The Canadian media landscape

I think that the biggest driving force in the Canadian media industry is the CRTC (Canadian Radio-television and Telecommunications Commission).  This government regulator’s most notable  actions have been:

  1. Forcing cable and telephone companies to open up their networks to independent ISPs (Internet Service Providers).  The competition from independent ISPs continues to drive down prices and to hurt the profitability of the incumbent cable and telephone companies.
  2. What I call the “CanCon tax”.  Most Canadian broadcasters and cable channels are forced to subsidize Canadian content and to devote airtime to Canadian content.  This hurts the quality of their product and hurts their profitability.

This environment is very good for over-the-top companies such as Netflix because they benefit from cheap Internet and don’t have to pay the CanCon tax.

Independent Internet Service Providers

The major cable and DSL Internet providers in Canada are forced to open up their networks to independent ISPs.  The CRTC determines the prices that the owners of the coaxial cables and phone lines can charge.  In general, the independent ISPs undercut the incumbents on pricing.

As well, the big cable and telco companies tend to have bizarre pricing structures.  Users are heavily penalized for exceeding their bandwidth caps.  The cost per GB rises dramatically once the caps are exceeded.  From an economic perspective, this makes little sense because the cost of bandwidth falls with higher usage.  There are economies of scale and fixed-cost leverage that makes additional bandwidth cheaper.  Independent ISPs such as Teksavvy offers significantly more rational pricing and do not gouge their customers on excess bandwidth.  I strongly believe that the pricing practices of the incumbent ISPs are driving their customers towards cheaper independent ISPs.

Over-the-top video speeds

In the US, ISPs are increasingly trying to extort money from Netflix.  Either Netflix pays fees to the ISP or Netflix users suffer slow speeds.  In Canada, I doubt that this extortion will happen.  Because consumers have several ISPs to choose from, they can switch to a faster ISP.  Any ISP with slow Netflix will lose customers to their competitors.

Netflix’s website shows that Canadians generally have faster Netflix service than Americans.  Here are the links for Canadian and American speeds.

EDIT (11/7/2014):  Netflix has a comparison of countries versus each other.

“Canadian” content

Let’s look at things from the point of view as the Canadian television producer.  Ideally, the television producer wants to be able to sell the completed show to the United States.  Because the US has roughly ten times the population that Canada does, American cable and broadcast networks can pay substantially more for content.  Because of this, many Canadian television producers will “Americanize” their show and remove the distinctions between Canadian and American culture.  The show will be set in a generic North American city rather than the Canadian city the show was shot in.  Because there aren’t a lot of differences between Canadian and American culture (e.g. same-sex marriage is legal in Canada), it is easy to make a show that is Canadian and American at the same time.  A show like Falcon Beach is theoretically set in Canada.  Falcon Beach is a place in Canada though the show is shot on a completely different beach.  American viewers likely would not notice that Falcon Beach is set in Canada.

To be fair, not all Canadian-produced television is Americanized.  Canadian networks will take popular show formats from other countries.  Canadian Idol is based on the British show.  Some television producers will also make uniquely Canadian shows as Corner Gas, The Red Green Show, Degrassi, Trailer Park Boys, etc.  However, it is rare for a truly Canadian show (especially dramatic series) to be one of the top 10 most viewed shows in Canada.  America’s scale gives it massive advantages over the entire Canadian television production industry despite massive government subsidies for Canadian programming.

Film and TV subsidies

The number of different subsidies are mind-boggling.

  1. Canadian broadcasters have to devote a certain percentage of their airtime to CanCon.
  2. Canadian broadcasters have to devote a certain percentage of primetime hours to CanCon.  Broadcasters would be more profitable if they could show 100% American programming during primetime hours since American programming draws more viewers.
  3. If two Canadian broadcasters want to merge, they will usually be required to pay money towards a fund that subsidizes CanCon production.
  4. There are other mechanisms which force Canadian broadcasters to spend a certain amount of money on Canadian productions.  Without these mechanisms, broadcasters would spend as little money on Cancon as possible and air as much American programming as possible.
  5. As a condition of their license, many broadcasters have to subsidize CanCon via production funds (e.g. MuchFACT, BravoFACT, etc. etc.).
  6. The Canadian government provides tax incentives to Canadian and foreign productions.  A foreign production such as the movie Chicago (set in Chicago but filmed in Toronto Canada) would qualify for some Canadian production subsidies.
  7. Each province provides their own set of production subsidies.  However, the rules and level of subsidies vary from province to province.
  8. Municipal governments may create indirect subsidies such as tax breaks for movie studios.  They may make it easy for productions to get film permits to shut down parts of the city (including major roads) for filming.  Municipal subsidies tend to be very low compared to provincial and federal subsidies.

