TRANSNATIONAL OVER-THE-TOP VIDEO DISTRIBUTION AS A BUSINESS AND POLICY DISRUPTOR: THE CASE OF NETFLIX IN CANADA - OPEN ACCESS JOURNALS AT UIO
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Zboralska and Davis, The Case of Netflix in Canada
Transnational over-the-top video distribution The Journal of Media Innovations 4.1 (2017), 4-25.
DOI: http://dx.doi.org/10.5617/jmi.v4i1.2423
as a business and policy disruptor: © Emilia Zboralska and Charles H. Davis, 2017
The case of Netflix in Canada
Emilia Zboralska Charles H. Davis
Ryerson University Ryerson University
emilia.zboralska@ryerson.ca c5davis@ryerson.ca
ABSTRACT INTRODUCTION
Digital disruption is often characterized as the Talk TV” hearings of 2013-2014. Through an ex- Domestic broadcasting industries are considered
conflict between the exponential rate of change amination of public documents, we analyze the vital to national cultural expression and demo-
in technology, and the slower-paced, incremen- ways Netflix is considered an opportunity, ally, or cratic practice, and for that reason they frequently
tal rate of change in law, economy, policy, and a threat by consumers, broadcasters, independent receive governmental support and protection and
society writ-large (Franklin, 2012). The rapid en- producers, and governments. We show that in a are regulated in the public interest. In Canada, the
croachment of over-the-top (OTT) content distri- reprioritization of values, many of the principles television broadcasting system serves as a major
bution raises policy issues concerning jurisdiction, that motivated legacy broadcasting policy are be- instrument of national policy regarding creation
access, pricing, consolidation of ownership, and ing sidelined by a consumerist approach that gives and distribution of domestic content, with atten-
source diversity (Holt, 2014), while undermin- freer rein to streamed services. However, Neflix’s dant expectations concerning national cultural
ing many of the traditional policy instruments. In refusal to provide the Commission with informa- expression, cultural sovereignty, and democracy
this paper, we analyze Netflix’s strategic expan- tion it was ordered to produce suggests the most
sion and meteoric growth in Canada, and focus serious disruption is to the notion that online video
on a landmark event in Canadian broadcasting distribution can or should be regulated in the pub- Keywords
policymaking: the Canadian Radio-television and lic interest. media innovation, media policy, political economy, over-the-top
Telecommunications Commission’s (CRTC) “Let’s video distribution, broadcasting
The Journal of Media Innovations 4.1 (2017) 4Zboralska and Davis, The Case of Netflix in Canada
(Armstrong, 2010; Grant & Wood, 2004; Le Goff et The television broadcasting sector is experienc- the review was framed primarily around the obser-
al., 2011; Picard et al., 2016). ing an unfamiliar pattern of disruption: “big bang” vation that television is “evolving at an incredibly
The “digital shift” in the media and content in- expansion (Downes & Nunes, 2014) of highly capi- rapid rate – and Canada’s regulatory system must
dustries is disruptive, introducing major transfor- talized, rapidly scalable transnational online ser- change with it” (Blais, 2013b). According to the
mations in consumer behaviour, business models, vices which quickly develop large bases among do- regulator, on-demand video streaming has altered
and competition, and requiring broadcasters to mestic consumers, making domestic incumbents Canadians’ expectations of the traditional broad-
develop multi-platform, multi-product proficien- appear as slow-moving, self-serving rent-seekers casting system, leading to a growing dissatisfaction
cies (Doyle, 2015; Naldi, Wikström & Von Rims- (Cable, 2016). The case of Netflix in Canada dem- with the status quo and a marked need to revise the
cha, 2014; Oliver, 2014). Disruption of core tech- onstrates how the Canadian broadcast industry is current rules regulating the operation of Canadian
nologies “inevitably creates tension for regulatory being disrupted through “big bang” innovation in television (CRTC 2014-190).
institutions” (Downes & Mayo 2015, p. 11), raising the screen media sector. The U.S.-based Netflix has Although at previous Canadian television policy
acute policy issues concerning jurisdiction, access, been operating in Canada only since 2010, but is hearings Netflix portrayed itself as complementary
pricing, consolidation of ownership, and source di- estimated to have attracted nearly 50% of Anglo- to the traditional Canadian television system, its
versity (Holt, 2014; Simon & Bogdanowicz, 2012). phone Canadians as subscribers (MTM, 2016). Our recent activity, messages to shareholders, and
Disruption causes the legacy regulatory regime to paper focuses on a recent landmark event in Ca- venture into original content show that it now has
become “unstuck” in the sense that “the old [policy] nadian broadcasting policymaking: the Canadian other plans. Here, we examine the entry of Netflix
instruments, like existing national mechanisms for Radio-television and Telecommunications Com- into a domestic broadcasting system that is already
direct support and domestic content regulations, mission’s (CRTC) “Let’s Talk TV” hearings of 2013- affected by a political environment favorable to
may no longer work,” while there is lack of a “clear 2014. On October 24, 2013 the Canadian broadcast transitioning away from cultural protectionism
idea about what to replace them with” (O’Regan & regulator (CRTC) announced the launch of a year- towards deregulation and free market strategies,
Goldsmith, 2006, p. 82). Regulatory “unsticking” long, three-phase review of the Canadian broad- with a recent federal governing party that chose
exposes the mixture of entitlements and respon- casting system. The policy process, dubbed “Let’s consumer sovereignty as a plank in its 2015 election
sibilities constituting the legacy regime, as well Talk TV” (LTT), invited stakeholders, including platform. Below we discuss Netflix’s activities
as what Freedman (2015) calls “policy silences,” individual Canadians, to “shape the future” of the in Canada, its encounter with the country’s
pathways that are not considered or discussed television system so that it “is adaptable for years media regulatory agency, and the responses it
publicly. to come” (CRTC Notice 2013-563). The need for has elicited in the Canadian television industry.
