Netflix not hurting anyone says CRTC
In releasing the results of its fact-finding exercise on Internet and mobile content, the federal regulator wrote that there was “no clear evidence” that Canadians were cancelling their television subscriptions because of OTT services.
The federal agency also dismissed the charge by members of the Canadian broadcasting industry who argued that Netflix was a Pay-TV operator selling exclusive content in Canada and therefore should be required to adhere to the same rules governing Canadian pay television operators.
The broadcasting industry argued that Netflix and other OTT services were direct competitors to existing Pay television services therefore they should also contribute towards the billions spent annually to prop up Canadian culture.
For example, under licence agreements with the CRTC, BDUs are required to contribute up to 5% of their gross broadcasting revenue to Canadian programming, with 1.5% to 5% to be contributed to production funds.
In early August, Netflix announced that it had surpassed one million members in Canada. At $8 per month, it means that almost $100 million dollars annually is being sent to a U.S. based company without any of those funds helping to support the Canadian Television Fund. If Netflix were subject to the same rules as Canadian pay television firms, they would be required to have contributed at least $5 million to the funds.
While Digital Home has never been a supporter of the Canadian Television Fund, we do believe that Netflix is a pay television provider and should abide by the same regulations and pay the same taxes as homegrown pay television providers such as Movie Central (MC) or the Movie Network (TMN). The only real difference between Netflix and MC or TMN is Netflix is delivered over Ethernet while MC and TMN is delivered over coaxial or twisted pair cable.
In its written statement, the CRTC failed to address the fairness issue and would only say that the broadcasting industry had failed to submit evidence of harm to the traditional broadcast system.
The notion that Netflix and other OTT service is not having a negative effect on Canadian Television producers is, of course, patently absurd. Had Netflix been required to pay the same cultural protection fees as traditional pay-tv subscribers are required to pay then the Canadian Television Fund would be $5 million richer today.
Some would argue that $5 million is a drop in the bucket and an amount that Alain Gourd, chair of the CRTC’s Working Group said “wouldn’t break the bank at this point”, however, it begs the question when will it break the bank?
The CRTC’s failure to create a regulatory environment that is fair to all business participants will put Canadian companies who are forced to comply with onerous regulations and taxation at risk while giving foreign firms carte blanche to operate in Canada. OTT firms that will be able to undercut Canadian providers because they won’t have to pay the same level of taxes.
In a statement, BCE, owners of the CTV television network and Bell TV said: “We continue to believe there should be regulatory symmetry between domestic broadcasters and foreign [over-the-top] broadcasters.”
Discuss the CRTC’s comments in Digital Home’s Canadian Television Industry / Channels and Providers forum.
Below is the full text of the Federal regulators “Results of the fact-finding exercise on the over-the-top programming services
CRTC – Convergence Policy, Policy Development and Research
On 25 May 2011, the Commission issued Fact-finding exercise on over-the-top programming services in the Canadian broadcasting system Broadcasting and Telecom Notice of Consultation CRTC 2011-344. In the notice, the Commission stated that since the publication of Broadcasting Regulatory Policy 2009-329 (the Regulatory Policy), it has been monitoring the development of broadcasting in new media, adding that “over-the-top” (OTT) programming accessed over the Internet is increasingly available to consumers at attractive price points.
In the Notice, the Commission outlined several trends that appear to be emerging on a preliminary basis since the publication of the Regulatory Policy and sought comments on the nature and implications of these trends. To better understand the trends and their implications and to gain an accurate understanding of the evolving role played by OTTservices, the Commission sought submissions from stakeholders, together with any data supporting their findings and/or assertions, with specific consideration for the English-language and French-language markets where applicable, on the following topics:
- the capabilities of measurement and analytical tools to enable a better understanding of OTT programming trends over time;
- trends in consumer behaviour, including the current and projected consumption of programming in the next five years, including Canadian and non-Canadian programming;
- technological trends in consumer devices and network capabilities that will influence the development of OTT programming;
- the possibility that, in the near term, OTT services may cause replacement or reductions in broadcasting distribution undertakings (BDU) subscriptions;
- the opportunities and challenges for the Canadian creative industries associated withOTT services;
- the impact that OTT services might have on the acquisition and exhibition of programming available to Canadians;
- the impact of the growth of OTT services on consumers;
- additional issues or evidence relevant to the contribution of OTT programming services to the achievement of the policy objectives of the Broadcasting Act.
