The Online News Act has quickly emerged as one of the government’s biggest policy failures with Canadian news outlets facing lost traffic, lost revenues, and lost competition. The source of the Bill C-18 failure was the government’s seeming inability or unwillingness to game plan the potential outcomes of the law, rejecting criticisms and calls for a “Plan B” by instead relying on the hope that the policy measures would simply unfold as they did in Australia. That obviously has not happened, leading to the growing realization that Meta’s blocking of news links, which has already gone on far longer than it did in Australia, is not a bluff. With Meta out of news in Canada, the government is hoping to salvage the law by convincing Google to pay at least $172 million for news links. Unfortunately, the draft regulations released by Canadian Heritage Minister Pascale St-Onge suffer from the same failures as the law, namely an inability to game plan the potential outcomes of the regulations. 

I’ve already written about how the draft regulations will do little to ensure more spending on journalism and how they are stacked against small, independent and digital first news outlets. But as I read analysis that suggests that Google got what it wanted – a cap on liability – I fear that the regulations are badly misunderstood. In fact, if you assess the competing policy objectives in the regulations and consider how they might actually play out, it becomes hard to avoid the conclusion that they don’t work and may well lead Google to walk away from news in Canada.

First, to be clear, the draft regulations do not create a cap on liability. As I noted in my first post on the draft regulations, they create a floor. In other words, the requirement to contribute the equivalent of 4% of search revenues in Canada – a number pulled out of thin air and never once raised at committee – is the minimum that Google or Meta must contribute to potentially qualify for an exemption from final offer arbitration under Bill C-18.  The 4% figure alone will be problematic given that it sets a minimum standard that is likely to be replicated in countries around the world and lead to billions in new liability.  However, the number is likely to be higher in Canada than the 4% minimum and there is little of the certainty the government promised.

The key to understanding how the draft regulations are likely to play out is to assess three policy choices in the regulations on obtaining an exemption from final offer arbitration that individually may have made sense to the government, but don’t work when applied together:

• The first is the regulation on “fair compensation”, which requires that all deals fall within a 20% band. In other words, the value of the best and worst deals presented to the CRTC must all be within 20% of each other. 
• The second is the regulation on how to determine what constitutes “relative compensation” when comparing deals. As discussed in this post, the relative compensation is based on full-time journalist positions, an approach that is advantageous for larger, more established outlets such as the CBC.
• The third is the regulation on what constitutes a “significant portion” of independent, indigenous or official language community news outlets. The regulations state that a significant portion is met where there is no group of 10 or more independent or official language community outlets or 5 or more indigenous news outlets that have been excluded. 

Why are these regulations unworkable in practice?

Start with the definition of a significant portion of news outlets. The law requires that a significant portion of independent, indigenous, and official language community news outlets benefit from platform agreements and opens to the door to any eligible news business to respond to a mandated “open call” to express interest in a deal. The effect of that regulation is that CRTC’s approval of the platform’s deals can be held up if any ten independent or official language community news outlets (or any five indigenous news outlets) object to the platform offer since without their agreement, the “significant portion” criteria is not met. Therefore, even if Google presents $172 million in deals with all the large news outlets and hundreds of smaller ones on board, just ten independent outlets can scuttle the entire process.  

If a group of ten outlets hold out, the platform can’t simply offer them more money due to 20% band on fair compensation. For example, if they offer a 30% increase, the effect would be to increase the value of many other agreements to restore the 20% band. Once that happens, others may come forward to demand more money and start the cycle anew. Since the 4% is a floor and not a cap, there is no limit to how high the number can go.

Now why might independent news outlets hold out? That’s where the second regulation that defines relative compensation based on full-time journalists comes in. If you are the CBC, that approach works well. But if you’re a small outlet with only a couple of full-time journalists but a large number of freelancers or community contributors, you might reasonably argue that the payment system does not reflect the value of your investment in journalism and you would therefore seek higher payments. But in order to do so, the relative compensation per journalist would increase and, with it, the corresponding 20% band on fair compensation. That would then require other agreements to be renegotiated and this cycle can continue as other groups (including five indigenous or ten official language community outlets) emerge and the number keeps going higher. 

The net effect is a set of draft regulations with understandable policy goals (fair compensation, ensuring smaller outlets are not left out) that may not work in practice. The combination of a 4% floor and regulations that can lead to a steady cycle of increased payments, means that the actual number is likely to be much higher and that there are no assurances of a cap on liability. And without that, Google has already stated that is likely to stop linking to news in Canada. If the government’s goal with the Bill C-18 regulations was to get Google onside and salvage its law, it may be headed the wrong way.