Disastrous Consequences by Daniel Lobo https://flic.kr/p/bURX6n (CC BY 2.0)

Disastrous Consequences by Daniel Lobo https://flic.kr/p/bURX6n (CC BY 2.0)

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The Broadcasting Act Blunder, Day 7: Beware Bill C-10’s Unintended Consequences

With the introduction of the government’s plan to regulate Internet streaming services, Canadian Heritage Minister Steven Guilbeault has touted new rules that will require companies such as Netflix and Spotify to make mandatory payments in support of Canadian content. The government’s bill also paves the way for the companies to both tinker with what they show to subscribers, so as to increase the “discoverability” of Canadian content, and open their books to Canada’s telecom and broadcast regulator by granting access to confidential corporate information.

The Broadcasting Act blunder series continues today with my recent Hill Times op-ed which notes that although Mr. Guilbeault argues that the changes are long overdue and merely establish a level playing with conventional broadcasters, much of the policy that underlies the new bill rests on shaky ground ((prior posts in the Broadcasting Act Blunder series include Day 1: Why there is no Canadian Content Crisis, Day 2: What the Government Doesn’t Say About Creating a “Level Playing Field”, Day 3: Minister Guilbeault Says Bill C-10 Contains Economic Thresholds That Limit Internet Regulation. It Doesn’t, Day 4: Why Many News Sites are Captured by Bill C-10), Day 5: Narrow Exclusion of User Generated Content Services, Day 6: The Beginning of the End of Canadian Broadcast Ownership and Control Requirements).

For example, the current contributions from conventional broadcasters to various Canadian-content funds are effectively a regulatory quid pro quo: they enjoy a host of regulatory advantages worth hundreds of millions of dollars annually that are not available to Internet streamers. And their contributions are increasingly outpaced by voluntary investments from foreign sources. Mr. Guilbeault concedes that foreign streamers have made significant contributions to film and TV production in Canada in recent years, but he says he wants to ensure they become mandatory.

“Free” money in support of government policy may be hard to resist but Bill C-10 involves at least three potential unintended consequences: less investment in Canadian film and TV production; shrinking competition that results in reduced consumer choice and higher costs and prices; and a trade battle with the United States that could prompt retaliatory tariffs in the billions of dollars.

Reduced spending on production could result from uncertainty about what counts toward the new mandated Canadian-content contributions. The bill contains few specifics about how much spending will be required or what constitutes Canadian content for the purposes of the new rules. With those issues left to the Canadian Radio-television and Telecommunications Commission (CRTC) to decide, it may be years before would-be producers find out.

Mr. Guilbeault has suggested everything could be finalized by the end of 2021, but this is Ottawa: parliament has to approve, the CRTC will have to hold hearings, and there may well be judicial appeals, so a more realistic timeline is 2023, at the earliest. In the meantime, companies that invest in the Canadian market won’t know whether their current spending will meet the regulatory requirements or hundreds of millions more will be required. The uncertainty could lead to lengthy delays in Canadian production and lost jobs during what is obviously a particularly difficult time for the industry.

Although companies such as Netflix are likely to stay engaged in the Canadian market, a myriad of smaller streaming services may not. Britbox, Spuul, Kocowa, and Crunchyroll may not be household names, but they are among dozens of streaming services that have emerged in recent years to serve a global audience via the Internet. Unless the CRTC provides specific exemptions for these niche services, many are likely to forego the Canadian market entirely, given all the new regulatory costs and the implausibility of meeting Canadian-content requirements.

The end result will be less competition in Canada, with multicultural markets especially hard hit by what will amount to a Canadian regulatory firewall. Streaming companies may instead choose to license their content to existing Canadian providers, so as to avoid dealing with the CRTC at all. The new regulations will be a boon to companies like Bell, whose Crave streaming service already promotes exclusive access to foreign content from services such as HBO and Showtime, which it makes available at a premium to subscribers. That may become the model in Canada, with blocked foreign services giving way to content-licensing domestic Internet streaming services indistinguishable from cable television.