Getting a Canadian television show financed is complicated.  Many shows are financed from several different sources.  The problem with this approach is that the Canadian TV producer may be turned down for funding from one or more production funds since the funds are always oversubscribed.  If that happens, the Canadian television producer has to get creative and find ways to fill the financing shortfall.

Canadian television producers do not go over budget.  (If they do, the difference comes out of their pockets.  Canadian producers will avoid it at all costs.)  For American productions financed by major movie studios or broadcast networks, it is normal for a production to repeatedly go over budget.  They have money to throw around.

Actual level of subsidies

In some cases, the subsidy levels are hard to calculate.  Television broadcasters are forced to pay above-market rates for licenses of Canadian programming.  To me, it is unclear what they would pay otherwise.

Over-the-top video

So far, Netflix has not needed to obey CanCon requirements or to send money to production funds that support the production of CanCon.  I believe that this provides Netflix and other over-the-top video services with an advantage over Canadian broadcasters.

On the other hand, sometimes Canada is a backwater that is far less innovative than the US.  Because rights are divided on a country-by-country basis, Netflix US has a different set of programming than Netflix Canada.  Some Canadians prefer the American version of Netflix due to better content.  Canadians can access American Netflix with workarounds such as a VPN service.  Because Canada sometimes lags behind the US in terms of innovation, Internet-based services may take longer to become established in Canada.  Canada will likely lag behind the US in adopting Internet-based radio services such as Pandora and Spotify.  Pandora is currently unavailable in Canada.  The lag in availability may be somewhat beneficial to Sirius XM Canada (XSR.TO) and other incumbents.  However, Internet-based services will likely have a big advantage given that they do not currently need to pay the CanCon tax.

The power of America

In a single word: scale.

America has roughly ten times as many people as Canada.  On the production side, the advantages of scale outweigh the massive subsidies that Canada provides to Canadian TV and film productions.  Many Canadian dramatic TV series have two thirds or more of their production budget coming from subsidies.  Despite the massive subsidies, Canadian television production is not very profitable.  Many of the best people in the Canadian film and TV industries end up moving to the US once they are successful.  On the content side, American programming dominates Canadian TV sets.  In general, Canada does not export much television or film content despite the massive subsidies.  Canadian television and film production is largely uncompetitive despite this business receiving the highest levels of government subsidies.  A Canadian TV series may have two thirds or more of its budget coming from various government subsidies.

Canadian production of foreign shows is reasonably healthy though it is completely dependent on subsidies.  The subsidy level is less than a fifth of the production budget (I forget the exact numbers).  Compared to the production of Canadian content, the production of foreign content is competitive despite significantly lower subsidies.  Without any subsidy, production levels would likely drop to a tiny fraction of what it is today because Canada is naturally disadvantaged:

  • Very few stories are set in Canada because the world loves American programming.  Very few TV shows and movies need to be shot in Canada.
  • Hollywood has a natural advantage because it rarely rains there.  Less rain means that fewer outdoor shooting days are disrupted by bad weather.
  • Most of the world’s best TV and film professionals have moved to Los Angeles/Hollywood.  The proximity to labour is a natural advantage.  Shooting an American production in Hollywood reduces the travel and accommodation costs for key talent that cannot be hired locally.

There are some areas of the film/TV industry where Canada is competitive with the US.  Canada is good at making broadcast equipment and computer software (e.g. Autodesk, Evertz, Leitch, Gennum, Imax, etc.).  This is partly due to SR&ED tax credits that subsidize Canadian R&D.  *Personally, I think that the R&D tax credits are a bad idea.

Investing implications

Looking at Canada, it’s easy to see the power of American content companies, cable channels, and broadcast networks.  American media businesses are more competitive and more profitable because of scale.  Being big is better than having two thirds of your production budget being subsidized by various levels of Canadian government.  As well, American companies do not have to pay the CanCon tax and have less of their profits taken away.  When it comes to film and television, I am generally more interested in American companies than Canadian ones.

*Disclosure:  I was born in Canada and live in Toronto.

2 thoughts on “The Canadian media landscape

  1. Pingback: Notes on cable – Part 3 – Monetizing content | Glenn Chan's Random Notes on Investing

  2. Pingback: Notes on cable – Part 4 – Billing for Internet | Glenn Chan's Random Notes on Investing

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