in many of Canadas larger urban centres but enjoys penetrationrates of in communities with less than three radio stations. It thus serves asignificant public policy goal of equalizing the audio opportunities for those Canadiansoutside major urban markets.

xix. Sirius XM Canada is not requesting any other changes in this Application in the hope thatthe Commission would find adjusting the CCD to match that of renewal term radiolicensees to be acceptable.

xx. The evidence demonstrates the need and the fairness of the requested CCD reduction. Itaccords completely with the Commissions policy to establish realistic renewal termCCD figures for its licensees commensurate with their financial situation.


6/33

A) INTRODUCTION & LICENCE FRAMEWORK1. Sirius XM Canada Inc. (Sirius XM Canada) welcomes the opportunity to review the

events of the last licence term and to explore with the Canadian Radio-television andTelecommunications Commission (the Commission) the current and future situationboth of satellite radio and of the Canadian audio programming industry more generally.

2. As mentioned in the cover letter, Sirius XM Canada is planning to allow the SiriusCanada licence to expire and is in the process of completing the Canadian channel line-upthat it plans to move forward with in the next licence term. That line-up will includecompelling, relevant audio content showcasing the best in Canadian music, news andinformation, sports and comedy. And it is being created in a way that blends all theelements of listener preferences, contractual requirements, satellite bandwidth constraintsand, of course, our conditions of licence. The outcome will be exciting, substantivecontent ranging from introducing emerging artists and new releases to a North Americanwide audience to the drama of the Stanley Cup playoffs to the discovery of Canadas nexttop comic.

3. With the merger, Sirius XM Canada now has over 2 million subscribers and many morelisteners. It is critical to design the best possible line-up to continue attracting moresubscribers, converting those on free listening periods and retaining all of them,particularly in light of the strong competitive threats now readily available online. SiriusXM Canada will have this new harmonized channel line up available for theCommissions review prior to the renewal hearing.

4. Although satellite radio is now a fixture in Canada, there was a time only six and a halfyears ago when many wondered if the undertaking that now serves more than two millionCanadians would ever be licensed. The Commission, over the numerous and, in some

cases, vocal objections of many in the cultural industries in Canada, took a regulatorygamble. In June, 2005, it approved the entry into Canada of Canadian Satellite Radio Inc.(XM) and Sirius Canada Inc. (Sirius), the two companies that merged last year tobecome Sirius XM Canada.3

5. At the time, the Commission issued a news release which contained the followingexcerpt:

These decisions foster the objectives of theBroadcasting Actandbalance the interests of Canadian consumers, the radio industry andthe music industry, said CRTC Chairman, Charles Dalfen. These

licences will harness new technologies for Canadians and giveCanadian talent exposure to listeners across Canada and indeed,North America both through new Canadian channels and air-play

3 Sirius XM Canada is not requesting the renewal of the licence previously issued to one of Sirius XM Canadas predecessorcompanies, Sirius Canada Inc. XM Canada and Sirius Canada merged into a single undertaking in June, 2011. A secondlicence is unnecessary. Therefore the licensee of both the XM Canada and Sirius Canada services is applying, in theApplication of which this Supplementary Brief forms part, for a new seven year licence term in respect of the Sirius XMCanada undertaking.


7/33

- 2 -

on U.S. channels. New and emerging artists should benefitespecially from the airtime that is being reserved for them.

The newly-licensed services will add new programming to theCanadian broadcasting system. There will be more choice anddiversity for consumers, particularly those in rural and remoteareas, where broadcasting choices are limited.4

6. The Commission was correct on every count. The satellite radio industry has been anenormous boon to Canadian consumers and to the Canadian music industry. Thedistribution of new Canadian music and music by emerging Canadian artists has providedsignificant exposure for home-grown talent not only in Canada but across North America.

7. On June 16, 2005, the Commission licensed both XM and Sirius to carry on Canadiansatellite subscription radio undertakings by harnessing the U.S. services andCanadianizing them by adding local components.5 This was not without controversy.Among the many grounds of objection by interveners at the time was the inaccurate

suggestion that the amount of Canadian content inherent in the satellite servicesproposed offerings would be too low to satisfy the requirements of theBroadcasting Act.6

8. After reviewing over 800 other interventions and conducting a four-day hearing, theCommission decided that licensing a Canadian version of satellite radio would, contraryto the assertions of the negative interveners, contribute to meeting the policy objectives oftheBroadcasting Act. In so doing, the Commission imposed a novel, and significant,series of conditions of licence in order to meet the requirements of theBroadcasting Act.

9. In order to ensure the greatest practicable use of Canadian resources, the Commission: doubled the total number of Canadian channels compared to the initial proposal,and required that all such channels be made available to all Canadians; mandated a solid linkage ratio based on past precedent; increased by a factor of more than two the Canadian content exhibition

requirements on satellite radio versus commercial radio;

mandated the same amount of French language content on each channel ascommercial radio;

required new conditions of licence unique to any other regulated audioprogramming licensee in the areas of Canadian spoken word content, the amountof original Canadian programming on the Canadian channels, and significantairtime for new Canadian music and for emerging Canadian artists; and

selected a CCD rate of 5% of revenues based on a comparison with broadcastdistribution undertakings (BDUs)

4 News Release (June 16, 2005). Available online at http://www.crtc.gc.ca/eng/com100/2005/r050616 htm5 Broadcasting Decisions CRTC 2005-246 (XM) and 2005-247 (Sirius).6 See for example, the interventions of CIRPA, Friends of Canadian Broadcasting, CCSA, APFTQ, available at

www.crtc.gc.ca.


8/33

- 3 -

10. Although the Commission was satisfied, a few disappointed interveners were not, andlaunched five petitions to the Governor-in-Council. Ultimately, those petitions weredenied and the satellite radio services applied for additional conditions of licence whichthe Commission approved and which remain in force today. Based on that finalizedbattery of conditions of licence, the two satellite radio licensees then signed long-term

supply deals with their U.S. counterparts relating to a variety of matters such asbandwidth, branding, technical support, and programming, which the Commissionclosely scrutinized and then approved.

11. The purpose of any licence renewal process is to take stock of what has been achieved bythe licensee over the first licence term and, more importantly, to calibrate its obligationsfor the next licence term in accordance with its financial capacity. Canadian satelliteradio has not had the benefit of its own policy review like terrestrial radio has. However,the Commissions objectives for the most recent commercial radio policy review, whichbegan following the licensing of satellite radio in the summer of 2005 and culminated inCommercial Radio Policy 2006,7 provide the type of guidelines necessary to consider thenext seven years in the satellite radio industry.

12. The public notice announcing that policy review stated the Commissions objectives:To develop policies that assist in creating conditions for:

A. A strong, well-financed commercial radio sector in bothofficial languages capable of contributing to the fulfillment of thepolicy objectives set out in the Act.

B. A commercial radio sector that makes effective contributions toCanadian artists through airplay of Canadian music, French-

language vocal music, and contributions to Canadian talentdevelopment (CTD) that are commensurate with the financialhealth of the sector.

C. A commercial radio sector that provides listeners with a greaterdiversity of musical genres, and airplay for a greater variety ofCanadian artists in both official languages. [Emphasis added]8

13. As the first licence term of satellite radio comes to a close, the Commission must nowreview the application of its policies in respect of Sirius XM Canada. It is appropriatethat the Commission be guided by the policy considerations made explicit with respect tocommercial radio generally. The evidence contained in this Supplementary Briefdemonstrates that the satellite radio sector satisfies the exhibition criteria set out by theCommission resoundinglybut also demonstrates that the satellite radio industrys CCDcontributions, if left unchanged in the next licence term, will not be commensurate withits financial health.