The Journal of Media Innovations 4.1 (2017) 5Zboralska and Davis, The Case of Netflix in Canada Through an examination of publicly available or can be regulated in the national interest. The Although hundreds of Internet-based video ser- documents, including filings to the CRTC, letters to case presented here illustrates how disruption vices have emerged since the late 1990s, most of shareholders, leaked e-mails, and other company of regulated media industries involves processes these services have been marginal or niche players texts and communications, we analyze the ways that of “unsticking” of regulatory regimes, exposing (Cunningham & Silver, 2013), allowing domestic Netflix is considered to represent an opportunity policy silences and showing that transnational broadcasters and cable operators to enjoy a cer- or a threat by the various players in the Canadian challengers seek rapid expansion among domestic tain bargaining power in architecting delivery plat- television system: consumers, broadcasters, consumers not just for purposes of revenue growth, forms (Baccarne et al., 2013; D’Arma, 2010; Evens, independent producers, and governments. We positioning, or branding, but also to provide 2014; Meisel, 2013). However, the key architects of show that many of the principles that motivated leverage in domestic regulatory reform. the emerging media ecosystem are not these niche and shaped legacy broadcasting policy in Canada video distributors, nor the domestic providers of are being marginalized by a consumerist policy fixed-line or wireless pathways to consumers, but approach that gives much freer rein to streamed INNOVATION, REGULATION, AND DISRUPTION instead providers of transnational cloud-based services than to legacy forms of video distribution. services, which encompass storage, processing, This places incumbent broadcasters at a relative Digitization affects media industries by driving the databases, software, networks, and platforms. Ac- disadvantage vis à vis the over-the-top operators cost of additional copies of media content to zero, cording to Noam (2014), advantages of scale and (OTTs), inspiring uncharacteristic expressions of enabling multiple uses and reuses of media content. scope are favouring the emergence of a small global interest from incumbents in a regulatory regime It enables interactivity and extensive data collec- oligopoly of cloud providers who exercise consid- they formerly portrayed as burdensome. The tion regarding consumer behavior, provides “loca- erable market power over users and providers of unscripted dénouement of the LTT hearings came tion agnostic” advantages to players who can lever- hardware, software, transmission, and content when Netflix publicly rejected the Commission’s age economies of scale and scope, and disrupts and inputs. Noam considers that the most likely cloud jurisdiction over online streamed video services reconfigures distribution networks. Media, IT, and providers in the emerging online media ecosystem in Canada and refused to provide the Commission telecommunication sectors that were formerly sep- will be “tech companies that have morphed into with the information it was ordered to produce. arate are becoming intermingled, leading to a new media, such as Google or Apple, or ... hybrid ‘tech- This turn of events suggests that the most serious business ecosystem in which all segments compete media’ firms such as Netflix or Amazon” (p. 688). potential disruption in broadcasting’s digital with all other segments for access to end-users and Most of the approximately 500 OTT service provid- transition is to policy itself, by making moot the consumers (Simon, 2012; Simon & Bogdanovich, ers in the world in 2016 serve local markets; the top assumption that online content distribution should 2012). five OTT service providers (Netflix, Amazon, Hulu, The Journal of Media Innovations 4.1 (2017) 6
Zboralska and Davis, The Case of Netflix in Canada
HBO, and YouTube) currently represent about half During television’s second and third generations (Hasselbalch, 2014, p. 23). Two conditions must be
of the $25 billion in worldwide OTT revenues (Ar- (multichannel satellite, cable, telecom networks, met in order for a policy regime to become disrupt-
thofer et al., 2016). and digital television), although carriage capacity ed: 1) the innovator must move first, steering the
The expansion of players from the computer increased significantly, most governments contin- market, and its development, and 2) the externali-
industry into new industries radically disrupts ex- ued to regulate domestic broadcasting systems by ties arising from the innovation must be considered
isting business models (Kushida, 2015). Downes requiring licenses or notification for television dis- controversial and enter public and political debate
& Nunes (2014) call the process of innovation in tribution (Schweitzer et al., 2014). The fourth gen- (Hasselbalch, 2014). Three factors allow an innova-
which newcomers take advantage of digital and eration of television, video streamed over Internet tor to move before the regulator: novelty (when the
cloud-based technologies to offer consumers mas- broadband, provides high resolution, peer and per- innovation presents something regulators have not
sively better, cheaper and more customized experi- son-to-computer interactivity, asynchronous view- encountered), speed (when it rapidly creates new
ences from the moment of market entry big bang ing, multiplatform distribution, and user-generat- markets), and obscurity (when it and its transac-
disruption. Highly capitalized transnational OTT ed peer-to-peer content (Noam, 2014), presenting tions develop and occur outside of the purview of
streaming video content providers have definite significant challenges to policy regimes, their his- regulators) (ibid.).
