Netflix becomes more Canadian—but you’ll pay for it

Last week, Ottawa announced that the American-based “over-the-top” broadcasting giant Netflix had agreed to set up a production house in Canada and that it will spend C$500 million over five years on producing Canadian content.

Another $25 million will be spent on French Canadian content. Because the deal was made under the Investment Canada Act, Netflix could be fined if it doesn’t live up to its agreement.

The Netflix agreement is a step towards addressing a major issue facing government architects of Canadian content rules and regulations. Namely, Canada’s major private broadcasters must allocate 30 per cent of their revenues to Canadian programming expenditures and 5 per cent to programs of national interest such as Canadian dramas and documentaries.

However, Internet broadcasters are unregulated and therefore not subject to the same domestic content expenditure requirements and other regulations facing the conventional broadcasting sector in Canada. Getting over-the-top companies (which provide content via Internet connection rather than cable or satellite) such as Netflix to play a larger financial role in supporting the creation of Canadian entertainment content is one of the federal government’s goals, especially given complaints about an uneven playing field levied by traditional broadcasters.

The Trudeau government’s announcement was part of its revelation of a new media strategy called “creative Canada.” While the strategy emphasizes the modernization of Canadian content policies by focusing more attention on digital content, in practice it embodies the traditional subsidies from taxpayers and consumers to the media sector, with an increased emphasis on subsidizing the digital media sector of the industry. Total government funding under its new media strategy remains unclear at this time, although Canadian taxpayers should expect increases—not decreases—to their fiscal burden.

The policy rationale for this new media strategy is much the same as the long-standing justification of Ottawa’s Canadian-content policy focus: to tell Canadian stories and to perform Canadian music. Nor does it seem that the main criterion for identifying Canadian content will change. Namely, Canadian content is defined primarily by the use of individuals in creative and technical positions who are Canadian, as well as by Canadian ownership of the relevant copyright. The emergence and growth of unregulated Internet broadcasting has apparently not yet curtailed the lobbying power of Canada’s entertainment and media sectors to extract wealth transfers from Canadian taxpayers.

An interesting question is why Netflix made the domestic production commitment that it did. Perhaps the commitment is consistent with the company’s strategy of “localizing” the production of entertainment content. It might also reflect a concern on the part of Netflix that the Canadian government would eventually impose a “Netflix tax”—a tax imposed on streamed entertainment content. The Trudeau government pledged not to introduce new taxes, although one could not fault Netflix for being skeptical about this pledge. To be sure, the absence of a tax does not mean that Canadians will avoid paying for Netflix’s commitment to Canadian content.

In this regard, Netflix announced last month that it would increase its monthly fees by $1 in Canada for a standard subscription and by $2 for a premium subscription. A hallmark of Canadian cultural policies is the centrality of cross-subsidies going from taxpayers and consumers to a relatively small group of Canadian copyright owners and creative and technical personnel. The new media policy of the Canadian government preserves this hallmark.

An economic case can be made that subjecting conventional Canadian broadcasters to costly government regulations and financial obligations, while exempting streaming services from those same regulations and obligations, is inefficient. However, a counter-argument can be made that regulations and financial obligations should be removed from conventional broadcasters if improved efficiency is the government’s main goal.

In an age when profitable entertainment can be created and distributed by individuals and small companies using low-cost equipment to produce content, the Internet to distribute content, and social media to promote that content, the hoary argument that government-coerced financing is needed for Canadian stories to be told and Canadian music to be heard, is as outdated as black-and-white televisions.