The Commission notes that there have been calls by a range of stakeholders and the Standing Committee on Canadian Heritage urging the Commission to undertake a consideration of the issues raised by the operations of new media broadcasting undertakings providing OTT programming services.
Comments were received from individual Canadians, public interest groups, representatives of the cultural sector, broadcasters and distributors, network operators, vertically integrated communications undertakings and Canadian and non-Canadian providers of OTT services. The complete record of this proceeding is available on the Commission’s website at >www.crtc.gc.ca under “Public Proceedings.”
Changes in the Canadian communications landscape
The Commission considers that the record of the fact-finding exercise demonstrates that significant change is underway in the communications sphere. New technologies, service providers and consumer behaviour underpin a transformation that is characterized by greater choice, a global marketplace and new opportunities for Canadian creators. However, such change is also creating uncertainty concerning established business models and associated support for the creation and presentation of Canadian content, as well as uncertainty for investment and innovation in advanced communications infrastructure.
Parties submitted a range of supporting material to the fact-finding exercise, including market intelligence, analyst reports and public opinion research. Taken together, the evidence provided by parties with respect to the current environment demonstrates that:
- Tools to measure OTT content are not yet adequate to provide a full understanding of content consumption trends. Standards to report OTT programming consumption across the industry have not yet emerged. Parties submitted data that was measured with a variety of tools available in the digital media environment, but none of those tools provided a comprehensive view. The Canadian Broadcasting Corporation (CBC) and Netflix Inc. (Netflix) both noted the shortcomings of consumer surveys.
- The CBC submitted that online video viewership has only recently become large enough to be included in the standard measurement systems and that the development of a measurement system for online viewing is only beginning to emerge.
- Parties submitted a wide variety of evidence relying on various methodologies to demonstrate that consumption of audio and audio-visual programming of the type traditionally provided by broadcasting licensees and now offered by both foreign and domestic OTT services is now a meaningful feature of the broadcasting system and is expected continue to grow.
- Although, as noted above, there are no standards to report OTT programming consumption, all methodologies used (e.g. surveys, measurement of encoded programming and measurement of bandwidth consumption) show a growth in consumption of OTT content.
- Many parties, including the vertically integrated BDUs, Cogeco Cable Canada Inc. (Cogeco), Saskatchewan Telecommunications (Sasktel), MTS Allstream Inc. (MTS Allstream), Teksavvy Solutions Inc. (Teksavvy), the creative groups and some broadcasters noted that Netflix had reached 800,000 Canadian subscribers in less than a year and was projected to reach 1,000,000 subscribers by the third quarter of 2011.
- Astral Media Inc. (Astral), Bell Aliant Regional Communications, LP and Bell Canada (Bell), Quebecor Media Inc. (Quebecor), Rogers Cable Communications (Rogers), Sasktel and Shaw Cablesystem Ltd. (Shaw) cited network traffic studies produced by Sandvine which indicate that online video content comprises the major proportion of Internet traffic.
- Astral quoted a ComScore Report showing that between September 2010 and March 2011, Canadians watched 388 million hours of online video (or 17.2 hours per viewer) each month. Furthermore, a group of parties from the cultural sector stated that according to the TV Trends and Quality Survey, in 2010 close to 31% of the Anglophone population watched Internet TV for an average of 4.5 hours per user per week. Finally, many parties stated that Canadians are the biggest online video consumers in the world. The CBC acknowledged that recent developments inOTT consumption have created a stir and that extension of the Internet to the TV set could happen rapidly. However, the CBC added that OTT consumption is currently modest in terms of total TV viewing based on MTM data.
- With respect to audio programming, RNC Media Inc. (RNC Media) cited Statistics Canada data that in 2009 32% of Canadians listened to web radio. It also stated that based on the results of an IPSOS Survey, as presented by substance strategies, the number of hours spent listening to music through conventional radio (AM/FM) in Quebec is surpassed by those spent listening via digital devices (computer, MP3 player, etc.) by almost 50%.
