Get yer grimy paws off my Netflix: the scam, continued

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(Updated Sunday, June 19)

This post and the one prior are devoted to a critique of the CRTC’s OTT proceeding, oops, fact-finding exercise – and the role of the Online Broadcasting Working Group (OBWG). Of its 11 publicly announced members, I’m looking at 5 in order to illustrate just how far removed from a “factual” exercise this circus will be. They are ACTRA and SOCAN (covered last time), plus Astral, the CMPA and Peter Grant.

Exhibit F – Astral: “The objective is … that we maintain a level playing field within the system—a system that is a very positive and strong element in terms of our Canadian culture, identity and the Canadian economy.” André Bureau, Chair, Astral Media, April 14. OBWG member.

Whenever you hear a Canadian media mogul saying all he wants is a level playing field, while draping himself in the flag, run for cover. Astral owns 22 TV services, including US “wraparounds” like HBO Canada. They have lots to lose in the OTT wave. I wonder what they’ll say to the OBWG and the Commission… Competition? Bring it on!

The old guard will continue to find lawyers who will continue to argue that every “new media” innovation is just another form of broadcasting, and therefore has to be regulated – meaning they, the moguls, have to be protected from anything that might compete with them. Since our moguls couldn’t innovate their way out of a wet paper bag, they harbor much fear and loathing for innovators like Netflix, because innovators are smarter and their business models have legs – unlike, say, being a subsidized, highly protected reseller of US TV shows with no Plan B for the digital age.

Last refuge of a scoundrel

Exhibit F(2) – Shaw: If only we could stop the moguls from all their pious fretting in public about consumers. As if their faux populism weren’t enough, we have it wrapped in faux patriotism as well. In the previous post I quoted from Shaw’s witness statement to the Commons Committee on Heritage. Here’s the whole excerpt:

“Foreign providers either own or have the power to acquire rights to the world’s most popular content. Moreover, non-Canadian entities have no Canadian content or exhibition requirements. They make no financial contributions to the Canadian production industry. Canadian producers are negatively impacted by revenue being diverted from regulated services to exempt non-Canadian services. And by consuming valuable capacity, over-the-top providers threaten to undermine our significant network investments and impact the quality of service offered to our ISP customers. Finally, consumers will ultimately suffer, with fewer Canadian choices.

How hypocritical can a mogul get? Well, the patriotic Shaw gang went to Parliament in March apparently forgetting that their erstwhile boss had long since put all this we-love-Cancon bullshit to rest…

Over the past 10 years, Shaw has contributed over $350 million in direct subsidies to the Canadian production industry. The fund has become nothing more than a means of subsidizing broadcasters, pay and specialty services and independent producers to produce Canadian television programming that few watch and has no commercial or exportable value. –Jim Shaw, January 2007

Booyah! Big Jim put all the dweebs in their place: the free-riding broadcasters, the indie producers whose work has no commercial value, not to mention the horrified bureaucrats in Ottawa who learned that Jim was taking all his marbles outta the TV Fund and going home:

Shaw pulls millions out of Canadian TV fund

“The CEO of Shaw Communications is tired of subsidizing the CBC. He’s frustrated by spending five per cent of his company’s annual revenues on television programs no one watches. He refuses to pay broadcasters a fee-for-carriage of their signals as well as part of the freight on their production costs. And he’s prepared to blatantly breach CRTC regulations to make his point” (Ottawa Citizen, January 11, 2007).

