CRTC, OTT, Taxes, and The 35

Originally published on August 11, 2011.

Last updated on September 7, 2011, with contributions by The Mark News. (easier to read streamlined version available here).

On May 25, 2011, The Canadian Radio-Television and Telecommunications Commission (the CRTC) published a Broadcasting and Telecom Notice of Consultation 2011-344, launching a fact-finding mission on today’s Over-The-Top programming services and their potential impact on the Canadian entertainment industry. This exercise could result in the modification of the CRTC’s previous New Media exemption orders which continue to promote a “hands-off” approach to regulating most new media technologies.

On the surface, the CRTC’s proposed exercise does sound reasonable. Internet streaming video services such as Netflix, Hulu Plus and Amazon Prime have become so popular in the United States since the CRTC’s exemption orders were originally published two years ago that it has become necessary to evaluate the potential impact these new services could have on the Canadian entertainment industry, and on Canadian culture. Already, Netflix has gained over a million Canadian subscribers since last year’s launch of their on-line video streaming service.

However, statements from the CRTC’s consultation suggest that its inquiry might produce highly undesirable results, further reducing our entertainment choices, and limiting the development of viable Canadian content. It refers, for instance, to a report issued by the Standing Committee on Canadian Heritage in March 2011:

7. The Commission notes that the Standing Committee of the 40th Parliament, 3rd session on Canadian Heritage, issued a report in March 2011 on Impacts of Private Television Ownership Changes and the Move Towards New Viewing Platforms. This report recommended “that the Canadian Radio-television and Telecommunications Commission examine the growing emergence of non-Canadian broadcast players in the new digital realm and initiate a public consultation process to determine whether and how such non-Canadian companies should support Canadian cultural programming.”

8. Further, the Commission received a letter dated 1 April 2011 from the “Over-the-Top Services Working Group.” The working group describes itself as “35 private sector executives from the distribution, telecommunications, broadcasting, production and creative sectors in Canada.” The group has noted a growing role for foreign OTT services in Canada. It has suggested that the Commission should initiate a public consultation as recommended by the Standing Committee on Canadian Heritage as described above. A copy of this letter has been placed on the record of this proceeding.

It appears the CRTC is considering recommending that the federal government levy a new tax against all OTT service subscriptions, based on the premise that the money is needed to help “support Canadian cultural programming.” This tax was indirectly proposed by the Standing Committee on Canadian Heritage, and is supported by members of the rather secretive “Over-the-Top Services Working Group”, or “The 35” as I like to call them.

Historically, similar taxes and levies have been introduced by various Canadian governmental departments with mixed results such as for example the levy imposed on blank recording media CDs, presented as a means to “support” Canadian music creators even though blank compact discs are often used for non-music related tasks.

One immediate and significant problem with this proposed new tax on OTT services: it would only apply to OTT services with a Canadian business presence. US-based Netflix, the largest OTT service in the world, has no official business presence here in Canada, and is out of the jurisdiction of both the Canada Revenue Agency and the CRTC. Netflix isn’t legally required to collect any Canadian sales tax, pay any Canadian corporate tax, or even comply with any Canadian content requirements.

However, foreign-based OTT services such as Netflix already suffer from a major disadvantage: a lack of Canadian Web broadcast and distribution rights to the most popular content, namely movies and TV shows. Many of these Canadian on-line broadcast rights are already held by Canadian broadcasters and cable/satellite providers, leaving foreign-based OTT services with very little material for their Canadian customers.

If the goal of the tax is to protect Canadian content, then it is missing the mark, because it will be unable to target precisely the companies that are supposedly causing the problem. This suggests The 35 must have a different goal in mind, with the foreign OTT services being nothing more than a red herring.

Large Canadian corporations already own a wide range of Canadian production, broadcast, distribution, and internet-access services, and are now launching their own subscription-based OTT services. Any taxes collected from their OTT subscribers would be returned to the corporations in the form of Canadian production funds. This means that, as a user, you would not only pay a monthly fee (plus sales tax) to the Canadian OTT service that has the content you want to watch, but you would also be charged an extra tax that would be handed over to various divisions of your OTT provider’s parent corporation.

Furthermore, the application process for these production funds could be rigged in such a way that any independent producer not properly “partnered” with any of the corporations represented by The 35 would never qualify.

The scheme would ensure that The 35 would not only receive all of the tax money collected from their own OTT subscribers, they would also receive the tax money collected from the few independent Canadian OTT subscribers struggling to survive. This money could be spent in any manner the recipients see fit including the possibility of paying salaries and bonuses to high level managers and directors before spending any money on actual content production.

Foreign-based OTT services such as YouTube, Vimeo and Netflix are already stealing customers away from the existing cable television services of The 35, not only by offering a wider selection of high quality entertainment choices, but also by allowing Canada’s next generation of content creators to independently publish high quality Canadian content on-line, completely bypassing the “walled garden” style corporate infrastructure of The 35.

Perceiving this as a threat against their control of the Canadian entertainment industry, The 35 have asked the CRTC to study the possibility of taxing OTT services, with the expectation that this new revenue stream will find its way back into their hands in the form of production funds.

Furthermore, the fact that usage-based billing and aggregated volume pricing of The 35’s Internet services will very likely not be applicable to their OTT services means that, in comparison, the continued use of foreign OTT services could become so expensive that most Canadians might have no other choice but to retain the services of The 35 – as chosen and priced by The 35 – whether they like it or not.

The CRTC already has a history of ill-conceived and counterproductive regulatory decisions such as for example the implementation of their Signal Substitution policy back in 1972. The original intent of the policy was to protect the Canadian broadcast rights of highly profitable foreign content delivered over cable television, and use some of the extra ad revenue generated by these enforced exclusive broadcasts to fund the production of high quality Canadian content.

But instead of encouraging the production of Canadian content, signal substitution has become such a monumental cash cow for the private broadcasters that they removed nearly all Canadian programming from their prime time schedules, replaced it with highly lucrative foreign programming, and now only spend enough money on Canadian productions to meet their Canadian content requirements, content often broadcast at times when Canadian television audience ratings are at their lowest.

And now, history is about to repeat itself. If implemented, this highly deceptive OTT taxing scheme will fleece Canadians, limit their entertainment choices, fill the coffers of large corporations, and further reduce the amount of viable Canadian content. This is not only another fine example of regulatory capture, it could also be viewed as a form of legalized embezzlement – one that has the potential to be approved by the CRTC.

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