7 Broadcasting Public Notice CRTC 2006-158, 15 December 2006.8 Broadcasting Public Notice CRTC 2006-1, 31 January 2006.


9/33

- 4 -

14. The unique regulatory structure devised by the Commission for this new type ofbroadcasting undertaking has delivered to the Canadian broadcasting system benefits farin excess of those the Commission contemplated in the news release cited above.

B) SIRIUS XM CANADAS FIRST LICENCE TERM ACHIEVEMENTS15. Since receiving its first licence, Sirius XM Canada has done much to help Canadian

artists and further the objectives of theBroadcasting Act. These accomplishments areparticularly noteworthy with respect to CCD expenditures and widespread distribution ofCanadian artists, including providing many rural Canadians with access to Canadiancontent.

a) Expenditures on Canadian content16. Set out below are Sirius XM Canadas estimatedcontributions to CCD at the time of

licensing compared to actual contributions for broadcast years 2005-2011 as well as itsestimated contributions for broadcast year 2012, now almost half complete. In its first

seven years of operation, Sirius XM Canada will have contributed almost $52 million,more than $10 million in excess of the amount originally projected.

Table 1: Sirius XM Canada Projected & Actual CCD Contributions(in $

thousands)2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012(est.)

Total

CombinedSiriusCanada andXM Canada

2004 CCDprojections

1,417 2,098 3,403 5,363 8,313 9,708 11,065 [8th yearnotprojectedat time of

licensing]

41,367(for first 7years ofoperation)

Combinedactual CCDcontributionsof SiriusCanada &XM Canada

Nil(launchin Q2 of2005-06)

51,952(for first 7years ofoperation)

17. Even the projected amount of approximately $41+ million was believed at the time oflicensing to be unrealistic and unobtainable by many. The apparent but erroneous belief

at the time was the possibility that the companies might achieve such low penetration asto make CCD contributions framed as a percentage of revenue almost meaningless. SiriusXM Canada defied those expectations by attracting literally millions of Canadiansubscribers and making CCD contributions to the Canadian broadcasting ecosystem thatwere well in excess of those original projections. However, it has done so at considerablyhigher cost than was anticipated.


10/33

- 5 -

b) Exhibition of Canadian content18. Equally impressive were Sirius XM Canadas accomplishments in the exhibition of

Canadian content. It is to be recalled that the Commission licensed Sirius XM Canadaspredecessor companies in 2005 with a requirement that each carry no fewer than eightoriginal Canadian programming channels. That number of Canadian channels wasdeemed by the Commission to represent the number necessary to achieve the objectivesof theBroadcasting Actand to balance the interests of Canadian consumers, the radioindustry and the music industry.

19. The Canadian satellite radio industry quickly overachieved on the exhibition front aswell. Shortly thereafter, it applied to increase those minimum channel figures from 8 to10, subject to subscriber penetration.9 The licensees exceeded those requirements as welland currently carry 12 Canadian channels under the Sirius brand and another 13 Canadianchannels under the XM brand.

20. As the following table demonstrates, any suggestion that satellite radios overallCanadian content requirements are insufficient are clearly without foundation. In fact,Sirius XM Canadas robust exhibition requirements have generated results thatdemonstrate its strong contribution both in absolute terms and relative to other licensees.

21. The table below sets out the minimum exhibition requirements of the Commissionsregulated commercial radio and satellite radio licensees.10

Table 2: Audio Programming Regulatory ComparisonMinimum Requirement11 Commercial Radio Satellite Radio

Number of Canadian Channels N/A 10

Canadian Channels / Total Channels N/A 10%

Canadian Content / Total Content ofStation or Channel

35% (Category 2)10% (Category 3)

85%

French Channels / Total Channels N/A 25%

French Content Requirement per Station orChannel (Vocal Selections)

65% 65%

Original Canadian Content / TotalCanadian Content

None 50%

Canadian Content / Total Content of

Station or Channel (Spoken Word)

None 85%

Emerging Canadian Artists / Canadian None 25%

9 Broadcasting Decisions CRTC 2006-37 and 2006-38, 10 February 2006.10 Unregulated audio programming options, a significant competitor to satellite radio, have no Canadian content requirements.11 Sources: For commercial radio, see Commercial Radio Policy2006, Broadcasting Public Notice CRTC 2006-158,

December 15, 2006 and theRadio Regulations, 1986; For satellite radio, see Broadcasting Decisions CRTC 2005-246 and2005-247, 15 June 2005.


11/33

- 6 -

Minimum Requirement11 Commercial Radio Satellite Radio

Content

New Canadian Music / Canadian Content None 25%

22.

It is clear from the foregoing that Sirius XM Canada has a comprehensive list ofobligations. The sections below further elaborate on Sirius XM Canadas success in theexhibition of Canadian artists.

(i) Canadian Content English and French Programming23. The table below displays the disproportionately large contribution of Sirius XM Canada

to the exhibition of Canadian content as compared to commercial radio. The Commissionmade the same observation in 2005, noting that Sirius XM Canada would exhibit over500% more Canadian content than its commercial radio equivalent.12

Table 3: Canadian Content ComparisonDisplay of Canadian Content13

1 Sirius XM Canada Channel = 5.4 Commercial Radio Stations

(ii) Canadian Content New Music & Emerging Artists24. The table below shows Sirius XM Canadas performance with respect to its obligation to

exhibit new Canadian music and emerging artists. Again, Sirius XM Canada hasperformed strongly in comparison to commercial radio. Sirius XM Canada has played,and will continue to play, a key role in delivering exciting new music and emergingartists to a national Canadian audience.

Table 4: New Music & Emerging Artist ComparisonDisplay of Canadian Content

New Music14 1 Sirius XM Canada Channel = 6.0 Commercial Radio Stations

Emerging Artists15 1 Sirius XM Canada Channel = 4.1 Commercial Radio Stations

.

25. The new Canadian music and emerging Canadian artist obligations are, of course, uniqueto satellite radio. Commercial radio, with neither obligation, lags behind. The exposure ofnew artists and emerging music to all Canadians by Sirius XM Canada is unprecedented.

12 Broadcasting Public Notice CRTC 2005-61, June 16 2005, at para 81.13 Calculations are based on Commission requirements and an assumption of 12 songs/hour for commercial radio versus 17

songs/hour for satellite radio.14 Data from 2005 Music Use Study.15 Data from 2009 Emerging Music Study.


12/33

- 7 -

26. Notwithstanding the extensive regulatory proceedings relating to Canadian emergingartists between 2006 and 2011, Sirius XM Canada remains the nations leader and theholder of the only CRTC requirement relating to new Canadian music and emergingCanadian artists in the country.

(iii) Canadian Content Spoken Word27. In the promotion of Canadian content, music receives the lions share of attention.

However, spoken word programming is also a valuable part of Canadas audio landscape.Sirius XM Canada, through its unique obligation to include at least 85% Canadiancontent on its spoken word channels, has done much to assist often-ignored Canadianspoken word artists.

28. No other audio licensee has such a requirement relating to spoken word content. Indeed,commercial radio had its spoken word obligations removed in 1998. Sirius XM Canadathus performs an important function by providing spoken word artists, especiallyCanadian comedic talent, with the platform they deserve by including the same high

percentage (85%) of Canadian content for spoken word as for music.

