Proceedings of the Standing Senate Committee on
Issue 23 - Evidence
OTTAWA, Tuesday, April 20, 1999
The Standing Senate Committee on Transport and Communications, to which was referred Bill C-55, respecting advertising services supplied by foreign periodical publishers, met this day at 5:43 p.m. to give consideration to the bill.
Mr. Michel Patrice, Clerk of the Committee: Honourable senators, I have received a letter from the Chair of the committee, Senator Bacon, which she has asked me to read. It is addressed to Sharon Carstairs, Deputy Leader of the Government.
I am sorry to inform you that I cannot continue to chair the Senate Standing Committee on Transport and Communications which is presently studying Bill C-55, an Act regarding the Foreign Publishers Advertising Services Act.
Due to my poor health status, as the enclosed medical certificate will confirm, I will not be able to return to the Senate until the end of May. I will be consulting an orthopaedist on Wednesday, April 21, for a possible surgery of a Bayker's cyst. If surgery is necessary, my sick leave will then be prolonged. I therefore think it is preferable that I submit my resignation as Chair of the Senate Standing Committee on Transport and Communications.
Again, I am sorry I cannot be of much help to the Committee but this situation is totally out of my hands. I would like to wish the very best to all the members of the Committee.
Yours sincerely, Lise Bacon, Chair.
Senators, as clerk of your committee, it is my duty to preside over the election of a new Chair. I am ready to receive motions to that effect.
Senator Maheu: I propose that the Honourable Senator Marie-P. Poulin be named Chair of this committee.
Mr. Patrice: Are there any other motions?
If there are no other motions, is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
Mr. Patrice: I declare the motion adopted and the Honourable Senator Marie-P. Poulin elected Chair of the committee.
Please take the Chair.
Senator Marie-P. Poulin (Chairman) in the Chair.
The Chairman: Before we get under way officially, on behalf of all committee members, I would like to thank Senator Lise Bacon for the excellent work she did chairing the Transport and Communications Committee these past few years. We all wish her a speedy recovery.
Senator Forrestall: Honourable senators, if I may, I should first like to welcome our very distinguished colleague, Senator Poulin, to the Chair and to wish her very well in it; then I would particularly pay tribute to Senator Bacon, who has done exemplary work with this committee over the past several years.
Senator Bacon has done her work under difficult circumstances and sometimes under great pain and difficulty. I wish particularly to express my appreciation to her for all the assistance she has given me in the work that I have done, as I know Senator Poulin reflects when she expresses her appreciation to Senator Bacon for the work that was done on the communications side.
I wish to express to her my best wishes, as well as those of my family, and I wish her a very speedy identification of precisely what her difficulties are and, beyond that, a very speedy recovery and a return to our presence.
The Chairman: I know Senator Bacon will appreciate our good wishes.
Honourable senators, this is our second meeting on this bill. I should like to invite our witnesses from the Canadian Business Press to come forward. We are reviewing Bill C-55, respecting advertising services supplied by foreign periodical publishers. We have with us Mr. Terry Malden, who has, I believe, a presentation for us.
Mr. Terry Malden, Chairman of Canadian Business Press and Executive Vice-President of Maclean Hunter Publishing: Thank you for the opportunity to present this issue to you and to give you our views on Bill C-55. The way we have chosen to structure our presentation is to talk a little bit about the issue itself, as the background to Bill C-55, and then, as a way to explain how Bill C-55 addresses the issue, to deal with the objections that have been raised in one quarter or another against Bill C-55 and to give you our answers to those objections.
Let us start with a discussion of the issue. For over 35 years it has been the policy of the Canadian government to ensure an environment in which Canadians have a choice of reading magazines that reflect our country, while at the same time having the ability to choose to read magazines from anywhere else in the world.
Canada is a totally open market for foreign magazines. In fact, I believe you have heard the numbers before.Imported magazines occupy something like 80 per cent of the space of an average newsstand in this country and account for something around 50 per cent of magazines sold in Canada.
In this very competitive and totally open market, Canadian publishers compete successfully for readers. In order to survive, Canadian publishers also must be able to compete for advertising revenues. Advertising revenues account for about 60 per cent to as much as 100 per cent of the revenue of a publisher. Therefore, if Canadians are to have the choice of reading Canadian magazines as well as foreign magazines, Canadian publishers cannot be subjected to unfair competition for that advertising revenue from foreign publishers.
How would that unfair competition take place? It could take place through the publishing phenomenon of split-run advertising editions. A split-run advertising edition is one for which the foreign magazine is circulated in this country with editorial content that is largely the same as appears in the domestic or home version of that magazine, but in which the advertising is Canadian.
The easiest example is a typical issue of the Canadian edition of Time. Time is a classic split-run edition that has been allowed to operate in Canada for all these years. In a typical issue of Time, one to three pages of editorial may be different from the editorials circulated in the States. In this week's issue, out of 50 pages there happen to be six pages of unique editorial material, three of them dealing with Wayne Gretzky's retirement. That takes the number a little higher than you would normally find in a typical issue.
In citing this example, I am careful to add that this is not in any way a criticism of Time Warner or Time Canada. They are following a business model, a publishing model, that any business person would like to have, because it includes the ability to produce a product and sell a service without incurring the same costs as your competitor. It is because of this cost advantage that foreign publishers can compete unfairly and with an insurmountable cost advantage over Canadian publishers.
In the first appendix of the document that you will receive there is a detailed explanation of how foreign publishers would approach the opportunity to publish split-run editions. The numbers that I have shown on page 2 of the document summarize those appendix numbers in an index format to bring them into a manageable presentation.
The first two sets of numbers here are for a consumer magazine and a trade publication.A consumer magazine is a typical magazine like Maclean's, Chatelaine or Time. A trade magazine is the kind of vertical publication that Mr. Doody publishes for vertical industry segments. The biggest difference between the two is that consumer magazines tend to have paid circulation whereas business publications often have controlled circulation and are targeted right at a vertical audience.
I have also shown actual profits and losses from one of Maclean Hunter's more successful consumer magazines. I indexed the numbers using the total revenue as 100. On that publication, we make a 12 per cent margin.
If the U.S. publishers were allowed to operate as split-run publishers with a similar kind of magazine with a similar circulation -- and there are U.S. magazines that operate in this market and which fit that description -- they would generate the same advertising revenue as we do, but they would incur very little incremental costs. There would be no editorial costs. They would have no costs other than changing the plates on the press to put the Canadian ads into the magazine as it was being printed for Canada and the costs of paying their sales people for selling those ads.
Using actual numbers from our income statement to arrive at the estimate of the cost that a split-run would incur, you see that it generates a profit margin of 80 per cent. It is true that, for a foreign magazine under the current regime, advertising for a Canadian advertiser in such a magazine would not be tax-deductible. The publisher would have that tax disadvantage over his Canadian competitor, but even if he discounted his advertising rates, as shown in the far right-hand column, to such a level that, on an after-tax basis, the net cost to the Canadian advertiser would be the same as the net cost of a tax-deductible Canadian publication, that publisher would end up with a 66 per cent profit margin.
I will not go through the numbers for the trade magazines. As I say, the explanation of those numbers is in the first appendix.
This huge cost advantage then allows a U.S. publisher of split-run editions to undercut Canadian publishers by charging less for advertising than Canadian publishers must charge to remain viable. Those split-run editions can gain market share and take advertising revenues away from Canadian publishers and their magazines.
The result of this unfair competition for advertising revenues from split-run editions of American publishers is that Canadian publishers would lose advertising revenues and could cease to be viable.
Split-run publishing represents the sale of a service at rates that do not reflect the true cost of delivering that service. That is an unfair trade practice that the Canadian government has prevented for the last 35 years. The measures previously taken to accomplish that policy objective were found by the WTO, as you know, to be inconsistent with GATT because of the effect on trade in magazines as goods.
Canada has complied with the GATT ruling by rescinding the previous measures. Bill C-55 has been introduced to accomplish the policy objective with a measure that is completely different from those that were found to be offside the WTO agreements by simply prohibiting the sale of advertising services in the Canadian advertising market by foreign publishers. This is a right that Canada has under its trade agreements, including the NAFTA, the FTA and the WTO/GATS agreement, which is the service agreement of GATT. Bill C-55 simply puts into law rights that Canada has already negotiated in its trade agreements.
That is the background. That is the issue and the problem that Canadian publishers would face if subjected to unfair competition from split-run editions.
Now I should like to go through the kinds of objections that have been raised by opponents to Bill C-55 and give you the answers to those objections. We think that is the best way to help you understand how Bill C-55 works and how it addresses the issues.
The first general objection is that protection of Canadian publishers is just inappropriate in a free-trade world. As we have said, Canadian publishers were not protected in the past nor will they be in the future under Bill C-55 from competition for readers in the consumer market. The market is completely open to imports of foreign magazines. Bill C-55 aims to protect Canadian publishers from unfair trade in the advertising services market.
American publishers, as we have seen, could sell advertising services in Canada at prices that do not reflect their real costs of providing those services. The performance of split-run editions of Sports Illustrated, when it was allowed to operate for three years in Canada, indicates that this is actually the strategy that is most likely to be adopted by foreign publishers.
Sports Illustrated operated from 1993 to 1995 and published, I think, 26 separate Canadian editions during that period. The content requirement of those editions that differed from the domestic editions went down from 23 per cent in the first year to 4 per cent. In the last nine issues published as split-run editions, seven of the nine Canadian issues had no original content at all.
Sports Illustrated in Canada charged advertising rates that were 30 per cent of the rates that Sports Illustrated charged in the U.S. for comparable circulation of regional editions. Consumer magazines often sell subsets of their total circulation in audience to advertisers. There are several regional editions of Sports Illustrated in the U.S. with almost the same circulation as the Canadian edition. The rates charged in Canada were 30 per cent of the rates charged for advertising in those U.S. editions.
In a goods market that would be dumping, an unfair trade practice that countries are allowed to stop. Unfortunately, there are no remedies for the dumping of services available to countries under international trade agreements. There are no trade rules dealing with the dumping of services.
Bill C-55 aims to prevent the sale of dumped advertising services. It is simply the prevention of unfair trade and is not the protection of Canadian publishers.
The second objection is that, if Canadian magazines are good enough, they can and should be able to compete with split-run editions. This is the notion found in every other industry that has been subjected to free trade: if you produce goods that consumers want to buy, you will survive and you should be subjected to that kind of competition so that you will be compelled to produce goods that are in demand by consumers.
We have already seen that Canadian magazines are in fact good enough to be in demand in a competitive market that is totally open to hundreds of American and other foreign magazines. Our magazines capture one half of the Canadian market, while the other half is captured by foreign magazines, largely American magazines.
Canadians want to read, and be able to continue to read, both Canadian and American and other foreign magazines. The problem arises with the split-run phenomenon that American publishers can deliver their audiences that they generate in Canada through advertising rates that are much lower than Canadian publishers have to charge to cover the full costs of publication.
The problem is not that we do not produce magazines that people want to read; the problem is with the advertising services market, where there is this artificial cost advantage that we cannot duplicate.
