On 25 May 2011, the Commission issued Fact-finding exercise on over-the-top programming services in the Canadian broadcasting system Broadcasting and Telecom Notice of Consultation CRTC 2011-344. In the notice, the Commission stated that since the publication of Broadcasting Regulatory Policy 2009-329 (the Regulatory Policy), it has been monitoring the development of broadcasting in new media, adding that “over-the-top” (OTT) programming accessed over the Internet is increasingly available to consumers at attractive price points.
In the Notice, the Commission outlined several trends that appear to be emerging on a preliminary basis since the publication of the Regulatory Policy and sought comments on the nature and implications of these trends. To better understand the trends and their implications and to gain an accurate understanding of the evolving role played by OTT services, the Commission sought submissions from stakeholders, together with any data supporting their findings and/or assertions, with specific consideration for the English-language and French-language markets where applicable, on the following topics:
The Commission notes that there have been calls by a range of stakeholders and the Standing Committee on Canadian Heritage urging the Commission to undertake a consideration of the issues raised by the operations of new media broadcasting undertakings providing OTT programming services.
Comments were received from individual Canadians, public interest groups, representatives of the cultural sector, broadcasters and distributors, network operators, vertically integrated communications undertakings and Canadian and non-Canadian providers of OTT services. The complete record of this proceeding is available on the Commission’s website at >www.crtc.gc.ca under “Public Proceedings.”
The Commission considers that the record of the fact-finding exercise demonstrates that significant change is underway in the communications sphere. New technologies, service providers and consumer behaviour underpin a transformation that is characterized by greater choice, a global marketplace and new opportunities for Canadian creators. However, such change is also creating uncertainty concerning established business models and associated support for the creation and presentation of Canadian content, as well as uncertainty for investment and innovation in advanced communications infrastructure.
Parties submitted a range of supporting material to the fact-finding exercise, including market intelligence, analyst reports and public opinion research. Taken together, the evidence provided by parties with respect to the current environment demonstrates that:
Some parties stated that there may be a reduction of revenues in the regulated system as a result of “cord-shaving”, “cord-cutting” or reduction of advertising revenues attributable to the operation of OTT services in Canada. Shaw and RNC media presented evidence that showed revenues for private conventional TV declined slightly from 2006 to 2009 but rebounded in 2010. However, they did not demonstrate that the consumption of OTT content was the cause of this decline. Shaw and the NFB presented evidence that showed that pay and specialty revenues have continued to grow over this period.
In contrast, other parties, including Netflix, Teksavvy, Apple and the CIPPIC, stated that OTT programming was complementary to that of licensed undertakings and that the vast majority of viewing is through services provided by BDUs. They further stated that there was no evidence of viewers abandoning traditional broadcasting to any significant degree in favour of OTT services.
A majority of parties, including the vertically integrated BDUs, the creative groups and private broadcasters, considered that the operation in Canada of OTT services, and particularly of foreign OTT services, will over time result in a reduction of resources flowing to subsidy funds that support Canadian content. In particular, parties asserted that the trend in content consumption from unregulated sources will cause subscription revenues associated with pay, specialty and video-on-demand undertakings and potentially those of BDUs to decline. Further, they indicated that advertising revenues in a fragmented programming environment may also be reduced, putting downward pressure on the revenues which form the financial basis for Canadian expenditure and exhibition requirements for programmers. Parties also suggested that well-funded foreign entities will increasingly acquire program rights traditionally purchased by Canadian entities.
Other parties, including Netflix, Teksavvy, Apple, and the CIPPIC, asserted that OTT services were complementary to the Canadian broadcasting system and that in fact licensed undertakings were responding by launching OTT services of their own. A number of parties, including foreign OTT entities, consumers and the NFB, asserted that the environment provided new opportunities for the regulated Canadian broadcasting system and that there were no systemic challenges to preserving levels of Canadian content while fostering consumer choice and innovation. The CBC characterized OTT as another platform with the potential to enable Canadians to access a diverse range of Canadian programming.
Some parties added that developments and trends in the marketplace did not have any implications of a regulatory nature. Other parties argued that in the absence of more robust measurement tools, it was too early to determine the impact of OTT services.
Some parties stated that greater innovation and investment in network infrastructure will be required to keep up with traffic generated by OTT services.
Groups advocating for persons with disabilities pointed out that most programming made available through the Internet does not have closed captioning or video description. They stated that this created barriers for their members. The Canadian Association of the Deaf indicated that the new media platforms offered an opportunity for Canadian broadcasters to provide fully accessible programming online and reach global audiences of people with disabilities.
Many stakeholders proposed policy options to deal with the challenges associated with growing OTT content consumption; these generally fell into three large categories based on either regulatory or market solutions: a) lowered obligations for regulated entities, b) creating regulatory obligations for OTT providers and c) maintaining the status quo.
A first group, comprised principally of vertically integrated Canadian entities, considered that the competitive landscape was asymmetric in favour of exempt non-Canadian undertakings and that licensed entities are at a competitive disadvantage relative to exempt OTT providers. OTT entities, according to this view, operate without meaningful regulatory restriction, have increasingly better access to capital from global sources to fund their activities and benefit from business models built entirely in response to consumer demands without regulatory restraints on packaging, pricing or selection. This group generally focussed on regulatory solutions, calling for the Commission to act to reduce existing regulatory requirements on licensed entities in order to correct asymmetries in the marketplace. Rogers and Shaw specifically called for a reduction in regulatory requirements on BDU-provided video-on-demand undertakings as OTT services compete most directly with these services.