29. On the XM platform, the NHL Home Ice channel is the only North American widehockey channel and provides unique talk, updates, interviews and interactive audienceparticipation. This Canadian talk channel is followed closely by the hockey worldincluding NHL franchise owners, GMs, coaches, players and, of course, continent wideNHL hockey fans. The Sirius subscribers also have an equally strong andoriginal hockey talk program, Hockey Night in Canada Radio, produced by the CBCuniquely for satellite radio. This 3 hour show airs 5 days a week throughout the hockeyseason and provides equally as compelling hockey talk.

30. A further example of original talk programming is the only North American wideCanadian comedy channel, Laugh Attack. This channel provides a unique outlet forCanadas burgeoning comedy industry and, with the need to be 85% Canadian, isdedicated to supporting Canadas comedic artists from early training as amateurs throughexperienced professionals, these artists now have a North American audio stage on whichto perform.

(iv) Canadian Content North American Platform31. No discussion of Sirius XM Canadas exhibition obligations would be complete without

considering its impact in the United States. As Chairman Charles Dalfen articulated onthe day the satellite services were first licensed by the Commission,

These licences will harness new technologies for Canadians andgive Canadian talent exposure to listeners across Canada andindeed, North America - both through new Canadian channels and


13/33

- 8 -

air-play on U.S. channels. New and emerging artists should benefitespecially from the airtime that is being reserved for them.16

32. If emerging Canadian artists are struggling to obtain airplay on Canadian commercialradio stations, what is the likelihood of success of obtaining any airplay on commercialradio stations in the United States? Yet, as a result of a Canadian condition of licenceimposed on a Canadian broadcaster, at least 21million Americans are receiving asignificant amount of Canadian content.

33. This is valuable exposure that cannot be matched by any other Canadian audio licensee.In fact, Canadian artists agree as seen in the following comment by a Canadian musicianwho appeared at the merger hearing last spring.

we went down to Austin [Texas] for a festival and there were afew people who came up to me and said, "Yeah, I came out tocheck your band, I had heard you on XM." I can't get that fromlocal Ottawa radio stations.17

(v) Canadian Content National Service34. As seen, one of the key benefits as determined by the Commission in licensing satellite

radio was the national platform for Canadian content that would now be made available.Therefore, no comparison of Canadian content can be complete without examining whatthis increased accessibility for Canadians to Canadian content actually means. The uniquenature of satellite radio service means that Sirius XM Canada is able to fulfill therequirements of section 3(1)(k) of theBroadcasting Actbetter than any other regulatedaudio programming option. In effect, the reach and content provided by Sirius XMCanada puts rural Canadians on the same footing as urban Canadians.

35. Commercial radio is not effective at serving rural Canada. There are fewer radio stationsin smaller markets; in the smallest markets, there are no radio stations at all. Canadianswho have no access to terrestrial radio also have no access to cable either. Withoutexposure to Canadian content, the efforts of the Commission will be in vain. This leavesSirius XM Canada as a crucial source of Canadian audio content for many Canadians.

36. The chart below demonstrates graphically how important rural Canada is to Sirius XMCanada (and, by extension, to the Canadian broadcasting system). This graph, usingcurrent account data for Sirius

18as of January 3, 2012, shows that the most important

predictor of Sirius XM Canadas success at converting customers into paying subscribersis the unavailability of terrestrial radio. The number of available radio stations is listedacross the bottom. The line represents market penetration and it clearly shows penetrationpercentages decrease dramatically as the number of radio stations available increases.The solid area represents the Canadian population and it shows that population has a

16 News Release, CRTC, 16 June 2005.17 Transcript regarding Broadcast Notice CRTC 2011-6, Volume 1, 7 March 2011.18 Sirius XM Canada does not believe there would be any meaningful change if the corresponding data for XM Canada were

added.


14/33

- 9 -

strong positive correlation with the number of radio stations. This demonstrates theimportance of Sirius XM Canada to Canadas rural population.

Table 5: Sirius Market Penetration and Canadian Population Distribution

37. The data supporting the graph above provide a compelling story. Sirius XM Canadasoverall penetration rate is abou nationally. However, as can be seen, Sirius XMCanada has a penetration rate of in Canadian communities with less than threeterrestrial radio stations. Conversely, the penetration rate plummets to in cities with24 radio stations or more. Indeed, the number one determinant of the success of SiriusXM Canada in a given market is notincome level, nor is it the make or model of the cars

driven there. Rather, the most critical determinant is the number of radio stations.

38. Furthermore, the geographic results of Sirius XM Canadas predictive models show thatits future high growth areas in Canada are virtually all remote. These results areconsistent with the above. Smaller towns that are less well-served by terrestrial radiostations are more likely to have substantial penetration rates or growth potential thanmajor cities, particularly along the Canada-US border.

39. This information demonstrates the importance of Sirius XM Canada as part of the audiodistribution mosaic in small communities across Canada. Given that Sirius XM Canada isthe only regulated commercial audio provider in Canada with obligations relating toCanadian new music, emerging music and spoken word, that importance is magnified.

40. Sirius XM Canadas accomplishments are significant and far above what was expected atthe time of licensing in 2005. However, they have been reached with difficulty.Moreover, Sirius XM Canada faces, and will face in the next licence term, a number ofthreats that are outlined in the next section.


15/33

- 10 -

C) COMPETITIVE THREATS TO SIRIUS XM CANADA41. Satellite radio has been perceived as a threat to regulated audio by industry players and

the Commission over the past several years. In its Commercial Radio Policy 2006, theCommission noted,

In general, commercial radio broadcasters stressed that, since theCommissions last review of radio in 1998 there has been aproliferation of alternative technologies for the distribution ofmusic to consumers. In their view, it is likely that these deviceswill continue to proliferate and become more sophisticated andattractive in the next few years. While there is little evidence so farof an impact on broadcasters revenues, commercial radiobroadcasters submitted that a significant effect on listeners habitsis inevitable, and the financial performance of commercial radiostations may well decline as a result.19

42. In its resulting analysis, the Commission referred specifically to satellite radio as one ofthose alternative technologies. However, as was the case during the licensing process,and as was noted by the Commission, no quantitative evidence was presented supportingthe assertion that satellite radio would harm commercial radio.

43. In fact, what evidence there is regarding the threat satellite radio poses to commercialradio points to the exact opposite of what commercial radio has asserted. TheCommissions July 2011 Communications Monitoring Report, for instance, shows thatprivate commercial radio has a 79.2% tuning share as compared to 2.5% for audioservices, which includes not only satellite radio, but pay and specialty audio services,over-the-air radio stations and video services broadcast on cable and the Internet.

44. Moreover, the only regulated technology on the list of emerging technology threatsprovided by the Canadian Association of Broadcasters in Commercial Radio Policy 2006is satellite radio. In fact, the converse is true. Commercial radio is the main threat tosatellite radio market penetration, most dramatically in urban environments. Even aftersix years Sirius XM Canada has been unable to make significant inroads in Canadasmajor urban centres. It is a daily challenge to compete against dozens of free radiostations offering valuable local content to their listeners at the touch of a button.

45. Where satellite radio is most successful, there are typically three or fewer commercialradio stations. Satellite radio serves markets where the choice of commercial radio

stations is limited. Unfortunately for satellite radio, these smaller markets make up muchless of the overall population, and the customers are more expensive to reach from anadvertising perspective. And satellite radio is prohibited from targeting such customerswith local advertisements or local programming.

