Potential regulation of Netflix steeped in questions, barbed answers

As a working group of industry insiders awaits the CRTC’s response to its request for a public consultation on the role of Netflix Inc. in the Canadian broadcasting system, experts are unsure how—or even if—over-the-top services can be regulated. “I think we’re in uncharted territory in certain respects,” Michael Geist, the Canada research chair in Internet and e-commerce at the University of Ottawa, said in an interview. He said the starting point would be to review the CRTC’s new media exemption order, which is scheduled for review every five years. “But in a sense, they’re being asked to accelerate that schedule by looking at the issue once again,” Geist said. In 2009, the CRTC upheld the 1999 new media exemption order, refraining from regulating broadcast activities on the Internet and continuing to exempt new media undertakings from the requirement to hold a broadcasting licence. Earlier this month, 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 over-the-top distributors like Netflix and Apple TV in the Canadian broadcasting system. Google TV is expected to come to Canada this year and other services in the U.S., such as those provided by Hulu and Amazon.com, could make a foray into Canada. Several broadcasters and broadcasting distributors are now calling on the CRTC to “level the playing field” between unregulated over-the-top services and regulated broadcasters. But the form that regulations could take and how they could be enforced on a foreign-owned Internet service—in a word, a website—remains uncertain. If the CRTC imposed new conditions on a foreign-owned website, such as Canadian content exhibition quotas or paying contributions into the Canadian broadcasting system, it’s unclear how such a measure could be enforced. That is, unless the commission chose to wade into the unknown territory of blocking web addresses. Dwayne Winseck, a communications industry expert and professor at Carleton University’s school of journalism and communication, said that while blocking an IP address would “be pretty heavy-handed,” there are other options in the regulations arsenal. One of these involves amending the Income Tax Act to encourage Canadian advertising dollars to flow to Canadian-owned digital media properties, as Corus Entertainment Inc. proposed last year. Section 19.1 of the Income Tax Act prevents Canadians from deducting, as income tax expenses, advertising spending on foreign broadcasters and newspapers operating in the Canadian market. But they can deduct advertising spending with Canadian-owned broadcasters and newspapers, effectively making it cheaper. Expanding the provision to digital media would make it more expensive to advertise with foreign companies and foreign-owned websites. “What it means is that when Sears Canada or the Bay or Canadian Tire advertise on Netflix, they couldn’t write that off as a business expense, whereas they could if they advertised on CTV.ca,” Winseck said in an interview. “That would whack hard in the bottom line, and it’s buried in the tax code so it doesn’t have the appearance of heavy-handedness. It’s unlikely to get Canadians up in arms the way blocking IP addresses might.” Although he supports net neutrality, Winseck said another possible option would be for regulators to ignore bandwidth throttling of over-the-top streaming. “If Netflix wants to operate here and if Rogers, Shaw, Telus, Bell, etc. want to go to war, and part of the arsenal of war online is bandwidth throttling, then the CRTC just turns a blind eye to that.” Winseck said ISPs are now getting away with the tactic, evidenced by the fact that Netflix downgraded the quality of its streaming. Winseck described Netflix subscribers as “savvy users” who are “sensitive about the quality of the video.” “To know that your signal is being deliberately degraded to deal with bandwidth caps, I mean, that’s going to be a turn-off,” he said. An April 15 RBC Capital Markets research note said usage-based billing and net neutrality issues would play “a major role” in determining the success of over-the-top services because exceeding bandwidth caps increases the “real” cost of services like Netflix. The report said that ISP Rogers Communications Inc. “lowered the caps and modified overage charges and download speeds of select Internet plans for new customers within days of Netflix announcing the expansion into Canada.” RBC also warned that the wider adoption of unregulated services at the expense of regulated ones would hurt Canadian content. “Should OTT services ultimately pose this kind of threat on the ability for Canadian broadcasters to meet obligations under the Broadcasting Act, we would not rule out the CRTC attempting to impose similar regulatory obligations on OTT services (i.e., Canadian content obligations), particularly should OTT