The third objection is the other side of that coin: "You Canadian publishers do produce magazines that Canadians want. No one will stop reading Maclean's, or Canadian Living or Outdoor Canada; so you will survive." The same answer applies, that, yes, we do have audiences and we would not expect to see any change in those audiences just because foreign publishers are allowed to operate in the advertising services market in Canada. Their magazines are already available in Canada. We already compete with them. Their ability to add Canadian ads to them is not likely to make them more competitive with us for readers than they already are. What they have, though, is this cost advantage that allows them to attract advertising services at lower rates than we could ever afford to charge.
The fourth objection is that Canadian publishers exaggerate the threat of split-run publishing. There are one or two major split-run editions, Time Canada being the predominant one, that operate in the Canadian market. It is fair to say that Time Canada does charge advertising rates that are roughly similar on a cost-per-thousand basis to competitive Canadian magazines. That would not be the case were the market to be entered by the 10 or 20 or 30 U.S. magazines that already have Canadian circulation that would be big enough to make the profit opportunity of split-run edition publishing attractive. They would be in a much more competitive market than we currently face, because not only would they be competing with Canadian publishers, they would be competing among themselves. They would surely adopt the strategy that Sports Illustrated exhibited when it was selling deeply discounted advertising rates.
In fact, an analysis done by Harrison, Young, Pesonin & Newell, which is one of Canada's leading media buying agencies, concluded that if all the U.S. titles that currently have Canadian circulation of 50,000 or more, which is an artificial level above which it could be assumed that split-run publishing might be attractive, were allowed to operate split-run advertising editions, they could easily obtain advertising market shares of 70 per cent.
The numbers at the bottom of page 6 show what would happen to that consumer magazine that I used as the basis for the numbers that we have just gone through to show the cost advantages of split-run editions. They show what would happen to the profit of that currently very successful, by Canadian standards, Canadian magazine if it lost just 10 per cent of its advertising volume and if its advertising rates were forced down by just 10 per cent because of the discounting by split-run editions. You can see that that profitable magazine turns into a break-even magazine. Of course, HYP&N concluded that the loss of advertising revenue would be much greater than the numbers that I have used here.
The fifth objection is that the Canadian magazine market is underdeveloped for readers; there are not as many Canadian magazines as there should be. First, we have to understand the reason for this underdevelopment. There are two major reasons. One is that the Canadian marketplace is a small marketplace by comparison to the U.S. If you are making the statement that there are fewer magazines than you would like to have based on a comparison with the number of titles published in the U.S., that is partly a "market size" issue. Magazine publishing is a big, fixed-cost business. The smaller the market, the smaller your base over which to spread those costs and the more difficult it is to be viable.
The second factor that probably results in there being fewer Canadian magazines than there might otherwise be is that we do compete in a very competitive market for readers, mostly with American magazines. Thus, we are not only competing among ourselves for our readers, but are competing with these hundreds of American magazines, which makes it difficult to publish in some sectors where there are big presences by American titles.
Whatever the explanation, the answer to this objection is that, whether or not the Canadian magazine market is underdeveloped for readers, allowing foreign publishers to produce split-run advertising editions will make no difference to the number of magazines that are available to readers. Those magazines that would publish split runs are already available in Canada, with mostly 100 per cent foreign content. Giving those American publishers the ability to make incremental profits by selling advertising services would do nothing to bring more magazines into this country or to encourage them to produce Canadian content in those magazines. They are getting the readers without having any Canadian content. Adding Canadian content would just increase their costs and reduce their profit opportunity. There is no reason for them to do it. Therefore, it would have no impact on the level of development of the Canadian magazine market for readers.
That the Canadian magazine market is underdeveloped for advertisers is a notion that there are fewer magazines in this country than there might otherwise be for advertisers to use to reach their audience. You must understand that part of the reason for this underdevelopment is that multinational advertisers in particular take into account the Canadian audiences that they get through the Canadian circulation of foreign magazines. They direct less of their advertising budgets to the magazine medium in Canada than they would otherwise do, because they are getting that spill-over advertising benefit from the foreign magazines.
In fact, the net result of split-run advertising editions being allowed to operate in Canada could be that advertisers end up with less rather than more choice, because they may get a number of split-run advertising editions to be able to use, but they may end up with many fewer Canadian magazines available to them as advertising vehicles because we cannot compete.
The seventh objection is that Bill C-55 is just about protecting the profits of Rogers and Telemedia. Bill C-55 seeks to create an environment in which all publishers, not just Rogers and Telemedia, are protected from unfair trade. All publishers in the private sector need an environment in which, if they do the right job of publishing the right magazine, they can earn a reasonable profit that is adequate to attract investment to the industry. Bill C-55 is every bit as important to an independent publisher as it is to the two major publishing companies.
Bill C-55 is supported by the members of both the Canadian Magazine Publishers Association and Canadian Business Press, which are made up of many more titles than just Maclean Hunter and Telemedia titles.
In fact, if I were to characterize the opposition to Bill C-55, I would say that that is where the profit motive of big publishers comes into effect. The opposition to Bill C-55 is really just about increasing the opportunity for big American publishers like Time Warner, Hearst and other American publishers, who are already making money in Canada, to make even more money regardless of the impact on the Canadian industry and on Canadians' ability to read about themselves in the magazine sector.
The eighth objection is that Bill C-55 is an infringement of the rights of advertisers. Bill C-55 represents no new restrictions on advertisers. In fact, all anti-dumping regulations restrict the ability of purchasers of a good from buying that good at an unfair price to their advantage for the time being. Thus, Bill C-55 really aims to strike a balance between the rights of advertisers to have good channels to reach their audiences and the rights of Canadians to be able to choose to read about their country and themselves in the magazine sector.
The ninth objection is that Bill C-55 is contrary to the Charter of Rights and Freedoms. The Charter, as honourable senators know better than I, allows the government to apply restrictions if the objective is in the interest of the country and if the restriction is the most reasonable means of achieving the objective.
Bill C-55 represents no change in the rights of advertisers and, in our view and the views of people from whom we have had advice on this, does apply reasonable restrictions in the aid of a very important national objective.
The tenth objection is that Bill C-55 contravenes Canada's obligations under its trade agreements. Ms McCaskill will deal with this in more detail, so I will not spend any more time on it. I have already covered the fact that it deals with the issue in a totally different way, with a totally different measure than the measures that were found to be offside the trade agreements.
The next objection is that Canada has lost twice at the WTO. Why does it not just give up? Well, in fact, in issuing its decision on the U.S. challenge to our previous measures, the WTO was very careful to say that it was not ruling that Canada did not have a right to a policy and to measures to protect its cultural identity. It did not say Canada could not have a policy; it simply said that the previous measures were offside the trade agreements. I believe the question that must be asked of someone who would raise that objection is, "Why should Canadian publishers not have the same protection from unfair trade practices as other Canadian industries?"
The twelfth objection is that Canada should not implement Bill C-55 for fear of a trade war. Since Bill C-55 is consistent with our trade agreements, the U.S. has no right to retaliate. If the U.S. does retaliate, Canada can seek remedy under the NAFTA dispute settlement process. We would submit, and feel very deeply, that it is not in Canada's interests, or the interests of our industry or any other Canadian industry, for Canada to give into threats of illegal retaliation.
The final objection is that Canada should seek a compromise that is acceptable to Americans. The difficult part of this situation is that, despite all kinds of very informed and brilliant minds looking for a solution to this issue over the last two years, no one has been able to identify a measure other than Bill C-55 that would be effective in stopping dumping, that would achieve the policy objective of ensuring that Canadians do have access to Canadian content in magazines, and that would be consistent with trade agreements.
In conclusion, we would argue that Bill C-55 should be, and could be, supported by Canadians on the basis of any one or more of the following reasons: First, because there is a belief in the importance of magazine content to the maintenance of Canada's identity and culture; second, if that reason were not important to you for some reason or other, then, because it is a prevention of unfair trade and it is in Canada's economic interest not to allow unfair trade to undermine its economy; third, because it does stand up to protect Canada's rights under trade agreements. Canada has the right to stop foreigners from operating in the advertising services market, and Bill C-55 simply reflects that right.
Since no other measure that is effective and consistent with trade agreements has been identified, Canada should pass Bill C-55, and if the U.S. believes that Bill C-55 is in violation of the trade agreement, then it should challenge it at the WTO, where it won the last time.
I would now ask Ms McCaskill to go through the trade appendix.
Ms Anne McCaskill, President of McCaskill Consulting Inc., Trade Advisor to Canadian Business Press: I wish to elaborate a bit on the key points that Mr. Malden has already made with respect to the trade aspects of Bill C-55. Mostly, I just wanted to reinforce a couple of key points that are based on my own almost 20 years of personal experience as a trade policy specialist and trade negotiator with the federal government, including direct involvement in the Uruguay Round negotiations on the WTO.
First, as does the Canadian government, we believe that Bill C-55 is, in fact, consistent with Canada's international trade obligations. That is because Bill C-55 regulates access to the Canadian advertising services market. It is therefore a services measure. It does not apply to or affect imports of magazines in any way. There will be absolutely no restriction on imports of magazines under this legislation.
In the WTO, therefore, Bill C-55 falls under the services agreement, or the GATS. In the negotiation of the GATS, Canada did not offer, and the U.S. did not obtain or pay for, access to our advertising services market. Canada therefore has no obligations to provide access, nor does the U.S. have any right of access, to the advertising services market.
In the case of NAFTA, Bill C-55 clearly falls within the cultural exemption, which means that Canada is entirely within its rights to pursue this legislation. Also with respect to NAFTA, I believe that the U.S., in fact, would have no right to retaliate under NAFTA in this case against Bill C-55. The word "retaliation" is really a bit of a catch word. What the cultural exemption really talks about is a right to withdraw concessions of equivalent commercial effect, which is somewhat different, but we do use the word "retaliation" as a short form. Under the provision in the cultural exemption, the right to withdraw concessions applies only if the measure would violate a Canadian obligation in the FTA, the original free trade agreement, if not for the cultural exemption. We must look back to the FTA to see if there is anything that would be violated in that agreement by Bill C-55. In fact, as is the case in the WTO with the GATS agreement, Canada assumed no obligations under the FTA to provide access to the advertising services market in the magazine sector. Therefore, once again, Canada has no obligations under the FTA that would be violated by Bill C-55.
We believe that, in fact, if the U.S. were to retaliate against Bill C-55, under NAFTA that would be illegal and Canada would be in a position to challenge, and we expect could successfully overturn U.S. retaliation.
Having said that we do not believe there is a legal basis for retaliation, we would also note that the level of retaliation that the U.S. has threatened is also illegitimate. As I have mentioned, the provision in the cultural exemption is for the withdrawal of concessions of equivalent commercial effect, and the idea here is to right the balance of concessions that was achieved in the negotiation of the FTA if it were upset by a new Canadian measure in the cultural area that benefited from the cultural exemption. However, in fact, there is nothing in Bill C-55 that affects the balance of concessions in the FTA. The measure is consistent with the FTA and would result in no new commercial effects.
Just on a final point that often comes up, the fact that Canada's previous magazine measures were ruled inconsistent with the GATT does not, we believe, mean that Bill C-55 would be ruled inconsistent. As Mr. Malden has said, this legislation is very different in some important ways from a trade rules perspective from the previous measures.