Hobgoblin of small minds

Shaw Communications has provided other juicy examples of their ability to contradict today what they said yesterday. Look at what the Shaw boys were saying two years ago about online broadcasting – and the stunning change of heart they had by the time they’d shown up for the TV licensing hearings last April. On March 10, 2009, Ken Stein assured the Commission that online broadcasting just wasn’t a thing, so for sure we didn’t need to regulate it (transcript):

“If you were building a broadcasting system right now, you would not use the Internet to do that. You would use a cable system, a broadcast system to do it, satellite, whatever. Those are the ways to do it. What people are using the Internet for primarily is self-generated content. It’s not professionally produced broadcasting. And we can all observe it in our own homes or with our own children. So I guess the problem we have is when you say we are not talking about regulating the Internet, I understand what you are saying but you are by just raising the question of, you know, are incentives or regulatory measures necessary or desirable for the creation and promotion of Canadian broadcasting content in new media, and all we are saying is no (paras 10256, 10257, 10258: my emphasis).

Fast forward to the TV licensing hearings and the April 6, 2011 testimony from the selfsame Shaw team – trying hard to stay on the messsage adopted for the Commons Committee hearing (CRTC transcript):

“The threat today from over-the-top television is alarming. It stems from major structural shifts in technology and rights exploitation that are permanently reshaping the global broadcast landscape. Google, Netflix and Hulu launching into the TV industry is only the beginning of what we can expect. Any attempts by these new entrants to characterize their presence here as merely complementary to ours is disingenuous. We are now competing head-to-head with OTT players within all key areas of our business, whether program acquisition, subscription fees and advertising revenues. Now, these foreign players have minimal distribution costs; no Canadian content requirements, accessibility or other obligations; and the financial ability to outbid us with very deep pockets. Given what we have seen over the last 6 months, we know that they will have a destabilizing impact on the Canadian broadcasting system if they continue to be allowed unfettered access” (paras 2543, 2544, 2545; my emphasis).

Whoa! So now the sky is falling? The main ingredients – and key words – of this cry for help are familiar. Canadian broadcasters have for decades made a ritual of going whining to the regulator about how tough life is for them and why they need a break – and “flexibility,” a favorite at licensing hearings, including this one. In addition to the alarmist language, we have vague threats about a bleak, unknown future; accusations of “disingenuous” talk from the invaders, like this was an ethics contest; focus not on the realities of supply and demand, but on the Canadian broadcasting system – a legal abstraction that can be “destabilized” as though it were a tinpot dictatorship being taken over by the CIA.

And the other big tearjerker: the invaders have those very deep pockets with which to drive us Canadians and our cultural sovereignty to the wall. In fact, Shaw’s market cap was $8.53 billion at the close of business Friday. Yeah, Netflix is doing better, at $13 billion, which hardly makes Shaw a hapless two-bit operation. (Shaw just raised $300 million in a preferred share offering that closed May 31, with the eager advice of TD Securities Inc., CIBC World Markets Inc., RBC Capital Markets, Scotia Capital Inc., National Bank Financial Inc. and BMO Capital Markets. Not too shabby.)

On the other hand, what cave have Shaw executives been hiding in the last two years? Since IPTV and similar online platforms weren’t invented last week, Shaw’s accusatory, alarmist tone doesn’t exactly show senior management in a flattering light. That’s the thing about monopolistic or oligopolistic market power. It’s great until a real shit-disturber like Reed Hastings comes along. Then the smug complacency comes back to haunt you.

Think US programming isn't a drug? Just ask "Anne" (not her real name).

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Exhibit G – CMPA: “[Netflix is] selling to subscribers the same way as a pay-TV service, except they’re not going through a cable provider. They’re using the same wire, just a different part of the wire. All they do is take dollars out of the country.” Norm ‘Heroin Drip’ Bolen, CMPA, Feb.22. OBWG member.

Three things to note about this diatribe. First, the description of the business model – pay-TV without the cable middleman – makes it sound like it’s a bad thing. And like this was the first business on the planet to have a big, fat, useless middleman get disintermediated by the Internet. The model is both ingenious, as the market has shown, and inevitable.

