Canadian Cultural Product and the Long Tail: The New Economics of Production and Distribution in Canada — Part III
April 30, 2008
This article continues our four-part series exploring the effect of new technology on cultural products. This instalment looks at the future of the television sector in the face of technological change. The sector’s future health depends on maintaining a distinct Canadian marketplace for audiovisual rights.
McCarthy Tétrault Notes:
Canadian broadcasters benefit from a number of protective measures. These include the following five measures:
- limits to the licensing of new competing free-to-air TV broadcasters in Canada, including foreign-ownership requirements;
- must-carry and priority provisions for local Canadian TV signals on cable and satellite companies;
- the simultaneous substitution policy applicable to the imported signals of the "4+" US border stations, which benefits Canadian free-to-air TV broadcasters carrying the same program at the same time;
- Section 19.1 of the Income Tax Act, which disallows advertising expenses placed by Canadian advertisers on US border stations as a business expense; and
- penal provisions for the unauthorized reception of encrypted signals.
It is interesting to note that these five protection measures are not unique to Canada. The US has exactly the same five protection measures in place to help their local broadcasters. In fact, the US is even more protective of its local TV broadcasters in two respects.
First, cable and satellite companies in the US are not permitted to carry alternative versions of network signals (whether time-shifted or otherwise) into local markets, but must honour the exclusive territory of local TV station network affiliates. By contrast, we allow time-shifted Canadian and US free-to-air TV signals to be carried by cable and satellite distributors into markets right across Canada. Local network affiliates in the US, jealous of their market exclusivity, would never allow that.
Second, as an alternative to "must-carry" rules, local TV broadcasters in the US can elect to require "retransmission consent" by local cable companies, which can translate into "fee for carriage." The Canadian Radio-television and Telecommunications Commission (CRTC) is currently considering whether to have a similar regime in Canada.
Canada does have a few protective measures of its own. For example, we prohibit the carriage of competing US pay and specialty services on Canadian cable and satellite companies, in order to support our local versions of those services. What we don’t prohibit is the US programming on those services. So we don’t get HBO. But we do get all the HBO programming.
People who argue for "broadcast deregulation" often fail to realize that US law matches ours in many respects.
For example, proponents of "open skies" — who want to erase any borders — may not realize that US law prohibits the reception of Bell ExpressVu and Star Choice in the US, just as Canadian law prohibits the reception of DirecTv or Echostar in Canada.
Both the US and Canadian laws and regulatory measures are intended to protect the integrity of the rights marketplace. (In addition to supporting copyright, Canadian law supports the CRTC’s rules.)
The important point to note is that the Canadian broadcasting system’s crucial underpinning is the fact that the Canadian broadcast marketplace for programs is distinct from that of the US. And copyright owners on both sides of the border generally want to keep it that way.
In that regard, it is important to note that the US does not pressure Canada to "roll back" any of these measures. In fact, as shown in the iCraveTV case, US program rights holders completely support the strengthening of measures to protect the integrity of the Canadian border for copyright purposes. The only US trade pressure comes from suggestions that existing players that are allowed limited access to the Canadian market (e.g., Spike or Country Music Television) may have their current status diminished by CRTC policies.
Thus, insofar as the integrity of the Canadian rights market is concerned, the major players offer little support for any significant change in the policies supporting the industry.
And contrary to popular opinion, neither the advent of direct broadcast satellites nor the introduction of high-speed Internet access have eroded the strength of the Canadian broadcast sector in practice.
The penetration of US direct-to-home satellite services in Canada continues to be an irritant, and strengthened penalties against the black and grey satellite markets will continue to be necessary. But the penetration of DirecTv and Echostar is still only a fraction of the penetration of the authorized Canadian suppliers, Bell ExpressVu and Star Choice, which have been extremely successful.
Insofar as satellites are concerned, audiences show a clear preference for locally originated services that have a mix of national and imported programming. The television audience share of foreign-source channels available by cable or satellite in Britain, France, Germany, Italy, Greece, Spain and Portugal is less than five per cent. In a number of cases, it is effectively nil. The key is to occupy the field with local services in the popular program niches.
As for the Internet, it is certainly a powerful new medium. But far from being a threat to conventional broadcasting, the Internet has exhibited unique weaknesses as well as strengths.
In its report on the impact of technology to the Governor-in-Council, tabled on December 14, 2006, the CRTC divided audiovisual content on the Internet into three broad categories:
- User-generated content — This tends to be inexpensively produced, largely non-commercial, lower-quality content. This type of content is manifested in the success of social networking sites such as YouTube and MySpace.
- Relatively inexpensive, commercial content — This includes news and sports clips, music, and other information and entertainment content. Canadian content of this type abounds on Canadian television and radio today and is generally viable in Canada without significant direct subsidy.
