Netflix growing, aims for one million Canadian subscribers by summer

Netflix Inc. is taking up customers faster than expected and is stocking up its online library in an effort to attract one million Canadian subscribers by the summer, Netflix spokesman Steve Swasey says. “That's a faster trajectory than we expected,” Swasey said in an interview Wednesday. “The more people have to watch, the more they're going to be excited about the service, the more they're going to join and stay, and the more they're going to tell their friends. The more people we have on the service, the more revenue we generate to be able to buy more content. It's an cycle.” At the one million customer mark, Netflix is expected to reach profitability for its Canadian operations, Swasey said. Since its Canadian launch last fall, Netflix has been gaining attention from the Canadian broadcasting sector. On Monday the service announced that it had signed a five-year contract with Paramount Pictures to obtain exclusive Canadian rights to about 350 movies, including all first-run films. Maher Yaghi, an analyst at Desjardins Securities, said in an interview that Netflix' strategy to acquire more movie content can be seen as a direct offensive against video-on-demand services. But Yaghi added that the company has yet to have an impact on the broadcasting industry. That may change, he said, when it starts making television shows available soon after they air for the first time. “Down the road they could have a big impact if customers start to reduce the packages that they take with the telcos or cable companies to take a subscription with Netflix,” he said. Yaghi said the next move for Netflix is to be more aggressive in acquiring content. Richard J. Paradis, president of consulting firm Groupe CIC and an instructor at the Université de Montréal's communications department, also said that Netflix is likely to have an impact on the broadcasting industry. Paradis said a change may come if Netflix acquires exclusive content distribution rights at the expense of other Canadian broadcasting distributors. “At some point, the government and the CRTC are going to have to take a really serious look at Netflix operating in Canada and probably come to a determination that it is in fact broadcasting over the Internet,” he said. Paradis said recognizing Netflix as a broadcasting distributor could force the CRTC into regulating online services. “This is going to be an important area of development for the future. And if the commission doesn't want to look at it, then the commission is going to be part of the problem,” he said. Last week, the CRTC held closed-door meetings to discuss the role of over-the-top content services in the Canadian broadcasting system. At issue was whether online content portals should qualify as broadcasters, which could require them to meet Canadian content requirements and to contribute to Canadian content creation. Prior to the meetings, Norm Bolen, president and CEO of the Canadian Media Production Association, (CMPA), told The Wire Report that he would meet with Netflix to discuss the possibility of making contributions to the Canadian broadcasting system. But the CMPA declined to comment Wednesday on the outcome of the meeting. Swasey also said the company isn't commenting but that is pleased that it was invited to participate. Swasey would not comment on how the company would be affected by having to pay into Canadian programming funds, but said Netflix is an Internet company rather than a broadcasting company. “The service is not like a broadcasting company. We don't have a presence or an office or anybody in Canada, but we also already have a lot of Canadian content,” he said. Swasey could not say how many Canadian titles Netflix offers. Paradis said he was surprised the CRTC invited Netflix to participate in the meetings since it is not a regulated broadcaster. “They have said ... they have no intention for the time being of investing in Canadian production,” he said. “Whereas everybody that's involved in this has got a broadcast licence, normally invest in Canadian production and acquires licence rights.” Ian Morrison, a spokesman for the Friends of Canadian Broadcasting, said in an interview that his group supports Netflix having to contribute to the Canadian broadcasting system. “We're a watchdog, and we've got our eyes on them,” he said. “They're trying to get the advantages of a regulated market, for example persuading the government to lean on the CRTC. They should take the obligations of the regulated market too.” In a submission filed Monday with the CRTC as part of its hearing on usage-based billing, Netflix came out against the billing system, arguing that it is an ineffective means to reduce monthly aggregate Internet usage. The company said the average incremental cost of Internet traffic by heavy users is about one cent or less per gigabyte. “Bell 's wholesale UBB rates provide margins in excess of 99%. This belies any argument that such rates are primarily intended to recover any additional costs to the system: rather, such excessive margins clearly have more to do with maximizing the size of the incumbents' windfall,” Netflix wrote. Netflix said wholesale usage-based billing would impact the state of competition, and added that vertically integrated companies have the incentive of using it to leverage their dominance in the online content delivery market. “Vertically integrated carriers/BDUs generate significant revenue from their video services and ownership of content for both regulated and unregulated services,” the company wrote. “The fact that these undertakings control the delivery pipes and generate significant revenue from content that travels over those pipes provides both the means and motive for discriminating against new ventures that might threaten revenue sources of the network operators.” The company also commissioned Michael Geist, the Canada research chair in Internet and e-commerce law at the University of Ottawa, to produce a research paper on usage-based billing. Netflix also announced on its blog Monday that it is reducing the service's default audio and video quality to help ensure subscribers can use the service without going over providers’ bandwidth caps. “Starting today, watching movies and TV shows streaming from Netflix will use 2/3 less data on average, with minimal impact to video quality,” Neil Hunt, Netflix's chief product officer, wrote on the blog. “Now Canadians can watch 30 hours of streaming from Netflix in a month that will consume only 9 GB of data, well below most data caps.” Viewing the video in high-definition, which is still an option for customers, would eat about 70 GB per month. Viewing the videos in standard quality would take up about 30 GB. “While there is some lessening of picture quality with these new settings, the experience continues to be great ... We will continue to test and innovate to improve the Netflix experience without high data use,” Hunt wrote. Hunt added that the company made the changes due to monthly data caps put in place by ISPs. But Paradis said lowering the image quality isn't the best option for consumers looking to watch high-quality content. “It's not going to be very customer-friendly as an option ... If you're looking for a really good experience watching a movie and you've got Netflix on your computer linked to your 40-inch screen, you're not going to want to watch something of a lesser quality,” he said. “I don't think it's going to be very successful.” kfournier@thewirereport.ca

Netflix growing, aims for one million Canadian subscribers by summer

Broadcast | March 30, 2011

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