- The BDUs, broadcasters, creative groups and Teksavvy noted that the majority of Canadian households have a high-speed broadband connection, which is required to use OTT services.
- The BDUs, broadcasters, creative groups and Teksavvy also noted that most Canadians now have the opportunity to consume content when, where and how they want. Canadians are using devices such as PCs, tablets, games consoles, Internet-connected set-top boxes and/or smartphones to access audio-visual and audio programming in a way increasingly akin to a traditional television or radio experience.
- Telecommunications networks may be challenged to support increasing consumption of audio-visual content provided via OTT services.
- Astral, Bell, Quebecor, Rogers, Sasktel and Shaw noted that Canadian consumers are consuming growing amounts of broadband-intensive online video content, referencing reports published by Sandvine.
- The National Film Board (NFB) and the CBC both submitted that bandwidth limitations could limit OTT adoption.
- MTS Allstream noted that it has had to make significant ongoing investment in capacity to keep up with the continually increasing demand for bandwidth, although it could not directly attribute the growth in demand to adoption of OTTservices.
- Some Canadians may be reducing or eliminating their BDU subscriptions but the extent of this and reasons for it are not fully understood.
- Bell pointed to a report by Parks Associates that provided quantitative indications of reductions or cancellations but did not indicate that this had been its experience.
- Shaw and Rogers cited reports that provide forecasts of “cord-cutting” in 2011-2012.
- Quebecor, Pelmorex Communications Inc. (Pelmorex), Bell and Allarco Entertainment 2008 Inc. presented a variety of perspectives with respect to BDU subscriptions that they considered were indicative of a decline in the growth in the number of subscriptions.
- Sasktel noted that it had experienced “cord-shaving” without providing quantitative evidence.
- However, MTS Allstream and Corus Entertainment Inc. noted that they had not experienced “cord cutting” or reductions in subscriptions.
- Some Canadian creators are availing themselves of new media opportunities to reach audiences in Canada and globally.
- Google Inc. (Google), Netflix, Apple Canada Inc & Apple Inc. (Apple), the CBC, the NFB, Teksavvy, Pelmorex and the Canadian Internet Policy and Public Interest Clinic (CIPPIC) submitted that OTT services provide a means of wider distribution for Canadian content. The NFB stated that OTT platforms allow for more innovative content. Teksavvy added that OTT services make niche content available. However, Pelmorex and the creative groups cautioned that Canadian content could get lost in the abundance of content.
- The creative groups submitted that the smaller producers have not had significant success in getting distributed on subscription or transactional OTT services.
- Some OTT providers appear to have established viable business models and revenue streams and are competing in the Canadian marketplace for Canadian rights and viewers.
- On screen Manitoba specifically pointed to Netflix as an example of a viable business model.
- The private broadcasters and vertically integrated BDUs expressed concern thatOTT services with deep pockets and lower cost structures could outbid Canadian players. However, Cogeco noted that it expected the large Canadian vertically integrated BDUs would continue to have an advantage over OTT services in acquiring Canadian programming rights on all platforms.
Some parties stated that there may be a reduction of revenues in the regulated system as a result of “cord-shaving”, “cord-cutting” or reduction of advertising revenues attributable to the operation of OTT services in Canada. Shaw and RNC media presented evidence that showed revenues for private conventional TV declined slightly from 2006 to 2009 but rebounded in 2010. However, they did not demonstrate that the consumption of OTT content was the cause of this decline. Shaw and the NFB presented evidence that showed that pay and specialty revenues have continued to grow over this period.
In contrast, other parties, including Netflix, Teksavvy, Apple and the CIPPIC, stated thatOTT programming was complementary to that of licensed undertakings and that the vast majority of viewing is through services provided by BDUs. They further stated that there was no evidence of viewers abandoning traditional broadcasting to any significant degree in favour of OTT services.
