Netflix - Generic Photo - Creative Commons by Matthew Keys (CC BY-ND 2.0) https://flic.kr/p/vsTUgA

Netflix - Generic Photo - Creative Commons by Matthew Keys (CC BY-ND 2.0) https://flic.kr/p/vsTUgA

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Netflix Canada and the Misleading Claims About “Level Playing Fields”

Canadian Heritage Minister Melanie Joly’s plan for digital Cancon has attracted considerable criticism, particularly the Netflix commitment to spend $500 million on productions in Canada over the next five years. Companies and commentators have argued that the deal creates an “uneven playing field”, noting that Netflix faces different obligations than Canadian companies for both tax collection and contributions to creating Canadian content. In both cases, however, the uneven playing field argument in favour of Netflix does not withstand even mild scrutiny.

Start with the tax issue. Joly has responded to the coverage by insisting that the Netflix Canada production arm will pay corporate tax. That may be true, but the production arm is unlikely to generate significant revenues (it is producing originals for Netflix, not earning subscriber revenue). The real debate is over the applicability of sales taxes for monthly subscriptions. Services such as Bell’s CraveTV collect and remit sales taxes (GST or HST), while foreign providers such as Netflix and DAZN do not.

This is not a culture-specific issue, however. Rather, there is ongoing work at the international level on developing standards for the application of digital sales taxes. Sales taxes on digital services seem inevitable, but requiring Netflix to collect and remit them without developing a broad-based approach to digital sales taxation makes no sense. Since sales tax revenues go to general government revenues – not specifically to cultural programs – requiring the collection of GST would not directly support Cancon. Further, the competitiveness (or lack thereof) of Canadian online video services such as CraveTV has little to do with the extra consumer cost stemming from sales tax. It is not credible to argue that Netflix subscribers would switch to CraveTV or remain with their cable package merely because the cost of their subscription was increased to account for sales taxes.

More relevant are the efforts to compare the Cancon contributions of Netflix with broadcasters and broadcast distributors (cable and satellite companies). According to critics, Netflix has an unfair advantage because it faces no mandatory contribution requirements, while broadcasters and BDUs both face regulations that require contributions (30 percent of revenues for broadcasters, 5 percent of revenues for BDUs). The critics argue that the Netflix investment in Canada is below either percentage.

The most apt-comparison to Netflix is not to a broadcaster or BDU, but rather to competitive online video services. These services, whether Canadian or foreign, are all subject to the same requirements, namely no mandated Cancon contributions. For example, Bell’s CraveTV, which largely promotes U.S. programming such as Seinfeld and the Sopranos, does not face any Cancon contribution or spending requirements. In fact, the CRTC even created another “hybrid” model in 2015 that allows for distribution through BDU systems and the Internet without any Cancon requirements.

While some prefer the comparison to broadcasters or BDUs (arguing that the service feels similar to Canadian subscribers), the reality is that both Canadian broadcasters and BDUs are subject to mandated contributions as part of a regulatory quid pro quo in which they receive significant benefits for being part of the regulated system. Note that U.S. broadcasters – which provide a better analogy to U.S.-based Netflix as a broadcaster – face no such requirements, having never been subject to Cancon requirements despite their near-universal availability in Canada.

Yet even the supposed unfairness of Netflix contributions compared with Canadian broadcasters and BDUs is unconvincing since it ignores all the advantages those companies receive as part of the regulated system. The advantages – none of which are enjoyed by Netflix – include:

  • Simultaneous Substitution, which allows Canadian broadcasters to replace foreign signals with their own. The industry says this policy alone generates hundreds of millions of dollars in revenues for Canadian broadcasters.
  • Must-Carry Regulations, which require BDUs to include many Canadian channels on basic cable and satellite packages. These rules provide guaranteed access to millions of subscribers, thereby increasing the value of the signals and the fees that can be charged for their distribution.
  • Bundling Benefits, that allow BDUs to bundle less popular Canadian channels with more popular U.S. signals, thereby guaranteeing more revenues to the Canadian broadcasters.
  • Copyright Retransmission Rules, which create an exemption in the Copyright Act to allow BDUs to retransmit signals without infringing copyright. This retransmission occurred for many years without any compensation.
  • Market protection, which has shielded Canadian broadcasters from foreign competition such as HBO or ESPN for decades.
  • Eligibility for Canadian Funding Programs and Tax Credits, for which, as Minister Joly points out, companies like Netflix are frequently ineligible.
  • Foreign Investment Restrictions, which limits the percentage that foreign companies may own of Canadian broadcasters or BDUs and thereby reduces competition.
  • Unlimited Distribution Without Caps or Usage Charges, unlike Internet-based services, whose subscribers often face high data costs for accessing those services.

A so-called level playing field should account for all the advantages that Canadian law provides to broadcasters and BDUs. Companies such as Netflix do not get any of these advantages. Instead, they simply compete in the marketplace against well-established competitors that have the regulatory deck stacked in their favour.