- High-quality, relatively expensive programming — This type of content, particularly drama and documentary, is popular on Canadian television but has generally not been produced in Canada without significant subsidy. Canadian content in this category remains largely "uneconomic."
This three-way categorization is useful, since it allows us to focus on the third category, where Canadian content production needs the most help and where the economics are the most problematic. Programming in the first two categories does not face the same economic threats, and Canadian content in these categories appears to be flourishing on the Internet. In its report, the CRTC stated that:
The evidence shows that the open nature of the Internet and other new digital media is allowing user-generated, non-commercial audio-visual content generated by Canadians to flourish. This user-generated content would also appear to be outside the intended scope of the Act. In any event, user-generated content appears to require no regulatory intervention, at this time.
In the second category of relatively inexpensive commercial content, Canadian undertakings are, at the present time, showing evidence of successfully competing without regulatory intervention. For example, Canadian websites dominate in the news and information category, with 17 out of the top 20 most popular sites (by monthly visitors). The Commission was not provided with specific evidence on the availability or usage of Canadian content on the Internet but, at least in this category, there appears to be no compelling evidence for regulatory intervention, at this time.
It is in the third category of high quality, relatively expensive content, still nascent on Internet and mobile platforms, that parties expressed the most significant differences of opinion.
It is this third category — "high quality, relatively expensive programming, such as drama and documentary" — where it is crucial that Canadian private broadcasters maintain the integrity of the rights marketplace, so that they can use the profits from imported high-quality programs to support the creation of Canadian drama and documentaries. Does the so-called "borderless" Internet threaten the integrity of the Canadian rights marketplace in this regard?
In fact, as rights holders begin to use the Internet to offer downloads of films and other audiovisual programs, they are beginning to use the same geographic borders and time windows as they apply to conventional television. Yes, in the US you can get downloads of Desperate Housewives for $1.99 an episode. But only a day after the episode has been broadcast on the ABC Network. And those downloads cannot be received on computers outside the US.
Now how can borders be maintained on the Internet?
This is an interesting story. The key piece of information is the Internet Protocol (IP) address assigned to each computer that accesses the Internet through an Internet service provider. When you click on a website, you send that website your computer address. Why? So that the website can send data back to your individual computer.
Of course, millions of these addresses exist. But enterprising firms, mostly in Japan, have worked up lists of these addresses tied to their location. They can determine that certain ranges of addresses are assigned to computers in Canada. Or the US. The lists are updated every hour. So when you click onto a website, the website can look up your address on these lists and say, "I’m sorry we don’t serve your territory." Or it can refer you to a more appropriate website.
A number of such providers exist, including Akamai, Limelight, Tometa and RealNetworks. These are global companies with file servers in over 100 countries that manage Internet traffic around the world for the big media companies.
A review of the statements found on their websites is instructive. This is from the Akamai.com website:
Akamai License Delivery offers an integrated service for securing, delivering and monetizing valuable audio and video content across PCs and portable devices. It enables content owners to protect their content and make it available for e-commerce with a wide variety of consumer payment models — pay-per-view, subscription, limited usage, no replication and many others…Key Features: …Geolocation to control distribution.
This is from the Tometa Software website:
With a free SDK, free e-mail support and code examples in almost any language, Tometa WhereIs easily provides information on the geographic location of Internet visitors and IP addresses. Cutting edge IP geolocation technology and continuously updated databases allows just a single line of code in your program or website to give you the following information: City name (e.g. Spokane), State or Region name (e.g. Washington), Full country name (e.g. United States of America), Postal code, Area code (e.g. 509), Latitude, Longitude, IP address, Country code (e.g US), Country code (e.g USA), DMA Code (e.g. 881), Region code (e.g. WA), Country Flag Graphic (large or small), Get a Full Country List.
And this is from the Shareme.com website:
GeoBlock filters all traffic from the client to your web-server based on locations that you select. You can even block locations all the way down to the state and city level! It is a fact that most hack attempts come from certain areas and countries. Stop them before they start and protect your site with GeoBlock!...Utilizing the Tometa WhereIs web service for updates, GeoBlock keeps a constant and updated database of every IP on the internet and the location for that IP.
And finally, from the RealNetworks.com website:
Geo-Blocking allows you to configure business rules around the geographical location of your end users. Use Geo-Blocking to analyze where your users are located or to block access to certain geographical regions based on broadcast rights.
So are there borders on the Internet? Yes, there are. Not only are borders possible, but for high-value audiovisual product, they are necessary in order to have an orderly marketplace for the exploitation of rights. And everyone uses them. CBS, NBC, Fox, ABC, CTV, Global — they all use geolocation software to control distribution of high-value audiovisual programming. While the systems are not foolproof, they are considered to be 95 per cent effective.