TCP/IP 4-layer protocol suite

Second, the players are using different parts of the same wire. Big whoop, that’s why they invented IP transport. And buried here is the biggest public-interest problem we face in the industry today: i.e. the ability of the carriers that control the network access layer in the residential last mile to leverage control of the application layer so they can block competition, gouge customers and avoid market discipline. The beauty of the Internet protocol suite is that it separates the various transmission functions into separate layers, so that innovation can proceed on, say, the application layer without the need for elaborate adjustments in the lower layers. That’s what the Internet revolution is all about. Like ACTRA and other members of the OBWG, however, the CMPA has no clue what it’s dealing with here – or what we risk by letting them meddle with Canada’s Internet.

And what about those dollars Netflix is “taking out of the country.” Netflix isn’t stealing money out of Canadians’ pockets, unlike some vertically integrated Canadian conglomerates I could mention. They earned it fair and square by appealing to our free will; entertaining us for as many hours in the month as we like, without caps; and treating us in a super-friendly way when we phone support. Rogers and Bell, eat your heart out.

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Exhibit H – Peter Grant: “Text and still images fall outside the definition [of broadcasting], for example. Traffic not going to the public is also excluded, so that gets rid of most e-mails and VoIP, as well as most business to business traffic. Interactive material where the consumer interacts with the content is probably not ‘broadcasting’ so games on the Internet would be excluded.” Peter Grant, to the CFTPA, in “Reinventing the Cultural Tool Kit: Canadian Content on New Media,” February 22, 2008 (pp.1-2: pdf download here). OBWG member.

From the book by Peter Grant and Chris Wood

In his now-famous address to the CMPA’s predecessor, the CFTPA, Peter Grant set the tone for much of the debate that was to follow over the ensuing year on the issue of new media broadcasting and the CRTC exemption order. Peter made the case that a) broadcasting indeed takes place on the Internet; b) the CRTC can regulate it; and c) absent regulation, and a levy on ISPs to pay for content, Canada would have no online visibility and that in turn would cause serious harm to our cultural identity (my paraphrase; download the paper to see the real deal).

Peter persuaded a lot of people with his logic, not least because he is one of the founding fathers of Canada’s communications bar, and a prolific author of work on broadcasting and cultural policy – including the 2004 book Blockbusters and Trade Wars: Popular Culture in a Globalized World (which I used for two years as a text in my lecture course). About 18 months ago, he and I were paired up on a panel at an Ontario Bar Association confab on the future of Canadian content. There was light as well as heat and most everyone seemed to enjoy the debate. But that was then.

In the excerpt quoted above, Peter begins by “getting rid” of a whole lot of Internet content, the better to zero in on the part of interest to the OBWG. Most of what is dumped fits into one of two broad categories: personal content, like messaging, and interactive content, like online games. What’s left, we’re told, is mostly “broadcasting.” I’m not here on a fool’s errand to dispute Peter’s reading of the Broadcasting Act: the drafters intended to include on-demand programming, says he, as well as the conventional kind? Fine. But that’s not the problem.

The Web and the Internet are two entirely different animals. The Web is just another protocol-based application that rides on the TCP/IP platform.

The problem is that when you take away all that is personal and interactive from this transmission platform, what you’re left with is not the Internet. The CRTC chair used this divide-and-conquer ploy during the new media hearings, as when he made this distinction (transcript of March 10, 2009):

“I’m not talking about the Internet, I’m talking about broadcasting over the Internet. We made that clear in our notice. Obviously we are not talking about the Internet in general, et cetera. We are talking about new media which we defined as broadcasting over the Internet or broadcasting over wireless” (para 10253).

The sleight-of-hand invoked here may well fit what lawyers call questions of law (like the statutory definition of “broadcasting” and “program”), but it certainly does not fit what they call questions of fact. To put that less charitably, it’s a piece of sophistry that rests on a serious misrepresentation of what the Internet is, as a matter of fact. And those who argue most vigorously for “regulating the Internet” are those who understand it the least.

