High Noon at the CRTC

In May of this year, the chair of the Canadian Radio-television and Telecommunications Commission acknowledged to a roomful of broadcasters in Cambridge, Ontario, that regulators such as the commission were losing the race against technology. The communications industry, said Konrad von Finckenstein, had “completely restructured itself,” while Canada’s regulatory system was created in “the previous century, before the digital revolution and before the internet.” It was a frank acknowledgement from a man whose job is getting increasingly difficult. The tools in his tool kit are becoming less and less effective.

The immediate source of debate for both von Finckenstein and his audience was new content platforms that have recently made their way into Canada, online services such as Netflix and Apple TV. Offering large catalogues of movies and television shows at a rock-bottom monthly price ($8), Netflix, an American website, expanded to Canada in the fall of 2010. A year later it has a million Canadian subscribers. Analysts started to predict that if Netflix added more television programming with the right to put it online immediately or shortly after it aired on linear TV for the first time, the service could compete with the broadcasting industry.

At that conference, von Finckenstein told his audience of broadcasters that they should not knock on his door asking the commission to do something about an unregulated internet. They would be better off taking those concerns to the federal government, he said, which has the power to make legislative changes to address technological convergence and to determine how to deal with so many new digital platforms. He reiterated his call for the government to move ahead with a wholesale review and merging of the telecom and broadcasting statutes.

But later that same month, von Finckenstein and his board of commissioners appeared to make a concession. The CRTC announced that it would open a consultation on new content platforms like Netflix and Apple TV. Not an official regulatory proceeding, mind you, but a mere “fact-finding exercise” to determine what impact these online platforms, so-called over-the-top services, were having on the Canadian broadcasting system—if any.

Many broadcasters applauded the launch of this consultation. About a month earlier, a secret working group representing 35 broadcasting industry executives (whose membership was later revealed to include people from BCE Inc., Astral Media Inc., the performers’ union ACTRA and others) had sent a letter to von Finckenstein asking him to hold a public consultation on the issue. The regulated broadcasting industry in Canada, they suggested, was beginning to feel the heat.

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The CRTC, which governs Canada’s broadcasting and telecommunications sectors (and in theory, new media), regulates broadcasting by issuing licences. This is the commission’s mechanism for ensuring that Canadian talent, independent production, creativity and cultural expression sustain their place within the Canadian broadcasting system, as mandated under the Broadcasting Act. If you want to broadcast on cable or over Canada’s public airwaves, you must have a licence, and to keep that licence in good standing, you must abide by your licence conditions and CRTC regulations. It is a fairly simple and, traditionally, an effective system.

Regulated broadcasters and broadcast distributors (that is, cable, satellite and, now, ­internet-protocol “IPTV” providers) face a number of requirements under the Broadcasting Act. Programmers must adhere to Canadian content exhibition requirements, ensuring that at least 60 percent of their content per year is Canadian and that 50 percent of it is aired in the evenings. Broadcast distributors are required to contribute a percentage of their revenues, normally about 2 percent to 3 percent, to funds such as the Canada Media Fund, which support the production of Canadian programming. In total, broadcast distributors contributed $368 million to Canadian content development in 2010.

Right now, web services, or over-the-top platforms, do not contribute to CanCon funds. They do not face any restrictions because the CRTC does not regulate the internet. In 1999, the commission issued a new media exemption order that exempted online and digital media services from regulation. It reviewed the exemption in 2008 and, in a decision in 2009, decided to maintain it with another review in about five years or less. In a release at the time, von Finckenstein noted that regulatory intervention was not necessary because “the Internet and mobile services are acting in a complementary fashion to the traditional broadcasting system.” That, of course, was before Netflix came along.

Mandatory Canadian content funding contributions, which cost big broadcast distributors such as Shaw Communications Inc. or Rogers Communications Inc. millions of dollars per year, began to raise eyebrows within the broadcasting industry. Netflix and Apple TV are like distributors. They are growing in popularity. They operate and earn revenues in Canada. Why should they not also contribute?