19 Commercial Radio Policy, Broadcasting Public Notice CRTC 2006-158, December 15, 2006 at para. 4.


16/33

- 11 -

46. Thus, the satellite radio threat to commercial radio is an illusion. Much likecommercial radio, Sirius XM Canada could arguably look to the Commission for areduced regulatory burden in order to ensure it remains competitive in an increasinglycrowded marketplace. However, the point of the foregoing comments is not to look forprotection against market forces or competition. Rather, the sole thrust of this Application

is to seek an equitable split in the financing of CCD obligations by terrestrial and satelliteradio services in Canada.

47. Sirius XM Canada is also targeted by unregulated competitors. These competitors, usingnew technologies, pose an even greater challenge for Sirius XM Canadawhich isnational and subscription-based, not local and freethan for commercial radio. Internetradio and radio that is available on wireless devices are complementary services tocommercial radio, but are substitutes for satellite radio. Moreover, Sirius XM Canadacustomers must make a significant investment in hardware and pay a separatesubscription charge, while most Internet and wireless radio is available to consumers atlittle or no additional cost.

48. The advent of these delivery methods for new unregulated competitors poses far more ofa threat to Sirius XM Canadas business than to commercial radio, because of this highersubstitutability. Satellite radio and new technologies are both non-local services accessedthrough mobile devices like smartphones and in-car auxiliary and Bluetooth connectorsand that offer curated, commercial-free music and talk programming. In addition,terrestrial radio is more protected from new media given that radios are ubiquitous andready to use. Yet, due to concerns about the growing threat of these unregulated options,the Commission refrained from increasing the regulatory burden on its commercial radiolicensees.

49. As well, the July 2010 decision by the Federal Court of Appeal20 puts Sirius XM Canadaat further disadvantage. Neutral Internet service providers and possibly wireless carriersare not considered to be broadcasting when they transmit content to end-users, and assuch they apparently fall outside of the purview of theBroadcasting Act. This furtherlimits the powers of the Commission to mandate that other players in the systemcontribute proportionately to the objectives of theBroadcasting Act.

50. The pervasive and dynamic threat of unregulated new technologies is very real. A shorthistory dating back to when Sirius XM Canadas predecessors, Sirius and XM, last filedlicence applications in 2003 is instructive.21 At the time, the Commission was concernedabout the spectre of grey market consumption of streamed audio programming that wascurated and assembled in the United States. The music industry was broadly preoccupied

with the online downloading of music: the first peer-to-peer file trading service,Napster, had declared bankruptcy the year before, although its new owner had promisedto launch a legal version soon, and there was some speculation as to whether the latest

20 2010 FCA 178.21 Applications 2003-1885-9 (Sirius) and 2003-1081-3 (XM); Call for applications for a broadcasting licence to carry on a

multi-channel subscription radio programming undertaking, Broadcasting Public Notice CRTC 2003-68, 23 December2003.


17/33

- 12 -

newly-announced service called iTunes, by the computer manufacturer Apple, woulddo the trick.

51. Sirius and XMs applications were gazetted in early 2004.22 Both companies participatedin a public hearing in late 2004, were authorized to operate in 2005, and began operatingas licensees very late in 2005. By that time, 10 percent of Canadian households relied ondial-up Internet, down from 20% at the time the applications had been filed. As many as33% of the public had purchased music from a paid service, 22% had listened to radioonline at least once, and 21% had used an MP3 player or iPod.23 Rumours of Applereleasing a combined iPod/cell phone to be known as the iPhone were only justbeginning to circulate.

52. Six years later, much has changed. Dial-up Internet has shrunk to less than 3%, to bereplaced almost entirely by broadband. More than a third of mobile phones aresmartphones, and in less than two years, most will be.24 Voice services and e-mail areonly two of the thousands of applications that are available on modern handsets, whoseability to deliver rich audio and audiovisual programming and information to consumersis a major contributor to their popularity. Virtually all new cars come with auxiliaryjacks, Bluetooth connections, or some combination of both. Pandora, a publicly-tradedInternet radio application that competes for investment directly with Sirius XM in theU.S., regularly announces deals with car manufacturers.

53. A list of competitors to Sirius XM Canada that did not even exist at the time of thelicensing hearing in November 2004 would include the following:

Apple iTunes (and its Genius playlister) Facebook Music Grooveshark last.fm Rdio Slacker Radio Shoutcast Deezer Rara

54. The foregoing demonstrates the very real threats that Sirius XM Canada has faced in thepast and will face going forward. Sirius XM Canada requires equitable treatment from theCommission in order to properly compete in this industry.

22 Broadcasting Notice of Public Hearing CRTC 2004-6, 8 July 2004.23 CRTC,Broadcasting Policy Monitoring Report 2007.24 eMarketer, Canadian Mobile Subscriptions to Climb 20% by 2014, 10 June 2010 cited in CRTC,Navigating Convergence

II, online: , Figure 6.


18/33

- 13 -

D) FINANCIAL PERFORMANCE & OUTLOOK55. This section presents the past financial performance of Sirius XM Canada and its

competitors and considers the financial projections for the next licence term for SiriusXM Canada.

56. Commercial radio and especially pay audio are highly profitable industries, while SiriusXM Canada has been losing money at a disturbing rate.

57. The table below demonstrates that commercial radio has enjoyed significant andconsistent profitability year over year, continuing to maintain profitability through asevere recession.

Table 6: Financial Performance of the Commercial Radio Industry (in $000s)2004 2005 2006 2007 2008 2009 2010 TOTAL/AVG

Revenues 1,226,653 1,342,364 1,419,395 1,502,755 1,593,679 1,507,733 1,551,759 10,144,338

PBIT 204,722 283,550 285,176 299,131 337,787 271,594 298,384 1,980,344

PBIT (%) 18.2 21.2 20.1 19.9 21.2 18.0 19.2 19.52

Source: All figures from CRTC Annual Financial Summaries.

58. With respect to pay audio, Galaxie had representative publicly available financialstatements until Stingray Digital Media Group (Stingray), a private company that alsoowns Max Trax, began operating it on behalf of CBC.25 Pay audio has been vastly moreprofitable than commercial radio, as can be seen below.

Table 7: Financial Performance of the Pay Audio Industry (in $000s)2002 2003 2004 2005 2006 2007 2008 Total/AVG

Revenues 10,822 13,275 16,254 17,217 20,235 21,838 22,146 121,787

PBIT 5,123 7,500 9,560 10,573 13,454 13,772 9,013 68,995

PBIT % 47.3% 56.5% 58.8% 61.4% 66.4% 63.1% 40.7% 56.7%

Source: All figures from CBC Annual Reports.

59. The effects of competitive pressures on Sirius XM Canada become extremely evident inthe comparison of its financial performance against commercial radio and pay audio.

Table 8: Comparative PBIT MarginsIndustry Average PBIT %*

Satellite radio

Commercial radio 19.52

25 Subsequent figures for Galaxie in CBCs financial statements, and the explanations thereof, were substantially differentfrom those of the prior decade and were not used in these calculations.


19/33

- 14 -

Pay audio 56.7

*Galaxies figures are for 2002-2008, commercial radios for 2004-2010 and satellite radios for 2006-2011. Data isfrom Sirius XM Canadas financial statements, Communications Monitoring Reports and CBC Annual Reports,respectively.

60.

The profit picture for Sirius XM Canada has been unacceptable. In contrast to the healthyperformance of commercial radio and pay audio, Sirius XM Canadas shareholders havenot fared well. Through August 31, 2011, they have incurred a cumulative PBIT deficitof and a negative net income of Set out below are the PBITand Net Income/Loss figures since inception.