The important point is that the previous measures applied to magazines as goods. The U.S. therefore had an opening to argue that the measures violated the GATT, which is the WTO agreement on goods. It should be noted that the Canadian government disagreed with the WTO finding and described it as seriously flawed, but, in fact, had no choice but to comply. In the context of the finding in the first case, however, the WTO went out of its way to emphasize, to make explicit, that Canada's right to pursue the underlying cultural policy was not at issue in the case.
The appellate body specified that they were looking only at the very specific question of whether the measures being used were consistent with the WTO agreements. In other words, Canada had and continues to have rights and is under no obligation to abandon the underlying cultural policy in the magazine sector or in any other cultural sector, but only to bring its measures into compliance. We believe Bill C-55 does that.
The bottom line is that under its trade agreements Canada does have the right to take measures in support of cultural industries and, more particularly, to regulate access to our advertising services market in the magazine sector. If Canada does not assert those rights, including its rights under the NAFTA cultural exemption, then the reality is that they are meaningless.
On a final point, Canada should not have to negotiate over and over again with the United States. We have paid for our cultural exemption in NAFTA. We should not have to negotiate again or compromise on measures that are consistent with our rights under NAFTA and our other trade agreements.
Senator Lynch-Staunton: It is interesting to see how the witnesses have approached this bill. It is in sharp contrast to the stance of the sponsoring minister who pretty well wrapped it up in the Canadian flag. These witnesses have reduced it to what it is -- basically a trade issue with a Canadian feature, as Mr. Malden said in his summary. Bill C-55 is the prevention of unfair trade, whether perceived or real.
The minister categorized the ongoing discussions in the United States as being more along the line of discussions and not negotiations. We will not quarrel about the proper words. Are you following these discussions or negotiations? Can you give us some insight as to what is happening down there, more than the little we know from the papers or from what the minister can tell us?
Mr. Malden: I doubt that I can give you more insight than you can get from the media. Our understanding is that the Americans would like to have some alternatives to Bill C-55 that would give their publishers access to the advertising services market, despite our trade agreements. They are seeking ways to achieve that.
Our government's view is that there has been no identification of alternatives to Bill C-55 that would be effective and that would ensure a fair and level playing field for Canadian publishers to be able to produce Canadian content. If there are ideas to be discussed, they can be discussed. Our view is that Bill C-55 is the only measure yet identified that is effective.
Senator Lynch-Staunton: You would like the bill passed as is? You do not care to see any amendments or changes to it?
Mr. Malden: That is true.
Senator Lynch-Staunton: We notice that the government is not pushing very hard. Obviously, something is going on in Washington right now; otherwise there would not be any discussions. One of the items admitted as being discussed is a minimum Canadian content, which would exempt this bill.
If a split-run edition had a minimum Canadian content, it would be exempt from this bill. I do not know whether that would be 50 per cent or 80 per cent or 30 per cent, but content apparently is being discussed.
Would you accept that kind of compromise, which, if we interpret the discussions correctly, would be acceptable to the Americans and would avoid the trade war that they have threatened and must be considered here? Would your association accept a proposal that this bill include a minimum Canadian content, however defined, that would allow split-run editions to be exempt from the bill?
Mr. Malden: We understand that there are a number of different measures being discussed in different areas, as you also understand from the press. Content is one of the elements being mentioned. Our view is that the basic issue here deals with content in two senses. First, the policy objective here is to ensure that Canadians have access to Canadian content; second, the absence of the need to produce content in split-run editions creates the non-level playing field.
We cannot comment on specifics, because we do not know what is being discussed.
Senator Lynch-Staunton: This is a hypothetical question so just give me a hypothetical answer. If a minimum Canadian content provision were acceptable to the Canadian government and the American government and were included in this bill, would that be acceptable to your association?
Mr. Malden: It boils down to whether the agreed definition of "content" and the level of content would, in fact, eliminate the unfair trading capability and the unfair cost advantage of split-run editions.
Content is at the core of the issue. We would certainly look for any alternative to Bill C-55 to somehow drive the content objective. I cannot comment on whether a content measure in and of itself, or a content objective, would accomplish the objective and would create that level playing field, because it depends on how it is structured.
Senator Lynch-Staunton: Do Canadian publishers have a policy of Canadian content in Canadian magazines?
Mr. Malden: Canadian publishers, to be eligible as tax-deductible vehicles for advertisers under section 19, are required to produce 80 per cent original content. The fact of the matter is that, because we operate in a marketplace that is so competitive with foreign magazines, our competitive advantage is in producing Canadian content. Although the requirement is for us to do original content, the net result in 90 per cent -- well, that is an inadequately studied number, but virtually any Canadian magazine exercises its competitive advantage by producing Canadian content in competition with the foreign magazines.
Senator Lynch-Staunton: How is Canadian content defined? The current issue of Maclean's magazine does not have 80 or 90 per cent Canadian content, if it is defined as Canadian subjects. Is it defined as written by Canadian authors and photographed by Canadian photographers? Does the subject matter have to be Canadian? What is Canadian content in order to be eligible for that exemption?
Mr. Malden: Section 19 simply says it must be original content. It does not get into specific definitions.
Senator Lynch-Staunton: How is "original" defined? Is it an original piece by a Canadian writer?
Mr. Malden: No. Section 19 simply says that it cannot be the same as content that has appeared in foreign magazines.
Senator Lynch-Staunton: It does not have to be Canadian then?
Mr. Malden: No. The net result is Canadian content.
Senator Lynch-Staunton: I see. That is how Canadian Geographic, for instance, can have a full issue on non-Canadian topics and still qualify for this description. An American magazine could have 50 per cent Canadian topics and yet not qualify.
Mr. Malden: Yes. The practical outcome of that regulation is that Canadian publishers do produce content that is Canadian -- not just in subject matter but in perspective and in reflecting the interests of Canadians.
Senator Lynch-Staunton: I will not belabour the point; I raised it simply because both you and the minister seem to be on the same wavelength when you use the expression "Canadians should be able to read about themselves." That is one of the main arguments she used last week and you picked up on it towards the end of your presentation.
As I understand it from the definition of "original content," it may not mean that Canadians are reading about themselves. It may be that Canadians are reading a Canadian magazine that has original material, or that can be reproduced as original in Canada. That is a long way from Canadians reading about themselves, is it not?
Mr. Malden: I think you have to ask the question, if Canadian publishers were to go out of business because of this unfair competition, would Canadians lose a lot of what both of us would agree is Canadian content? The answer is yes.
Senator Lynch-Staunton: Your presentation is well done. Unfortunately, I did not see it before, so if I am on the wrong track take me off it immediately. This is based on many assumptions, is it not? "If so many people come in with so many split-run editions, this may happen?" But in fact do you know of any major American publishers who are waiting to come in with split-run editions, should they be able to do so without penalty?
Mr. Malden: Yes. Time Warner has clearly shown an interest in doing it, because they did it with Sports Illustrated.
Senator Lynch-Staunton: That is one.
Mr. Malden: The president of international publishing for Hearst, the publisher of Good Housekeeping and Cosmopolitan and other magazines, has expressed an interest in doing that in Canada.
Senator Lynch-Staunton: I remember Newsweek tried to do it some years ago and failed. Thus, it is not exactly a sure thing when you say, "I am going to try it." Newsweek is quite a powerful magazine and they tried twice, as I recall, and finally folded, for whatever reason.
Mr. Malden: They were here and, for whatever reason, they decided not to stay.
Senator Lynch-Staunton: My last question has to do with the definition of "foreign owner." A foreign owner is one with less than 75 per cent of its shares owned outside Canada; is that correct?
Mr. Malden: Yes. Well, more than 25 per cent in Canada, I think.
Senator Lynch-Staunton: Would that not stop a Canadian publisher from selling to a foreigner?
Mr. Malden: Yes.
Senator Lynch-Staunton: Then you are locking in a successful publisher who, for valid reasons, wants to sell and the only buyer he can find is outside the country. Once that is done, all the advantages of Bill C-55 will then be lost.
Mr. Malden: Yes.
Senator Spivak: Good.
Senator Lynch-Staunton: Did I hear "good"?
Senator Spivak: There are different values.
Senator Lynch-Staunton: I think that would penalize the Canadian seller more than it would the American buyer. I was wondering whether you had given some thought to that. Let us say a small publisher has done well and has built up a good business, but has no one to take over -- as happens in a lot of small family businesses; now he wants to sell, but he can only find a foreign buyer. The foreign buyer says, "Sorry, but I will only buy you at a discount, because I have to carry Bill C-55 as a result of my purchasing you."
Mr. Malden: Canadian publishers have been subject to restrictions on their ability to sell to foreigners up until now and they would continue to be. I can only say that the membership of the two major publishing associations representing consumer publishers and business publishers are supportive of this measure knowing that it has that effect.
Senator Lynch-Staunton: Are there restrictions now on the sale of Canadian publications abroad?
Ms McCaskill: Yes.
Mr. Michael Doody, Action Communications Inc.: I am the president of a small publishing company and we cannot sell to foreign people. Canadians have to own 75 per cent of our company. If we have a nice successful company and would like to cash in on it and retire, we have to find a Canadian buyer. We cannot sell to an American or a foreigner.
Concerning the figure of 75 per cent, senator, I think it is the reverse to the way you described it.
Senator Lynch-Staunton: I knew I was not explaining it properly.
Senator Tkachuk: How would you do that?
Senator Doody: We would have to sell to a Canadian, or we would just keep going the way we are and try to get our own employees to buy us.
Senator Rompkey: I am interested in international comparisons, although it may not be possible to find a comparable situation anywhere else in the world, because we sleep next to the elephant, so to speak, and perhaps we are unique. Do you know of anywhere else in the world where this situation pertains, where a smaller country like Canada has laws similar to Bill C-55?
Mr. Malden: I do not know.
Ms McCaskill: We believe that our situation is unique for precisely the reason you mentioned, senator. That is to say, we are right beside the largest magazine market and largest producer of magazines in the world. As well, it is the only country in the world that exports a reasonably significant percentage of its magazine production. The average around the world for exports is about 1 per cent of domestic production in most countries. Generally, magazines are not export products, but are local media.
The exception to that rule is the United States. It exports about 5 per cent of its domestic production, most of which comes to Canada because our market is so close and there are so many common, shared interests.
Senator Rompkey: We are in a unique situation. To your knowledge, no other country in the world faces the same sort of competition that we do in the magazine sector, is that right?
Ms McCaskill: Yes.
Senator Rompkey: Is there any other legislation that prohibits foreign companies from operating in the Canadian services market? This legislation is aimed at the services market. We have changed from goods to services. If there is other legislation, how does it square with NAFTA?
Ms McCaskill: I think there are two sorts of measures that act as restrictions in services markets. First, under the Investment Canada Act, there are foreign ownership restrictions in the magazine sector and in the broadcasting sector. In addition, there are several measures that have the effect of restricting access of foreign interests to services markets, as is the case thus far in the magazine sector. There are restrictions on access of foreign broadcasters to the Canadian advertising services market in the broadcast sector. We also have restrictions that relate to the distribution and retail sectors, particularly with respect to cultural industries.
In all those cases, the approach that has been taken in trade negotiations is that Canada has simply not accepted any obligations in our services agreements that would prevent those kinds of measures, which I said tend to be for cultural policy reasons, from being maintained.
