The Globe and Mail’s Simon Houpt ran a column over the weekend titled It’s Time to be Honest: Netflix is Parasitic. The piece received some positive commentary on Twitter, with some suggesting that it provided a counter-view to the Netflix support that has prevailed publicly and politically for several weeks in Canada. Houpt uses some effective imagery (Netflix as a Wal-Mart or Costco behemoth that will lay waste to Canadian film producers in the same way that the retail giants take out “mom and pop” stores), but this post argues that he does not come close to making his case.
The Netflix backlash (also found in Globe pieces from Kate Taylor and John Doyle) can be distilled down to two key concerns. First, that Netflix only produces a limited amount of original content and merely selling access to a large library will gradually mean no new content. Second, that Netflix (unlike the conventional broadcasters) does not contribute to the creation of original Canadian programming and the erosion of that support will lead to the end of new Canadian content. This second concern lies at the heart of the calls for a mandatory contribution by Netflix (referred to by some as a Netflix tax).
I address each of these concerns below, but start by noting that though Netflix is the current market leader, there is every reason to believe that there will be other major players in the video streaming market. In the U.S., Hulu and Amazon Prime already offer large libraries of content, while Showmi (from Rogers and Shaw) is set to launch in Canada later this fall. While some of the online video services are tethered to a cable or satellite subscription, true independent online video services should continue to grow and so long as they offer good value for money, consumers may subscribe to more than one service. This suggests a competitive online video market that competes for both subscribers and content.
That competition is the reason that online streaming services are likely to increase the amount of original content created, not decrease it. Companies like Netflix are funding their own original content (House of Cards, Orange is the New Black) and extending older series that started on conventional television (Arrested Development, Trailer Park Boys), but the bigger source of revenue for new series is that streaming video services will compete for the right to add them to their libraries for streaming purposes. Streaming rights are reportedly selling for as much as $750,000 per episode for top shows, with executives describing it as the “defacto domestic syndication window.”
In other words, shows that might have previously been cancelled or not made due to financial concerns (particularly that the show might not make it to syndication, which often represents a major source of revenue), are now relying on streaming revenue to provide a guaranteed source of income. In fact, this article shows how a combination of streaming revenues, tax breaks, and international sales covered the full production cost of a $3 million per episode show without any advertising revenues. This experience is not limited to U.S. shows. The same article points to Vikings, a Canadian-Irish production that generated significant revenues from streaming deals in Germany and the U.K. The opportunities presented by streaming revenues should excite television producers because there is the potential for a broader array of content (the limits imposed by a broadcaster’s need to fill a schedule are gone) and public interest will be invariably linked to commercial success (make stuff people want to see and streaming companies will pay).
Even with some Canadian success stories, however, critics will still argue that without financial contributions toward the creation of Canadian content from companies like Netflix, Canadian content will disappear, leaving nothing to license to streaming companies. Yet a closer look at the numbers suggests that Canadian productions will continue with or without a Netflix contribution. The data shows that the Netflix contribution would be insignificant relative to the existing financing of Canadian productions. In fact, the largest single source of financing remains the public, which pays for the creation of Canadian content through tax credits and direct government contributions.
Houpt says that Netflix generates $300 million per year from Canadians. Leaving aside the objections to a Netflix tax (online video is not broadcasting, jurisdictional questions about links to Canada, Netflix being unable to benefit from the contribution), assume that online video services are required to contribute at the same five percent rate as the regulated industry. The $300 million in revenue amounts to a $15 million contribution from Netflix.
Would $15 million alter the economics of the Canadian television production industry?
Not even close.
The Canadian Media Fund, the recipient of the contributions, reports revenues of $365 million in its last financial statement (roughly 2/3 from the industry contributions and 1/3 from the government). In other words, the Netflix contribution would be roughly 4 percent of CMF’s annual revenues. That is pretty minor, but CMF itself is only a small part of the overall source of funding for Canadian productions.
The Canadian Media Production Association provides detailed data on the industry in annual economic report. The latest report indicates that spending on Canadian television production amounted to $2.32 billion in its latest year. As the chart below notes, the CMF funding constituted 13% of the total financial cost. Far more important sources of funding come from broadcaster licence fees and the public in the form of federal and provincial tax credits. In fact, the combination of tax credits and the government contribution to CMF means that the taxpayer remains the largest source of financing for Canadian productions.
Taken together, a Netflix contribution of $15 million is only 4% of CMF funding, which itself amounts to only 13% of total television production financing (and the broadcast distributor contribution is roughly 2/3 of the CMF funding or just over 8% of the total financing). The total value of the Netflix contribution to a $2.3 billion industry: 0.6 of 1%. Of course, that is only the “lost” financial contribution and does not factor in the benefits that come from Netflix funded productions (such as Trailer Park Boys) nor the increased value of productions that come from licensing streaming rights.
Yet somehow the absence of less than one percent of funding spells the end of Canadian productions and renders Netflix a “parasitic” enterprise? Hardly. Even if the market grows dramatically – perhaps tripling in size with Netflix and other foreign competitors generating a billion a year – the overall effect on lost contributions to Canadian productions will remain tiny relative to the total expenditures that come from public dollars, licensing fees, and investment from producers.
Houpt concludes by arguing that it is worth having a conversation about the future of television and broadcasting in Canada and the role of Netflix. I agree and would argue that the public outcry against the CRTC’s threat to impose new regulations on Netflix is part of that discussion as is the economic data that points to a multi-billion dollar industry that will not rise or fall based on handouts from online video services.