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Peter Menzies: How the CRTC could kill Netflix in Canada—All in the name of ‘modernizing’ broadcasting

Commentary

Next week, the Canadian Radio-television and Telecommunications Commission (CRTC) will go live with its efforts to wrestle the internet and those who stream upon it into submission. Whether it fully understands the risks remains unclear.

There are 127 parties scheduled to appear before a panel of commissioners at a public hearing in Gatineau starting November 20. The tone-setting opening act will be Pierre-Karl Peladeau’s always-scrappy Quebecor while the UFC will throw the final punches before the curtain drops three weeks later.

The list of presenters consists mostly of what those of us who have experienced these mind-numbing hearings refer to as “the usual suspects”—interests whose business plans are built around the Broadcasting Act and the requirements of related funding agencies. 

The largest Canadian companies will ask the CRTC to reduce its demands upon them when it comes to feeding and watering Big Cancon: the producers, directors, actors, writers, and other tradespeople who make certified Canadian content.

Quebecor, for instance, will be arguing for its contribution to be reduced from 30 percent of its revenue to 20 percent—a draw it proposes be applied to designated streamers. More money from foreign companies and less from licensed domestic broadcasters will be a recurring theme.

But there will also be a new slate of actors—those with business models designed to entertain and attract consumers in a free market—who will be staring down the barrel of CRTC Chair Vicky Eatrides’ stifling regulatory gun for the first time.

Disney+ is set to take the stage on November 29. Meta, the Big Tech bete noire that refused to play along with the Online News Act, is up on December 5.

But the big day will almost certainly be November 30 when Netflix locks horns with the Commission and what appear to be its dangerously naive assumptions.

More than half the streamer’s 30-page submission is dedicated to detailing what it is already contributing to Canada.

Some examples:

  • $3.5 billion in investment;
  • Thousands of jobs created;
  • Consumers are 1.8 times more likely to watch a Canadian production on Netflix than they are on a licensed TV network;
  • Le Guide de la Famille Parfaite—one of many Quebec productions it funded—was in Netflix’s global top 10 for non-English productions for two weeks.

Netflix is insisting on credit for what it already contributes. It has no interest in writing a cheque to the Canada Media Fund and takes serious umbrage with the CRTC’s assumption it will.

“The (hearing) notice could be understood to suggest that the Commission has made a preliminary determination to establish an ‘initial base contribution’ requirement for online undertakings,” Netflix states in its submission. “The only question for consideration would appear not to be whether, but rather what funds would be the possible recipients of contributions. 

“Netflix submits that this is not an appropriate starting point.”

It gets worse. The CRTC is considering applying some of the non-financial obligations it imposes on licensed broadcasters such as CTV and Global to the streaming world.

Executive Director of Broadcasting Scott Shortliffe told the National Post recently that “Netflix is clearly producing programming that is analogous…to traditional broadcasters” and that it could be expected to “contribute” in terms of the shape of its content as well as how it spends its money.

In other words, the CRTC’s idea of “modernizing” broadcasting appears heavily weighted in favour of applying its 1990s way of doing things to the online world of 2023. 

If that’s the case, the Commission is entirely unprepared to deal with the harsh truth that offshore companies don’t have to play by its rules. For decades, primary CRTC hearing participants have been dependent on the regulator. In the case of broadcasters like CTV and cable companies such as Rogers, their existence is at stake. Without a license, they are done. Which means they have to do what the Commission wants. But if the regulatory burden the CRTC places upon the offshore streamers doesn’t make business sense to them, they are free to say, “Sorry Canada, the juice just isn’t worth the squeeze. We’re outta here.”

This is most likely to occur among the smaller, niche services at the lower end of the subscription scale. The CRTC has to date exempted only companies with Canadian revenues of less than $10 million. Any company just over that line would almost certainly not bother to do business in Canada —a relatively small and increasingly confusing market—if the regulatory ask is anything close to the 20 percent commitment being suggested.

Ditto if the CRTC goes down the road Shortliffe pointed to. It would be absurd to impose expectations on unlicensed streamers that are similar to those applied to licensed broadcasters. For the latter, the burden is balanced by benefits such as market protection granted by the CRTC. 

For streamers, no such regulatory “bargain” exists. Too much burden without benefits would make it far cheaper for many to leave and sell their most popular shows to a domestic streamer or television network.