First of all, contrary to widespread popular belief, the Web and the Internet are not co-extensive or synonymous. The first Web server did not go public from Geneva until 22 years after the initial deployment of the 4-node ARPAnet – in 1991 and 1969 respectively. The Web is just another protocol-based application or service that runs on the lower layers of the Internet (HTTP, for hypertext transfer protocol). Many protocol-based applications run alongside HTTP: post office protocol (POP), file transfer protocol (FTP), BitTorrent, Telnet and about 120 others.

Openness and innovation. There’s a very good reason why the Internet has given birth to such a rich cornucopia of functions, services, applications and products – including the Web, which has grown from one site in 1990 to perhaps 250 million today. That reason concerns the open nature of the Internet. TCP/IP provides a “dumb” transmission platform for the many things we do online. Developers and inventors can implement their new ideas without having to reach a compromise with the underlying platform – exactly the opposite of how our closed, centralized telephone networks were designed.

Indeed, one of the fundamental design assumptions behind the engineering of the Internet is the end-to-end principle, whereby the resources and control features are pushed out to the edges of the network – under the control of the end-user, rather than, say, the phone company (though Bell has done a brilliant job of institutionalizing its gatekeeper’s stranglehold over our broadband connections).

The Internet more generally owes its robustness to what CRTC Commissioner Denton characterized as “innovation without permission” in his concurring opinion on the 2009 new media decision (Broadcasting Regulatory Policy CRTC 2009-329):

We are all aware that the Internet has fundamentally changed the range of possibilities available to us, but fewer would be aware why this is happening. The essence of the Internet is innovation without permission. No one has to ask permission of a carrier or a regulatory agency before introducing a new product or service. –Commissioner Denton, June 4, 2009

By trying to treat some Internet services like part of a closed, licensed broadcasting system, the anti-Netflix camp presents a huge risk to our well-being: depriving Canadians of our greatest engine of economic growth and innovation, not to mention free expression. Nothing shuts down creativity like having to seek out permission from a gatekeeper, especially one who has a competing widget he wants to sell on his network.

ISP levy. As I’ve intimated, one of my greatest concerns about the OBWG is that their proposals will entail increased costs to the consumer. A hit to the pocketbook could happen in any of three ways: Netflix gets “taxed” and increases its monthly fee; SOCAN’s Internet tariffs are approved by the Copyright Board and charges go up for Netflix and many other content providers; and, finally, the CRTC could impose a levy on ISPs to raise cash subsidies for the creation of Canadian new media. A levy of this kind is spelled out in detail by Peter Grant in his “Tool Kit” paper.

“Since, as we have seen, about 50% of the traffic on the Internet may be broadcasting, it’s hard not to acknowledge that the Internet is now ‘an element’ of the Canadian broadcasting system. And when Internet service providers (ISPs) distribute broadcasting, in that sense they are acting as broadcasting distribution undertakings.

“If you wanted to impose a levy on ISPs, of course, the CRTC would have to amend its Internet exemption order. It could still exempt Internet service providers and websites from licensing or other regulation. But it could impose a levy on ISPs to support high quality Canadian content made expressly for the Internet.

“How much would the levy be? Based on the BDU precedent, you might start with 5% but presumably you would have to discount it because only 50% of the Internet traffic is broadcasting. So let’s use 2.5% as the amount of the levy. Last year, the Internet service providers had residential broadband revenue of $2.912 billion. So a 2.5% levy would produce $72.8 million a year” (pp. 12-13).

With all due respect, the idea of adding another levy, a cost the ISPs would pass on to their subscribers in a heartbeat, is appalling.

First, we already have almost the highest rates for broadband service in the entire OECD and the CRTC shows no signs of regulating them.