A second group, comprised primarily of the cultural sector and creative groups, submitted that the primary challenge in this environment would be to maintain support for Canadian programming as audiences fragment to sources that have no requirement to contribute to the creation and presentation of Canadian content. This group proposed a regulatory solution calling for the Commission to act to correct this asymmetry by imposing obligations (e.g. content subsidy contributions, exhibition and expenditure requirements) on exempt undertakings.
One party, Bell, suggested that regulation should be applicable to the “primary” business of a communications entity. That is, in the case of a regulated BDU or broadcaster, regulation should apply to those activities while affiliated OTT providers would continue to be exempt. However, entities that are primarily engaged in OTT programming delivery would have obligations in support of Canadian programming creation and presentation imposed on them.
Parties in a third group considered that no regulatory action is required at this time in support of the achievement of the legislated policy objectives. This group, mainly represented by OTT providers and individual Canadians, as well as the CBC, TekSavvy and the CIPPIC, recommended that the Commission maintain a hands-off approach to encourage innovation and experimentation and competitive responses by licensed undertakings. The NFB stated that there was room to create an alternative Canadian OTT service that would not compete with the existing commercial sector but provide unique opportunities for the Canadian private production industry and Canadians. Some parties noted that the exemption applies equally to Canadian and non-Canadian entities and that Canadian OTT providers have the opportunity to compete on a level-playing field. Other parties called for a status quo approach – for now – because of a lack of a full understanding of the OTT context.
The Commission considers that the record of the fact-finding exercise demonstrates that significant change is under way in the communications sphere, with potential for further change. New technologies, service providers and consumer behaviour underpin a transformation that is characterized by greater choice, a global marketplace and new opportunities for Canadian creators. Such change is also creating uncertainty with respect to established business models and associated support for the creation and presentation of Canadian content, as well as for investment and innovation in advanced communications infrastructure.
However, the evidence does not demonstrate that the presence of OTT providers in Canada and greater consumption of OTT content is having a negative impact on the ability of the system to achieve the policy objectives of the Broadcasting Act or that there are structural impediments to a competitive response by licensed undertakings to the activities of OTT providers.
The Canadian broadcasting system has been successful at supporting a diversity of programming from a wide variety of independent producers and broadcasters that reflects the Canadian experience. Canadians have access not only to a variety of high-quality Canadian programming, but also to content from around the world. The proposed reduction of rules that restrict how regulated entities package services and make contributions to the system may lead to reduced levels of Canadian content and loss of diversity in the broadcasting system, key policy goals of the Broadcasting Act.
Stakeholders calling for the imposition of regulatory obligations on OTT providers demonstrated that consumer adoption of OTT services is real and growing. However, they did not submit evidence of harm to the traditional broadcast system. This is consistent with the Commission’s ongoing research into new media trends.
The Commission considers that extending regulatory obligations normally achieved through licensing to exempt undertakings could lead to unintended consequences in a global, digital environment. For example, Google, the NFB and Shaw expressed concerns that regulation could be a disincentive to innovation. Shaw added that regulation could impair the ability of Canadian media companies to compete globally. The CIPPIC noted that regulations enforcing the exclusivity of access were not applicable to the Internet as the Internet was designed to ensure access for all users to all types of content regardless of their location in the world.
In light of the above, the Commission will not at this time consider a general review of the New Media Exemption Order, nor a review of potential policy changes to increase the regulated players’ flexibility to respond to the activities of OTT providers. Nevertheless, the Commission considers that the record of the fact-finding exercise has demonstrated that in a short time the activities of OTT providers have reshaped the broadcasting landscape by introducing viable alternatives, foreign and domestic, to traditional services. The financial impact of those services may be expected to grow as OTT services become a more important feature of the Canadian broadcasting environment.
The Commission considers that currently it is best to allow the OTT market to continue evolving, better measurement tools to emerge and entities that contribute to the policy objectives of the Act to take advantage of the many opportunities in this new environment.
Given the fast pace of change in this environment, the Commission intends to maintain a watching brief on OTT, and conduct financial data collection and another fact-finding exercise in May 2012 to determine if the scenarios put forth by parties with respect to potential regulatory impacts and opportunities have materialized. It expects that at that time stakeholders will be able to provide rigorously collected data, including public opinion research, internal customer surveys, historical revenues and expenses associated with OTT services, market intelligence, qualitative and quantitative evidence with respect to the state of closed captioning and described video for OTT programming and other such quantitative evidence, that will assist the Commission in better evaluating the impacts and opportunities offered by this environment. In addition, as part of its watching brief, the Commission will focus its annual consultation with the broadcasting industry primarily on the subject of OTT.
 Broadcasting Regulatory Policy 2009-329 amended, clarified and affirmed the continued appropriateness of the New Media Exemption Order applied to new media broadcasting undertakings.
 The Commission considers that Internet access to programming independent of a facility or network dedicated to its delivery (via, for example, cable or satellite) is the defining feature of what have been termed “over-the-top” services.
 On 4 August 2011, Netflix announced that it had surpassed one million members in Canada.
 According to Akamai as cited by Bell, in 2010 88% of the unique IP addresses in Canada had average download speeds of greater than 2Mbps.
 Netflix cited a recent U.S. study by ESPN, relying on Nielsen data, that found that between Q4 2010 and Q1 2011 only 0.18% of U.S. households dropped their subscription to a BDU service – and even that percentage was entirely cancelled out by the 0.18% of U.S. households that became BDU subscribers during that same period after having previously relied on OTA broadcasting.