On the other hand, if the CRTC decides to exempt these smaller services and instead use its new power to single out specific companies (e.g., Netflix, Amazon Prime, and Disney+), such an approach could lead to another unintended consequence: big retaliatory tariffs under the USMCA.

Canada did negotiate an exemption for the cultural sector in the new trade deal, but using it triggers the possibility of retaliatory U.S. tariffs aimed at any sector. The problem with company-specific regulation – or any regulation that provides advantages to domestic companies – is that it helps establish a credible case for a violation of Canada’s commitment to equal treatment of digital services. As a result, the $800 million that Mr. Guilbeault says he has found for the industry may ultimately be paid by Quebec’s dairy sector or Ontario’s steel industry.

There is no Canadian-content production crisis at the moment, but Mr. Guilbeault’s new bill may well create one.

10 Comments

  1. Another unintended consequence is there will more business for the lawyers and accountants to come up with creative ways to game the regulatory system and have substantively non-Canadian programs (eg – Vikings – made in Ireland, stars foreign actors, and does not tell a Canadian story) classified as Canadian content

    Exemptions based on revenue will have Apple and Amazon allocating less of their bundled revenue to video streaming and more to non-regulated services. Netflix and Disney could split their services into several smaller services each of which would be below the threshold.

    Spending requirements will result in transfer pricing games. For example, Netflix could set up a non-regulated subsidiary which would buy Canadian content and then sell it to Netflix streaming at a greatly inflated price.

    Enough money is already being wasted on gaming the regulatory system. We don’t need to waste more money.

    • You could add to that list of U.S. corporate ‘streamers’, the multi-billion dollar online streaming gaming industry like Steam, Ubisoft – sort of Canadian company, and many others.

  2. From its opening sentence, this post mischaracterizes what is in Bill C-10. The Bill does not propose any new rules that will require companies such as Netflix and Spotify to make mandatory payments in support of Canadian content. On this question, the bill merely confirms powers the CRTC already possesses while signaling the direction the government would like the Commission to take. None of Michael Geist’s “potential” unintended consequences from passage of the bill will come to pass. His latest post amounts to idle speculation which will certainly please economic traditionalists and those who still believe in Internet exceptionalism, but does not add anything to what he has already said.

    There is no more uncertainty created by this bill than by any other Parliamentary legislation of substance. Any new legislation creates uncertainty in the short term as details are worked out. The best way to avoid “marketplace uncertainty” is to leave everything as it is, which is what economic libertarians favour. The bill contains few specifics about how much spending will be required or what constitutes Canadian content because this kind of detail is handled by regulation pursuant to the Act, as is the case now.

    If Bill C-10 passes, existing conditions of licence will immediately be transformed into conditions of service and Canadian broadcasting will continue on its way. Gradually, programming outliers operating in Canada, such as online undertakings, will be integrated into the Canadian broadcasting system in one form or another. In all likelihood, only the web giants will be required to make significant contributions to Canadian production – on a non-discriminatory basis applicable to Canadian and non-Canadian services. The smaller Internet services will be exempted, as they are now. If the federal government is unhappy with the way the CRTC is proceeding, it can issue a policy directive to fulfil its objectives.

    In the recently negotiated CUSMA with the United States and Mexico, Canada renewed the same exemption for the cultural sector that existed in NAFTA. There is no indication that the elements in Bill C-10 to support Canadian content in film and television production could spark a trade war with the United States. CUSMA is basically a retread of the NAFTA, and the United States has never initiated an action of this type under the NAFTA. Nor will it do so under the Biden administration.

    This blog is filled with speculative language – “paves the way”, “could”, “potential”, “are likely”. “may become”, “may well create”, etc. It doesn’t provide any new analysis, it’s part of a polemic that we’ve already heard.

    • Seems to me you are speculating about the impact of the bill as much as Mr. Geist is.

