Canadian Heritage Minister Steven Guilbeault tabled his “get money from web giants” Internet regulation bill this morning. As expected, Bill C-10 hands massive new powers to Canada’s telecom and broadcast regulator (the CRTC) to regulate online streaming services, opening the door to mandated Cancon payments, discoverability requirements, and confidential information disclosures all backed by new fining powers. Given that many of the details will be sorted out by the CRTC, the specifics will take years to unfold. In the short term, the bill creates considerable marketplace uncertainty that could lead to reduced spending on Canadian film and television production and delayed entry into Canada of new services. Once the policies are in place, the end result will be CRTC-approved versions of Netflix, Disney+, or Amazon Prime in which the regulator decides how these services promote Canadian content to their subscribers.
As I wrote over the weekend in a preview of the bill, much of the grounding for this legislation is based on fictions. For example, the government says that a key objective is “fair and equitable treatment as between online and traditional broadcasters” and that the current system “perpetuates a regulatory imbalance that puts Canadian broadcasters at a competitive disadvantage.” Yet the reality is that traditional broadcasters enjoy many regulatory advantages such as lucrative simultaneous substitution rules that allow them to replace U.S. commercials with Canadian ones, foreign investment restrictions that limit competition, must-carry regulations that mandate that certain channels be purchased by consumers in even basic cable packages, copyright rules that legalize redistribution of broadcast signals, and protection to keep U.S. giants such as ESPN and HBO out of the market. Those rules create competitive advantages for Canadian broadcasters, but the government nevertheless envisions equal mandated contributions to support Canadian content.
The government also warns that “the support system for Canadian content is at risk” without reform. The data demonstrates that there has been record setting film and television production in recent years, much of it supported by companies such as Netflix. CRTC chair Ian Scott last year said that Netflix is “probably the biggest single contributor to the [Canadian] production sector today.” The overall financing picture shows an industry that has had record amounts of investment in film and television production with the total amount nearly doubling over the past decade. Further, certified Cancon has also grown in recent years, with the top two three years for certified Cancon television production occurring over the past three years. In fact, last year was the biggest year for French language Cancon over the past decade.
Notwithstanding the weak policy foundation, what is the government proposing?
First and foremost, the government is establishing a new class of regulated broadcaster it calls the “online undertaking.” Online undertakings include any services that transmit programs over the Internet in Canada. However, they do not include social media services or user generated content, an important rejection of a recommendation from the BTLR expert panel (other issues such as digital taxation or link licensing are left to future reforms). These new online undertakings will not be licensed, but they will face regulation from the CRTC. The bill leaves many of the specifics to the regulator, subject to a forthcoming policy direction in which the government plans to direct the Commission to prioritize issues such as support for diversity and inclusion as well as revisit what is considered Canadian content.
All of this places the CRTC in an enormously powerful position. Over the coming years, it will determine how Internet streaming companies must financially contribute in Canada (for example, payments into a general fund to support Cancon or a spending percentage of their own revenues) and how they must promote Canadian content on their services. These companies will be required to provide confidential corporate information to the CRTC and will be subject to audit. The CRTC will have new powers to levy fines in case of non-compliance. Notably, the CRTC’s decisions on these conditions of service cannot be appealed to cabinet. Instead, they will require judicial review and extensive litigation.
In the short term, this bill creates considerable uncertainty that could lead to reduced investment in Canadian film and television production and less consumer choice as potential new streaming entrants avoid the Canadian market until there is greater clarity on the cost of doing business. Canada is set to become a highly regulated market for Internet streaming services and the uncertainty regarding those costs are sure to have an impact. The regulatory process will take years to unfold with a call for public comment, a lengthy hearing, the initial decision, applications to review and vary the decision, judicial reviews, and potential judicial appeals. If any of the appeals are successful, the CRTC would be required to re-examine its decision and the process starts anew.
This lengthy process could have a major impact on investment decisions. For example, if you’re a large Internet streaming company that is already investing $100 million per year in film and television production in Canada, you might delay some of that spending until there is greater clarity on what “counts” for the purposes of meeting your new regulatory requirements. New entrants may also delay entering into the Canadian market given the prospect of significant new spending requirements and regulatory intervention into confidential business information. Canada was once a highly attractive market for new services, but this bill may cause new entrants to rethink their plans.
From the Canadian consumers’ perspective, this decision will ultimately lead to a more expensive CRTC-approved Netflix service. The increased cost side is obvious: someone is going to pay for fees that are projected to run into hundreds of millions of dollars and the safe bet is that it is going to be Canadian consumers. The resulting service will be a CRTC-approved version of Netflix in which the regulator will require services to promote Canadian content directly to their subscribers. This policy raises net neutrality concerns given that the regulator will intervene in the display of content on Internet services.
The creation of a CRTC-approved Netflix seeks to solve a problem that does not exist. The truth is that “discovering” Canadian content on Netflix only requires typing Canada into the search box. That immediately generates a Canadian Movies and TV section that features many shows and movies. Typing “Canadian” generates tabs for Canadian TV Shows, Canadian Movies, and Critically-acclaimed Canadian Movies, Canadian TV Comedies, and much more. For years, the Canadian cultural sector has claimed that Canadians want access to Canadian programming. If true, that provides Internet streaming services with all the incentive they need to ensure that they offer Canadian programming and that it is easy to find. With no long term commitment and plenty of competition, subscribers will leave if they do not find programming that appeals to them. If the culture sector is right, their success in Canada is directly linked to offering Canadian programming and ensuring that their subscribers are able to find it. In this scenario, it is not regulation that drives access to Canadian content but rather subscriber demand.
Yet this market-based approach – premised on the vision that Canadians can create great content that will be funded, distributed, and available to subscribers who want it – is being replaced by a regulated model in which success depends upon intervention from the government and the CRTC. That new approach will cause harm in the short term, increase consumer costs in the long term, and leave behind a market that perpetuates unfortunate perceptions of Canadian content as a weaker product reliant on government mandated support.