Table 9: Financial Performance of Sirius XM Canada (in $ millions)2003 2004 2005 2006 2007 Adopt

Sec.306426

2008 2009 2010 2011 Cum.todate

PBIT

Net Inc./(Loss)

61. In an effort to improve operations, Sirius XM Canadas predecessor companies, Siriusand XM, announced a merger, which was approved last year by the Commission27. At thetime, Sirius XM Canadas parent company announced that,

It is expected that a combined XM Canada and Sirius Canada willyield synergies of approximately $20 million (on an annualizedbasis) within 18 months of closing by allowing the combinedcompany to better manage costs through improved efficiencies andgreater economies of scale.28

62. Sirius XM Canada is pleased to report that it is on track to saving approximately $20million as planned, but that amount is insufficient by itself to change the fortunes of thecompany. Since inception, the profit picture for the Canadian satellite industry has beennegative. It has lost at the PBIT levelduring that time and that figure doesnot include interest payments.

63. This was not the picture that was originally contemplated. At the time of the licensingapplications in 2004, the financial projections showed that by 2011, the combined entitieswould be earning annual pre-tax profits of more than $77 million. Such an overwhelming

differential between projection and reality is neither acceptable nor sustainable.

26 In February, 2008, the CICA-issued Handbook section 3064 Goodwill and Intangible Assets, which replaced otherexisting sections of the CICA Handbook. The adoption of section 3064 resulted in certain changes in assets and liabilities.

27 Broadcasting Decision CRTC 2011-240, 11 April 2011.28 Sirius XM Canada press release. February 17, 2011. Available online at: http://www newswire.ca/en/story/775811/xm-

canada-merger-with-sirius-canada-inc-approved-by-shareholders-of-canadian-satellite-radio-holdings-inc


20/33

- 15 -

64. This is the financial situation in which Sirius XM Canada finds itself as it approaches itsfirst licence renewal. And as the projections shown in response to Questions 20 and 21 ofthe attached letter Application show, Sirius XM Canada is a long way from achieving thePBIT levels of other undertakings.

65. Sirius XM Canada runs a complicated business, and is subject to a variety of possiblerisks. The majority of customers result from Sirius XM Canadas agreements with automanufacturers that operate in Canada to factory install satellite radios. Sirius XM Canadahas a high variable cost structure which other regulated services need not incur. $1.00 ofrevenue from an OEM subscriber will incur a 15% licence fee to Sirius XM Radio Inc. inthe United States, 5% CCD, approximately 6% of performance rights and

. This is before costsincurred by Sirius XM Canada to subsidize the cost of the radio, programming, marketingand administrative costs. Thus, current economic conditions are particularlydiscouraging, because the recent difficulties of major American auto companies and theslow recovery of vehicle sales continue to plague subscriber growth. These issues are aproduct of the current economic downturn, the severity and length of which areimpossible to predict.

66. Sirius XM Canada also has two exclusive licence agreements with Sirius XM Radio Inc.that come up for renewal during the next broadcasting licence term in November 2015and August 2017, respectively. It is possible that Sirius XM Canada may only be able torenew or extend those agreements with Sirius XM Radio Inc. on economic terms lessfavourable than current terms.

67. In addition, Sirius XM Canada must incur all of the costs of acquiring, converting andretaining a subscriber, while its main competitors, both regulated and unregulated, facenone of those costs. Conversion happens when a trial subscriber (i.e. one who has

received a freeat least to him or hersubscription as part of the purchase of a car)becomes a paying subscriber. Nonetheless, although the financial situation of the lastlicence term can be expected to improve going forward, the Commission will appreciatethe significant risk factors involved in Sirius XM Canadas business.

68. There are many risks other than those described above that face Sirius XM Canada. Anumber of these were encapsulated in the Annual Information Form issued in November,2011 by Sirius XM Canada, excerpts of which have been included as Schedule 1. Theserisk factors and the foregoing discussion make it clear that there is no other broadcastingsector in Canada that faces such uncertainty over the next licence term. Certainly, otherregulated audio businesses face more secure futures than the one facing Sirius XM

Canada.

69. Sirius XM Canada has provided the Commission with two sets of financial projectionsfor its second licence term. It is important to understand the assumptions underlyingthem. A key variable in building the projections is the assumption about the number ofsubscribers. Sirius XM Canada currently has approximately subscribers ofwhom about are self-paying. This corresponds to approximately ofCanadians.


21/33

- 16 -

Table 10: Sirius Market Penetration Trend

70. Although market penetration is still trending upward, it has slowed considerably since thelaunch in 2005-2006. And after being in business for more than 6 years, it is unrealistic tothink that the Canadian satellite radio industry will experience explosive growth.

71. Despite this stagnation, modest subscriber growth over the coming licence term is stillpredicted, with an average subscriber growth of approximately year over year. The

major reason is that an increasing proportion of cars sold are satellite radio-equipped.This alone will drive some subscriber growth, because as people buy cars, they are alsobuying radios that enable them to become subscribers if they so choose.

72. Of course, more subscribers translates into more revenues, but there is another factor thatis predicted to drive some revenue growth. To increase the subscription rate, Sirius XMCanada has been offering deep introductory discounts. Going forward, Sirius XM Canada

This will have the effect of marginally increasing theaverage revenue per user.

73. In terms of costs, there are issues that are projected to have a significant effect.Positively, there are areas where Sirius XM Canada hopes to lower them, such asrenegotiating supplier agreements on more favourable terms. However, there are alsounavoidable cost increases such as

74. All of the foregoing demonstrates that this is a very different, and difficult, industry witha unique business model. It has high operating costs and is dependent on the auto sector.This in turn requires the company to seek out and acquire, then convert, then retain,subscribers, all in an uncertain marketplace.


22/33

- 17 -

75. As a result of the foregoing factors, the financial projections demonstrate PBIT levels thatSirius XM Canada believes to be achievable. Again, it must be noted that PBIT does notaccount for the significant interest payments that Sirius XM Canada must make. Thissubstantial obligation exists regardless of Sirius XM Canadas performance. Furthermore,these payments alone can be the difference between turning a net profit or a loss.

76. In the graph below, Sirius XM Canada presents two sets of financial projections where allvariables are held constant exceptthe CCD contribution levels. In the first, whichdisplays a continuation of CCD payments at the 5% of revenues level, the average PBITmargin of Sirius XM Canada is over the next licence term. This is clearly too low,especially in light of the severe losses sustained by shareholders over the first licenceterm. Conversely, the projections using 0.5% of revenue, still more than renewal-termcommercial radio licensees, demonstrate an average PBIT of over the next licenceterm, allowing for a reasonable margin, albeit far lower than the competition.

Table 11: Sirius XM Canada Projected PBIT Margins by CCD Contribution Rate

77. The variance is attributable solely to the fact that CCD is reduced in the second set offinancial projections. The difference is significant over the coming licence term. SiriusXM Canada has already lost over the first licence term and will have madeCCD expenditures of $52 million by the end of this fiscal year.

78. As seen above, there is a daunting list of risks to Sirius XM Canadas business. However,notwithstanding all of the potential risks and challenges, Sirius XM Canada has notproposed any changes to its licence other than to bring its CCD contributions into linewith renewal-term commercial radio licensees at 0.5% of prior years revenue.