advantages over domestic cable, broadcasting, and torical rationales, and regulated incumbents. Downes & Mayo (2014) argue that regulatory
satellite services, whose business model involves Cable (2016) emphasizes the increased inci- inertia in the face of disruptive innovation in the
bundling content with distribution. OTT content dence of “reformer startups” or fast-moving, well- communications sector stems from: 1) an increas-
providers are able to attract customers away from capitalized newcomer firms that “operate in the ing mismatch between regulations and the reality
domestic distributors on the basis of lower cost, face or shadow of prohibited regulatory regimes” that regulated markets are now consistently driven
greater choice, greater convenience, and (thanks (p. 2). These firms rapidly gain traction in the do- by innovation, 2) the failure of regulatory bodies to
to their huge collections of data on viewing prefer- mestic market and grow large customer bases, de- adapt their rules when regulations made by com-
ences) personalized playlists. They also enjoy deep terring regulatory intervention and disrupting the peting or complementary bodies are altered, and 3)
pockets, brand recognition, and a favorable regula- policy regime. Policy disruptions are characterized political forces which must navigate the institution-
tory environment (Lee, 2014). by “a change in the material conditions of a market alized distribution of benefits created by previous
Governments regulated the first generation of (either an existing one or a new one), which leads policy regimes. The political dimension of regula-
television, over-the-air broadcasting, justifying to an invalidation of existing regulatory expecta- tory decisions in the face of disruptive innovation
their licensing requirements on the grounds of tions, norms, ideas and frameworks, and pressure is increasingly significant in situations where the
public ownership of scarce spectrum frequencies. to accommodate and eliminate this invalidation” status quo is justified in terms of abstract public
The Journal of Media Innovations 4.1 (2017) 7Zboralska and Davis, The Case of Netflix in Canada
benefits (Cable, 2016). Because reformer startups domestic content to the digital sphere, continuing broadcasting activities in Canada. The Act provides
offer consumers immediate benefits, regulations to focus their efforts on the legacy broadcasting that “Canadian broadcasting shall be effectively
that negatively affect these benefits can carry sig- system, and favoring market forces and consumer owned and controlled by Canadians.” The Canadi-
nificant political cost (ibid.). satisfaction as the driver of innovation, rather than an broadcasting system, the Act continues, should
Thus, due to their deep pockets and their ex- other dimensions of public interest (Freedman, “serve to safeguard, enrich and strengthen the cul-
ponential growth that occurs in the shadow of ex- 2015b). On the whole, little effort has been made tural, political, social and economic fabric of Cana-
isting regulatory regimes, reformer startups have to secure new digital shared public spaces, which da” by encouraging “the development of Canadian
substantively more clout in their interactions with could complement, supplement, or perhaps even- expression” by “displaying Canadian talent in en-
regulators than the less-capitalized startups of the tually replace those shared televisual spaces his- tertainment programming” and by “offering infor-
past (Cable, 2016). Rational choice theory predicts torically safeguarded by legacy broadcasting policy mation and analysis concerning Canada and other
that coalitions of opposing interest groups who de- (Freedman, 2010; 2015b). Notably, proposals to countries from a Canadian point of view” (Part 1,
cide on a common goal are more likely to succeed secure and cultivate shared national spaces in the Section 3). According to the Act, the broadcasting
in steering regulatory decisions in their collective digital realm are treated as relics of an earlier era. system should be reflective of Canada’s multicul-
favour than groups with dissenting goals. Yet these turalism, in both “its programming and ... employ-
coalitions ultimately may have divergent goals. ment opportunities” (Part 1, Section 3.1.d.iii). The
Cable (2016) evokes regulatory economist Bruce CULTURAL SOVEREIGNTY AND THE Act also stipulates that each broadcasting under-
Yandle’s famous “Bootleggers and Baptists” catch- DOMESTIC POLICY ENVIRONMENT taking must make “predominant use, of Canadian
phrase to refer to such a situation in which makers creative and other resources in the creation and
of illegal alcohol supported religious prohibition- Canadian broadcasting policy has developed an presentation of programming” (Part 1, Section 3).
ists in order to drive up demand for product only uneasy mixture of economic and cultural objectives Achieving these policy objectives involves a
they could supply. In the present case, transnation- to attain a measure of cultural sovereignty in the “high-end trade off” wherein “once admitted into
al providers of online services ally with domestic context of Canada’s small national market, which is the market, Canadian companies are protected
consumers in support of consumer sovereignty in now dominated by a handful of domestic vertically from competition, especially foreign competition”
order to deter extension of domestic regulations. and horizontally integrated media and telecom- (Raboy & Bonin, 2008, p. 61). In return they are
In most jurisdictions, regulatory regimes for munications conglomerates (Edwardson, 2008; expected to contribute to the goals and objectives
broadcasting have not extended their concerns Winseck, 2008). The 1991 Broadcasting Act (“the of the Broadcasting Act, including production and
about production, distribution, and exhibition of Act”) is the preeminent legislation that governs exhibition of unprofitable Canadian content. The
The Journal of Media Innovations 4.1 (2017) 8Zboralska and Davis, The Case of Netflix in Canada
Act provides the basis for Canada’s complex broad- ing Act and declined the CRTC’s request to provide sive and more lucrative to import content from
casting “policy toolkit” (Grant & Wood, 2004), information about subscribers, audiences, and the elsewhere. Canadian broadcasters therefore gener-
which currently consists of the maintenance of a Canadian content it distributes. ally treat Canadian content as a burden they must
Canadian national public broadcaster, Canadian endure in exchange for the industrial protections
content expenditure and scheduling requirements, they receive (Grant & Wood, 2004; Le Goff et al.,
foreign ownership restrictions on broadcasting en- NETFLIX: FRIEND OF CANADIAN 2011; Picard et al., 2015). When English-speaking
tities, competition policy, and subsidies and tax in- CONSUMERS Canadians watch drama or comedy on television,
centives. The Act gives the Commission the power it is imported content four times out of five (CRTC,
to exempt entities from any and all regulatory re- Canada was the first target of Netflix’s international 2013). Meanwhile, Canadian consumers and crit-
quirements if it “is satisfied that compliance with expansion. After Netflix’s 2010 entry into Canada, ics lament the mediocrity of English-language Ca-
those requirements will not contribute in a materi- its popularity with Canadian consumers grew rap- nadian television content, especially drama, which
al manner to the implementation of the broadcast- idly. Through its pricing, its advocacy of net neu- generally has underperformed among English-
ing policy” (Part 2, Section 9.4). Since 1999, foreign trality, and its tolerance of Canadian customers us- speaking Canadian audiences (Coutanche, Davis &
and domestic new media in Canada operate under ing virtual private networks (VPNs) to tap into the Zboralska, 2015).
