Scotia Capital identifies major ‘barriers’ to OTT services in Canada

As Canadian broadcasters discuss the potential for over-the-top services like Netflix to disrupt the Canadian broadcasting sector, a report by Scotia Capital Inc. identifies a number of significant consumer barriers in Canada “that offer a measure of protection to incumbent broadcasters.” The 100-page equity research report, titled “Going over the top: Implications for the Canadian broadcasting system,” released in January, identifies three central barriers to the consumption of over-the-top services in Canada: “securing sufficient content rights”; “overcoming bandwidth caps”; and an “evolving regulatory framework.” The report by Scotia Capital analysts says that media concentration in the Canadian broadcasting industry and the large broadcasters’ “significant spend” on the rights to air foreign content in Canada “have created a barrier of entry into the Canadian market for OTT operators.” The report notes that the Canadian broadcasting industry is “highly concentrated” with the large broadcasting ownership groups representing 88 per cent of television revenues and carriage of more than 700 specialty television services. It points out that programming expenditures for the broadcasting sector increased from $2.5 billion in 2006 to $2.9 billion in 2009, “mainly driven by the significant increases in non-Canadian content (i.e., mainly U.S.)” Jeff Fan, an analyst with Scotia Capital, wrote in a research note published Monday that, following Shaw Communications Inc.’s acquisition of Global and BCE Inc.’s final close of the purchase of CTV, “the vertical integration of the Canadian television broadcast system is substantially complete.” The new industry structure, he wrote, “limits content ‘leakage’ to independent over-the-top (OTT) video providers.” Fan added: “While we believe OTT providers, such as Netflix, will have the purchasing power to secure some rights to film and TV content in Canada, we believe the structure will ensure OTT remains a complement to the system, as opposed to a substitute.” The Scotia Capital report says Google Inc. is expected to launch Google TV in Canada this year, but adds the over-the-top service will also depend on the company’s ability to acquire licensing deals. The report notes that Apple Inc.’s Apple TV has also faced challenges building up its online video catalogue in Canada. As of the report’s release in January, Apple TV had “no TV shows currently available for rental as all TV shows must be purchased,” the report said. As Canadian broadcasters beef up their on-demand distribution services online and on television services, they are “working with distribution partners to offer more viewing options for customers (i.e., regular TV scheduling, video on-demand, and online on-demand access) and are co-operatively seeking to lock up ancillary content rights,” the report says. It adds that Corus Entertainment Inc. and Astral Media Inc. have been working to negotiate multi-year, multi-platform licensing agreements in an effort to “put in place a strong competitive response to new OTT services by securing longer-term agreements for key content.” Monthly bandwidth caps, used by Internet service providers, will also serve as a key barrier for over-the-top services in Canada, the report adds. Caps and overage fees that often range from $2 to $5 per gigabyte “can significantly limit the amount of content that can be viewed online by Canadian consumers without incurring additional usage fees,” the report says, noting that, in the U.S., consumers do not face the same bandwidth constraints. The report provides a consumer analysis of switching from cable or satellite television services to a combination of “over-the-top & over-the-air” viewing, and concludes that, with bandwidth overage fees, “the overall cost for switching to OTT television in Canada could be significantly higher than most consumers may perceive.” Given Canada’s broadband pricing structure, a move from subscription television services to over-the top platforms could mean more revenues for the ISPs. “Under the current broadband pricing and usage regime, we believe cord cutting would financially benefit the BDUs ,” the report says. Netflix Inc. says it intends to expand its library as it ramps up its customer base and aims for 1 million Canadian subscribers this summer. “Licensing content is only restricted by the size of the cheques we can write,” Steve Swasey, a spokesman for Netflix, said in an interview Tuesday. He added that the company disagrees with the use of bandwidth caps. But he suggested that they are not a barrier for the company in Canada, noting that the service recently reduced its default audio and video quality so that movies and TV shows use two-thirds less data on average. Swasey added that Netflix continues to add content to its library, referring to a recent deal to make Paramount Picture’s content available in Canada. “We launched the service just about six months ago, and we’ve already added thousands of titles and will continue thousands more,” he said, adding that Netflix is more of “a complement than a competitor to cable.” The Scotia Capital report also refers to regulation as a potential barrier. The report’s authors say they expect the CRTC to examine the application of the Canadian broadcasting regulatory framework to over-the-top services this year. On April 1, a working group of industry insiders submitted a letter to the CRTC, calling on the commission to open a public consultation on the role of Netflix in the Canadian broadcasting system. Under Canada's broadcasting regulatory framework, over-the-top services benefit from the CRTC’s new media exemption order, which exempts new media undertakings from the requirement to hold a broadcasting licence. The working group letter noted that under a condition attached to the exemption order, the CRTC requires new media undertakings tied to traditional broadcasting companies to report data to the commission. The group said it would like to see that reporting requirement extended to foreign-owned services like Netflix. Independent broadcasting consultant Alain Gourd, chair of the working group, said the committee has 12 members, including representatives from Astral, the Canadian Media Production Association (CMPA), Rogers Communications Inc., BCE, and Shaw. Gourd said he could not reveal all members of the group without their permission. The working group has received pro bono help from “a few” lawyers who have informally advised that the CRTC would not be required to amend its new media exemption order to require foreign-owned, over-the-top services to report revenues and other figures to the commission, Gourd said. The CRTC could simply ask foreign-owned, over-the-top services to report with questionnaires. “The exemption order applies to both Canadian online services and foreign-owned online services,” he said. “They don’t need to change anything. They develop a relevant questionnaire, and they send it.” Gourd said the CRTC has responded to the working group’s letter, saying it will make public its approach to the issue “in the near term.” In his interpretation of the letter, the CRTC will respond within weeks as opposed to months, and probably before the end of May, Gourd said. At a closed-door meeting in February, where the working group was created, industry leaders discussed the power of the CRTC to attach new conditions to its new media exemption order, which could require a foreign-owned player like Netflix to pay contributions to support the Canadian broadcasting system. Gourd said it’s too soon to say whether members of the group agree that over-the-top services should make contributions to the system. In reaction to the idea, Swasey said that “regulating the Internet is never favourable for consumers.” sdoyle@thewirereport.ca

Scotia Capital identifies major ‘barriers’ to OTT services in Canada

Broadcast | April 19, 2011

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