How Netflix and Canada’s broadcast regulator arrived at a deadlock

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Netflix Inc. and Canada's broadcast regulator are locked in a standoff.

Last week, a representative of the U.S.-based video streaming service appeared in Gatineau at Let's Talk TV, a major hearing into the future of the country's television industry, to answer questions from the Canadian Radio-television and Telecommunications Commission (CRTC). When the regulator asked for information that the company considers sensitive – like the number of subscribers Netflix has in Canada, and how much money it earns from them – the exchange became heated. The CRTC ordered Netflix to hand over the information, in confidence.

But as a Monday deadline for providing it came and went, Netflix produced some basic information, while refusing to provide the more sensitive data, citing concerns over confidentiality.

The dispute now raises serious questions about the CRTC's jurisdiction and its powers under Canadian law. Here is a look at how we arrived at this deadlock, and what could happen next.

What is this really about?

The showdown began with the CRTC's demands to see sensitive information about Netflix's operations in Canada, and Netflix's refusal. But it is now focused on a much more fundamental question: Does the CRTC have the legal right to demand anything of a service like Netflix?

Some have argued that a free and open Internet is at stake, and that regulating Web-based companies who have customers around the globe is impractical at best. But Netflix readily submits to country-specific laws that govern the online world, including privacy laws.

"The more specific question here is, does [Canada's] Broadcasting Act apply to these Internet-based services?" said Michael Geist, a law professor at the University of Ottawa, in an interview.

How has the CRTC treated Netflix in the past?

In 1999, the CRTC grappled with how to handle so-called "new media," a growing industry fuelled by the Internet. The CRTC decided that much of what was happening online did not fall within the scope of the Broadcasting Act, putting it outside CRTC jurisdiction. But it ruled that "some new media services fall under the Broadcasting Act's definitions of 'program' and 'broadcasting.' These include digital audio services and audio/visual signals."

The CRTC took a watch-and-see approach by creating a new media exemption order that allowed companies that fit the parameters of a "new media" outfit to be exempt from regulations imposed on traditional broadcasters like TV providers. Companies like Netflix were, practically speaking, left unregulated in Canada.

What changed?

In 2012, the CRTC amended its new media exemption, adding a requirement that new media ventures must submit information about their "activities in broadcasting in digital media, and such other information that is required by the Commission in order to monitor the development of broadcasting in digital media, at such time and in such form, as requested by the Commission from time to time."

"So now this is really regulation," Mr. Geist said. "It's very soft regulation, but it's still regulation."

What is the CRTC's argument?

As Netflix and other online video services compete for viewers with traditional TV, the CRTC has faced pressure over whether to regulate them in some fashion to keep the playing field level. To decide whether that would be wise, it wants to understand how these companies operate in Canada.

When Netflix resisted the CRTC's requests for information on Friday, citing concerns about whether it would be kept confidential, CRTC chairman Jean-Pierre Blais reminded the company its exemption requires it to provide information, and that "failure to provide information puts at risk your exemption order."

This was, in effect, one of the first times the CRTC had tried to assert its jurisdiction over Netflix. "Everything changed on Friday," Mr. Geist said.

A spokesperson for the CRTC declined to comment.

What is Netflix's argument?

When a company submits information to the CRTC and asks that it be kept confidential, the CRTC makes a decision about whether confidentiality is in the public interest. Despite the CRTC's assurances on Friday that it would keep Neftlix's sensitive information private, the company wanted a blanket guarantee.

In a statement on Monday, Netflix argued some information requested is "competitively sensitive," and it would be "highly prejudicial to Netflix" if it became public.

But Netflix also made another argument with greater implications: that the CRTC's orders "are not applicable to Netflix under Canadian broadcasting law." The company stressed that even what it did hand over was "filed voluntarily," and that doing so "is not an acknowledgment of or attornment to either the jurisdiction of the Commission" or the application of Canadian law or the Broadcasting Act to Netflix.

In essence, Netflix argues it has never been regulated by the CRTC, and Canadian broadcasting laws don't apply because it has neither staff nor a physical presence in Canada.

A spokesperson for Netflix declined further comment.

Which other companies could this dispute affect?

Any online streaming service that operates from outside Canada under the new media exemption. The CRTC also asked Google Inc. for information about its operations in Canada, particularly around YouTube, and Google filed a response. But it, too, may have refused to disclose some data.

"We hope that our voluntary participation has assisted the Commission in its review," a Google spokesperson said in an e-mailed statement.

But Google differs from Netflix in that it has substantial staff and operations on Canadian soil.

What could happen next?

The CRTC and Netflix could, conceivably, have back-channel talks to find a solution.

Otherwise, the CRTC could assert its jurisdiction by withdrawing Netflix's new media exemption. That would mean Netflix would need a license to broadcast in Canada – which it can't get, because it is foreign owned – and would either have to stop its Canadian service or risk violating Canadian laws.

Mr. Geist said the prospect that Canada would seek to block Netflix from streaming its TV shows and movies to Canadians – which would require ordering Internet providers to block access to the site – seems almost "unthinkable."

But if the CRTC can't enforce its jurisdiction, its authority would be threatened. Meanwhile, Canadian Heritage Minister Shelly Glover has said the federal government "will oppose any new regulations" for online video services. In a statement on Tuesday, she said "it is up to those two parties to settle this dispute," and that the government is "following the process closely."

"I think the CRTC painted itself into a little bit of a corner here. They're in a bind, for sure, and it doesn't look like they've got the government on their side, which really doubles down the problem," Mr. Geist said.

"It seems to me this is headed to court," he said.