the Digital Media Exemption Order (DMEO), and company’s much richer program offerings in the Of all the players in the domestic television
are not required to contribute to the goals ascribed U.S. market, Netflix has positioned itself as more ecosystem, it is the domestic broadcasters that
to the Canadian broadcasting system. friendly to Canadian consumers than the incum- have developed the most problematic reputation
Although some reports submitted to the 2014 bent domestic broadcasters. In typical big bang among consumers, who express their dissatisfac-
“Let’s Talk TV” hearings determined that over-the- disruptor fashion (Cable, 2016; Downes & Nunes, tion across a multitude of fora, including interven-
top video streaming did not represent an immedi- 2014; Hasselbalch, 2014), Netflix has been able to tions submitted to CRTC public consultations and
ate threat to Canadian incumbents, it was thought offer greater choice, convenience, and affordability through less formal channels such as online news-
that a tipping point could be reached in three to five at market entry, rapidly growing its market share in paper comments sections, social media, and blog
years. The question of how a national media regu- the face of regulatory uncertainty. posts. Frequently cited complaints include: billing
latory agency might regulate a transnational video Canadian audiences are highly attracted to im- errors; dissatisfaction with content and the way it
streaming service, and in whose interest, burst un- ported American drama and comedy, and domestic is programmed (i.e. the perception that there is too
expectedly into the open when Netflix claimed to broadcasters resist the obligation to produce and much repetition in programming) and sold (i.e. the
operate outside the jurisdiction of the Broadcast- exhibit Canadian content because it is less expen- way content is bundled and organized across vari-
The Journal of Media Innovations 4.1 (2017) 9Zboralska and Davis, The Case of Netflix in Canada
ous tiers); a belief that broadcasters’ services are We are a relief from the complexity and frustration provide undue preference to themselves by raising
inflated in price; and a dissatisfaction with custom- that embody most MVPD [multichannel video pro- Internet rates, or lowering Internet data caps, and
er care. A recent study found that 51% of Canadian gramming distributor] relationships with their cus- engaging in unfair traffic management strategies,
linear television subscribers contact their providers tomers. We strive to be extremely straightforward. rendering the streaming of audiovisual content
for customer service, and that 33% of these individ- There is no better example of this than our no-hassle from third parties potentially cumbersome and un-
uals do not have their complaints resolved by their online cancellation. Members can leave when they affordable (Guindon & Dennie, 2010; Middleton,
service provider on the first call (J.D. Power, 2014). want and come back when they want. (Netflix, 2015a) 2011; Quail, 2012; Winseck 2008). Internet pricing
Canadian media scholars have argued that the and quality fundamentally affect streaming behav-
CRTC historically has been under regulatory cap- Although penetration rates of Internet are high iours (Stewart, 2015), and are thus of paramount
ture by the private sector (Hoskins & McFadyen, in Canada, the country ranks low on key indicators importance to Netflix.
2004; Raboy, 1990; Raboy & Bonin, 2008; Skin- related to Internet quality, value, and download Net neutrality has emerged as a politically
ner, 2008), or alternatively that Canadian commu- speed when compared to other OECD countries charged issue in Canada and abroad, and Net-
nications policy has existed in a “vacuous nether- (Ookla, 2015a, b, c). Netflix has publicly criticized flix has conspicuously placed itself on the side of
land,” marked by “the worst of all possible worlds” Canadian ISPs for their cost and quality of service. consumers in this regard. Netflix has presented
where “neither regulated monopoly, meaningful In 2012, Netflix’s chief content officer, Ted Saran- itself as a champion of net neutrality, giving itself
competition, [n]or regulatory responsibility pre- dos, commented that “what they’re charging for In- a positive aura from the perspective of advocates
vail” (Winseck, 1998, p. 257). Given Canadian rules ternet access in Canada” is “almost a human rights and consumers. Netflix’s advocacy of net neutral-
against majority foreign ownership of broadcast- violation” and that Netflix’s performance in the Ca- ity presents a powerful veneer of the greater good
ing and telecommunications entities, Canadians nadian market would be even better were it not for over its own economic interests. Strong net neu-
did not have many alternatives until the arrival of the “almost third-world access to the Internet” sold trality laws allow Netflix to profit from the sale of
Internet-based streaming services such as Netflix. at bandwidth caps that are prohibitive to stream- its services directly to consumers without having to
Netflix has committed itself to providing an excel- ing (Tencer, 2012). Indeed, scholars have long make costly investments in network infrastructure.
lent user experience, and has identified consumers’ recognized that the vertically integrated Canadian In 2015, Netflix spent 1.32 million dollars (U.S.)
troubled relationships with domestic incumbents incumbents, with assets in telecommunications, on its lobbying efforts, most of which were aimed
as an opportunity to exploit: content creation, traditional television distribu- at Internet-related issues (Center for Responsive
tion, and Internet distribution, have the capacity to Politics, 2016), and U.S. federal records indicate
The Journal of Media Innovations 4.1 (2017) 10Zboralska and Davis, The Case of Netflix in Canada that in 2012, Netflix formed a political action com- used a virtual private network (VPN) to access the of the Canadian vertically integrated communica- mittee (PAC), permitting it to contribute directly to U.S. version of the service, bypassing the Canadian tions firm Rogers, David Purdy, allegedly remarked federal campaigns (Thier, 2012). rights market completely (Kwong, 2015). Canadi- that VPNs should be made illegal by the Canadian Despite the fact that Netflix and consumer in- ans were eager to access the U.S. version of the ser- government in order to maintain a distinct rights terests are currently closely aligned, the limits of vice due to its richer content catalogue at the time. market in Canada (Tencer, 2015). Bell Media presi- this relationship have yet to be tested. Although Netflix’s user contract has long contained a dent Mary Ann Turcke equated Canadian consum- publicly a champion of net neutrality, Netflix has, clause that permits it to suspend user access on ers’ usage of VPNs with stealing, triggering a wave on multiple occasions, agreed to deals in which its the suspicion of territory circumvention (Netf- of consumer and media backlash (Dobby & Brad- services become prioritized, effectively undermin- lix, 2014c). For years the company did not act on shaw, 2015). While Netflix was being permissive ing its commitment to the principle, including a these provisions, although it faced increasing pres- with its tolerance of VPN-masking behaviour, old- multi-year direct traffic access deal with Comcast sure from rights owners to do so. Indeed, Netflix’s media incumbent and Hollywood studio-owned in 2014 (Brandom, 2014; Gustin, 2014), and one (leaked) contract with Hollywood’s Sony Studios streaming service, Hulu, had long enforced a stron- with Australian ISPs that sees its content excluded reveals that it is required to “use ... geolocation by- ger, payment-based authentication system, which from data caps (Netflix, 2015b). Now that it has pass detection technology” to identify territory cir- had largely eradicated out-of-market