I mentioned earlier that in the case of the magazine sector Canada has no obligations under either NAFTA or the services agreement in the GATS, in the WTO, to provide access to our advertising services market. The same is true for broadcasting, distribution and retail services markets.
Senator Rompkey: This legislation, then, is not unique. It is mirrored to a degree in the broadcast sector.
Ms McCaskill: Yes.
Senator Rompkey: Can you give me some examples in the retail sector?
Ms McCaskill: There are some limitations in the Investment Canada Act with regard to book retailing, for example. There are restrictions on entry into the retailing sector in Canada. Once again, we have not assumed any obligations. In fact, there currently is no multilateral investment agreement at the international level. Essentially, we have not taken on any trade obligations that would limit our ability to maintain our investment policies under the Investment Canada Act.
Senator Tkachuk: I am trying to get a handle on this magazine business itself. The bill is based on the fact that Canadian magazines need protection from U.S. competition and that the competition would be unfair. We have had the fact thrown about that American magazines occupy 80 per cent of newsstand space. When you include subscription sales, would I be right in saying that that figure would be reduced to 50 per cent?
Mr. Malden: The estimate is that 50 per cent of the magazines sold in this country are foreign magazines and 50 per cent are Canadian.
Senator Tkachuk: If I then include freer controlled circulation magazines, it would be even less than that; it might be 20 per cent of the circulation.
Mr. Malden: I do not know that number.
Senator Tkachuk: I am just asking. I am trying to get the information. From what I gather, it is about 20 per cent American readership, if you include all those other magazines that are out there. I get a magazine by the name of Western Living. I do to pay a subscription for it, but it is a Canadian magazine. It is a demographic magazine.
In reality, when we use these numbers of 80 per cent, saying, "Oh, Lord, the world is falling in," it is not quite as bad as people would make it out to be, is it?
Mr. Malden: The "quite as bad" really refers to the competition in the advertizing services market that would take place if split-run editions were allowed to come in. Approximately 30 to 40 American magazines have 50,000 plus circulation in Canada. That is based on a totally objective analysis by the media-buying company I mentioned earlier, which simply said, "Let me pretend that those 50 magazines -- or 30 or 35 magazines -- with that level of circulation or higher were offering advertizing services in Canada in competition to Canadian publishers; and let me plug that into our media-buying model, the computer program that we use to decide which magazines to use. Then let me take a hypothetical advertizing client, and say, "I am trying to reach this kind of a marketplace and I have this big a budget. What would I do with that budget?" In every scenario they came up with, they had as much as 70, 80, or 90 per cent of that hypothetical advertizer's budget going to the split-run editions. Because of the cost advantages, that is enough to do the damage that we are talking about to the viability of Canadian publishers.
Senator Tkachuk: Let us talk about that for a minute. When the minister was here, I was trying to get to that using the Sports Illustrated edition. Well, the minister tried to waylay me with the question of nationalism and the question of whether a person would have the right to buy the bathing suit edition, but I was simply talking about the magazine.
No one in Canada produces an equivalent magazine, so would they take advertizing away from Maclean's or would they take advertizing away from SportsNet and TSN?
Mr. Malden: They would clearly take advertizing away from other magazines.
Senator Tkachuk: Which ones?
Mr. Malden: Maclean's and Chatelaine, for instance, both of which attract car advertizing, as does Sports Illustrated.
Senator Tkachuk: But let me suggest to you that if I am selling cars, or any other product, and I want the competitive advantage of being able to address a particular audience, say for a muscle car, I will want go to a sports magazine that has a strong male readership, because it is not advantageous for me to advertize in Maclean's; however, I advertize there because I have no other choice. Do you think that is good for the car advertizer, or is that bad?
Mr. Malden: It is that balance that the Canadian government has adopted and has tried to achieve over the last 35 years of putting some restrictions on advertizers' ability to use foreign magazines to reach Canadian audiences in favour of ensuring that Canadians have access to Canadian magazines as well as those foreign magazines. That is the trade-off have that has been made.
Ms McCaskill: Could I just add a point?
Senator Tkachuk: Absolutely.
Ms McCaskill:There are two other factors to bear in mind here in talking about the Sports Illustrated question. Although it is true that there is no directly competitive Canadian general interest sports magazine at the national level -- one of the reasons being that it is very difficult for a Canadian publisher to enter that market because it is so dominated by Sports Illustrated -- nevertheless, there is a range of niche sports magazines in Canada. There are magazines about Canadian golf, about boating, about a whole range of other sports. I have certainly spoken with Canadian publishers in the sport market segment, who were immediately and adversely affected when Sports Illustrated began selling advertizing services in Canada. There was an immediate loss of advertizing revenue to Sports Illustrated. So there is an impact in that market segment. Then, as Mr. Malden said, there is also an impact in other market segments, because sometimes the advertizing may be placed in a sporting magazine but also in a general news magazine.
In addition to that there is another very important point: If Canada were to open the advertizing services market in the magazine sector, which has so far not been done, it would be an on-off switch. You could not pick and choose which foreign publishers would enjoy the right of access to the market and could sell advertizing services in Canada. If you opened the market up to one, you would have to open it up to all.
In other words, you cannot really speak only about the specific impact that a Sports Illustrated would have. You would really need to look at what the impact would be right across the board, if the advertizing services market were opened up; and there you would have a range of foreign publishers coming into the Canadian market right across the board. Instead of looking at one case, you would be looking at multiple cases, both in terms of the market segments affected and also in terms of the number of players in the marketplace.
Senator Tkachuk: Let us talk about that. I have a lot of confidence in the Canadian publishing industry. I believe that much of our magazine industry is demographic in nature. We write about golf and about all sorts of things. Muscle Magazine has 90 per cent of its circulation in the United States; 350,000 households in the United States subscribe to Muscle Magazine International. That is a Canadian magazine. Oxygen, is another health magazine and has 90 per cent of its circulation in the U.S. -- 225,000. We produce Owl. We produce good kids' books and magazines. We produce The Hockey News. I do not believe that Canadians are not capable of producing magazines that will sell in the North American marketplace, whether they are about golf or homes or whatever.
Let us go back to Sports Illustrated and maybe Newsweek. Let us say, hypothetically, that Sports Illustrated has a circulation of 250,000 in Canada and Newsweek has 50,000. When they publish in the States, they sell their advertizing space based on the fact that they have a certain total circulation, of which that 250,000 Canadian is a part and is counted in. Is that not right? That is the way it works.
Mr. Malden: No, that is not the way it works.
Senator Tkachuk: Tell me how it works, then.
Mr. Malden: Magazine advertizing is sold on the basis more of audience than of circulation, the distinction being that circulation is the number of copies that you sell by subscription or newsstand, while audience is an estimate. There are companies in the States that do that estimating, and in Canada there is an industry organization that does it. They measure readership and determine, for instance, that Time magazine has five readers per copy. It is that audience that is the basis on which advertizing rates are negotiated by publishers in Canada and the U.S.
U.S. magazines that have Canadian circulation do not have their Canadian audiences as part of their measured audiences, because those firms that do that measurement for them do not come up to Canada and measure that audience. Of course, circulation is there, and they cite an advertizing circulation rate base, but the prime driver of advertizing rates is audience. Many publications have American circulations that more than equal their guaranteed rate base without having to include their Canadian circulation.
Senator Tkachuk: Why does Newsweek magazine, if it does not take that into account, print the extra copies?
Mr. Malden: It makes money through the sale of those copies in Canada.
Senator Tkachuk: Let us use subscription as an example. A company owned by Reader's Digest sells a lot of magazines. I cannot remember the name of it exactly, but it sells magazines in schools.
Mr. Malden: Yes.
Senator Tkachuk: Newsweek gives 100 per cent of their money to that company. Newsweek does not make one dime from that magazine. It all goes to the person who sells it. Why would they go through that whole effort of selling that magazine, from which they make not one dime of money? The same is true with door-to-door sales and sales through telemarketing and Publishers Clearing House. When someone pays $100 for a subscription, they might get $10 or $5 or, in many cases, zero. It all goes to the person selling the magazine. Why would they do that if they did not take that cost estimate into account?
Mr. Malden: Most U.S. magazines that have any significant circulation in Canada do sell the bulk of their circulation through newsstands; so that agency-source type of circulation you are talking about is not a big part of those magazines' circulation in Canada. Therefore, they make money on their circulation by selling it on the newsstand.
Senator Tkachuk: How much money would Newsweek make out of the $4.25 Canadian that I pay for my Newsweek magazine, after you take out the newsstand cost, transportation, shipping, and the rest of it?
Mr. Malden: The numbers I provided here as the actual numbers for a Canadian magazine are for Flair, which is our fashion magazine, and one of the reasons I used it is that Cosmopolitan magazine is comparable in audience and circulation size to Flair. I was trying to set up a real-world comparison. For Cosmopolitan, as I estimate their costs of printing the copies for Canada and what they would net from their newsstand revenues, they do make a profit in Canada.
Senator Tkachuk: I have one last question. Time has been here since 1948 or 1947?
Mr. Malden: I am not sure when.
Senator Tkachuk: It has been here for as long as I can remember. Maclean's magazine went from a monthly to a weekly and is very successful. It has used the money from its success to buy all kinds of cable companies, which is another monopoly. How did they do that? How did they compete against Time and succeed?
Mr. Malden: Time magazine, as I mentioned earlier in the presentation, has not chosen to use deeply discounted advertising rates. It is the single split-run edition magazine operating in this market and, as such, does not need to use those cost advantages to attract a share of advertising that produces its optimum profits. Maclean's is operating in a competitive, but fairly competitive, environment, not just with Time but with all other magazines with which it competes for advertising. What we are talking about here is the threat of 20 or 30 publications coming into this market with those cost advantages and doing what Sports Illustrated did when it was here, which is sell advertising at rates well below what it charges in its home market. That is a documented fact and it did it because it was new to the market and was aiming to gain market share.
Senator Tkachuk: Don't try to fool us. I like questions answered honestly. Almost every publication, when it starts, discounts advertising. Newspapers, when they start, discount advertising, and so do magazines until they build their circulation, because they are losing money until they get rolling, and then they try to come up with some average price that reflects the marketplace. They all do that. Sports Illustrated did not do this in particular because it was an American magazine and came in here to try to get everyone.
Mr. Malden: I do not think it is normal, even for a start-up magazine, to charge rates 70 per cent below the normal rate in the market place. That would just be suicidal.
Senator Joyal: Bearing in mind your experience in the Canadian publishing market, I wish to draw your attention to an article that was published in the Mirror, the Montreal weekly magazine, about the market conditions of Canadian magazines. The article says:
There was some bad news for major Canadian magazines this month: circulation is down, way down.
According to Masthead ("The Magazine About Magazines"), "it was a slaughter out there on the newsstands" in 1998. For example, over at the Canadian edition of Time, newsstand sales dropped by 41.6 per cent. At Maclean's, the loss was 39.1 per cent.
The losses were pretty much all across the board: magazines as diverse as Chatelaine, Canadian Living, Canadian Geographic... L'Actualité... Toronto Life Fashion and The Hockey News all had poor showings. Among the few mass circulation mags to post increases were Reader's Digest...
and so on. Further on, the article states:
Not that the plummeting circulation has hurt the big mag's advertising sales: As Masthead notes, "most of the country's leading titles performed exceedingly well" and experienced "remarkable growth." Which means that Canadian advertisers are pumping more and more money into lame mainstream magazines that fewer and fewer people are reading.
