By Brad Danks
TIME IS RUNNING OUT. Last month I set out the reasons why I agreed with the Yale Report that it’s time to regulate the Internet. However, there is much more to like in that report, such as the recommendations which would bring the digital platforms into the Canadian regulatory system – and why government must take action as soon as possible.
The number of digital platforms entering Canada increase in number and size by the day. They are accelerating the decline of the conventional Canadian broadcasting system that supports our culture and production industry. It’s very likely that that the digital platforms will replace our current broadcasting distribution model in the near future and we have likely already passed the tipping point.
This sounds quite dramatic but I, and many others, believe if a new regulatory system is not quickly put into place it will lead to disaster for our broadcasting sector, our creative industries, our Canadian identity and our country.
Let me emphasize, we’re not suggesting to push back the tide. OUTtv has had a direct and positive experience in working with many of the digital platforms. Our company was one of the first to fully embrace direct to consumer delivery, launching our OUTtvGo service in 2016. We were also among the first channels on Amazon Prime Video, and one of the first to launch a channel on the Apple TV+ platform in Canada. In addition, we have content on many platforms around the world, including in the US, UK, South Africa, Australia, New Zealand and more.
Canadians can and will compete in global markets if given the chance. If little OUTtv can do it, so can others, but only if we move quickly and adapt can our system be sustainable in order to capitalize on this once-in-a-lifetime opportunity. If we continue to sit on our hands, we risk missing out and even possibly losing our cultural industries for generations to come, and along with it our cultural identity.
The platform innovation
In the previous article, I described these foreign digital services as proprietary platforms designed to bring together consumers and the sellers of individual products. They are Internet-based streaming services, data and algorithmically driven and designed to scale to meet the consumer need for a large quantity of products. There are generally two different types of these platforms, although there are variations.
Some, like Netflix, Disney+ and the other studio offerings (Viacom/CBS, Peacock and HBO Max), are like a large channel offering, as they are one price for access to all their content: a subscription video on demand service (“SVOD”). To the extent they aggregate other content, they acquire the rights from the content owners in a conventional acquisition.
The other type of platform is more like a conventional aggregator, similar to a Broadcasting Distribution Undertaking (“BDU”), which aggregates third party content along with its own onto the platform, often free with the price of the service. The content is made available to the consumer either free with advertising or in a channel type bundle as a “mini” SVOD. The best known of these platforms in Canada are Amazon Prime Video, Apple TV+ and Roku.
The next wave is the Advertising Video On Demand (“AVOD”) platforms. They’re all free services with content supported by advertising. The first to come to Canada was YouTube, but more recently Tubi, a platform freshly acquired by Fox, has arrived. The next three dominant foreign players, PlutoTV, Xumo and SamsungTV will eventually follow. Other new services in the US are Redbox, Peacock and Amazon’s IMDB.TV. Many other services will arrive embedded in smart televisions, such as Vizio, Hisense, TLC and Huawei. AVOD is a rapidly growing market with a number of players pursuing global markets. There are also many regional players around the world which are gaining local market share in both SVOD and AVOD. Among the major Canadian players are Bell Media’s Crave and CBC’s Gem.
What’s so different about these services that makes them a threat to the current broadcasting system? Originally the content was similar to that on the broadcasting system, but increasingly it’s exclusive to a platform and premium, which is important. However, the real innovation is in their pricing model.
“It’s fair to say that the driving force behind much of the media concentration globally in the past few decades has been about gaining enough leverage to negotiate with carriers to improve channel pricing.”
The digital platforms avoid the high cost entry point of the conventional system and the cumbersome approach to packaging and pricing. Many are free to join or, as with Amazon or Apple, are free if you have purchased their other services or products. They’re also increasingly easier to access than conventional cable and satellite because they use a simple device connected to your television, such as an Amazon Fire Stick, an AppleTV or Roku box or are already integrated into your smart TV. Meanwhile, conventional television still (mostly) requires some form of set-top box technology delivered by the BDU.
