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Report On Business Liberal deal lets Netflix play by own rules in Canadian broadcasting

Heritage Minister Mélanie Joly announced this week the centerpiece of Ottawa’s new broadcasting, media and cultural policy is a landmark $500-million deal with Netflix.

Dave Chan

When Heritage Minister Mélanie Joly declared last year that she was ready to blow up the rules governing Canada's $48-billion broadcasting, media and cultural industries, she had a blunt message for Canadians.

"Everything is on the table," she said at the time.

The plan, it turns out, is less of a buffet than might have been imagined.

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Read more: Critics assail Mélanie Joly over lack of specifics in Netflix announcement

Read more: Cancon 2.0 and the Netflix deal: The 10 key takeaways

Amid much fanfare, Ms. Joly announced this week that the centerpiece of Ottawa's new policy would be a landmark $500-million deal with Netflix, the popular U.S.-based streaming service.

The announcement is seen as a signpost of a new era in cultural policy: that of the government dealmaker.

It also raises questions of transparency about what the deal actually means for consumers, and whether it will serve as a blueprint for future investments in Canada.

David Sparrow, president of ACTRA, the Alliance of Canadian Cinema, Television and Radio Artists, said such an investment doesn't necessarily mean more Canadian content.

"I'm somebody who very much supports Canada setting its own cultural agenda," he said.

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"The Netflix deal, what it represents is a good-size investment in foreign-service work to be done in Canada, but there's no guarantees they're going to actually use Canadian creators."

The opposition, too, has been quick to criticize, noting that Netflix said last month it would raise its monthly prices in Canada, and questioning whether the new deal is simply a commitment to money that Netflix was already spending here.

"We already knew Netflix intended to maintain investments in Canada. Knowing this, will the minister admit that Canadians were ripped off?" NDP MP Rachel Blaney said in Question Period on Friday.

In fact, what Canadians know about Netflix's investments in Canada is limited: In its submission as part of the Heritage consultations, Netflix said it had "commissioned hundreds of millions of dollars of original programming produced in Canada" last year. But in response to questions from The Globe and Mail this week, Netflix spokesperson Bao-Viet Nguyen would not clarify whether that number reflected investment in new productions, or if it included spending on licensing programs already made in Canada to show on its platform.

A senior Canadian official said the agreement relates to original production in Canada. This does not include, for instance, a series that has already been shown in the country, such as Degrassi, or shows that are syndicated.

Netflix Inc.'s commitment to spend at least $500-million on Canadian programming over the next five years was touted by the government as a first-of-its-kind deal globally. It is also a deal that declares, at least for now, that Internet broadcasters will be allowed to play by a different set of rules in Canada.

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"This is a serious undertaking by Netflix to do this...this will become what other countries look at around the world in terms of asking for similar types of commitments," a senior government official, who was not authorized to speak publicly, told The Globe.

"That production is going to go somewhere. Netflix is making investments, they are looking to become a bigger producer. The question was do we drive that into Canada or do we go somewhere else?"

Ms. Joly touted the "top-shelf, quality content" that would result from the deal during a speech outlining her vision for Canada's evolving cultural policy on Thursday. It will see the creation of Netflix Canada, the first permanent production presence the company has established outside the United States.

It also puts Netflix on a different plane from other TV services.

"It's a validation of the view that you can get significant investment in the Canadian market without regulation," said Michael Geist, law professor and Canada Research Chair in Internet and E-commerce Law at the University of Ottawa.

Netflix's spending on programming is not mandated by any regulatory body; the company is not required to submit its financial performance to the Canadian Radio-television and Telecommunications Commission (CRTC); it will not be required to adjust that spending upward if its revenues here grow; and it faces no restrictions on the type of programming in which it invests. All of those conditions apply to Canadian broadcasters.

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Proportionally, that investment is also less than what the broadcasters spend. Including revenue from both broadcasters (which make money primarily from advertising and from subscriptions in the case of specialty and pay TV channels) and from cable and satellite TV subscriptions, TV companies in Canada made roughly $14.8-billion in revenue in 2016, according to the CRTC.

Some of those are the same companies, such as Rogers Communications Inc., which is both a cable company and a broadcaster. Canadian program spending commitments required of both broadcasters and TV service providers totalled $2.79-billion last year; or 18.9 per cent of those overall revenues.

It is difficult to make comparisons, both because the nature of the businesses is different and because Netflix does not report its subscriber numbers or its revenues in Canada. However, Solutions Research Group Consultants Inc. estimates that Netflix has roughly 5.9 million Canadian subscribers, covering roughly half of the total Internet-connected households in the country. After a change in prices announced last month, Netflix subscriptions will now range from $8.99 to $13.99 per month; assuming that most subscribers take the standard plan, which will soon be $10.99 per month, a very rough estimate would put Netflix in the range of $778-million in Canadian subscriber revenue in the next year. That means that Netflix's agreed minimum spending on Canadian programming is closer to 13 per cent of its revenues, which is less than the nearly 19 per cent that the Canadian TV companies pay into the system.

And Netflix is expected to grow significantly: Solutions Research Group expects that by 2021, roughly 70 per cent of Internet-connected households in Canada will have a subscription. If it does, that percentage could be lower.

"We note that the Netflix contribution will be voluntary, and a fraction of what Canadian companies like Bell Media are required to pay," Bell Media spokesperson Scott Henderson said in a statement.

Netflix noted, however, that $500-million is simply a floor for its planned spending.

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"Today's announcement affirms there's more to come as Netflix launches Netflix Canada, our permanent production presence in Canada. We look forward to continuing our work with Canadian talent, producers, broadcasters and other local partners to create Netflix originals in Canada for many years to come," chief content officer Ted Sarandos said in a statement.

Corie Wright, Netflix's director of global public policy, said more details about the deal are forthcoming.

"Every market is different. … Our minimum guaranteed investment of $500-million was only approved [Thursday,] and we haven't yet incorporated. Be on the lookout for more announcements," Ms. Wright said in an e-mailed statement.

Netflix accounts for roughly 90 per cent of the paid streaming market in Canada currently, not including free services such as YouTube, but more competition is on the horizon: CBS has announced it will soon launch its own streaming product in Canada, and others could be eyeing the market. Amazon Prime Video, which is not a separate service but is embedded in Prime subscriptions, reaches roughly 500,000 households in Canada currently, according to Solutions Research Group.

"The world revolves around streaming, culturally, and Netflix is at the very centre of it," SRG president Kaan Yigit said. "It's a real coup to achieve this kind of partnership. Over time, you'll see these things evolve."

"We maintain that the broadcast model in Canada is in structural decline and judging from today's announcements is very unlikely to get a government lifeline," Macquarie Capital Markets analyst Greg MacDonald said in a research note on Thursday.

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The government also made no indication that it would require Netflix to charge sales tax on its subscriptions, a measure some had hoped would help "level the playing field" with Canadian competitors. Such a move could have collected nearly $100-million per year (though this is difficult to calculate because Netflix does not report its subscriber numbers by province.)

"The government is saying it's not there to increase the tax being paid by the middle class. On the other hand, they said that the declines in the Canada Media Fund will be [made up for by the government and therefore] funded by taxpayers," said Quebecor Inc. chief executive officer Pierre Karl Péladeau, referring to Ms. Joly's announcement that the government would top up the fund to make up for lower contributions due to declining TV revenues. "Why would they pay for that while Netflix is not taxed? It's just not fair. I don't see the logic in that."

With reports from Christine Dobby in Toronto and Chris Hannay in Ottawa.

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