      As far as the bill not giving the CRTC any new powers then why did news agencies report “that the CRTC is to be given express powers to require broadcasting undertakings, including online undertakings, to make financial contributions to support Canadian music, stories, creators and producers.” and that these contributions could amount to $830 M by 2023?

      The existing Canadian content rules have not cost US media companies anything, hence no NAFTA action. The new bill will cost US media companies hundreds of millions of dollars a year, so a CUSMA action is far more likely, even with Biden as President.

      Bill C10 is a major overhaul of the Broadcasting Act that leaves most of the important questions on implementation unanswered. Foreign streaming businesses considering entering the Canadian marketplace or expanding their presence would be crazy not to defer their decision until the new rules are developed and the costs understood.

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  4. Bill C-10 does not propose any new rules that will require companies such as Netflix and Spotify to make mandatory payments in support of Canadian content. It does not alter significantly the definition of “broadcasting”. However, it does circumvent a problem in the existing legislation insofar as the CRTC possessed the authority to supervise and regulate online services, but it could not do this through a licensing process because of the Canadian ownership requirements contained in the government’s Direction to the CRTC (ineligibility of non-Canadians). Drawing on a proposal from the Yale Legislative Review Panel, Bill C-10 gives the CRTC the explicit authority to register online services, request information from them, impose requirements on them, and exempt those whose compliance with those requirements would not contribute in a material manner to the implementation of the broadcasting policy set out in the Act. Arguably, the CRTC possesses some of these powers pursuant to the current Act; Bill C-10 makes them all explicit.

    You say the existing Canadian content rules have not cost US media companies anything, but Michael Geist begs to differ with you. Look at his long list of regulatory and policy benefits enjoyed by Canadian broadcasters and broadcast distributors that are not available to US Internet streaming services operating in Canada. (“The Broadcasting Act Blunder, Day Two: What the Government Doesn’t Say About Creating a “Level Playing Field”) According to Michael Geist, Canadian broadcasters enjoy a host of “regulatory advantages” worth hundreds of millions of dollars annually that are not available to Internet streamers. But as I have suggested in previous comments, these fall considerably short of what the web giants are pulling out of Canada.

    • It is irrelevant whether Bill C10 requires mandatory payments. The Bill directs the CRTC to require internet streamers to spend hundreds of millions of dollars to make, buy, fund, or use legal alchemy to create content deemed Canadian by the CRTC.

      Regulation of business is required when there is sufficient risk of a problem that will cause damage. The problems typically addressed by regulation are inherent lack of competition, health and safety concerns, and financial loss. TV has been regulated because of the inherent lack of competition – the number of channels was limited to 12 when TV was first launched.

      One of the problems with regulation is that it can become entrenched and resistant to its reduction or elimination. The vested interests that profit from the regulation vigorously fight for its retention and expansion. This is what we are seeing with Bill C10. The internet does not inherently limit the number of competitors so the reason for regulating is gone. But the internet does threaten the vested interests.

      Michael Geist has done an excellent job listing the regulatory benefits enjoyed by Canadian broadcasters, but that does not mean the benefits came at the expense of US broadcasters. In fact, simultaneous substitution and competition restrictions also benefitted US broadcasters. Both increased the prices US broadcasters could charge for their TV shows because Canadian broadcasters had greater ad revenue from larger audiences.

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  6. It seems that sole priority government is to create taxes and history has shown us that if any Canadian government; federal, provincial, municipal, or rural can tax something – they will. IMO.

    The telecom giants are still trying to leverage more money from the consumer to force Canadian ‘content’ onto Canadians. IF Canadian content was any good, there would be no forcing us to pay for what we’re not interested in. And they just keep trying.

    Ottawa wants to tax that too! Remember when they promoted a tax on storage devices (disks, HDDs, and s on) to help support suffering Canadian artists, because we MIGHT download copyright songs, movie without paying for it?

    This kind of tax is a penalty for not buying/paying for more Canadian -stuff-.

    ~s~

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