Second, the assumption that video on the Internet is part of our broadcasting system because it happens to fall within a statutory definition does violence to every other aspect of these two platforms. The broadcasting system is closed, licensed and centrally controlled; has extremely high barriers to entry; appeals to mass audiences through expensive, least-common-denominator programming; is financed by the sale of eyeballs to advertisers, i.e. the audience is the product for sale; and the viewer is an entirely passive participant with no means of interaction or self-expression. The Internet, on the other hand, does not belong to anyone and runs on open-source software; is primarily a medium for self-expression and personal messaging (Web 2.0); has low to zero costs of entry; exposes commercial and political élites to unprecedented levels of scrutiny; allows like-minded individuals to overcome geographical and other barriers so as to form meaningful communities; encourages creative destruction, which in turn promotes countless different kinds of innovation; and so on.

Third, an ISP levy, as well as other measures financed by the public, are typically presented as self-justifying. If consumer or taxpayer money supports the creation of Canadian content, digital or otherwise, this money is ipso facto well spent. But what is the demonstrated benefit of such expenditures? Who decides how much to collect, how much to spend and on what? Clearly those who make content benefit. What about the rest of us? Peter does mention in his Toolkit paper that government efforts should be made to provide content that the market alone would not provide (p. 14).

There are lots of things governments should do to remedy market distortions. If e.g. an oligopolistic market will not provide affordable broadband (Canada!), then it’s not so difficult to think of corrective solutions, and it’s even less difficult to measure the benefits of lower rates for what is now a de facto utility. The public benefits of produced content, on the other hand, are extremely difficult to measure – especially since the CRTC and its sister agencies aren’t in the business of forming policy by asking Canadians what they want on their screens for their hard-earned money.

Fourth, the most unsettling aspect of the levy idea is that it would amount to a regressive tax. As ISPs would pass on Peter’s suggested 2.5% levy to all their subscribers, poorer subs would be financially punished compared to wealthier subs, since household income is not taken into account. And it gets worse.

Poorer households in Canada that are not online obviously won’t be paying any levies. But as Statistics Canada has just reported, many such households are being deprived of the wonderful benefits of Internet access precisely because they cannot afford to pay for it. According to the survey data (for 2010) released on May 25, almost 50% of households in the bottom (poorest) income quartile do not have Internet access in the home, whereas almost 100% of those in the top (wealthiest) income quartile do have access.

Anyone who supports an ISP levy (big questions are yet to be settled by the Supreme Court) – a levy designed to subsidize the creation of entertainment content – has some serious thinking to do about the social costs entailed. Stats Can says 20% of Canadian households are still not online, even on dialup. Every dollar that makes home access more expensive keeps millions of Canadians from being able to use the Internet to find employment, use government services, get an education, research a health problem, help their kids with homework and engage in the hundreds of other personal activities that are freely chosen by end-users to make their own lives more comfortable, in terms that are meaningful and important to them. Not some faceless functionary in Gatineau or Ottawa or anywhere else.

Ask Canadians this question if you dare. You want to get online to find a job and help your kids do well in school? Or do you prefer to have a functionary divert what would have been your annual access fees towards subsidizing – in the immortal words of Jim Shaw – “Canadian television programming that few watch and has no commercial or exportable value”?

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The CRTC shuts PIAC down. PIAC replies.

Let’s get back to procedurals.

I began about 3500 words ago with PIAC, noting the Commission has refused to allow the Centre to submit intervener costs on the grounds this is a “fact-finding exercise,” not a “proceeding.” The consequence is that PIAC will not be participating. The exchange seemed fishy to me, if only because I had never heard the term “fact-finding exercise” before seeing the May 25 NoC. This is where semantics is important – the regulator gives a meaning to the consultation that automatically excludes public-interest advocates.

John Lawford, PIAC’s counsel, copied me on the email reply he sent to the CRTC challenging their rejection (I’ve uploaded the 2-page pdf here). According to John, the Commission’s bright-line distinction isn’t so bright:

There have been three other instances of formalized “fact findings” by the CRTC we could find, but all of these were on the broadcast side. While the Broadcasting Act may be flexible enough to allow such fact finding exercises, we do not believe it is permitted under the authority of the Telecommunications Act. As this proceeding is a Broadcasting and Telecom Notice of Consultation, and is being conducted under the revised Rules (for both telecommunications and broadcasting) we believe using a process which may occasionally be acceptable in broadcasting to be ill-suited to combined telecom and broadcasting concerns. By excluding the application of the intervenor costs rule to the present process, the Commission is indirectly limiting the “facts” upon which it will be deciding the very important issue of over- the-top programming by effectively only receiving the “facts” from deep-pocketed corporate parties. –John Lawford, for PIAC, June 17, 2011.

