Taming the tech giants will cause collateral damage

The Online Streaming Act will hurt content creators and incentives to produce content relevant to Canadians, but the CRTC can reduce the damage. (File photo: dole777/Unsplash)

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Governments around the world are contemplating media and competition policies that would expand their regulatory and taxation authority over the global tech giants like Google, Meta, Amazon and Netflix that dominate digital service markets.

The Canadian government is working with other advanced economies to implement a general digital services tax. It is also in the process of implementing the Online Streaming Act, Bill C-11. The new law authorizes the Canadian Radio-television and Telecommunications Commission (CRTC) to regulate online audiovisual and audio content providers and to mandate contributions from them to subsidize the production of what it officially defines as Canadian content, or “CanCon.”

The economic effects of the act will largely depend on how the CRTC translates the act’s provisions into regulatory practice. If the CRTC chooses the wrong path, it will inflict economic harm on Canadian content creators and smaller media outlets, reducing competition and consumer choice.

A low exemption threshold will hurt media competition and diversity

Originally marketed as a necessary law for bringing the global tech giants into the fold of the Canadian broadcast funding system, the government has rejected calls to specify a minimum revenue threshold to limit the scope of the act to the tech giants. Without providing any relevant analysis or explanation, the CRTC has proposed a $10-million annual Canadian revenue threshold as a starting point for discussions in its ongoing public proceedings.

This opening bid by the agency might seem surprising when we consider that Canadian revenues of global giants run into the hundreds of millions of dollars per year, up to over a $1 billion for larger ones such as Google/YouTube and Netflix. The CRTC’s proposed exemption threshold of $10 million indicates that it intends to capture a wide range of small and medium online TV, streaming and video distribution services into the scope of the act, including, for example, multicultural/ethnic media, specialized kids, sports, religious organizations, content creators and distributors.

A low exemption threshold may enable the CRTC to generate more revenue from a wider tax base beyond the tech giants to maximize cross-subsidies for the Canadian content production it has been mandated by the act to provide. However, a low threshold will mean that many small, specialized, competitive online streaming and media content providers will have to register with the CRTC and pay into the official CanCon funding system.

Compared to the tech giants with resources and expertise in managing country-specific regulatory risks and costs, compliance with C-11 will be disproportionately harder and more expensive for smaller, more specialized media service providers that serve Canada’s multicultural communities. Unless the CRTC adopts a minimum revenue threshold that is at least five to 10 times higher than its opening proposal, the potential for the Online Streaming Act to undermine media diversity and competition by smaller entities is significant.

Policy risk mitigation

The government has tried to allay fears about what the CRTC will do with its new expansive regulatory mandate and authority under the act by issuing a draft policy direction, which nominally aims to foster the development of a “sustainable and equitable broadcasting regulatory framework.” Given the history of systematic racism and discrimination in the Canadian content subsidy system and the underrepresentation of racial minorities, particularly women, in the media industry, the potential for achieving the stated equity objectives through these channels is limited.

After the passage of Bill C-11, the CRTC issued a three-phase implementation plan to “modernize Canada’s broadcasting system.” Both the goals of the bill and the CRTC’s 18-month plan create major uncertainties, including which online “broadcasters” will be regulated, how much they may be required to pay, and what type of content will be considered Canadian enough by the government to be eligible for cross-subsidies from the monies collected from entities that provide audiovisual and audio content on the Internet. 

Asymmetric power

The CRTC Bill C-11 implementation process includes a series of public proceedings through which interested parties may submit interventions on the public record. Effective participation in CRTC proceedings is, however, costly and requires specialized expertise. CRTC proceedings tend to be dominated by large, established Canadian telecom and media players with extensive resources.

Moreover, in an apparent rush to implement the act, the CRTC has issued unusually short deadlines for submitting interventions regarding key questions in the design of the regulatory policy framework it is developing. Small- and medium-sized online streaming media providers, digital-first creators, and multicultural communities of Canadian artists and consumers will face an uphill battle identifying their concerns and persuading the CRTC to adopt regulations that take their perspectives into account.

While the draft policy direction sets some boundaries within which this government expects the CRTC to implement the legislation, it fails to address some of the concerns around fundamental economic effects of the act.

We address two specific mechanisms through which the effective implementation of the act will have the potential to inflict significant collateral damage, particularly on Canadian creators and small, competitive, online media service providers that serve the diversity of demand from Canadians for content that is relevant to their individual preferences.

Income and incentive effects on “social media creators”

The policy direction orders the CRTC “not to impose regulatory requirements” on social media creators (including podcasters) or on the transmission of video games, and to “minimize the need for broadcasting undertakings to make changes to their computer algorithms that impact the presentation of programs.” Nevertheless, the global tech giants on which artists and content creators depend tend to have significant market power, which gives them the capacity to pass on some of the country-specific regulatory fees and taxes to the online creators who use their platforms.

It’s time for an online creators act

Online creators left on the outside of Broadcasting Act reforms

A notable example of how this will work can be found in a prospective policy issued by Google/YouTube, in which the company explains how it plans to deduct country-specific duties from advertising revenue it shares with social media creators. In the more competitive direct streaming market, players tend to have limited market power and may have to absorb most of the country-specific costs. The net impact on revenue and income that social media creators can generate from producing content that Canadians want to watch on large platforms with market power such as YouTube is likely to be negative.

Expectations of generating lower revenue from building a Canadian following on social media will reduce the incentives of online content creators to produce content that is relevant to Canadian audiences. This disincentive would have the perverse effect of discouraging Canadian storytelling, particularly by minorities whose voices and stories tend to be excluded from mainstream Canadian corporate media and the official, exclusive world of Canadian content production subsidies.

Media competition and diversity

In sharp contrast to the captive audience and homogeneous business models of traditional linear TV, multipurpose broadband networks have enabled the development of a wide variety of Internet-based digital media business models, specialization, and competition in the delivery of content online.

Disintermediation has enabled small- and medium-sized online TV and streaming services to compete effectively with both traditional broadcasters and global tech giants.

But the low regulatory thresholds proposed by the CRTC threaten their ability to compete in a sustainable manner in the Canadian market. Combined with the CRTC’s new power to impose administrative monetary penalties, smaller, more specialized, service providers will face material compliance risks, which may lead some of them to exit the Canadian market. Reduced competition will inevitably lead to higher prices and less choice and diversity for Canadian consumers.

Democratic accountability at stake

Because our elected Parliament has failed to address the organizational size threshold issue in the act, the CRTC is now left with an unenviable task of balancing the anticompetitive effects of Bill C-11 with demands on the agency to generate more subsidies to produce what it imagines are Canadian stories. How the unelected CRTC balances these competing considerations will shape the future of media competition and diversity in our country.

This article first appeared on Policy Options and is republished here under a Creative Commons license.