How do you reconcile the fact that, on the one hand, it seems that the advertising business is booming and advertisers are looking for magazines, while, on the other hand, the Canadian public seems to question their use of Canadian magazines in a substantial way? When a drop is 40 per cent, I feel that it is certainly substantial. We are almost close to 50 per cent. How do you reconcile the situation of the magazine industry presently in the context of the discussion that we are having?
Mr. Malden: I did not see the article. I gather from what I heard you read that they were talking about newsstand sales as opposed to total circulation. In fact, the whole newsstand environment, both for Canadian and American publishers, has been very volatile in the last couple of years because of industry consolidation and wholesalers taking over other wholesalers and so on. That has had an impact. I think overall sales of magazines in North America on newsstands are probably about flat to a little bit down, partly because of that phenomenon and partly because of new magazines coming in and taking away market share for newsstand sales.
In fact, though, our total circulation, including subscriptions for our magazines, is roughly stationary. Maclean's magazine sells in total 500,000 copies per issue, of which I think last year we averaged 20,000 newsstand sales, with all the rest being subscription. If we experience a 10 or 15 per cent decline in newsstand sales, it is a very much smaller percentage of our total circulation. As newsstands have gone through this turmoil and had this impact on unit sales, not just of our magazines but of others, we have worked harder to generate subscriber circulation. We are doing okay in terms of maintaining our circulation levels and maintaining our audiences and the number of people reading our magazines.
Advertising has been on an upswing for the last two or three years, because we have come out of the recession. The year 1998 was a good year relative to the previous year and left most Canadian publishers with acceptable, but not exceptional, profit margins.
Senator Joyal: We have heard the figure of $160 million in advertising sales that could be drawn by foreign magazines; is that a figure you agree would represent what, in fact, the foreign magazines could draw from the market at this point in time? Do you agree that, in fact, we are looking at that segment of the money that advertisers are putting in the market?
Mr. Malden: The estimate of total advertising revenue in magazines in Canada, both trade and consumer, is $500 million to $600 million. If you take that number and apply the Harrison Young conclusion that at least 40 per cent of revenues could shift to foreign magazines if they were publishing split-run editions, then you are somewhere in the ballpark of $150 million to $200 million.
Senator Joyal: What I would like to try to get from you, from your experience, is whether that $160 million is targeted to very specific magazines or is spread in so many bits and pieces that we cannot measure the impact on some kinds of magazines? Are some magazines more attractive in comparison to others that do not really attract advertisers? In other words, that money would have a major impact for some kinds of magazines and much less impact for others.
Mr. Malden: Except for cultural sorts of magazines that are supported largely by their readers, almost all publishers depend for their survival on advertising revenues. When Sports Illustrated was operating in Canada, a fellow who was associated with a maritime regional outdoors type of magazine told me that he specifically lost two or three accounts because they consolidated revenues from a number of publications in order to put into Sports Illustrated.
There is a belief on the part of most publishers who do depend on advertising revenue that split-run editions would do damage to them as well. It would not be restricted to one category or one size of magazine.
Mr. Doody: Mr. Malden is absolutely right. There would be quite a severe effect on our ability to publish magazines if we lost even 10 per cent or 15 per cent of our revenue because of split-run editions coming into Canada and covering our markets. We do not have the same situation, because ours are all controlled circulation magazines. They go free to the recipients and we do not depend at all on newsstand sales or subscriptions. Advertising revenue is the entire, critical thing to us.
Senator Joyal: Are you telling us that such a small difference as a 5 per cent or 10 per cent decrease in revenue, because of a lack of advertising or a rechannelling of advertising, could threaten the life of some of your members?
Mr. Doody: Five to 10 per cent probably would not; however, 10 to 15 would. It is that critical.
Senator Joyal: What is the profit margin normally of a magazine? Is it true that half of the magazines do not make a profit?
Mr. Doody: I have heard that. We do better than that. We would be 7 to 10 per cent, probably.
Mr. Malden: It is marginal.
Senator Joyal: In other words, if I understood your answer correctly, for most of the magazine industry such a small margin would even threaten the life of some magazines, perhaps many of them.
Mr. Doody: Yes, I believe it would.
Senator Joyal: Have you ever determined which of the magazines in Canada is the largest and which magazines are totally self-sustaining, as opposed to just breaking even or making only a small profit, or perhaps not even making a profit at all? Can you tell us that from the figures that you seem to have at your disposal?
Mr. Doody: When we refer to an independent publisher, we are usually referring to someone who is not Maclean Hunter, Southam or Telemedia. Among the independents, Action Communications Inc. has five magazines; some of them have one, two or three magazines. The independents cannot take a big hit in advertising revenue, because that is all they have to live by.
Does that answer your question?
Senator Joyal: Yes. However, if you could give more precise answers in terms of the variety of magazines, that would certainly be more enlightening, if that is information you have. Give us some examples so that we can try to understand what you say.
Mr. Doody: We have one magazine that is aimed at the metal working industry in Canada; another goes to the electronics industry. We have one for design engineering, which is product design and development in this country, and we have a woodworking magazine in Canada. We also have a general industrial magazine that we publish in French. That is the safest one of the bunch, because foreign publishers are not likely to enter that market.
As an aside, in the woodworking field, for example, through the efforts of our publisher and editor we have been instrumental, and at some cost to us, in establishing with Industry Canada a degree-granting course at the University of British Columbia in woodworking. That is an engineering degree. It is really the only co-op woodworking course in North America. The magazines that we publish certainly have an effect on what is happening.
Senator Joyal: You seem to know that magazine very well. What revenue is drawn from the advertising?
Mr. Doody: That particular magazine would probably do approximately $600,000 a year in advertising revenue.
Senator Joyal: On a budget of how much?
Mr. Doody: That would be our gross revenue. Out of that we pay salaries and printing bills.
Senator Rompkey: That would be 100 per cent.
Mr. Doody: Yes.
Mr. Malden: The second table in the appendix shows the numbers for one of our business publications, which happens to be one serving the printing industry. You can see that it has total revenue of $1,200,000; of that, $1,100,000 is advertising, and I have a line called "other" for the difference, most of which is for providing services like preparation of ads for advertisers; so it is virtually all advertising-related revenue, because that magazine has very little paid circulation.
Last year that magazine reported a profit margin of 14 per cent. That is above average for our division of 30 some business publications. The average for Maclean Hunter -- and we think we are successful publishers in business publishing -- is somewhere around 10 per cent. As Mr. Doody said, if advertising dries up, you can save costs. If you are selling fewer pages then you will print fewer pages; therefore, you do save some costs. However, a big chunk of the cost of publishing is fixed costs. You pay the publishers and editors, et cetera, so there is not lots of room to cut costs when your revenues or your ad rates fall or your volume falls.
We experience that in cycles. Publishing is a cyclical business; many of our magazines that are today making decent margins were losing money during the early 1990s just because the advertising was not there. The threat of split-run editions is that that would not be a cyclical phenomenon, but would be a permanent one. We know we can lose money on these publications if advertising is not up to the adequate volume.
Ms McCaskill: We do have some material that we could perhaps make available to you that would provide more background in terms of the industry and the structure of the industry. We have been using a few examples that probably are above the industry average in terms of profitability. There are approximately 1,500 titles. The vast majority would be small to medium-sized publications; if I am not mistaken, the industry average in Canada in terms of profit margin is approximately 4 to 5 per cent overall.
The examples which Mr. Malden has presented are intentionally examples of relatively successful publications, just to illustrate that even a successful publication would be adversely affected pretty quickly in terms of the impact on advertising revenues if there were foreign publishers competing with discounted pricing in the advertising services market. That is an example of a successful magazine with an above-average profit margin, just to show that even a strong performer like that could be adversely affected. Of course, profit margins for many other publishers in Canada, who are smaller, would be much less than what you are seeing here.
Senator Joyal: Perhaps you could provide that information to our colleagues on the committee. Certainly, in terms of the real world, they would be interested to see exactly what it means, because we are talking about an industry as a whole. What we have in mind is Time magazine, Sports Illustrated, Reader's Digest, the big ones, but in fact those do not make up the reality of the things at which this legislation is aimed. That is why it is has been difficult for us to understand fully the impact of those measures in the real world of the small magazines.
Senator Rompkey: When the witnesses are sending information, could they aim it at regional publications in order to add a nuance to the information sent? Perhaps they could target how these small magazines are distributed regionally. I know that the Atlantic region already has a number of small magazines like Atlantic Business. I would suspect that the small size of that market makes those magazines vulnerable. Can we find out more about that?
The Chairman: Is that information available for forwarding to our clerk, Michel Patrice?
Mr. Malden: We can try to obtain that information.
Senator Roberge: Mr. Malden, you were referring in your presentation to the media firm of Harrison, Young, Pesonin & Newell. They came up with a few conclusions that I found interesting.
First, they say that without Bill C-55, the introduction of split-run magazines would not affect French-language magazines in Canada. Mr. Doody just commented that foreign publishers are not interested in that. Does that also include publishers from France?
Mr. Doody: Those publishers cannot buy our publications.
Senator Roberge: I was referring to the claim that French-language magazines would be unaffected by split-run editions.
Mr. Malden: I do not believe that would be the outcome, if foreign publishers, even of English-language magazines only, were allowed to enter the market and take serious amounts of advertising volume away from Canadian publishers. Many Canadian publications have English and French versions, although they usually have totally different editorial content. For example, we publish Chatelaine in English as well as Châtelaine in French. Their contents are totally different and they are produced for two different markets. However, we sell the advertising in combination. Therefore, an advertiser who is trying to reach the Canadian market in both languages will buy both magazines from us.
If Chatelaine disappeared or Canadian Living and Coup de Pouce, or other examples of those combinations, it would make it very difficult for a French magazine to continue to be viable, because they share a large part of the cost base with their English counterparts. The damage may be indirect. It may not result from French magazines coming into the marketplace from France, but there could be real damage even on the French magazine side.
Senator Roberge: Harrison, Young also concluded that the opening of the Canadian market for split-run magazines would not be harmful to Canadian Business Press. That is a firm that you utilized. They say that, because they would be starting from a zero base, unlike their consumer counterparts, the process would be long, laborious and expensive and that would benefit Canadian business-to-business publishers.
Can you give us your comments on that?
Mr. Malden: We did not utilize the firm. That study was commissioned by Heritage Canada. It is true that they do start largely without significant circulation in Canada, although there are a few publishers who have found it to their advantage to have some Canadian circulation. In those cases, they tend to charge for that circulation as part of their ad rates.
One expected phenomenon is that Canadian entrepreneurs in the publishing sector will strike deals with U.S. trade publishers to take care of advertising sales in Canada. They would arrange the printing of those ads and the binding of those ads into the copies being produced for Canada. Then there would no risk and no effort for U.S. publishers to enter the Canadian market. I am sure that that activity would occur.
U.S. publishers see it as a competitive advantage to serve the Canadian market. For many of our publications, a very high percentage of our advertising comes from south of the border. These are American firms seeking to sell their products and services in Canada. They use our magazines to reach the Canadian marketplace. Those same advertisers, of course, are buying space in the American counterpart magazines and, therefore, they are already doing business with these firms that would end up seeking to publish split-run editions in Canada. They have real cost advantages just because they are there. They are making the selling effort already and they would not have to produce new editorial material and so on.