23/33

- 18 -

E) A SINGLE REQUEST AN APPROPRIATE CCD RATE79. Sirius XM Canada has not requested any changes to its licence other than a reduction of

CCD to 0.5% of prior years revenue. The reasons for the requested CCD change can besummarized as follows

(a) Inappropriate Proxy: The imposition of the 5% of revenue CCD condition oflicence was patterned after the BDU Canadian programming contributionpercentage. But this is clearly an inappropriate proxy. In fact, the Commissionitself has rejected the idea that satellite radio services are equivalent to BDUs.29

(b) Equity & Consistency: Like all would-be commercial radio licensees, Sirius XMCanada offered Over & Above CCD contributions at its competitive licensinghearing. Therefore, like all renewal-term commercial radio licensees, Sirius XMCanada should revert back to lower levels. Renewal term commercial radiostations pay 0.5% of revenues in CCD.30 It is inequitable to require theunprofitable Sirius XM Canada to pay higher rates than an industry earning a

PBIT of approximately 20%.

(c) CCD Contribution Policy: Sirius XM Canada has already lost overthe first licence term, yet will have spent $52 million in CCD by the end of thisfiscal year. Even with the merger, Sirius XM Canada continues to face fiercecompetition going forward. Extending contributions of this magnitude wouldviolate the Commissions policy of ensuring that mandated CCD contributions arecommensurate with the financial health of a given sector.

80. This Supplementary Brief has already demonstrated Sirius XM Canadas unprecedentedsupport of the Canadian broadcasting landscape, its competitive struggles and its

troubling financial situation. The following discussion will focus on the original proposalto introduce a 5% of revenue CCD level, that there should at least be regulatory fairness-in the absence of symmetry- between the regulated audio players, and the Commissionspolicy that CCD obligations are commensurate with ability to pay. The analysis makes itclear that commercial radio, not BDUs, represents the most appropriate comparator forSirius XM Canada.

a) Inappropriate Proxy81. Looking back through the filings and the transcripts of the public licensing hearing, it is

apparent that comparatively little attention was paid to CCD at the time of theestablishment of the satellite radio licensing framework. Satellite radio was a new,unknown industry. The view held by some at that time was that satellite radio shared

29 Licence amendment for Sirius, Broadcasting Decision CRTC 2007-134, 11 May 2007, paragraph 8.30 Given the $1,000 flat fee on the first $1,250,000 of income, renewal term commercial licensees actually pay much less than

0.5% since that percentage is only paid on amounts over revenues of $1,250,000 annually. Sirius XM Canada estimates theeffective rate at more like 0.44%-0.47%. Moreover, the Commission has recently (Broadcasting Notice of ConsultationCRTC 2011-796, 20 December 2011), called for comments on the possibility of exempting commercial radio licensees fromCCD altogether if their revenues are less than $625,000 annually.


24/33

- 19 -

similarities with BDUs. Thus, at the November 2004 licensing hearing, the same 5%CCD contribution level as for BDUs was selected.31

82. In hindsight, there was no policy logic in equating satellite radio companies CCDcontribution levels to the 5% Canadian programming contribution level of BDUs. Thefinancial contribution regime for video programming undertakings such as television andBDUs is completely different than for audio programming, and therefore directcomparisons are both difficult and unhelpful.

83. The revenues of BDUs and the revenues of satellite radio undertakings supportcompletely different underlying cost infrastructures and it is critical for tribunals chargedwith rate setting to take those costs into account in setting rates. This is a factor that istaken into consideration by the Copyright Board of Canada (the Copyright Board) insetting tariffs which it has done for BDUs and for satellite radio.32

84. Importantly, as the Commission is aware, BDUs effectively provide a must-haveservice. They enjoy penetration of more than 91% of Canadian homes, and, critically, are

responsible for the delivery of high-speed Internet, itself a must-have service, to thevast majority of Canadians. By contrast, satellite radio is a truly discretionary expenditureand one that is linked to the sales of cars in Canada. Yet for three decades while cablewas growing into the powerhouse that it is today, it made no financial contributions toCanadian programming funds. It was only in the mid-late 1990s, in a regulatory trade-offthat effectively allowed the cable industry to keep half of its otherwise expiring rateincreases in exchange for a contribution to the precursor to the CMF, that cable beganmaking a financial contribution to such funds.

85. In fact, the Commission already has a position on this issue,The Commission further notes that Sirius Canada is licensed tooperate a SSR [satellite radio] undertaking, not a BDU.33

86. Accordingly, there is no regulatory justification for imposing a 5% of revenues CCD rateon a renewal term satellite radio undertaking.

b) Equity & Consistency87. In attempting to put forward an equitable CCD contribution rate for the next licence term,

Sirius XM Canada was guided by the approach the Commission has taken withcommercial radio. The following chart compares the CCD contributions of Sirius XM

31 Transcript of November 2, 2004. Available online at: http://www.crtc.gc.ca/eng/transcripts/2004/tb1102 htm32 The Copyright Boards most recent decision relating to BDUs copyright obligations is found at http://www.cb-

cda.gc.ca/decisions/2008/20080320-m1-b.pdf. The 1.9% of revenue for large systems is split 50%-50% with theprogramming services carried by the BDUs such that BDUs and programming undertakings subject to that tariff effectivelypay 0.95% of revenues to SOCAN. This contrasts with the copyright tariff payable by satellite radio to SOCAN of 4.26%.See http://www.cb-cda.gc.ca/decisions/2009/20090408-m-b.pdf.

33 Licence amendment for Sirius, Broadcasting Decision CRTC 2007-134, 11 May 2007 at paragraph 8.


25/33

- 20 -

Canada against the contributions of first term and renewal term commercial radiolicensees.34

Table 12: Comparative CCD Contributions(in $

thousands)2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012(est.)

Total

First TermCCDcontributionsof Sirius XMCanada

First TermCCDcontributionsofallTerrestrialRadioLicensees

6,427 9,001 8,457 8,611 10,68935 12,03136 N/A N/A 55,216

RenewalTerm CCDcontributionsof allTerrestrialRadioLicensees

2,418 2,528 3,387 5,538 11,045 7,269 N/A N/A 32,185

88. This chart displays the imbalanced burden in CCD contributions. Furthermore, the $52million contributed by Sirius XM Canada is greater than the CCD contributions ofall 400+ Canadian renewal-term commercial radio licenseescombinedover the sameperiod.

89. During 2005-2010, the period in which satellite radio has operated as a licensed servicein Canada, the Commission licensed 274 new terrestrial radio services.37 Cumulatively,those 274 new radio stations, which are still in their first licence term, contributed only

more in CCD combined than did Sirius XM Canada over the same period. It ishighly likely that, although 2011 and 2012 figures are still not available, Sirius XMCanada is already contributing more than all of Canadas first-term commercial radio

licensees combined.38

34 From the Commissions 2011 Communications Monitoring Report, Table 4.2.12.35 Including satellite radio, the CCD contributions for 2009 would be $19,537,000.36 Including satellite radio, the CCD contributions for 2010 would be $22,061,000.37 Communications Monitoring Reports38 Given that the Commission only licensed 8 new services in 2009 and 1 new service in 2010 in competitive processes

compared to 17 and 23 in 2007 and 2008 respectively.


26/33

- 21 -

90. The disproportionately high contributions of satellite radio as compared to commercialradio exist not only on an absolute basis, but by percentage of revenues as well. As canbe seen below, the effect of a much lower CCD percentage tariff combined with therenewal term step-stair exemption levels ensured that the commercial radio industry as awhole paid only 0.92% of overall revenue in CCD. This amount even included all first-

term commercial radio licensees Over & Above promises. Canadas first termcommercial radio licensees paid an effective CCD rate of 2.05% of revenues while all ofCanadas renewal term commercial radio licensees paid 0.47% of revenues.