services begin to aggressively bid for premium television programming,” the report said. “Such obligations could better level the playing field between regulated and non-regulated services.” One industry analyst who asked to remain unnamed said it would be very unlikely to see all Canadian Internet service providers block an over-the-top service if the company doesn’t comply with Canadian broadcasting rules. While a company like Netflix might fight ISPs’ traffic management policies, it wouldn’t go to battle with the regulator, the analyst said. A more likely scenario would be that Netflix contributes more-or-less voluntarily to funds like the Canada Media Fund, producing a modest amount of its own Canadian content and carrying a percentage of Canadian titles in its library as the cost of doing business. “It’s not about the CRTC forcing them. It’s not about ISPs shutting content down. Netflix never wants to get to that level,” the analyst said. In a submission to the CRTC this week for its proceeding on vertical integration, Shaw Communications Inc. wrote that Parliament did not create the power for exemption orders “to allow foreign competitors—which replicate the role and function of licensed programming services and BDUs and which would otherwise be ineligible to hold broadcasting licenses--to enjoy unfettered entry into Canada. This would be clearly inconsistent with the will of Parliament and the objectives of the Act.” Shaw wrote that the CRTC “must immediately develop a strategy to respond to the fact that non-Canadian OTTs are broadcasting in Canada without a licence and should be appropriately excluded from the safe harbour of the New Media Exemption Order.” The company said that, at a minimum, the commission should open a hearing to “reconsider the legal status” of foreign-owned over-the-top services. Shaw said the CRTC should look at potential measures such as Canadian ownership and control, content requirements, Canadian program expenditure requirements and direct contributions to programming funds. Canadian Media Production Association president and CEO Norm Bolen—who was one of the main players who organized the over-the-top working group—said he also believes that it’s in Netflix’s interest to find common ground. “Companies that do business in Canada, whether they have an office here or not, are subject to Canadian law and Canadian regulation if there’s a political will to do it,” he said in an interview. “No companies want to operate in any marketplace contrary to domestic regulatory policy or law.” Bolen said Netflix is just the beginning in terms of over-the-top providers, and that while nobody is talking about banning those services from operating, a serious public policy debate is necessary. “I think the worst thing we can do is just ignore it,” he said. He added that he thinks it’s too early to talk about enforcement when there’s still a chance to “bring these services to the table if the regulator and the government wanted that to happen.” “If you started with the tail instead of the dog and said: ‘How would we enforce this? Oh, we can’t enforce it so we won’t do anything,’ to me that’s just a defeatist approach,” Bolen said. Rogers CEO Nadir Mohamed took a stance apart from other media leaders Wednesday when he told reporters that his company is not seeking to extend regulations to new media. “It is a different and new world,” Mohamed said. “What we should do, smartly, is try to figure out what makes sense and what are the things we don’t need, because frankly, I think less regulation generally is better because then the market can dictate how the world unfolds.” Geist said he can’t imagine the dispute reaching a level where IP addresses are blocked. “In some ways it seems to me more likely that you do away with all Canadian content requirements than go to some of those potential steps to try to enforce it for out-of-country providers,” he said. “I think the broadcasters would jump up for joy. I think some in the creative community would obviously be deeply troubled. If you look at the most recent group licensing hearings, broadcasters have long done the bare minimum when it comes to content requirements, and if there was the ability to remove that further, I don’t think many of them would object.” Bolen said it’s too early to predict what the regulator is thinking. “How can anybody know what the intentions are of a public body like this?” he said. “The CRTC is not a monolith. You’ve got a large number of commissioners with a wide variety of points of view, with a wide variety of backgrounds. I don’t think anyone can know at this point that they would rather eliminate Canadian content rules than take on a foreign entity.” mburgess@thewirereport.ca

Potential regulation of Netflix steeped in questions, barbed answers

Broadcast | April 28, 2011

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