Possible implications of those changes
A majority of parties, including the vertically integrated BDUs, the creative groups and private broadcasters, considered that the operation in Canada of OTT services, and particularly of foreign OTT services, will over time result in a reduction of resources flowing to subsidy funds that support Canadian content. In particular, parties asserted that the trend in content consumption from unregulated sources will cause subscription revenues associated with pay, specialty and video-on-demand undertakings and potentially those of BDUs to decline. Further, they indicated that advertising revenues in a fragmented programming environment may also be reduced, putting downward pressure on the revenues which form the financial basis for Canadian expenditure and exhibition requirements for programmers. Parties also suggested that well-funded foreign entities will increasingly acquire program rights traditionally purchased by Canadian entities.
Other parties, including Netflix, Teksavvy, Apple, and the CIPPIC, asserted that OTTservices were complementary to the Canadian broadcasting system and that in fact licensed undertakings were responding by launching OTT services of their own. A number of parties, including foreign OTT entities, consumers and the NFB, asserted that the environment provided new opportunities for the regulated Canadian broadcasting system and that there were no systemic challenges to preserving levels of Canadian content while fostering consumer choice and innovation. The CBC characterized OTT as another platform with the potential to enable Canadians to access a diverse range of Canadian programming.
Some parties added that developments and trends in the marketplace did not have any implications of a regulatory nature. Other parties argued that in the absence of more robust measurement tools, it was too early to determine the impact of OTT services.
Some parties stated that greater innovation and investment in network infrastructure will be required to keep up with traffic generated by OTT services.
Groups advocating for persons with disabilities pointed out that most programming made available through the Internet does not have closed captioning or video description. They stated that this created barriers for their members. The Canadian Association of the Deaf indicated that the new media platforms offered an opportunity for Canadian broadcasters to provide fully accessible programming online and reach global audiences of people with disabilities.
Policy approaches proposed by stakeholders
Many stakeholders proposed policy options to deal with the challenges associated with growing OTT content consumption; these generally fell into three large categories based on either regulatory or market solutions: a) lowered obligations for regulated entities, b) creating regulatory obligations for OTT providers and c) maintaining the status quo.
A first group, comprised principally of vertically integrated Canadian entities, considered that the competitive landscape was asymmetric in favour of exempt non-Canadian undertakings and that licensed entities are at a competitive disadvantage relative to exempt OTT providers. OTT entities, according to this view, operate without meaningful regulatory restriction, have increasingly better access to capital from global sources to fund their activities and benefit from business models built entirely in response to consumer demands without regulatory restraints on packaging, pricing or selection. This group generally focussed on regulatory solutions, calling for the Commission to act to reduce existing regulatory requirements on licensed entities in order to correct asymmetries in the marketplace. Rogers and Shaw specifically called for a reduction in regulatory requirements on BDU-provided video-on-demand undertakings as OTT services compete most directly with these services.
A second group, comprised primarily of the cultural sector and creative groups, submitted that the primary challenge in this environment would be to maintain support for Canadian programming as audiences fragment to sources that have no requirement to contribute to the creation and presentation of Canadian content. This group proposed a regulatory solution calling for the Commission to act to correct this asymmetry by imposing obligations (e.g. content subsidy contributions, exhibition and expenditure requirements) on exempt undertakings.
One party, Bell, suggested that regulation should be applicable to the “primary” business of a communications entity. That is, in the case of a regulated BDU or broadcaster, regulation should apply to those activities while affiliated OTT providers would continue to be exempt. However, entities that are primarily engaged in OTT programming delivery would have obligations in support of Canadian programming creation and presentation imposed on them.
Parties in a third group considered that no regulatory action is required at this time in support of the achievement of the legislated policy objectives. This group, mainly represented by OTT providers and individual Canadians, as well as the CBC, TekSavvy and the CIPPIC, recommended that the Commission maintain a hands-off approach to encourage innovation and experimentation and competitive responses by licensed undertakings. The NFB stated that there was room to create an alternative Canadian OTTservice that would not compete with the existing commercial sector but provide unique opportunities for the Canadian private production industry and Canadians. Some parties noted that the exemption applies equally to Canadian and non-Canadian entities and that Canadian OTT providers have the opportunity to compete on a level-playing field. Other parties called for a status quo approach – for now – because of a lack of a full understanding of the OTT context.