The Online Streaming Act (Bill C-11), which led to this tussle, was originally pitched as making sure web giants “contribute” their “fair share.”

So, as it turns out, was the Online News Act (Bill C-18). 

That legislation resulted in Meta/Facebook getting out of the news business and Google may yet do the same. As a consequence, news organizations will lose hundreds of millions of dollars. Many won’t survive.

Eatrides and her colleagues, if they overplay their hand, are perfectly capable of achieving a similarly catastrophic outcome for the film and television industry.

Trevor Tombe: Canada has a serious fiscal challenge looming as the federal debt explodes

Commentary

Canada’s finance minister, Chrystia Freeland, will provide a fiscal update next Tuesday. It will not be pretty. 

Federal finances are under increasing strain from slowing economic growth, expanded affordability measures, new social programs (such as dental care), massive subsidies for battery plants, and, perhaps most important of all, rapidly rising interest rates

In fact, the monthly interest costs of the federal government are now at an all-time high. The latest available data for August shows federal interest costs exceeded $4.3 billion, surpassing the previous record of $4.03 billion set in December 1995. It’s more than double the pre-COVID amounts, as I illustrate below. And it’s the fastest acceleration in interest costs in recorded history.While the fiscal monitor data does not extend further back than 1995, my own estimates of monthly costs inferred from the historical public accounts suggest very strongly that August 2023 is indeed an all-time record but I’m willing to be corrected.

At this rate, annual interest costs could exceed $50 billion—four years ahead of schedule. 

All this means that when Minister Freeland updates the numbers next week, the federal deficit will almost surely grow. A lot.

In the PBO’s latest economic and fiscal outlook, they anticipated a $46.5 billion deficit this year—up from the budget’s $40 billion.

Other projections suggest we may see an even larger deficit. The latest projection by Finances of the Nation, which releases new figures every month, including a new set published last week, projects a deficit of just under $56 billion this year. 

That may be overly pessimistic, of course. But if it is even close to accurate, then it would be a very large increase indeed. Excluding the COVID-19 years, which are obviously an exception, it would be an over $20 billion increase over last year. That’d be the largest increase since the financial crisis. And controlling for the health of the economy (using what’s called the “cyclically adjusted budget balance”), it would be the largest deficit, as a share of the economy, since 1995.  

This doesn’t mean we’re headed over a fiscal cliff. 

Relative to the size of government or the overall economy, the burden of these high interest costs remains lower than it was in the mid-1990s. Far lower. In 1995, interest costs were 35 percent of revenue and nearly 6 percent of our entire economy. Today, even if interest costs exceed $50 billion, that would be 11 percent of revenue and less than 2 percent of GPD. And central banks should start lowering their policy rates next year, perhaps by spring or earlier, as inflation pressures recede. 

Canada is also not alone. Indeed, the situation abroad is even worse. Based on the latest data compiled by The Economist, the U.S. federal deficit is set to reach 5.7 percent of GDP this year, equivalent to roughly $165 billion in Canada. Borrowing in the Euro area is 3.4 percent. The U.K. is 3.9 percent. Indeed, of all the countries it tracks—developed and developing alike—only three expect a surplus: Australia, Denmark, and Norway. 

However good the company we may be in, though, Canada has a challenge on its hands. 

The federal government’s 2023 budget was based on a 10-year interest rate of approximately three percent. That may now have to increase by half a point, which could increase borrowing costs by several billion per year for the foreseeable future.

And if rates stay higher for longer, as many (including the Bank of Canada) now expect, the government’s debt levels may not be sustainable. 

Consider a situation where federal borrowing costs average 3.5 percent, government revenue and economic growth slow to an average of 3 percent, and government spending grows at 3.5 percent. I estimate that federal debt GDP by 2028 would reach 47 percent—roughly where it was at its highest level following COVID-19. This is far higher than the government’s plan for 40 percent that year.

Federal debt that grows faster than the economy is not sustainable. If the fiscal update shows that, alarm bells should ring.

What can Canada do? As I’ve noted before, sticking with the government’s own previous plans would be a good start. Ratcheting up spending plans with every single budget is an important reason why we’re in this situation. Looking ahead, those seeking to replace the current prime minister—whether within the Liberal Party or Pierre Poilievre of the Conservatives—should start considering options.

The longer we delay, the larger and more difficult our fiscal challenges will become.