That point is being raised, increasingly. In March of this year, the House of Commons committee on Canadian heritage issued a report that recommended the CRTC hold a hearing on non-Canadian over-the-top providers to determine whether and how they should support Canadian cultural programming. The Conservatives, NDP and Liberals agreed to the recommendation (the Bloc Québécois argued the proposal as drafted did not reflect the Quebec industry).

The committee report followed calls from Shaw and ACTRA, which, in appearances before the heritage committee for its 2010–11 study on digital media, said over-the-top services should also contribute a portion of their revenues to funds supporting the Canadian broadcasting system. The key culprit, the most common focus of criticism, was Netflix.

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The problem for broadcasting executives was not the apparent competition that Netflix posed on its own. The consensus among industry experts right now is that Netflix is complementary to the Canadian broadcasting system, not a threat to it, just as von Finckenstein concluded in 2009. What executives are truly concerned about is not Canadian content, but what Netflix could represent: the future of broadcasting.

Netflix may be the most popular service of its kind in Canada, but it is not the only one, and the chorus of online options is increasing. Apple Inc.’s iTunes offers streaming television and movie rentals through a computer or the Apple TV box. In September, Google Inc. launched YouTube Movies in Canada, a streaming rental service.

Other services such as Boxee or Roku aggregate online video sources—including shows from free sites such as thecomedynetwork.ca and subscription services such as Netflix or MLB.TV (Major League Baseball streaming)—into a single, searchable portal connected to your television. Canada’s options are only expected to grow, as they have in the United States, where other over-the-top platforms such as Hulu and Google TV are included in the mix.

The web services are called “over the top” because they eliminate the need for a television distributor, or cable guy, if you will, who has served as a key member of the subscription TV value chain. Broadcast distributors deliver specialty channels to television subscribers who select, and pay for, the channel packages they want. For each specialty service carried on cable, the distributor pays a portion to the channel and keeps a portion for itself. Carriage agreements between television distributors and specialty channels are a key revenue stream for cable, satellite and IPTV providers.

But new, online sources of programming eliminate the need for the television distributor. They go over the top of the cable company. The consumer needs only an internet connection (or even a mobile device) and, of course, a willingness to subscribe to, rent or purchase content online. The producers and studios need only websites willing to buy their shows and movies. Television aggregation portals like Boxee or Google TV can find content for consumers and make it easy and searchable. Mobile phone applications can provide TV shows on the go. The future of TV is on demand, online and what analysts call “TV everywhere.”

When content goes over the top, studios and producers can also provide shows directly to subscribers through their own websites or apps. Warner Bros. announced in March that it was launching a new Facebook application (for U.S. members only) that would allow users of the social network to stream the studio’s movies for US$3 each using Facebook’s virtual currency. The service took over-the-top to another level, offering films directly from Warner through an application.

The bypassing of distributors is precisely what a CRTC-commissioned report, authored by independent communications lawyer Peter Miller, warned about last May. The report said Netflix’s acquisition of exclusive content was the first instance of a foreign-owned, over-the-top service bypassing a Canadian distributor and the Canadian broadcasting system. Miller wrote that content providers such as Showtime and HBO may start to wonder whether they are better served by offering their programming directly online rather than selling the rights to a Canadian online distributor.

In October, the commission issued a report on its findings from the consultation, noting that it produced “inconclusive results.” There is no evidence that online distribution is harming the traditional broadcasting system, the report said. The CRTC did not conclude that over-the-top services need regulation. Instead, it opened a “watching brief” on the development and popularity of online content services, and said it will hold another, more comprehensive consultation in the spring of 2012. What the CRTC’s consultation on over-the-top service did reveal is that the regulator is under pressure to do something. We just do not know what that might be and, given that the future of broadcasting is leaving the CRTC behind, commissioners themselves are probably unsure.

Not unsurprisingly, during the consultation some groups and companies called for an extension of the regulatory regime to digital media. But others have called for sweeping deregulation. Shaw, in its brief to the CRTC, called for almost a complete deregulation of broadcast distributors’ Canadian content funding obligations. The company proposed that contributions to the Canada Media Fund be phased out, subsidies scrapped for a CRTC funding mechanism called the Local Programming Improvement Fund and the rules for video-on-demand services deregulated.