The Commission considers that the record of the fact-finding exercise demonstrates that significant change is under way in the communications sphere, with potential for further change. New technologies, service providers and consumer behaviour underpin a transformation that is characterized by greater choice, a global marketplace and new opportunities for Canadian creators. Such change is also creating uncertainty with respect to established business models and associated support for the creation and presentation of Canadian content, as well as for investment and innovation in advanced communications infrastructure.
However, the evidence does not demonstrate that the presence of OTT providers in Canada and greater consumption of OTT content is having a negative impact on the ability of the system to achieve the policy objectives of the Broadcasting Act or that there are structural impediments to a competitive response by licensed undertakings to the activities of OTT providers.
The Canadian broadcasting system has been successful at supporting a diversity of programming from a wide variety of independent producers and broadcasters that reflects the Canadian experience. Canadians have access not only to a variety of high-quality Canadian programming, but also to content from around the world. The proposed reduction of rules that restrict how regulated entities package services and make contributions to the system may lead to reduced levels of Canadian content and loss of diversity in the broadcasting system, key policy goals of the Broadcasting Act.
Stakeholders calling for the imposition of regulatory obligations on OTT providers demonstrated that consumer adoption of OTT services is real and growing. However, they did not submit evidence of harm to the traditional broadcast system. This is consistent with the Commission’s ongoing research into new media trends.
The Commission considers that extending regulatory obligations normally achieved through licensing to exempt undertakings could lead to unintended consequences in a global, digital environment. For example, Google, the NFB and Shaw expressed concerns that regulation could be a disincentive to innovation. Shaw added that regulation could impair the ability of Canadian media companies to compete globally. The CIPPIC noted that regulations enforcing the exclusivity of access were not applicable to the Internet as the Internet was designed to ensure access for all users to all types of content regardless of their location in the world.
In light of the above, the Commission will not at this time consider a general review of the New Media Exemption Order, nor a review of potential policy changes to increase the regulated players’ flexibility to respond to the activities of OTT providers. Nevertheless, the Commission considers that the record of the fact-finding exercise has demonstrated that in a short time the activities of OTT providers have reshaped the broadcasting landscape by introducing viable alternatives, foreign and domestic, to traditional services. The financial impact of those services may be expected to grow as OTT services become a more important feature of the Canadian broadcasting environment.
The Commission considers that currently it is best to allow the OTT market to continue evolving, better measurement tools to emerge and entities that contribute to the policy objectives of the Act to take advantage of the many opportunities in this new environment.
Given the fast pace of change in this environment, the Commission intends to maintain a watching brief on OTT, and conduct financial data collection and another fact-finding exercise in May 2012 to determine if the scenarios put forth by parties with respect to potential regulatory impacts and opportunities have materialized. It expects that at that time stakeholders will be able to provide rigorously collected data, including public opinion research, internal customer surveys, historical revenues and expenses associated withOTT services, market intelligence, qualitative and quantitative evidence with respect to the state of closed captioning and described video for OTT programming and other such quantitative evidence, that will assist the Commission in better evaluating the impacts and opportunities offered by this environment. In addition, as part of its watching brief, the Commission will focus its annual consultation with the broadcasting industry primarily on the subject of OTT.
 Broadcasting Regulatory Policy 2009-329 amended, clarified and affirmed the continued appropriateness of the New Media Exemption Order applied to new media broadcasting undertakings.
 The Commission considers that Internet access to programming independent of a facility or network dedicated to its delivery (via, for example, cable or satellite) is the defining feature of what have been termed “over-the-top” services.
 On 4 August 2011, Netflix announced that it had surpassed one million members in Canada.
 According to Akamai as cited by Bell, in 2010 88% of the unique IP addresses in Canada had average download speeds of greater than 2Mbps.
 Netflix cited a recent U.S. study by ESPN, relying on Nielsen data, that found that between Q4 2010 and Q1 2011 only 0.18% of U.S. households dropped their subscription to a BDU service – and even that percentage was entirely cancelled out by the 0.18% of U.S. households that became BDU subscribers during that same period after having previously relied on OTA broadcasting.