While conventional providers are working to improve their technology, it’s their pricing model which remains our system’s Achilles’ heel. In many respects, the situation in television is now analogous to where music was in the late 1990s. At that time, CDs were $19.99 (or more) for 12 songs (two that you actually wanted but 10 you had buy to get them). Then Napster disrupted the entire business by making music free. Apple arrived with a digital management system, the iTunes store, and later the iPod freed music forever. The content didn’t change but the way it was priced (99-cents/song at first) and delivered did. Television is now going through its own version of this. As Mark Twain famously said, “History doesn’t repeat itself, but it often rhymes.”
In the conventional model, the content owner or channel negotiates their fee and carriage directly with each BDU. The most important terms relate to price and channel packaging. The material terms are based on the expected future performance of a channel and contracts are generally long in duration – three-to-five years. The BDU then adds its costs and fees and the price increase is passed onto the consumer in the retail market. The process is long, often divisive and usually based as much or more on corporate power than it is on channel performance. It’s fair to say that the driving force behind much of the media concentration globally in the past few decades has been about gaining enough leverage to negotiate with carriers to improve channel pricing.
“The BDUs still try to keep the consumer entry point – and legacy pricing – as high as possible to maintain profits. This makes the system ripe for disruption by new pricing models from the digital platforms.”
Over time, the pricing model essentially worked backwards with BDU gatekeepers raising the price of television to the maximum the consumer was prepared to pay. Total cable television subscribers peaked around the year 2012, but the monthly revenues per subscriber received by BDUs continued to increase through 2015, showing prices were also continuing to increase as subscribers started cutting the cord. It is true there have been incremental adjustments with more à-la-carte pricing and skinnier offerings, but the BDUs still try to keep the consumer entry point – and legacy pricing – as high as possible to maintain profits. This makes the system ripe for disruption by new pricing models from the digital platforms.
The new platforms’ consumer side is something that we have probably all now experienced. They are priced relatively inexpensively in comparison to conventional TV and even those with add-on services give the consumer more pricing freedom. In general, they get more of what they want but – most importantly – pay less for what they don’t want.
The aggregator platforms can also add an almost unlimited amount of content without having to raise their entry-level prices. This is because they operate with revenue share agreements between the content provider and the aggregator. Whether it’s a split of the subscription revenue or of the advertising revenue or both, the platform and content provider are real partners in the arrangement. Since the platforms are Internet-based, they have enormous content capacity without incurring significant upfront costs. This is a huge competitive advantage and among the reasons these services are growing so quickly.
Of course, Netflix was the first major mover of the SVOD market, but others have followed quickly. With all of the studios now launching services, it is evident that they all believe that this is the future of the business. The Covid-19 pandemic has only accelerated this process, with more consumers adding OTT services to their subscription bundle. At the same time, conventional television has seen an increase in cord cutting. A new report from Globaldata indicates that the number of subscribers to SVOD services will globally surpass pay television subscribers in 2020. The trends are clear and with the major studios all launching services this year, the transition will only accelerate.
We see a tremendous opportunity for our business, and for Canadian creators in general, to become exporters in partnership with these platforms over the coming decades. All of these platforms are in a hurry to increase market share and are open to new opportunities. Both Amazon and Apple have done a terrific job marketing OUTtv in Canada. We consider them to be the current gold standard for platform partnership.
So, what’s the problem? Why don’t we just leave things as they are? Two reasons, which very much overlap. The first is they are all entering Canada without contributing in any way to the Canadian system – a system that supports the creation of Canadian content that helps us to maintain a clear and distinct Canadian identity. This has to end.
The second is less obvious, but it relates to the history of information industries and how they tend to develop and consolidate over time. This problem is less understood but equally important to the consideration of when to regulate. It was too early to regulate Internet-delivered content when the initial Digital Media Exemption Order was originally issued, in 1999. Markets do remain open and free for a period of time, as did the Internet in its first decade. However, as it has for the Internet, that time is quickly passing for digital platforms.
Brad Danks is CEO of OUTtv and adjunct professor of law at the University of Victoria. Part II will appear next week.
Original artwork by Paul Lachine, Chatham, Ont.