access to its reached its current size, Netflix has indicated that cumvention services (WikiLeaks, 2015a). Leaked service (Van der Sar, 2014). Netflix thus could have even if net neutrality rules were to weaken under private e-mails between Sony executives revealed similarly imposed stronger geolocation restrictions the current Trump administration, its bottom line their “deep dissatisfaction” with Netflix’s inatten- if it had been so inclined at the time. The issue would be materially unaffected “because we are tion to the matter, and the apparent intentionality was therefore not primarily a technological one, now popular enough with consumers to keep our of this behaviour, noting that Netflix had the incen- as implied by Netflix when it appeared before the relationships with ISPs stable” (Netflix as cited in tive to be permissive with VPN usage “since they Commission during LTT (CPAC Digital Archives, Dunn, 2017). are getting paid by subscribers in territories where 2014b). Another aspect of Netflix’s consumer-friendly Netflix does not have the rights to sell our content” Rather than enforcing stricter protocols, in aura, adding weight to the Baptists and Bootleggers and “have every motivation to continue” given that 2015, Netflix CEO Reed Hastings publicly com- analogy (Cable, 2016), was Netflix’s long-time tol- increased subscriptions lead to a higher market mented that he hoped Netflix would be able to “get erance of customers who surreptitiously bypassed valuation (WikiLeaks, 2015b). Canadian rights global and have its content be the same all around the rights market in their own territories. In 2015, holders also objected to Netflix’s extended toler- the world so there’s no incentive” to use a VPN an estimated one-third of Anglophone Canadians ance of rights violations. The senior vice president (Hopewell, 2015). Just one year later, after Net- The Journal of Media Innovations 4.1 (2017) 11
Zboralska and Davis, The Case of Netflix in Canada
flix’s entry into another 130 territories and Hast- LET’S TALK TV each regulatory process is “its own political econo-
ings’ declaration that the world was “witnessing my, and we cannot assume that the benefits of in-
the birth of a global TV network” (Liedtke, 2016), The CRTC’s review of the Canadian broadcasting novation necessarily outweigh” traditional policy
Netflix finally began enforcing its own longstand- system, “Let’s Talk TV,” invited stakeholders, in- concerns (p. 12).
ing policies on out-of-market access (O’Neil, 2016; cluding individual Canadians, to “shape the future” Although the CRTC is an independent body that
Slater-Robins, 2016). Increased pressure on Netflix of the television system so that it “meets the needs is supposed to operate at arm’s length from the
to honour its agreements with rights holders is like- of Canadians as consumers, creators and citizens” government, it is not completely insulated from
ly behind the change in strategy. Prior to its recent and “is adaptable for years to come” (CRTC 2013- politics (Salter & Odartey-Wellington, 2008) and
global expansion, it made economic sense for the 563). The hearings had broad scope and examined its orientation is certainly affected by the govern-
company to tolerate surreptitious access, given that programming, distribution and access, and acces- ment of the day (Raboy, 1994). The chairperson is
many paying users were only able to access the ser- sibility issues. The Commission warned that the appointed by the federal government. The regula-
vice through VPNs when living in areas where the evidence collected during the LTT process could in- tor thus brings its own conceptual lens, which de-
company was not officially a market player (Slater- dicate the need to “remove or adapt some ... exist- fines and limits the field of potential action, and
Robins, 2016). In view of Netflix’s recent global ing regulations” and that the Commission was not determines which issues are deemed to be salient
expansion, the risks associated with its permissive- “interested in satisfying anybody’s sense of entitle- and worthy of attention.
ness (i.e. potential legal action by rights holders) ment, based on the way things used to be” (Blais, Freedman’s (2010) concept of “policy silence”
now outweigh the benefits. 2013b). is particularly useful for examining the trajectory
In summary, with respect to its public image The LTT process demonstrates the significant of LTT in order to recognize potential alternative
and branding, Netflix has closely aligned itself with political tensions that come along with the intro- pathways that were not given consideration. Ac-
consumer interests such that many regard it as duction of disruptive innovation into regulated cording to Freedman (2010), policy scholars must
an emancipatory and innovative disruptor of the markets. By making changes to existing regimes, “dig a little deeper” than the visible spectrum of the
much-derided Canadian status quo. In the next regulators are at once at risk of alienating voter- policy process (p. 347). Policy silence refers to the
section, we analyze “Let’s Talk TV” interventions to consumers, disturbing the complex set of institu- options that are not considered, to the questions
show how OTT is perceived to disrupt the Canadian tionalized benefits and tradeoffs developed in the that are kept off the policy agenda ... and to the
broadcasting system. previous regime, and inadvertently acting as barri- values that are seen as unrealistic or undesirable
ers to innovation with the absence or introduction by those best able to mobilize their policy-making
of new rules. As Cable (2016) contends, however, power. (Freedman, 2010, p. 355)
The Journal of Media Innovations 4.1 (2017) 12Zboralska and Davis, The Case of Netflix in Canada
From our analysis of the major LTT documents, ming if it is going to increase the price for consum- posed the forced unbundling of cable and satellite
it seems clear that the Commission never intended ers” (CRTC, 2014b). Although Jenny’s statement program packaging in the linear television realm so
to impose any regulatory requirements on Netf- did not mention costs, and expressed only a convic- that it more closely resembles the responsiveness
lix or any other foreign OTTs. Notably, a question tion that OTTs should contribute to the creation of and consumer choice offered by OTTs.
about whether foreign OTT services should be sub- Canadian jobs and content, the implicit suggestion The Commission seems not to have intended to
ject to domestic content requirements was absent that such requirements would automatically result modify the Digital Media Exemption Order under
from the 80 questions the Commission posed to in increased costs to consumers was reinforced by which foreign OTTs such as Netflix operate. In-
stakeholders in the Notice of Consultation (CRTC John’s statement. The survey thus made the no- stead, the Commission sought to showcase Netflix
2014-190) it issued to launch the final, most formal tion of OTT contributions to domestic content in the LTT hearings as a beacon of innovation and
phase of the LTT process, or in the later working unattractive to survey participants, 67% of whom a model for Canadian incumbents. However, this
document (CRTC 2014-190-3), which proposed agreed with John. approach backfired when Netflix refused to pro-
various concrete policies for consideration. There The Commission’s active concern throughout vide the Commission with the information needed
was no question regarding what to do with foreign the policy process was the identification and re- to make the case, and the hearings concluded with
OTTs, and no policy options concerning the issue moval of regulatory “barriers” that supposedly Netflix’s outright rejection of the Commission’s ju-
were put forward for consideration. Although ex- have impeded the Canadian broadcasting system in risdiction over its operations in Canada.