If all of this sounds familiar, it is because it is. Telecom watchers will recall the wireless public relations battle of 2013 when Bell, Rogers, and Telus banded together to fight against the rumoured entry of Verizon into the Canadian market. The prospect of a deep-pocketed global player competing in the sheltered Canadian market struck fear in the “Big 3”, who warned of a “bloodbath” if Verizon was permitted to bid for new entrant spectrum. The companies issued public letters claiming to welcome new competition but only if there was a “level playing field.”  Verizon ultimately abandoned the initiative, but the Netflix Canada debate demonstrates that the “level playing field” strategy remains alive and well.

In the case of Netflix, the danger for the Canadian creative community is that history will repeat itself. Joly has indicated that the government hopes that the Netflix deal will serve as an example for future deals with other global players. Yet as other international giants look at the negative reaction to a voluntary agreement to invest hundreds of millions in Canada, they may conclude that future agreements are simply not worth the headache.

9 Comments

  1. Pingback: Heritage Minister says Netflix’s Canadian production ‘presence’ will pay corporate taxes | Daily Update

  2. Pingback: Heritage Minister says Netflix’s Canadian production ‘presence’ will pay corporate taxes – High Tech Newz

  3. Screw the “level playing field” Netflix should remain as it is. Every provider in Canada are way too expensive on everything. Let Netflix have their no taxes or whatever it is and leave it be. We pay more than almost anywhere in the world for our internet, phones and television. Enough is enough at one point

  4. Pingback: Heritage Minister says Netflix’s Canadian production ‘presence’ will pay corporate taxes - Apple Watch 101

  5. Michael Geist is really pulling out all the stops to defend the indefensible on this one. What a mouthpiece for international capital and laissez-faire everything. It’s appalling. The Netflix deal stinks and everyone knows it. They’re laughing up their sleeves at the rubes who made the deal. Mélanie Joly had never held political office before,a nd two years in she’s redoing Cancon and dealing with Netflix. We got taken to the cleaners, and people like Michael Geist are there to cheer it on.

  6. Fortinbras says:

    Netflix Canada and the Misleading Claims About “Level Playing Fields”

    Michael Geist is a master at setting up straw men which he then tries to dissemble. He targets a false problem and proceeds to resolve it in his favour. The above post is another of those.

    Michael Geist claims that requiring Netflix to collect and remit sales taxes without developing a broad-based approach to digital sales taxation makes no sense. This is obvious. To my knowledge, no one has suggested that Netflix be alone in collecting such taxes. They should be applied to all digital products and services sold in Canada, as they are in Australia.

    Because the New York Times has offices in Canada, I am required to pay Canadian sales taxes on my subscription to its digital edition. If Netflix is going to open a production company in Canada, why should it not collect Canadian sales taxes like any other company with operations in Canada? Why would the Canadian government exempt Netflix from doing what everybody else with offices in Canada is required to do?

    Nobody has said this is a culture-specific issue, and anybody the least knowledgeable about government taxation policy knows that the proceeds from sales taxes go into general revenues. From there, they help to pay for the government’s contributions to the CBC/Radio-Canada, the Canada Media Fund, and all of the other government contributions to Canadian culture, among other government activities.

    As any student in Economics 100 would know, raising the price of a good or service generally lowers its consumption. While it is true that Bell’s CraveTV does not face any Cancon contribution or spending requirements, Canadian subscribers to CraveTV are still required to pay domestic sales taxes. A 15% price differential between two similar services is not insignificant and it is clear that, at the margin, Bell Media’s CraveTV and Videotron’s Illico sur demande suffer from the Canadian sales tax exemption that Netflix enjoys and will continue to enjoy as a result of Canadian Heritage Minister Mélanie Joly’s new digital strategy.

    Here are few other inaccuracies in the above post:

    • Of course, US broadcasters are not subject to Cancom contributions or requirements (quelle absurdité!), but they are subject to BDU fees for access, unfavourable channel placement on BDU systems, to having their programs (and advertising) replaced by Canadian equivalents, and to the benefits of copyright retransmission royalties if distributed in Canada.
    • The hundreds of millions of dollars in revenues generated by simultaneous substitution in Canada have been demonstrated by academic studies over the years, including at least one commissioned by the CRTC.
    • Netflix is potentially eligible for all of the foreign location shooting provincial and federal tax credits in Canada, including CAVCO’s Film or Video Production Services Tax Credit.

    It is clear that the “level playing field” to which critics of Joly’s polices are referring lies within the Canadian regulatory environment. To try to place this discussion in the context of a borderless country where economies of scale and pure economic power would dominate all else is to deny the fundamental nature of the country in which we live.

    The secret Netflix “agreement” is a hoax in which Netflix has agreed to continue doing what it is already doing (or perhaps a little less) in exchange for an exemption from Canadian cultural policy. To place this agreement at the center of the federal government’s cultural strategy is a shameful abdication of responsibility.

  7. Pingback: Netflix wants to ‘set the record straight’ on $500M Canadian deal | Daily Update

  8. Pingback: Netflix wants to ‘set the record straight’ on $500M Canadian deal – High Tech Newz

  9. Pingback: Quebec Digital Sales Tax Bill Demonstrates the Complications That Come With Implementing a "Netflix Tax" - Michael Geist

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