Netflix by Avijeet Sachdev (CC BY-ND 2.0) https://flic.kr/p/9vou6m

Netflix by Avijeet Sachdev (CC BY-ND 2.0) https://flic.kr/p/9vou6m

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Making Sense of the Canadian Digital Tax Debate, Part 2: Mandated Canadian Content Contributions aka a “Netflix Tax”

The series on the Canadian digital tax debate continues with an examination of calls for mandated contributions by Internet video services to support the creation of Canadian content, frequently referred to as a “Netflix tax” (earlier post on digital sales tax). The Netflix tax is perhaps the most politicized digital tax issue, with both the Conservatives and Liberals opposing such a tax during the last federal election. Despite the opposition, the issue continues to resurface as it is regularly raised by cultural groups and was part of the CRTC’s report on the future of broadcast regulation released in the spring.

Proponents of a mandated Netflix contribution typically rely on three arguments: (i) failure to impose fees and regulation on foreign providers represents an “existential threat” to Canadian creative industries since they argue it will lead to reduced spending on production in Canada; (ii) there is a need to “level playing field” for Canadian services competing against foreign providers; and (iii) Europe is moving toward Netflix regulation and Canada should too.

The “Existential Threat”

Proponents of a Netflix tax to support Canadian content production argue that without such a system, Canadian film and television production will be placed at risk. Yet the data demonstrates that there is no Canadian content emergency. Notwithstanding the doomsayers who fear that the emergence of digital services such as Netflix will result in less money for production in Canada, the most recent annual report by the Canadian Media Producers Association on the state of screen-based media production in Canada confirms that financing of Canadian television production continues to hit new heights. The data is consistent with internal government documents, which appear to confirm that Netflix outspends Bell, Canada’s largest broadcaster, on English scripted programming.

Last year, the total value of the sector exceeded $8 billion, over than a billion more than has been recorded over the past decade. In fact, last year everything increased: Canadian television, Canadian feature film, foreign location and service production, and broadcaster in-house production. Canadian television, which some claim is at risk due to services such as Netflix, posted the largest expenditure ever (or least over the past two decades looking back at older annual reports).

In fact, the increase in foreign investment in production in Canada is staggering. When Netflix began investing in original content in 2013, the total foreign investment (including foreign location and service production, Canadian theatrical, and Canadian television) was $2.2 billion. That number has doubled in the last five years, now standing at nearly $4.7 billion. While much of that stems from foreign location and service production that supports thousands of jobs, foreign investment in Canadian television production has also almost doubled in the last five years. The data makes it clear that Netflix isn’t a threat, it’s an opportunity with new money entering the sector.

“Level Playing Field”

According to critics, services such as Netflix have an unfair advantage because they face no mandatory contribution requirements, while broadcasters and broadcast distributors (BDUs) 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 and that the absence of required contributions creates an uneven playing field.

The most apt-comparison to Netflix is not to a broadcaster or BDU, however, 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 frequently 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, for which companies like Netflix may be 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. Creating a mandated system based on false notions of leveling the playing field would require significant additional reforms to ensure that all entrants compete with equivalent regulations.

“The European Model

The third argument for Netflix regulation is that Europe has introduced regulatory requirements on services such as Netflix and Canada should follow suit. While proponents argue that Europe envisions requirements that 30 per cent of the Netflix catalog constitute European programming, those rules are an apples to oranges comparison with Canada. First, the European rules, which do not take effect until 2020, rejected Europe-wide mandated payments, opting instead for optional system. In other words, there is no required European Union Netflix tax. The European Commission states:

The new rules clarify the possibility for Member States to impose financial contributions (direct investments or levies payable to a fund) upon media service providers, including those established in a different Member State but that are targeting their national audiences. This would be a voluntary measure for Member States, not an obligation at EU level.

Second, the content requirements are continent-wide, not limited to a single country. The European requirement of 30 per cent incorporates all 28 European Union member states. Once spread across all member states, the requirement is not particularly onerous since it effectively envisions a few per cent per country of the overall catalog. The percentage of Canadian content on the Canadian Netflix is already comparable to the per-European country amount. In fact, the Commission emphasizes:

We also need to pay attention to new market entrants and small players. The new rules also include a mandatory exemption for companies with a low turnover and low audiences. It could also be inappropriate to impose such requirements in cases where – given the nature or theme of the on-demand audiovisual media services– they would be impracticable or unjustified.

Even as it invests hundreds of millions of dollars in Canada – Netflix maintains that Canada is among one of the top three countries worldwide for commissioning original productions without any regulatory requirements or legislative mandates – the service has become the top target for the Canadian cultural sector. Yet the calls to regulate due to so-called existential threats, level playing fields, or European models ring hollow against an evidence that points to remarkable Canadian cultural success story without new taxes or regulation.

One Comment

  1. Jason Riddell says:

    in my opinion we should be ASKING “what do we want in CANCON?”
    IE are we AFTER JOBS and MONEY in the Canadian economy OR are we wanting CANADIAN “stories” with Canadian “viewpoints” from Canadian writers ETC
    IMHO filming a scripted show IN Canada using SOME Canadian labour written by a US company aimed at the US market is NOT doing “creative Canada” any good

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