plicit questions about the imposition of cultural ob- “adapting to change” (CRTC 2014-190). The Com- In the following sections, we discuss the major
ligations on OTTs never made it to the more formal mission portrayed Netflix and other OTTs as ushers arguments presented by the various stakeholders,
documents introduced later in the LTT process, the of the change, noting that Canadian consumption including Netflix, on the topic of foreign OTTs in
early “Choicebook” survey, designed for participa- of video is increasingly moving from “scheduled Canada. Most broadcast industry stakeholders
tion from the general public, did feature one ques- and packaged programming services to on-demand (other than Netflix) perceived the Commission’s
tion on the topic. The question asked the public and tailored programs” (CRTC 2014-190). Accord- use of Netflix as exemplary of a 21st century broad-
to side with one of two statements, made by two ing to the Commission, the rise of on-demand cast model as deeply flawed, and argued against us-
fictional characters, Jenny and John. John’s state- viewing on the Internet has changed viewers’ ex- ing this model as the basis for making wide-ranging
ment associated the imposition of Canadian con- pectations more generally, and has led to a growing and substantive changes to the regulation of tradi-
tent requirements on OTTs with increased costs: dissatisfaction with the Canadian traditional sys- tional linear broadcasting.
John “does not think online services should be re- tem at large (CRTC 2014-190; Blais, 2013b). Using
quired to contribute to Canadian-made program- OTTs as the exemplar, the Commission then pro-
The Journal of Media Innovations 4.1 (2017) 13Zboralska and Davis, The Case of Netflix in Canada
STAKEHOLDER POSITIONS Additionally, we found that of the 137 interventions – including Canada’s net neutrality policy – and
from individual Anglophone Canadians to the Com- undue preference rules, but do not contribute in a
Broadcasting regulatory proceedings such as LTT mission’s final phase of the policy process that ex- reciprocal manner (CBC, 2014; MTCS, 2014).
often engender stark divisions of opinion among pressed a definitive statement either for or against 2) Stakeholder groups pushed back against the
stakeholder groups. In the case of LTT, major in- the issue, all but three were in favour of extending Commission’s apparent embrace of the “digital
dustry stakeholders unanimously agreed that for- cultural obligations to Netflix and other OTTs. sublime” (Mosco, 2005), or belief in the unquali-
eign OTTs such as Netflix are having a profound Three key arguments pertaining to foreign fied transformational power of the Internet – in
and tangible impact on the Canadian broadcast- OTTs recurred regularly in the submissions from this case, as a new global distribution platform,
ing system. Most of Canada’s major Anglophone major industry stakeholders (broadcasters, creator and the solution to Canada’s problem of having a
broadcasters either expressly recommended that groups, and governments): domestic market that is too small to support the
the Commission impose contribution require- 1) Industry stakeholders believed that the Cana- production of expensive content. In a speech to in-
ments on foreign OTTs such as Netflix (Bell, 2014; dian government has created an environment that dustry delegates prior to the launch of LTT, CRTC
CBC, 2014), or argued that if the Commission is is more favourable to foreign firms than to Cana- Chairman Jean-Pierre Blais remarked that new
not prepared or able to impose such requirements, dian ones: Netflix does not pay sales tax in Canada, broadband-based technologies and services offer
it should similarly refrain from imposing them incur expenses related to regulatory processes, or Canadian creators an “unprecedented opportuni-
on domestic services (Corus 2014; Rogers, 2014; make financial contributions toward the funding ty,” “extraordinary possibilities,” and open “doors
Shaw, 2014). Only one major (Anglophone) broad- of Canadian content. According to one incumbent, to niche markets unimaginable even a decade ago”
caster (Shaw, 2014), argued against the applica- this amounts to a cost advantage of 19-20% (Bell, (Blais, 2013a).
tion of regulatory requirements on foreign OTT 2014). In addition, Netflix has no regulatory con- Stakeholders were skeptical about the value of
services such as Netflix. Canada’s principal trade straints, including no restrictions on sources of these opportunities. One intervention represent-
associations and guilds representing actors, direc- programming, no limits on advertising, no acces- ing Canada’s writers summarized the concern well.
tors, writers, and independent production firms sibility expenditures for described video or closed The organization argued that the notion that the
(ACTRA, 2014; CMPA, 2014; DGC 2014; WGC, captioning, and does not contribute toward the Internet eradicates barriers to the creation and dis-
2014), and the province of Ontario (the epicentre of infrastructure costs required for service delivery tribution of quality content is mistaken, and leads
Canadian television production), each argued that (Bell, 2014; Corus, 2014; Rogers, 2014). The bot- to a conviction in neoliberal economics and dereg-
Netflix and other foreign OTTs should be required tom line is that foreign OTTs benefit financially and ulation, in the belief that the new “perfect markets”
to contribute to the creation of Canadian content. strategically from Canada’s regulatory protections created by the Internet will naturally lead to the
The Journal of Media Innovations 4.1 (2017) 14Zboralska and Davis, The Case of Netflix in Canada
creation of the best content, which will automati- content producers to learn their crafts. Stakehold- tain key objectives codified in the Act. Among its
cally find its ideal audience online, with the finan- ers were concerned that an OTT model could not most substantive claims, Netflix (2014) maintained
cial rewards of such content flowing to those who provide the same training grounds for new artists that it serves “diverse communities,” unlike tradi-
most deserve them. (WGC, 2014) since Netflix does not produce nearly the same tional broadcasters who, due to a reliance on ad-
Other stakeholders pointed out that the low quantity of content, in Canada, that is produced by vertising, focus primarily on content with mass ap-
barriers to entry in the digital space lead to the er- the legacy system (Corus, 2014; WGC, 2014). peal. Netflix further argued that through consumer
roneous belief that “one can compete in the digital 3) Finally, a recurrent argument pertaining to demand and market forces alone, it has stimulated
interactive world with cottage industries” (Corus, Netflix relates to its refusal to divulge data about its innovation in the delivery of, and access to, pro-
2014, para. 49). Stakeholders called attention to audiences, an issue frequently reported by industry gramming; that it grows demand for Canadian au-
the difference in size: While the major Canadian observers (for example, Stilson, 2014). In their sub- diovisual content and expands content production
broadcasters may be large players in the Canadian missions, stakeholders (ACTRA, 2014; Bell, 2014a; sources; and that it extends the reach of the public
industry, transnational digital companies have a DGC, 2014; MTCS, 2014) urged the Commission to broadcaster and Canadian content more generally
substantial scale advantage that Canadian com- require foreign OTTs to submit annual reports on by disseminating this content to global audiences.