The impetus for this comes largely from U.S. publishers such as Time Warner and Hearst. However, I have no doubt that intermediate-run foreign trade magazine publishers would also see it as an opportunity.
Senator Roberge: Senator Perrault made some interesting comments when we met with the minister. He was talking about electronic communications, cyberspace, the Internet and such things. The way we receive information has changed dramatically over the last five years.
Are we using outdated methods to solve a problem that will be changed by technology over the next couple of years?
Mr. Malden: We in the publishing business actually do not believe that the Internet will replace magazines as a medium for entertainment and communications, although it might be one phenomenon helping to flatten magazine circulation overall. It is certainly a competitor for consumers' time. We nevertheless believe that magazines will continue to exist and that, as long as they do, in our unique Canadian situation we need to be protected from this potential for unfair competition.
Whether a comparable problem will develop in the Internet sphere, I do not know. The entire role of the Internet in providing information and being a communicator of cultural identity is not clear. I also cannot foresee the business model of successful Internet publishing. There are many more publishers in that sphere who are not making money because they have not yet figured out how to generate revenue than there are publishers there who are making money. I do not know whether that will be an issue in the future. I do not believe it is an issue today.
Senator Roberge: In the future it may be an issue, because technology is moving so rapidly. You can print things easily from the Internet.
Mr. Malden: It may be that advertising will not be the prime revenue source for these sites. We may not have the same issues with Internet publishing as we do with magazines as printed vehicles.
Senator Fitzpatrick: We have been speaking mostly about the impact of this unfair competition on the magazine publishing industry. Perhaps, there is another aspect. We rely in Canada on emerging businesses to develop specific new sectors that rely upon magazine advertising to grow.
If the magazine industry is restricted, then these emerging industries must look for alternative ways of advertising. It has been suggested that to advertise in American publications, whether split-run editions or otherwise, may be too expensive for such industries.
Have you done any studies on potential impacts of new Canadian industries trying to develop their advertising strategies?
Mr. Malden: There are hundreds of Canadian magazines available to advertisers both on the consumer side and on the trade side. The titles that are most likely to do split-run publishing in Canada are those that are direct counterparts to successful Canadian magazines. If those split-run magazines are allowed to operate and use their cost advantage to undercut us until we cannot afford to continue, there probably will be no net gain to advertisers. They would lose the Canadian vehicles that are currently available to them, but they would have these new split-run editions.
The challenge is that you could end up with 30 or 40 split-run magazines in a few major editorial categories, such as women's publishing and so on, and they would take advertising revenues out of Canadian magazines on a broad number of categories. The same is true for the business press. The net result could well be a diminishment of the vehicles available to these Canadian companies to which you are referring.
Senator Fitzpatrick: Do you also think that, once the split-run industry has established itself, those rates would not be so advantageous, as they are attempting to get into the business with split-run opportunities?
Mr. Malden: That is a valid question to ask and to wonder about. There is no doubt that selling advertising in magazines is a competitive business today and would be more competitive then and they would use that cost advantage. If the level of competition diminishes as Canadian magazines disappear, there may be an upward trend in the rates that they charge. They will charge what the market will bear and maximize their profits.
Senator Spivak: I wish to return to the question of trade. I know you said that the United States has no right to retaliate, because Canada has not violated any provision of the FTA. However, in reading newspaper accounts, they have threatened billions of dollars of retaliation. I asked the minister when she was here whether the United States intended to act illegally, and she did not really respond to that question.
Let us suppose the Americans were to retaliate. What would be the total dollar amount in terms of the commercial equivalent, if they actually had the right to retaliate?
Ms McCaskill: There are a number of different scenarios you could look at. To estimate it, you would have to start with the value of the Canadian advertising services market, which is the market they want to gain access to.
As Mr. Malden mentioned earlier, the total value of the advertising services market is roughly $500 million Canadian. Let us say that the U.S. claimed that if U.S. publishers could access that market they would capture 50 per cent of it. If they made that claim, it would counter somewhat the rhetoric that we have heard from the U.S. They have attempted to indicate that U.S. publishers would not really take up much of the Canadian market or draw very much in the way of advertising revenues away from Canadian publishers.
Let us just say, if it came right down to it, that they might argue that they could easily capture 50 per cent of the Canadian market. That would presumably then suggest a commercial effect of $250 million Canadian, which, to put this subject in perspective, amounts perhaps to four or five hours in a day's bilateral trade between Canada and the United States. In the scheme of things, that is a small number.
Senator Spivak: Is it your opinion that the reason for exaggerating this retaliation claim is to pressure Canada into doing something else, which is what they are doing now, namely, negotiating? Is that what you think they are doing? If the compromise they are looking at is to have a minimum Canadian content, then it seems strange to me that the government did not legislate it that way. I do not understand why, or what, they are negotiating, if this is as clear-cut as you have laid out. Why would we then be negotiating anything with the United States? What is your answer to that?
Ms McCaskill: To begin with your first point, senator, I believe that the threats of retaliation are intended to apply political and economic pressure on the government to back down from this legislation. The threat of retaliation is a tool or a lever that the U.S. often uses, not just with us but with other countries as well. Their exaggeration is intended to increase the amount of pressure being applied.
If we are on solid ground in terms of the defensibility of Bill C-55 under trade agreements, which I think we are, then what is the point of negotiations? My recollection of how we got to these negotiations is that a number of months ago the United States said that they thought there were other approaches that they would find more palatable. It was at the suggestion of the U.S. that bilateral suggestions were initiated, with the expectation that the U.S. had some suggestions of alternatives to make. U.S. officials did indicate that they had other ideas and they wanted an opportunity to discuss those. That was how this process of negotiation or consultation got under way.
Senator Spivak: Obviously, that minimum Canadian content provision was one of the options that the government must have looked at in reviewing this legislation. That is obviously less satisfactory, in whatever terms you wish to put it, than this piece of legislation. Would that be a correct assumption?
Ms McCaskill: It is correct to assume that, having reviewed a wide range of options, the government concluded that Bill C-55 was the best approach in terms of its effectiveness and striking the balance between consistency with trade agreements and other kinds of considerations that were taken into account.
Senator Spivak: What impact would this have on our trade stance? Suppose we negotiated a compromise. What impact would it have on the status of our agreements if we voluntarily, or under pressure or whatever, gave up something that we do not have to give up? What impact would that have on other things?
Ms McCaskill: Minister Copps and other ministers have indicated that if an alternative can be found that is effective in achieving the policy objectives of Bill C-55, and it can be properly enforced, then they would be open to considering such an alternative. Basically, the industry has indicated that it would be open to an alternative. The bottom line has always been that any alternative would have to meet the policy objectives of Bill C-55 and be effective in achieving those policy objectives.
Thus far, we have not seen any sign that such an alternative has been found. Bill C-55 is, therefore, still the best approach.
In my view, if Canada, under threat of retaliation from the United States, accepted a compromise that did not achieve, but rather fell short of, the policy objective of Bill C-55, which is the policy that has been in place in this country for over 30 years, then Canada would not be availing itself of or asserting the rights that it has under its trade agreements, including the cultural exemption under NAFTA. That would have important implications -- not only for this particular case, but for future trade issues on which we will deal with the Americans.
The whole purpose of negotiating our trade agreements, both the regional agreement, NAFTA, and also the multilateral agreement, has been to move away from the law of the jungle that previously applied, in which the economically strong essentially called the shots, to a rule of law where we have defined rules that will produce certainty and predictable results. If, when it comes right down to it, we are unable to enjoy our rights, while respecting our obligations under our trade agreements, then we will not be achieving what our trade agreements have been intended to achieve.
Senator Callbeck: My question relates to the examples on page two of your brief where you show that split-run publishing gives the foreign publisher an advantage. That is obvious to see from the examples.
Under the U.S. example, why is there such a difference in the margin as between a consumer magazine and a trade magazine, whereas in Canada they are about the same?
Mr. Malden: When a U.S. consumer magazine publisher already has circulation in Canada, it is generating whatever revenues it is generating from that circulation; if it were given access to the advertizing service market in Canada, it would make its decision on whether to bother coming into the Canadian market, on whether it saw that as a big opportunity or not, strictly on the basis of the incremental revenues it could get and the incremental cost it would incur to get those revenues. It could ignore the cost of printing that magazine, because it is already spending that money to print magazines that are coming in here to get the circulation revenue.
Therefore, in the case of a consumer magazine, its only costs would be the plate changes and stopping the press to change the plates. However, in the case of a business publication, as Mr. Doody and I have both said, most U.S. publishers do not have circulation in Canada because they are a controlled circulation and do not generate circulation revenue. Therefore, they have had no reason to have big circulations in Canada. This reflects that business publishers will have to take into account in this incremental analysis the cost of printing the copies as well. However, they will still save editorial and overhead costs.
The Chairman: Thank you for your presentation and your answers.
Senator Lynch-Staunton: We are still ready to move to clause-by-clause examination, Madam Chairman. I do not know why the government is so reluctant to do so.
The Chairman: Thank you for wanting to move this ahead so efficiently, senator.
Our next witnesses are from Reader's Digest Magazines Limited: Mr. Paul Lalonde, Ms Barbara Robbins, and Mr. Poirier. Please proceed.
How long will your presentation take?
Ms Barbara Robbins, Vice-President, Legal Affairs, Reader's Digest Canada: Since we will try to be as concise as possible, I would have to say about ten minutes. We plan to leave ourselves enough time to answer your questions.
Allow me to introduce to you Mr. Poirier, the President of Reader's Digest Magazine.
Reader's Digest Magazines is the publisher today of Reader's Digest (Canada) and the French-language counterpart but separate magazine Sélection du Reader's Digest. Paul Lalonde, of the legal firm Flavell Kubrick & Lalonde here in Ottawa, has considerable experience in the area of trade and Canada's treaty obligations.
I thank the honourable senators for this opportunity to appear before you this evening on behalf of Reader's Digest and its more than 300 full-time employees in Canada. As we have been a member of the Canadian publishing community in Canada for more than 50 years, we think it is of great importance that our voice be heard on the subject of the bill before you.
I should like to emphasize from the outset that advertizing revenues are an extremely important component of the viability of both Reader's Digest and Sélection. In turn, the success of our magazine product line is the basis, if you will, of the success of the total of Reader's Digest's operations in Canada. It is the fulcrum from which we have grown our success into books, videos, and so on.
I should also like to confirm to you that the voice with which we are speaking, both from a corporate stature and from a publications stature, is a Canadian voice.
I should like to dispel any lingering perceptions that may unfortunately have found their way into the media because of the high profile of this debate and, perhaps, because of a lack of understanding of the Digest that we publish a split-run. We do not publish split-run magazines. Reader's Digest and Sélection are Canadian publications.
Notwithstanding our full support for the policy objectives of Bill C-55, we do have one or two important concerns on the details. People say that the devil is always in the details. I should like to address those concerns with you by taking a brief, concise detour on our structure, both corporate and editorial. It will make comprehension of the issues easier.