I have two questions for the CRTC’s Executive Director of Policy Development & Research. Under what statutory, regulatory or other published authority was he able to turn down both PIAC and CIPPIC for intervener costs? And why does he believe that doing so serves the public interest?

Six reasons why this sham exercise is not in the public interest

1 – The Commission has called the consultation at the instigation of a private, external group, the OBWG, that has conducted all its activities in secret and has only one goal: keeping out new, online OTT services no matter how popular with Canadians.

2- The Commission and members of the OBWG have shown over and over again they are utterly incapable of understanding the Internet or the benefits it can bring all Canadians, not just the tiny community that benefits directly from subsidies and reduced consumer choice.

3 – The Commission has rigged this exercise by extending moral and practical support to vested, old media interests, while excluding, on a technicality, the two organizations – PIAC and CIPPIC – whose explicit mission is to defend the public interest.

4 – The Commission has denied any policy or regulatory decisions will flow from the results of their so-called fact-finding, whereas it will be impossible for the Commission to ignore the outcome of this exercise in later deliberations.

5 – The exercise has been framed by the CRTC chair and others as a way to prop up Canada’s broadcasting, production and distribution sectors, regardless of the damage to consumer welfare that may ensue.

6 – The Commission and OBWG are fighting yesterday’s battles, tying their efforts to the health of a moribund industry, while millions of Canadians are deprived of participation in the online world – a fate that will not be remedied by any amount of so-called “shelf space” for patriotic content providers.

(PS: I’m not glorifying this exercise by copying and pasting any of my deathless prose into a file and sending it to Gatineau by July 5. They’ll just have to manage without me.)

D.E.

4 thoughts on “Get yer grimy paws off my Netflix: the scam, continued

  1. Thanks Barri – one of the great producer/policy wonk crossovers of all time.
    I certainly take your point that Jim Shaw was not making a rigorous empirical observation when he had his outburst. I was trying to get at corporate attitudes – not the real value of indie productions. I think you and many of your peers would attest to the negative and contentious attitude Canadian broadcasters have long shown towards the indie community.
    And while wishing that community the best, I’d definitely prefer they achieve their success without curtailing everyone else’s freedom of choice and expression, especially on the Internet.
    D.E.

  2. Excellent and thoroughgoing as usual David. I’m concerned by your use of Jim Shaw’s arguments however, as you let them stand unquestioned. Admittedly, they’re more for rhetorical effect and not central to your review and criticism. But you and your readers should know that in fact, a tremendous amount of production from the independent prodco sector IS exportable and has seen tremendous revenue from international sales. Programs I’ve produced along, a mere trickle in the bucket, have been sold to many countries world wide, and those programs from my production partner as well have sold to over 20 countries. I just returned from the Banff New Media Festival where conventional distributors and Netflix were doing lots of deals with Canadian producers! I don’t know what era Jim Shaw was referring to, but it certainly isn’t the common one, as any cursory glance through CMPA’s yearly stats would reveal. Moreover, there are many programs that are NOT eligible for private-public funding through the Canadian Media Fund, and they sell internationally as well.
    There’s a reason Jim Shaw was essentially retired; his remarks were often inflammatory and without basis in fact.
    cheers, Barri

  3. “our Canadian culture, identity”

    And what are those exactly?? These are simple buzz words, meant to evoke emotion. The truth is, all of these groups have a vested interest in keeping the status quo…. A level playing field=collusion by big business, in fixing prices. No competition.

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