Opponents of extending the CanCon funding requirements to over-the-top services also started calling the move a “tax” on Netflix. Google is one opponent of the proposal. The company suggests that, in the new digital environment, we should let go of the idea that Canadian content must be publicly funded, legally required and professionally produced. The company, in its brief to the CRTC, wrote that user-generated videos on sites such as YouTube (owned by Google) may not be “highbrow” expressions of Canadian culture, but they still count, and YouTube does not face any requirements to distribute it.

The CRTC, in theory, has the power to regulate new media. It could lift its new media exemption order and start issuing broadcasting licences for online services—for Canadian ones. One of the problems with over-the-top services is that many of them are foreign-owned websites. How does the CRTC issue broadcasting licences for foreign-owned websites? Under the Broadcasting Act, licensees must be Canadian owned.

In one brief submitted to the CRTC for its consultation, a coalition of cultural groups including ACTRA, the Canadian Media Production Association (CMPA), the Writers Guild of Canada and the Directors Guild of Canada, submitted that the commission, as a regulator, effectively has the influence necessary to impose new conditions on foreign-owned web services.

The brief, written by McCarthy Tétrault partner and broadcasting authority Peter Grant, said the commission could apply aspects of the Broadcasting Act to foreign websites available in Canada. The CRTC could issue mandatory orders for compliance, and if the issue played out in court, Canadian internet service providers could even be found to have some responsibility in their provision of foreign-owned services violating the rules.

Another reason the CRTC has some powder in its keg, Grant reasoned, is that companies—especially publicly traded ones—do not like to be seen in violation of regulations. It does not look good to investors. “There are therefore significant pressures on such firms to bring themselves into compliance,” Grant wrote.

The short answer is that some insiders say the CRTC could place conditions on its new media exemption order. This would mean that, in order to qualify for the exemption, web services, even foreign ones, must abide by certain conditions. One of those conditions could be to contribute a portion of their Canadian revenues to CanCon development funds. Hence the rise of “Netflix tax” opponents.

But the commission is losing its grip. Further questions arise if the discussion is taken to its logical end. What, really, can the CRTC do if foreign-owned web services do not abide by its conditions or orders? Kick the foreign website out of the country? Obviously, no. Block the website from Canada? Does the CRTC really want to get into the business of blocking websites?

Regulatory bodies like the CRTC generally do not feel inclined to deregulate. It is counterintuitive, especially in this case, where the body is tasked with encouraging Canadian cultural expression. But perhaps a simpler if not more controversial answer to the so-called threat of over-the-top services is to level the playing field through across-the-board deregulation, as Shaw daringly proposed.

The approach can be combined with funding. Testifying at a May 2010 meeting of the House of Commons industry committee, Randall Morck, an economics professor at the University of Alberta, suggested that the government could foster greater CanCon production through a combined approach of deregulation and greater funding.

Morck said Canadian content regulations “impose a huge economic cost” and suggested that the government scrap them. This could be combined with a move to lower the foreign investment limits, he said, which would open Canada’s markets, increase economic activity and give the government room to raise the tax base and pump more dollars directly into Canadian production through organizations such as the CBC and the National Film Board.

Netflix is just one service, but it is a powerful symbol of things coming to a head for the CRTC. Eyes are now trained on the commission to see how it will respond to the issue. That response will depend in part on who the Tory government selects as a replacement for von Finckenstein, whose term ends in January. Members of the Conservative government have not been shy about their opposition to regulating services like Netflix.

Whichever policy direction the CRTC takes—whether it is a stay-the-course policy or a move toward new regulation—it will be viewed through the prism of an old institution that, given its existing instruments, is rapidly losing control. As Morck has suggested, it may be time to move away from such a system.

“We can’t control it anymore,” von Finckenstein acknowledged in a public discussion at a conference in Ottawa in early 2010. “From a structure of control, we have to move to a structure of incentives.”