In the mid-1970s, when the government of the day brought forth section 19, another magazine policy measure, the executive of Reader's Digest's Canadian operations at the time, with the full support of the American Reader's Digest, took the conscious and deliberate decision that we would do what we had to do to comply, that is, to be Canadian. Thus, Reader's Digest magazine was incorporated with the appropriate and requisite share structures and directorships in place in Canada and thus has it continued until today.
As regards the editorial side, let us step back for a moment. Understand that Reader's Digest publishes a digest, which by nature and definition is a product that reprints to a certain extent pre-published materials from different sources. When the language of section 19 was being proposed, it became quite clear that, unwittingly and unintentionally, some of the language in the drafts would not have allowed for a digest publication, ours or any other. Therefore, we succeeded in sitting down with the revenue authorities and obtaining what we called a ruling or a recipe for how a digest publication can comply as a Canadian periodical and yet continue to publish its unique type of digest product.
The results of that ruling, as they date from the mid-1970s and right through, are such that we have two full-time editorial staffs in Montreal that are buffered and supported by literally hundreds of freelance writers, photographers and translators from sea to shining sea of this country. We have two full-time research staffs who work to produce our content.
On the topic of content, 80 per cent of the editorial content of Reader's Digest and Sélection is material that either we create -- that is, we commission a Pierre Berton or a Jim Hutchison or Margo Pfeiff to do an article for us -- or that we rework from material for which we purchase the rights from publications that are not associated with Reader's Digest. We condense those materials, we adapt them and we put them into our magazine. Given that Reader's Digest has a subscription base right now in Canada of over 1 million, that exercise, and even the exercise of buying up rights, gives a secondary source of income to the Canadian creative community and exposes their work to many more readers and subscribers than perhaps they would have had with their initial publication. We can also give them the opportunity to be exposed in other Reader's Digest magazines throughout the world because of the network that we have.
In short, I wish to underscore the fact that 80 per cent of our content is, if you will, original or derived from sources that are not related to the digest. We have put the magazine together in that format since 1976 or so and we continue on that way today.
Again, it is perhaps because of the digest aspect that misperceptions have persisted about what this beast known as "the digest" is. The important thing to underscore here is that we do not publish a split-run magazine.
When we have addressed the language of Bill C-55, we have not focused on clause 21, which is well known as the grandfathering provision. Given the restructuring that we did and given our editorial practices, not to mention the fact that we have a foundation that helped to establish the publishing program at UBC and that supports schools of journalism throughout the country, we do not feel that we should be content with that kind of status. Given what we have done and the contributions that we make and will continue to make, I think you will agree that it is not fair; we do not deserve to be treated thus. We wish to be treated along with all the other Canadian publishers in the other language of the bill.
That brings me to the two specific points or concerns that we have. They are in the language of clauses 3(2) and 3(3) of the bill as currently drafted. I can remind you that, in all the materials that you have received from us, these matters are addressed in pages 1 to 5, particularly pages 3 to 5.
Clause 3(2) tries to define a foreign publisher and a split-run issue without using the term "split-run." It says that a publisher will be deemed to be a foreign publisher if a substantial part of its publication is published under licence, and so on. The language in clause 3(2), particularly against the backdrop of a company like ours, is ambiguous and raises a certain amount of concern because each monthly issue of our magazine is put together with material that is reprinted and very often under the authority or licences of certain parties. We certainly do not steal that material. We pay handsomely for it and are well recognized, again, as a good financial nourisher of the creative community.
On page 5 of our brief, you will note that we have put forth some language that we feel will help to address the ambiguities that we believe exist in the current language of clause 3(2). We understand that there may be other digests or similar types of publications that may be affected by that same concern.
We proposed amending the wording of clause 3(2) to read as follows:
For the purpose of this Act, a person who, directly or indirectly, produces or publishes under licence or other authority granted by a foreign publisher a periodical which is substantially the same in format and content as a periodical produced or published by that foreign publisher is deemed to be a foreign publisher.
That new wording would address our concern that somehow the type of publication that we have would be misperceived to be a split-run edition.
As we have said, that provision talks about the split-run edition without using those words. It is another way of dealing with the content issue, and the basis for it and its intent are not necessarily wrong. We have been hearing in the media and again here tonight some of the propositions about Canadian content. Leaving aside for the moment the qualifying aspect, there is the question of quantity, of what percentage would be Canadian content. Based on our experience, I suggest that there be a 50 per cent bar. I can say that it would require a very respectable infrastructure and investment in the country to meet a 50 per cent Canadian content requirement. Perhaps this committee could propose a requirement of 50 per cent.
Also, instead of the words "substantial part," it might be worth considering putting in a percentage. Again, there is a lot of ambiguity. From a business point of view, publishers must know what the level is, where the bar is. The bar could be different for each and every one of us.
Clause 3(3) also presents a concern for us, and perhaps for other publications that may not have thought this through. A test for control in law and for control in fact is another way of labeling a foreign publisher. We do not have a problem with that. We understand that. However, on page 5 of our brief, we propose some additional language. That language already exists in section 256 of the Income Tax Act and is thus not unknown. It attenuates, if you will, the bareness and the boldness of those wordings and allows for certain kinds of common business agreements, whether franchises, licences or trademark agreements. In essence, it would assuage concerns by saying that a company that operates under a licence to a trademark with a foreign company that happens to be the owner of that trademark need not be worried unnecessarily that suddenly that trademark agreement will be held up to scrutiny or will be used against it to determine that it is controlled by a foreign publisher.
Those are the two concerns that we have with the language in the bill as currently drafted.
In conclusion, I should like to reiterate our support for the policy objectives of the bill, understanding that we have complied with former policy objectives since section 19 was implemented. We are fully dependent on a current policy objective that translates into postal subsidies by the PAPT program. Please do not hurt us in the current language of the bill or in any further drafts that may occur. Please keep us in mind in your deliberations.
Mr. Paul M. Lalonde, Lawyer, Flavell, Kubrick & Lalonde, Reader's Digest Canada: Honourable senators, if I may encapsulate or recapitulate what Ms Robbins said, she came to me and said, "Look at clause 3(2) and clause 3(3) as my lawyer and tell me if we are okay." Looking at that language, the best I can do in good conscience is tell her, "Probably."
The purpose of our recommendations and of our presentation here tonight is to move that "probably" to a "clearly." We think it is clear that Reader's Digest is entitled to be recognized unambiguously as a Canadian publisher of a Canadian publication or publications, and that is the spirit in which our recommendations to modify the language ever so slightly are made.
We believe that our proposed amended version of clause 3(2) is preferable to the clause as it exists in the bill now. However, as Ms Robbins said, if you wish to make it even more explicit, instead of using language like "substantial," you could put in some sort of definite threshold like 50 per cent. That could also work for Reader's Digest.
Mr. Bernard Poirier, President and Chief Executive Officer, Sélection du Reader's Digest: I will not be making any speeches, but I will answer your questions. In fact, I would like to respond to a question that was asked earlier regarding a subsidiary company we have in Canada by the name of Quality School Plan.
Quality School Plan, or QSP, is a fundraising company fully owned by the Canadian Digest in Canada. Someone was asking that before.
Senator Maheu: How does the Canadian version of Reader's Digest differ from the American edition?
Ms Robbins: Your question could also be applied to the British and French versions, since many editions of this magazine are published, not just the U.S. edition.
Our Canadian publication is unique. Each month, our team of editors sit down and decide on the content of Reader's Digest and Sélection, relying on a number of factors, while complying with the 20 per cent content rule, as spelled out in the Income Tax Act, and our own ruling. We can reproduce articles taken directly from another edition of Reader's Digest, whether the U.S. or the Polish edition.
As for the remaining 80 per cent, it is comprised of a mix of original articles taken from such publications as National Geographic, Canadian Living, Chatelaine and The Economist.
Senator Maheu: Occasionally, Reader's Digest publishes a condensed version of articles taken from other publications. Do you view these abridged versions as having Canadian content?
Ms Robbins: Yes, absolutely. First of all, our product involves reprinting in a condensed format previously published material. This is not something we do haphazardly. We do not go about striking two or three paragraphs from these articles for the fun of it. We seek out a Canadian or Quebec perspective, without trying to make any political statements. We peruse articles to find relevant anecdotes and so forth. If the article did not originate in Canada, publishing it nevertheless always involves some work by Canadians, whether it be by our full-time staff, or by our freelancers in Quebec or elsewhere.
Senator Maheu: Amendments were made to Bill C-55 by the House of Commons standing committee. Are you still not satisfied with this bill? Would you like further amendments to be made?
Ms Robbins: We are satisfied with the amendments respecting the share structure and the 75 per cent. The wording of the bill was changed to ensure consistency with the wording of the Income Tax Act. We are completely satisfied, as far as our corporate structure is concerned. However, we are concerned about the two points that Mr. Lalonde and I just mentioned and submitted to the committee.
Senator Lynch-Staunton: What was the government's reaction to your anxieties surrounding clauses 3(2) and 3(3)? Why did they not amend the bill accordingly to respond to those concerns?
Ms Robbins: Frankly, that is difficult for me to answer.
Senator Lynch-Staunton: You did make representations, did you not?
Ms Robbins: I cannot say that we got vociferous dissension, frankly, nor bullish support. It may be that there are still reflections going on. It may be that reflections took place and the jury came in with a negative response, but accepted the ownership one.
Senator Lynch-Staunton: I hope that we will move to clause-by-clause study of the bill sometime this week. If you want changes made, then you should bring us amendments in the form you have suggested and in text form so that we know what the wording should be.
Ms Robbins: On page 5 of the brief we have the language. Page 5 is exactly what we have been submitting to different parties all along. We have the language there. We have redrafted the wording of the clauses exactly as we would prefer them.
Senator Lynch-Staunton: Thus far, the government has not seen fit to accept those two recommendations; is that correct?
Ms Robbins: It does not seem so.
Senator Lynch-Staunton: Why is that? Do they not share the same concerns as you? Do they not feel that there is a potential penalty to Reader's Digest in someone's interpretation?
Ms Robbins: Again, it is difficult to say. We have not been able to hone in on an exact reason. Perhaps there are those who, having been exposed to our publications and analysis, are somehow comfortable and will say, "It is academic. You do not have anything to worry about because I believe that you are what you are and we will not apply this to you." It could be something of that nature. However, the language of the text must stand on its own.
Senator Lynch-Staunton: Do you not think that clause 21 applies to you?
Ms Robbins: Based on our history, we do not feel that we should have to accept a second-class status.
Senator Lynch-Staunton: Is it not better to have a well-protected second-class status than a non-protected first-class status?
Ms Robbins: Clause 21 is there. If you will, it is my insurance policy. We do not feel that clause 21 will disappear. It seems to be carved in stone.
Senator Lynch-Staunton: In effect, you agree that clause 21 protects you, but it gives you a status that you do not accept.
Ms Robbins: Yes.
Senator Lynch-Staunton: However, if you have to accept it, you are protected.
Ms Robbins: Yes.
Senator Lynch-Staunton: Therefore, you wish to change clause 3(2) and clause 3(3) so that you escape clause 21 and reconfirm your status as a Canadian publication rather than be defined as a split-run publication. Is that the basis of your argument?
Ms Robbins: Absolutely.
Senator Lynch-Staunton: I can see that. It is up to the government side to decide whether they wish to follow through on your recommendation which, in effect, is to reconfirm the status that you have so eloquently developed.