Table 13: CCD Contribution Rate of Canadian Commercial Radio (in $000s)2004 2005 2006 2007 2008 2009 2010 AVERAGE

FirstTermCCD /Revenues

1.45% 1.96% 2.33% 1.91% 1.76% 2.31% 2.65% 2.05%

RenewalTermCCD /Revenues

0.27% 0.24% 0.24% 0.32% 0.50% 1.06% 0.66% 0.47%

TotalCCD/Revenue

0.58% 0.66% 0.81% 0.79% 0.89% 1.44% 1.24% 0.92%

Source: All figures from CRTC Annual Financial Summaries except CCD which is from CRTC CommunicationsMonitoring Report. This figure excludes CCD payable as a result of transfers.

91. However, the fact that Sirius XM Canada has paid significantly higher CCD rates thanfirst term commercial radio licensees is a matter of historical interest. Much more

important is the fact that every first-term commercial radio licensee is relieved at the endof its first licence term of the Over & Above CCD undertakings offered during itscompetitive licensing process. No applicant ever intends that Over & Abovecontributions survive the first licence term, nor has the Commission ever extended themfor commercial radio licensees, regardless of how much is promised. Rather, CCDcontributions automatically revert to the much lower amounts established by CommercialRadio Policy 2006.

39

92. Sirius XM Canada is no different. With respect to its first term CCD obligation, Siriusnoted at the licensing hearing that,

This is an impressive amount, unmatched by any applicant at thishearing40

93. It is instructive to calculate CCD for Sirius XM Canada as if it was a renewal termterrestrial radio licensee. If one treated each channel as a separate service, the way eachcommercial radio station is treated separately, Sirius XM Canada would divide its

39 Broadcasting Public Notice CRTC 2006-158, 15 December 2006, paragraph 116.40 Transcript of November 2, 2004. Available online at: http://www.crtc.gc.ca/eng/transcripts/2004/tb1102 htm.


27/33

- 22 -

revenues by the number of channels and pay only $1,000 on the first $1,250,000 ofrevenue allocated to each channel. Licensees operating multiple terrestrial radio stationsdo, in fact, take advantage of the lower fixed contribution across all their stations, payingthe higher 0.5% only in the event a station passes the $1,250,000 threshold.

94. In this manner, commercial radio operations with large revenues are still able torepeatedly benefit from the $1,000 fixed contribution. If one took a hypothetical operatorwith, say, 80 radio stations each earning more than $1,250,000 per annum, that ownerwould pay $80,000 on its first $100,000,000 of revenue. Sirius XM Canada, under itscurrent regime, would pay $5,000,000. Even with the new 0.5% rate, Sirius XM Canadawould pay $500,000 or more than 6 times what that owner would pay in CCD on thatfirst $100,000,000 of revenue. And this is per annum, such that the disparity is magnifiedover a seven-year licence term.

95. Applying the renewal term terrestrial radio discount on the first $1,250,000 of annualrevenue would greatly decrease Sirius XM Canadas annual CCD contribution.Nonetheless, Sirius XM Canada is not proposing to do this, although it is exactly whatevery commercial radio broadcaster in Canada does. As mentioned, Sirius XM Canadasimply proposes to multiply its prior years revenues by 0.5%.

c) CCD Contribution Policy96. The imbalanced burden in mandated CCD contributions is not linked to capacity to

contribute either. However, as mentioned above, the Commissions stated objective is toset,

contributions to Canadian talent development (CTD) thatare commensurate with the financial health of the sector.41

[emphasis added]

97. Indeed, the Commission has considered profitability, not only revenues, when settingCCD rates for commercial radio42 and pay audio, 43 as well as Canadian programmingexpenditures for BDUs44 and specialty services.45 The repeated use of financial health asa criterion makes it clear that the Commission sees CCD expenditures and profitability asbeing intricately linked.

98. As discussed above, commercial radio is highly profitable, while Sirius XM Canada isnot even profitable at all. The following table highlights the stark imbalance betweensatellite radio on the one hand and commercial radio on the other.

41 Broadcasting Public Notice CRTC 2006-1, 31 January 2006.42 Public Notice CRTC 1998-41, 30 April 1998.43 Broadcasting Decision CRTC 2002-391 (Galaxie) and 2002-392 (Max Trax), 20 November 2002.44 Broadcasting Public Notice CRTC 2008-100, 30 October 2008.45 Broadcasting Public Notice CRTC 2004-2, 21 January 2004.


28/33

- 23 -

Table 14: Comparative Financial Health and CCD Contribution RateIndustry Average PBIT %46 CCD / Revenue %

Satellite radio 5.00

Commercial radio (first term) 19.52 2.05

Commercial radio (renewal term) 19.52 0.47

* Commercial radios figures for 2004-2010 and satellite radios for 2006-2011. Data is from Sirius XM Canadasfinancial statements and Communications Monitoring Reports.

99. Commercial radio has enjoyed healthy profit margins for many years. Yet when thecommercial radio industrys profit margins were under threat in the 1990s, theCommission re-examined that sectors CCD contributions and set a minimum annualthreshold of only $1.8 million for the entire industry.47 In Commercial Radio Policy1998, the Commission confirmed this minimum contribution scheme, which wasdesigned to maintain a basic level of CCD contribution while at the same time attempting

to protect the financial health of commercial radio licensees.

48

At the time, commercialradio was still benefitting from higher margins than those of Sirius XM Canada. It wasonly in 2006, when the Commission once again reviewed commercial radios financialsituation and noted that it had enjoyed healthy profits for several years that its CCDobligations were marginally increased.

100. The projected income statements filed by Sirius XM Canadas predecessor companies atthe time of their original applications predicted a cumulative deficit of approximately$100 million over the seven-year licence term, but a net income of more than $65 millionby the final year. The actual figures are much worse. The company has a cumulativedeficit of and another significant net loss for the year ending in 2011.

101. If the Commission is to consistently apply its policy that contributions to mandatedCCD be commensurate with the financial health of the sector, then a reduction inthe CCD rate applied to satellite radio is required for the next licence term. As canbe seen in the financial projections included as part of this Application, the PBIT levelsdo not become satisfactory even over the next licence period.

102. In summary, the Commission thought that a maximum rate of 0.5% of revenues was acommensurate level of contribution for a commercial radio sector with a 20% PBIT. And,by licensing and re-licensing pay audio without raising its CCD commitment,

49the

Commission has indicated that its rate is commensurate with a sector with excellent

46 The PBIT% of first and renewal term commercial licensees were assumed to be the same, because separate PBIT% data isunavailable. An assumption that renewal term stations have higher PBIT% would increase the first term CCD/Revenue %,but decrease the renewal term CCD/Revenue %.

47 Public Notice CRTC 1995-196, 17 November 1995.48 Public Notice CRTC 1998-41, 30 April 1998.49 The Commission renewed the licences of Galaxie (Broadcasting Decision CRTC 2002-391, 29 November 2002) and Max

Trax (Broadcasting Decision CRTC 2002-392, 29 November 2002) and also licensed Rogers (Broadcasting Decision CRTC2007-147, 22 May 2007) and Stingray (Broadcasting Decision CRTC 2008-368, 23 December 2008) all without raising thetraditional CCD rate despite the requests of intervenes who highlighted pay audios profitability.


29/33

- 24 -

financial health, as reflected in its 57% PBIT. The outlier in this regulated audioprogramming picture is clearly satellite radio.

103. For the foregoing reasons, Sirius XM Canada believes it not only deserves but requiresthe requested amendment to its CCD condition of licence. While the cost synergiescreated by the merger clearly help, they are not a panacea. The merger did not create amonopoly that has allowed (or will allow) Sirius XM Canada to recklessly raise its pricesand thereby recover any continuing mandated obligations that are above and beyondthose of its competitors. The merger was not about eliminating a competitor. Rather, themerger was an operational reaction to the American merger and to the competitiveenvironment for audio programming undertakings that spurred it. With improvement ofthe economy, good management and a proper regulatory structure, Sirius XM Canadabelieves that its business is viable, and it certainly does not want to abandon its 2million+ Canadian subscribers to the grey market.