panies do not (Corus, 2014). The major industry their levels of spending on Canadian content, and Although Netflix did not request to present at
stakeholders also contended that Netflix’s business their revenues in the Canadian market so industry the oral hearing, the Commission invited it to ap-
model cannot be adopted by broadcasters since and audience developments can be better moni- pear. During the oral component, the Commission,
they have many other obligations that Netflix does tored. looking for evidence to “support the conclusions
not have, including obligations to be responsive that Netflix is advocating – that Internet video pro-
to local communities through news and informa- viders can support the policy objectives under the
tion services, upgrading costs, and investments in NETFLIX AND THE REGULATORY Broadcasting Act ... without the need for any addi-
human capital and skills retraining (Bell, 2014b; SHOWDOWN tional regulatory action” (CRTC, 2014c), requested
CMPA, 2014; Corus, 2014; WGC, 2014). Others information from Netflix to substantiate the claims
pointed out the curious economics of Netflix, not- Netflix’s own written intervention to the LTT pro- made in its written submission. Specifically, the
ing that it has built its empire with content that cess demonstrated a clear understanding of tra- regulator was seeking information about the num-
was produced by the legacy broadcasting and film ditional Canadian broadcasting policy goals, and ber of Netflix’s Canadian subscribers, how Canadi-
systems, which provided the training grounds for many of its arguments responded directly to cer- an content performs globally, how much Canadian
The Journal of Media Innovations 4.1 (2017) 15Zboralska and Davis, The Case of Netflix in Canada
content is watched by Canadians, how much of DISRUPTION, CONSUMER SOVEREIGNTY, parency in the broadcasting system (ACTRA, 2014;
Netflix’s library is Canadian, and how much Netflix AND ELECTORAL POLITICS Bell, 2014; DGC, 2014). This would have required
spends on Canadian original content (CPAC Digital the Commission to strongly assert its jurisdiction
Archives, 2014b). Despite the lack of concrete (and requested) evi- over non-Canadian broadcaster affiliated OTTs.
After several requests by the CRTC and a heated dence from the major foreign OTT provider of pro- These overlooked potential policy pathways could
debate, Netflix refused to comply. In a letter ad- fessional screen programming in Canada on how have been part of a larger initiative to design a cul-
dressed to the Commission following the hearing, it contributes to the goals of the Broadcasting Act tural policy toolkit for the digital age.
Netflix stated that the Commission’s orders for without any formal regulatory requirements to do Further evidence that the Commission regarded
the information “are not applicable to Netflix un- so, and with reasons for concern provided by other Netflix as an exemplar to be emulated by incum-
der Canadian broadcasting law” (Vlessing, 2014) industry stakeholders regarding OTT distribution bents can be seen in its decision to incentivize the
and that Netflix’s responses are filed “voluntarily” of video content, the Commission concluded that adoption of an open OTT model. The Commis-
and do not represent “an acknowledgment of or “licensing digital media broadcasting undertakings sion created a new “hybrid” category of service
attornment to either the jurisdiction of the Com- is generally not necessary to achieve the broad- (CRTC 2015-86) that exempts previously regulated
mission by Netflix, or the substantive application casting policy objectives set out in the Act” (CRTC video-on-demand platforms based in traditional
of Canadian law (including the provisions of the 2015-86). Notably, the Commission opted not to delivery systems (cable, satellite, IPTV) from all
Broadcasting Act) to Netflix” (Netflix, 2014d). Fol- initiate a separate review of the Digital Media Ex- Canadian content requirements and restrictions,
lowing Netflix’s refusal to provide the requested emption Order, as was suggested by some indus- provided that broadcasters make the same pay ser-
information, the Commission struck its participa- try interveners (Bell, 2014; OMTCS, 2014; WGC, vice available online to all Canadians on an OTT
tion from the public record completely, removing 2014) who requested a review in order to be able video-on-demand platform. In an effort to encour-
its written submission and even the transcripts of to derive a more complete picture of the over-the- age incumbents to move into the online space, the
its oral participation at the hearing from LTT docu- top environment and its effects on the Canadian in- Commission initially proposed that incumbent
mentation, thereby adding to the accumulation of dustry. It similarly decided not to institute annual broadcasters be able to count their expenditures
policy silences. requirements for non-Canadian broadcaster affili- on Canadian content placed online as part of their
ated OTTs, such as Netflix, to disclose information required spending on Canadian programs (CRTC
regarding their Canadian business operations and 2014-190-3), but ultimately decided not to imple-
expenditures, as was also suggested by other in- ment this measure. Without any Canadian content
dustry interveners in order to restore overall trans- requirements in the online space, and now linked
The Journal of Media Innovations 4.1 (2017) 16Zboralska and Davis, The Case of Netflix in Canada
video-on-demand services on traditional televi- regulator has demonstrated a rupture from some quire channels to be unbundled” (ibid.). Shortly
sion, the Commission’s decisions assume that in- of the public good values and goals related to cul- thereafter, the Commission received an Order-in-
cumbents will voluntarily produce or acquire Cana- tural sovereignty that it previously sought to secure Council requiring it to submit a report about how
dian content for online distribution. in the legacy broadcasting space. In its reprioritiza- consumer access to programming on a per-channel
In its desire to align the linear environment with tion of values, consumer concerns – the desire for (unbundled) basis “can be maximized in a manner
the more flexible OTT space, the LTT process con- convenience and more control, for example – have that most appropriately furthers the implementa-
cluded with the regulator requiring the unbundling been given top billing. tion of the broadcasting policy for Canada” (Order-
of cable and satellite channels by December 2016 It is important to mention also that the timing in-Council 2013-1167).