Ms Robbins: It is not language that has been drafted personally for us. As we have said, there are other digests in Canada and other hybrid or different types that may also be affected. In some ways, it makes the language clearer and more precise.
Senator Lynch-Staunton: I was a little surprised, perhaps out of ignorance, when I read the definition of Canadian content. At the end of his presentation, Mr. Malden spoke about Canadians knowing each other better through Canadian stories. The minister also made mention of that. I always assumed that that was what Canadian content is about. However, it turns out it is not that. It is original editorial material that is first published in Canada.
Ms Robbins: That is the language of clause 19, yes. It does not use the words "Canadian content."
Senator Lynch-Staunton: Therefore, for the purposes of our discussion tonight, Canadian culture and Canadian identity are not necessarily part of Canadian content.
Ms Robbins: You can say that. However, if you focus on what has happened in the case of the digest, we think we are a success story and a positive byproduct of the language of clause 19. We do nourish the Canadian creative community. We nourish Canadians with stories about Canada, by Canadian writers. There is no question about that. In other words, even without using the words "Canadian content" specifically, the by-product does turn out to be that to a healthy extent.
Senator Lynch-Staunton: You can devote a whole issue to an original story by an American novelist and that would come under the definition of "Canadian content"?
Ms Robbins: It would come under the definition, depending on the circumstances of content not hitherto published possibly, yes.
Senator Lynch-Staunton: I am still reflecting on that one. I feel that we wave the flag and then we realize that we are not talking about the same thing when it comes to Canadian content.
Mr. Lalonde: If I may add, digesting as the Reader's Digest does, is not simply cutting and pasting.
Senator Lynch-Staunton: I am not talking about the Reader's Digest as such. I am talking about what we mean when we say "Canadian content."
I have a great deal of time for Reader's Digest. I worked for a Canadian-owned subsidiary of a foreign company that was more Canadian than many companies I know. So I respect what you have done here and I have no problem with the Reader's Digest. It was just this question of Canadian content, and that is all I have to say for the moment.
Senator Tkachuk: On the Canadian ownership question, could you clarify the relationship between the non-profit foundation and Reader's Digest Association (Canada) Ltd.? There is a parent company of Reader's Digest that trades on the New York Stock Exchange. What do they own in Canada? Can you work it down for me so that I can see how all this fits together?
Ms Robbins: The company that is traded is the Reader's Digest Inc., which is out of New York. It owns 100 per cent of a company called the Reader's Digest Association (Canada) Ltd. The Reader's Digest Association (Canada) Ltd. owns 25 per cent of Reader's Digest Magazines Limited, the entity that is here before you this evening -- which is the publisher, the periodical arm -- and the 75 per cent balance is owned by the foundation.
Senator Tkachuk: The foundation is a non-profit company under the federal statute governing non-profit corporations?
Ms Robbins: Yes.
Senator Tkachuk: There are no shares in the foundation, but there are members?
Ms Robbins: That is correct.
Senator Tkachuk: Who are the members? How many members does it have?
Ms Robbins: That can vary; there is a range. According to the company charter, or by-laws if you will, the understanding is that the members are to be selected essentially as individuals who have an interest in publishing and journalism, because those are the objectives of the foundation.
Senator Tkachuk: They would have some voting rights, would they not? They own 75 per cent of Reader's Digest Magazines. Who represents the foundation at the board of directors meetings?
Ms Robbins: It could be the president or it could be someone who is given a proxy to attend. It depends on who is given the right to vote.
Senator Tkachuk: Let me go through this again, because this is really important. You could have one member, you could have five, or you could have 100. How many members does the foundation have as per in its by-laws?
Ms Robbins: The foundation currently has five members, what we call five directors, but one, possibly, will be designated -- or it can be done through a proxy -- to attend and vote at a meeting of the Reader's Digest Magazines.
Senator Tkachuk: The reason I am asking these questions is to clarify the Canadian ownership question and the 75-25 per cent relationship. It is confusing to me because of the way this is structured.
Who are the five members who are on the foundation? What is their background? Are they business people or writers, or what?
Ms Robbins: Right now they are business people.
Senator Tkachuk: Are they American or Canadian?
Ms Robbins: They are all Canadian.
Senator Tkachuk: Do any of them work for any of the subsidiaries or the related companies of Reader's Digest?
Ms Robbins: Yes.
Senator Tkachuk: All of them?
Ms Robbins: Right now all of them, yes, but it is rotational.
Senator Tkachuk: That is pretty nifty, I think.
Let us say that Reader's Digest Magazines makes a $1 million profit. I use that number not because I know, but just because you can do easy math with it. After taxation, but bearing in mind that it is jumping up some dividends, 25 per cent is $250,000. That goes to --
Ms Robbins: The association.
Senator Tkachuk: That goes upstairs and then that probably goes to New York, right, or wherever the headquarters is located?
Ms Robbins: Yes, there is a path, and it goes up the path.
Senator Tkachuk: I am not sure of this part of the law. Say I am a partner with Senator Fitzpatrick, and he owns 60 per cent of a company and I own 40 per cent; if he creates a dividend for himself of, say, $6,000 and writes himself a cheque for $6,000 from this private company, he is required to give me a dividend as well, because I am a partner. With that in mind, what happens then to that $750,000?
Ms Robbins: It is a dividend that flows to the foundation, but you must remember that charities are non-profit companies and they are regulated in Canada, and audited.
Senator Tkachuk: I know that.
Ms Robbins: We have restrictive by-laws that state the purposes and, therefore, indicate where the money is to go. We have at times been audited. Therefore, I cannot show that the money has gone to you or Mr. Lalonde. I must show that it has gone to Concordia School of Journalism or an institute of technology. It must fulfil the purposes.
Senator Tkachuk: I understand that. What I was getting at is that by Canadian law, in a private corporation, if Senator Fitzpatrick creates a dividend for himself, he is obligated to create the same dividend in proportion to the other shareholders.
Are you, Reader's Digest Magazines, obligated by law to give the non-profit 75 per cent, if you give 25 per cent upstairs to your holding company? Or can you write the whole 100 per cent and then it has no effect whatsoever, which I do not think it does?
Ms Robbins: No, we are not.
Senator Tkachuk: You must give 75 per cent?
Ms Robbins: Yes, to the foundation.
Senator Tkachuk: The foundation can do business, too, can it not?
Ms Robbins: No.
Senator Tkachuk: It does not do any business at all?
Ms Robbins: No.
Senator Tkachuk: It takes three-quarters of the profits of the Reader's Digest Magazines, the net profits?
Ms Robbins: Yes.
Senator Tkachuk: It takes it into itself and donates the money out?
Ms Robbins: Yes.
Senator Tkachuk: It sounds like a heck of a deal. The way I figure it here, over the period of 20 years you have given something in the neighbourhood of $125,000 per year. You claim the foundation has given out $2.5 million to journalism schools, non-profit organizations and high schools across Canada. That is $125,000 per year based on a 20-year period. That would be 75 per cent of your net profits, then, per year?
Ms Robbins: Yes.
Senator Tkachuk: I do not get this. That means Reader's Digest makes $200,000 per year? You are in the wrong business.
Ms Robbins: I did not choose the figures. You chose them hypothetically and then we followed the example down.
Senator Tkachuk: I am following your hypothetical example. How much does it make?
Ms Robbins: Frankly, I do not know how much the magazine makes each year.
Mr. Poirier: It does not quite work that way. Reader's Digest Association gets 25 per cent. The magazine company has a profit to make.
Senator Tkachuk: Of course.
Mr. Poirier: It then gives $100,000 to $200,000 per year to the foundation.
Senator Tkachuk: That is much better.
Mr. Poirier: It then retains in the magazine company the other profit. There is a contract between the magazines and the foundation that it will do the publishing of the magazines. That is the way it works.
Senator Tkachuk: Therefore, there is a contract between the magazine and the foundation?
Mr. Poirier: Yes.
Senator Tkachuk: You do all this to get around Canadian law. It is unbelievable.
Mr. Poirier: In 1976, I was a kid when this law was passed by the liberal government.
Ms Robbins: We respect the law.
Senator Tkachuk: I am trying to point out that Canadian ownership is not quite what it seems.
You have another operation called Quality Service Programs Inc., or QSP, which assists schools and youth fundraising through the sale of magazines and gift products. It is owned 100 per cent, is it not? By which company?
Ms Robbins: It is now owned 100 per cent by Reader's Digest Association (Canada) Ltd.
Senator Tkachuk: That is the Canadian company that is wholly owned by the American parent company; correct?
Ms Robbins: That is correct.
Senator Tkachuk: It is not owned by Reader's Digest Magazines Limited. I want to make that clear, because that was not clear earlier. Who was it owned by previously?
Ms Robbins: It was owned previously with Maclean Hunter in a 50-50 share arrangement.
Senator Tkachuk: And then you sold it?
Ms Robbins: No, we bought the rest of it.
Senator Tkachuk: Sorry. You bought the other 50 per cent.
Ms Robbins: Yes.
Senator Tkachuk: What did you pay for the other 50 per cent to Maclean Hunter?
Ms Robbins: I think that is proprietary information, sir.
Senator Tkachuk:It is just that you put down that you assist schools and youth funding, and, it sounds almost like the Red Cross, and you do that through the sales of magazines and gift products.
Ms Robbins: Yes, we do.
Senator Tkachuk: I would just like my colleagues in the Senate to know that this is a very profitable business. What does it gross, $30 million a year? In other words, it is a business that makes money.
Ms Robbins: Yes.
Senator Tkachuk: You go to the schools, but it is not some charity; it is a profit corporation; it makes money; and kids go out there and they sell magazines for you.
Ms Robbins: Yes.
Senator Tkachuk: That is what they do. You take a piece; they take a piece. They fund their band program, and everyone is happy. Right?
Ms Robbins: Yes.
Senator Tkachuk: I wanted that clarification.
Mr. Poirier: I do not think our submissions ever suggested that Reader's Digest Magazines does not make a profit.
Senator Tkachuk: I did not say that. I am just trying to get at the ownership question. Reader's Digest is a great Canadian company. I like Reader's Digest; don't get me wrong. However, it is controlled by New York.
Ms Robbins: It depends on your definition.
Senator Tkachuk: Let us be truthful. Let us not try to cover it up.
Ms Robbins: That is not true. We are not trying to cover up anything.
Mr. Poirier: We have supplied more executives to Pleasantville, N.Y., than any other digest in the world. I have been with Reader's Digest for 39 years. For 15 of those years I worked in foreign countries. I have opened up countries -- Spain, Portugal, the countries in Latin America, et cetera. There are dozens of executives in Pleasantville who came from Canada. We are a centre of excellence for the entire digest world and we are proud of it.
If you hurt Reader's Digest you are hurting a big institution in Canada that has been flourishing here for years, enabling many authors and digesters to work in Canada. It is a great company to work for.
Senator Tkachuk: Mr. Poirier, I do not argue with any of that. I know you are a great company. You do great stuff. You print here and you employ Canadian writers. That is fine. I do not disagree with that. You are also a good corporate citizen. I did not say that you were not.
Mr. Poirier: No, but there is this question of the United States controlling us. They have been very democratic. They run a global organization where there is a significant amount of autonomy given to each country. In Canada, as the CEO, I run the compa