The purpose of that control goes back to the economics of culture that we looked at earlier. Revenue in the TV world is driven by "high quality, relatively expensive programming, such as drama and documentary." This programming has to be financed up front and is very risky. When those programs succeed, and become one of the Top 20 shows that everyone talks about around the water cooler, they can be very profitable. But only if they can be sold to multiple platforms in different territories at different prices. So borders become important.
With this in mind, let’s go back to the IBM report from 2006. Is the Internet going to spell the end of television as we know it?
Well, not really. In fact, if you talk to the people who run the television industry, you now find a remarkable consensus. Yes, the Internet is important. Yes, we want our programs to be promoted and downloaded, whether on the Internet or on cellphones. But these extra platforms, far from cannibalizing TV viewing, are actually accretive to TV viewing.
By promoting the program, and permitting people to catch up on missed episodes of scripted drama, these platforms are increasing the stickiness of television.
And that shows up in the numbers.
Looking specifically at television in Canada, despite the introduction of satellites and the Internet over the past decade, the amount of viewing and the share of audience enjoyed by Canadian conventional, pay and specialty TV broadcasters has increased rather than decreased.
When you look at these numbers, and you examine how the Internet actually works, you have to conclude that it is highly unlikely that TV broadcasters will be cannibalized by the Internet or mobile TV in the next few years. While dramatic increases in revenue for free-to-air TV in the future do not appear to be likely, dramatic declines also appear to be unlikely. The consensus is emerging that, for a variety of legal and economic reasons, it is unlikely that the new services on unregulated media will cannibalize or cripple conventional TV.
In brief, it is becoming increasingly clear that the Internet will tend to complement, not replace, traditional media. The Internet shows no more likelihood of killing off television than television does of destroying radio, or than either of those older "new" media do of rendering books extinct.
Over the last five years, in fact, viewing of Canadian TV services has increased at the expense of US TV services, largely because of the drop in the viewing of US border stations. And the introduction of the Internet, DVDs and mobile phones has had negligible impact on TV viewing. And while growth in Canadian conventional TV revenues has slowed in the last five years, Canadian pay and specialty TV revenues have increased significantly, again despite the introduction of the Internet, DVDs and mobile devices.
On March 20, 2007, the CRTC appeared in front of the Standing Committee on Canadian Heritage. In 2006, the CRTC carried out a major inquiry into the impact of new technology. It asked what effect new technologies would have on Canadian broadcasters. Here is what the CRTC said:
While the consumption of new technologies is growing, we observed that it is having a minimal impact on the regulated system. Canadians still consume the vast majority of programming through regulated broadcasting undertakings and new technologies have played a complementary role up to now…. (emphasis added)
These are important points to bear in mind for Canadian content production. As mentioned, the viability of Canadian broadcasters depends on maintaining a distinctive Canadian rights market for high-quality, relatively expensive productions. In the case of private TV, Canadian broadcasters need to control the distribution in Canada of the foreign shows that drive their profits. Only then is it possible for them to commission high-value Canadian programs that can enter the marketplace.
In the result, new technologies are likely to be additive and promotional, not substitutional in effect. Cross-platform licensing will rise, and customized short-form content will be developed for mobile and Internet use. Generational distinctions in usage patterns will also emerge, as will the use of content in short snippets when available, to supplement conventional broadcasting in places such as transit, waiting rooms, lunch rooms, and so on. But television as we know it will survive. And our ability to regulate television will survive.
A 2007 study by Convergence Consulting Group supported this thesis. It noted that the economics of the Internet did not support migration of traditional TV shows to Web TV, both in terms of expense and convenience for the viewer and in terms of return to the rights holders. Increasingly, observers have noted that conventional and specialty television have real staying power.
This is not to minimize the negative effects of the Internet in terms of piracy. It is true that downloads of audiovisual material on an unauthorized basis are growing on the Internet. But guess what happened to YouTube as soon as Google bought it? It started removing illegal high-quality copyrighted content in the face of demands from copyright owners. And even then, Viacom has sued it for over a billion dollars.
In the US, the law is increasingly on the side of the copyright owners. In Canada, our copyright law needs to be strengthened. There is no question that we need up-to-date copyright legislation to support our creators.
Having discussed the impact of technological change on Canadian film and TV sectors, we turn to the music industry in the last instalment of this series.
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Canadian Cultural Product and the Long Tail: The New Economics of Production and Distribution in Canada — Part IV
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Canadian Cultural Product and the Long Tail: The New Economics of Production and Distribution in Canada — Part III