(CRTC 2015-96). While maintaining requirements of the Commission’s major television policy review There were thus clear political expectations
that broadcasters spend a set portion of revenues coincided with an upcoming federal election. The that the Commission conduct the LTT hearings in
on Canadian content, the Commission eliminated party then in power, the Conservative Party, select- a manner consistent with the consumerist orienta-
all requirements for exhibition of Canadian content ed a consumerist platform for this election. At the tion endorsed by the federal conservatives. While
from television except in the prime time evening start of CRTC Chairman Blais’ appointment, the the LTT hearings were still ongoing, and before the
hours. These changes, taken together, are expected Minister of Heritage sent a letter to the new appoin- Commission took any decisions, the (Conservative)
to affect the quantity of Canadian content that is tee expressing his belief that the Commission could Minister of Heritage publicly commented that the
commissioned, and the range of available choices, do a better job of addressing consumer issues, by, federal government would “not allow any moves to
with spending on domestic Canadian content over among other things, ensuring that consumers have impose new regulations and taxes on Internet vid-
the next four years forecast to decline to one-third access to “more” and “affordable” programming eo” (Bradshaw, 2014a). Although the CRTC publicly
of what it is today (Nordicity & Miller, 2015). The choices across all distribution platforms, includ- made assurances about the fairness of the hearing
forced unbundling of channels is expected to re- ing the Internet (Moore, 2012). The Minister also (ibid.), the independence of the Commission from
duce content diversity since special interest chan- expressed his hope that the Commission “regulate government became a topic of debate amongst in-
nels that could never survive in the small Canadian broadcasting undertakings only to the extent nec- dustry observers and news organizations (see for
marketplace on their own are currently sold in bun- essary” (ibid; emphasis added). example O’Brien, 2014; Winseck, 2014). During
dles with other, more successful channels. Without In the 2013 Speech from the Throne, the fed- the federal election, and to much public ridicule
this bundling, the channels are unlikely to achieve eral government announced (long before any LTT (including several YouTube parody videos, as well
the audience share necessary to thrive in the Ca- decisions were made by the CRTC) that in order to as a substantial Twitter backlash), then Prime Min-
nadian domestic market. It is in this sense that the protect “everyday Canadians,” it intended to “re- ister Stephen Harper launched a campaign video
The Journal of Media Innovations 4.1 (2017) 17Zboralska and Davis, The Case of Netflix in Canada
in which he is shown sitting in front of a television nature, and inclusivity (Downes & Mayo, 2015, p. sion appears to have used the seeming inevitability
screen with the Netflix logo prominently displayed, 23). of the changes related to technological disruption,
assuring voters that only his political party could be The “digital revolution,” and the “tornado” of and the unsubstantiated claim that OTTs contrib-
trusted not to impose a “Netflix tax” and to “focus digital disruption that accompanies it, are being ute to the goals of the Broadcasting Act through
on the needs of Canadian consumers, and to keep framed by many as not merely unstoppable, but market forces alone, to ease regulatory require-
your taxes low” (Harper, 2015). also as intrinsically good (Morley, 2006; Mosco, ments. Policy silences (Freedman, 2010), notably
Regardless of how direct an influence the feder- 2005). Thus, in many countries the rationale for the lack of consideration of alternative measures to
al election and the government’s stated hopes had regulatory intervention in broadcasting has shifted deal with OTTs, have supported the hands-off ap-
on the CRTC, it is clear that the regulator was op- from spectrum scarcity to the interests of “citizen- proach to streaming services, and failed to consider
erating under prevailing assumptions that certain consumers” who seek a greater range of choices the development of shared, non-commercial, digi-
policy pathways were to be favoured over others. from domestic broadcasters (Freedman, 2015a; tal public spaces.
Freedman, 2015b; Lunt & Livingstone, 2011). Although Netflix received the majority of pub-
Our examination has revealed the complex- lic attention due to its ostentatious rejection of the
CONCLUSION: REGULATE OR CHILL ity of Netflix’s presence in Canada, and how it has Commission’s jurisdiction, Google also ran afoul of
been able to capture such a substantial share of the the Commission’s requests for the company to pro-
According to a popular theme, digital disruption Canadian market in such a short period of time. vide evidence to substantiate claims it made dur-
arises from a collision between exponential rates Canada has provided ideal conditions within which ing LTT about how it contributes to the goals of the
of technological change and slower-paced or incre- Netflix can thrive, disrupt, and induce regulatory Broadcasting Act (CRTC, 2014d). Unlike Netflix,
mental rates of change in law, economy, policy, and policy to become unstuck. The regulator’s commit- Google did not publicly reject the Commission’s ju-
society (Franklin, 2012). Broadcasting policy, in ment to a greater reliance on market forces, and risdiction, noting “we stand by the submissions we
particular, is often portrayed as being reactive and its overall prioritization of consumer choice, have made in this process and believe we made a positive
more sensitive to the welfare of incumbent broad- made Netflix’s entry and continued presence an contribution to the discussion” (Google spokesper-
casters than to the welfare of citizens or consum- easy one. Netflix and OTTs have furthermore pro- son, as quoted in Bradshaw, 2014b). However, the
ers. The “near-glacial pace” of regulatory change vided a way for the Commission to legitimize its result was the same – the Commission was forced
in democratic systems is attributed to its intrinsic application of wider deregulatory measures to the to make its decisions without complete informa-
features including its public character, deliberative Canadian linear television system. The Commis- tion, “based on the remaining evidence on the re-
The Journal of Media Innovations 4.1 (2017) 18You can also read