F) CONCLUSION104. Given its mandate and objectives, it has been shown that the Commission weighs the

following factors when determining what level of CCD contribution is appropriate for aparticular sector/licensee:

(a) contributions by licensees in similar sectors;(b) sector profitability;(c) applicant/licensee profitability;(d) type of licence (commercial, first term/renewal term, etc);(e) threats from new technologies; and(f) the sectors/applicants exhibition requirements.

105. The most appropriate level of CCD contribution for Sirius XM Canada for the nextlicence term is that of renewal term commercial radio licensees, but without the benefit ofthe step-stair exemption.

106. This Supplementary Brief has demonstrated that,(a) The Commission routinely calibrates required CCD contributions for different

players in the Canadian broadcasting industry. Since by any measure Sirius XMCanada will be significantly over-contributing CCD funds compared to itscompetitors, both regulated and unregulated, it is time for such a routinecalibration to take place for satellite radio.

(b) Sirius XM Canada has contributed much more CCD funding than theCommission and even interveners expected at the time of the licensing hearing inthe fall of 2004.

(c) Sirius XM Canada has and will continue to exhibit the talents of Canadian artistsin both French and English, and more particularly new Canadian selections andemerging Canadian artists, on a national platform in quantities unmatched by anyof its competitors.


30/33

- 25 -

(d) Approval of this Application will remove an imbalance in the Canadianbroadcasting system and would allow for sustainable competition between SiriusXM Canada and its competitors.

(e) Sirius XM Canada has always and will continue to play a higher percentage ofCanadian content selections than any of its competitors.

(f) Both Canadian and non-Canadian Internet radio services are not required to makeany contribution whatsoever to the Canadian broadcasting system notwithstandingthat these services will have a much more detrimental impact on satellite radioservices going forward than on any other licensed Canadian programmingservices.

(g) Sirius XM Canada faces far more threats to its business over the next licence termthan does commercial radio.

(h) The commercial radio industrys traditional practice is to promise an amount ofCCD that exceeds the minimum in order to convince the Commission to licensenew services in response to competitive calls for applications.Never are suchCCD promises carried into a renewal licence term. Invariably, the successfulapplicant moves to the much lower commercial radio industry model approved bythe Commission. More than seven years after the hearing relating to theimposition of the 5% CCD figure on the satellite radio industry, it is appropriatefor the Commission to recalibrate this figure just as it has in the past and willcontinue to do in the future for commercial radio stations.

(i) Sirius XM Canada greatly over performs in rural regions of Canada that othermedia either ignore or under serve. It also does this without the benefit of reduced

CCD that non-competitive commercial radio licensees enjoy.

(j) Satellite radio has contributed materially more to CCD in its first licence termthan first term commercial radio licensees.

(k) Other audio programming licensees are far more profitable than satellite radiolicensees and will be for the foreseeable future. While Sirius XM Canadasrevenues have shown positive growth, this has been largely as a result of its radiosubsidies and expensive customer conversion and retention plans, both of whichhave come at a significant cost to Sirius XM Canada during the first licence term.It is unrealistic to expect that CCD contributions should be taken off the top linein the same amount as suggested in 2004 without taking into consideration thatcurrent revenues would not exist had Sirius XM Canada not dug into itsshareholders pockets to enable those costs to be incurred and thus revenues to beenhanced.

(l) Sirius Canada has lost over the first licence term and requires anadjustment of its CCD level to match that of its main competitor.


31/33

- 26 -

107. The worries and concerns expressed by interveners in 2004 have failed to materialize.Sirius XM Canadas exhibition requirements exceed those of commercial radio, resultingin significant new Canadian content (in both English and French) being made available toall Canadians as well as internationally. Sirius XM Canada has materially outperformedeven its most optimistic estimates from a CCD perspective and carries a disproportionate

share of CCD obligations when compared to other audio programming undertakings.Sirius XM Canada is a valuable contributing member of the broadcasting community,with over two million subscribers. And all of this has been accomplished without havingany discernable effect on other forms of audio programming.

108. In licensing satellite radio in Canada, the Commission introduced unique and innovativeconditions of licence to ensure that the licensees would make the greatest practicable useof Canadian resources under the circumstances. All Canadians now have the opportunityto enjoy a robust national offering that features more Canadian music and, in particularmore emerging Canadian artists, than from any other Commission licensee.

109. However, the examination of Sirius XM Canadas CCD obligations as set out in thisApplication clearly demonstrates that to continue the 5% level of CCD contributionwould be inappropriate.

110. Setting Sirius XM Canadas CCD level at that of commercial radio during licencerenewal terms, 0.5% of revenues, commencing September 1, 2012, would restore thatbalance while ensuring that the policy objectives of theBroadcasting Actare met.


32/33

- 27 -

Schedule 1Risk Factors in Sirius XM Canadas 2011 Annual Information Form

Risks Related to Our Business

Current economic conditions may adversely affect our financial results and financialposition.

Demand for our service may be insufficient for us to continue being profitable.

We rely on our exclusive relationship with Sirius XM for the provision of our Satellite

Radio Services.

We must maintain and pay copyright licence fees for music rights which may increase

and become more costly than expected.

Higher than expected costs of attracting new subscribers, higher subscriber turnover or

weaker than expected advertising revenue could each adversely affect our financialperformance and operating results.

Our inability to retain customers, including those who purchase or lease vehicles that

include a subscription to one of our Satellite Radio Services, could adversely affect our

financial performance.

Competition from traditional and emerging audio programming providers could

adversely affect our revenues.

Our business depends in large part upon automakers, whose sales are dependent on

general macroeconomic conditions.

Our service network, national broadcast studios or other facilities could be damaged by

natural catastrophes, which would adversely affect our business.

Adverse impact of litigation, claims, patent, copyright and other infringement could be

material to our bottom line.

Our service could be interrupted in areas where there is no direct line of sight access to a

satellite or a terrestrial repeater, which would adversely affect our business.

We rely on third parties for the manufacture and distribution of radios.

A bankruptcy or financial difficulties of a third party with whom we have a significant

relationship could harm our results of operations.

We need people with special skills to develop and maintain our new service. If we cannot

find and keep these people, our business could suffer.

Our terrestrial repeater network may not provide an adequate level of reception.


33/33

- 28 -

We may from time to time modify our business plan, and these changes could adversely

affect us and our financial condition.

Rapid technological and industry changes could adversely impact our Satellite Radio

Services.

Consumers could pirate our Satellite Radio Services.

Changes in consumer protection laws and their enforcement could damage our business.

Risks Related to our Indebtedness

We have substantial indebtedness and we may be unable to service our indebtedness.

The agreements governing our indebtedness contain significant restrictions that limit our

operating and financial flexibility.

To service our indebtedness, we require a significant amount of cash. Our ability togenerate cash depends on many factors beyond our control.

We may be able to incur additional indebtedness, which could further exacerbate the

risks associated with our substantial indebtedness.

Risks Related to Our Principal Shareholders

A small number of shareholders own a significant percentage of our voting shares and

could significantly affect matters requiring a shareholder vote.

*** End of Document ***

dm#1663183 - 2012-0064-1 - app - sxmc - 2012-01-19 - doc03 - appendix d - supplementary brief -...

Documents