WINNIPEG – As long as the federal government and their provincial counterparts keep allowing Netflix to do business in Canada without at least collecting sales taxes, they are perpetuating a structural imbalance in favour of the big U.S. streamer (and others) over Canadian competitors.
That deduction is part of an enlightening new discussion paper called Netflix in Canada released Wednesday by Winnipeg’s Communications Management Inc., which takes a deep dive into the numbers.
CMI’s paper references research from the likes of CBC’s Media Technology Monitor and Solutions Research Group, but it relies most heavily on a large 2016 Statistics Canada survey (one of its General Social Surveys with 19,609 respondents) for its conclusions on the streamer’s size in Canada with projections through to 2020, what we know now about Netflix’s Canadian subscriber base, and the sales tax issue.
Netflix debuted in Canada in September of 2010 and is now present in nearly half of all Canadian households. The report quarrels with some of the recent estimates on the revenue the company may be earning in Canada, calling the $766 million figure in the CRTC’s 2017 Communications Monitoring Report too high, but CMI estimates, using its methodology, that Netflix earned $615.6 million in revenue on 5.7 million subscribers in Canada in the 2016 calendar year.
That figure, though, is going to jump to $1.02 billion in 2020 on 7.7 million subscribers. (Ed note: To put that in perspective, Corus Entertainment in 2017 earned $1.15 billion in revenue from all of its TV operations, according to CRTC filings.)
CMI’s data also shows, likely as expected, the younger the Canadian, the more likely they are to subscribe. The 
StatCan numbers show close to 70% of Canadians aged 15-24 subscribe to Netflix while just under 60% of those aged 25-34 are subscribers.
While Quebeckers and French speakers overall subscribe to Netflix far less than the rest of Canada, still 50% of 15-24 year old Francophones report subscribing to the streamer.
When it comes to the overlap among Canadians who subscribe both to Netflix and a traditional TV provider, it’s a healthy number. In the 2016 GSS survey, 76.2% of Canadians said they subscribed to a cable, satellite or IPTV provider while a total of 44.5% of Canadians said they had a traditional TV service but not Netflix. A total of 31.7% reported they had both and 13.1% had Netflix but not a traditional TV subscription (see image).
Netflix and taxation
When it comes down to the contentious issue of Netflix and taxation, the report notes the current federal Liberal government has simply parroted the old Conservative line of “No Netflix Tax”, and has held firm on that. However, in order to analyze how much revenue the provinces and the feds are missing out on, calculations have to be done province by province, since each has its own sales tax rate. Quebec so far is the only province to say it will have Netflix and others collect provincial sales tax, starting in 2019.
“Had the various sales taxes applied to Netflix subscriptions in 2016, the federal government would have realized an estimated $30.8 million in GST revenue, and the provincial governments would have realized an estimated total of $42.8 million, for an overall total of $73.6 million,” reads the report.
“To the extent that it is argued that sales taxes should not be levied on Netflix and other similar services, then it would seem only logical to consider removing those taxes from their Canadian competitors.”
However, “over the five year period (2016-2020), the cumulative total potential is estimated at $209.3 million in GST revenue, and $294.3 million in provincial HST or sales tax revenues, for a total of $503.6 million – just over half a billion dollars.”
(Ed note: It’s worth noting that this figure is near exactly the amount Netflix pledged – in a confidential deal signed with the federal government in 2017 – to spend in Canada over the next five years on movie and TV production.)
The report doesn’t take a side on whether sales taxes should be applied to Netflix, but does note that the simple fact Netflix doesn’t have to collect those monies confers upon it a competitive advantage over Canadian TV companies. “To the extent that it is argued that sales taxes should not be levied on Netflix and other similar services, then it would seem only logical to consider removing those taxes from their Canadian competitors – the online services, of course, but possibly also cable- and satellite-delivered services, which are part of the same competitive market,” it reads.
The structural advantage for Netflix isn’t just a retail pricing issue, either. Using Ontario’s 13% HST rate and a hypothetical retail price of $10/month, the report succinctly breaks the challenge down.
“If a consumer is willing to pay $10 a month for an online video service, she can get the service from a tax-exempt provider for that amount, and the tax-exempt provider will receive the entire $10,” the report explains.
“That advantage can be used in a number of ways.”
“She can also get the service from a Canadian provider, but if the spending is to be kept constant at $10 a month, then the Canadian provider will only receive $8.85; the remaining $1.15 goes to HST ($8.85+13%=$10.00). That means that, for every $10, the tax-exempt provider has an advantage of $1.15, and that advantage can be used in a number of ways, including: higher profits for that non-Canadian provider; more spending on programming, to make that non-Canadian service even more attractive to consumers; and/or flexibility to offer discounts from time to time, to help increase subscriber totals.”
(Ed note: Applying that calculation to the revenue figures referenced earlier means we’re into some serious multi-millions worth of disadvantage for the Canadian players.)
These figures (and more in the report) reveal serious Canadian cultural policy implications. “The way public policy evolves to deal with Netflix has implications far beyond just taxes, because Netflix is but one high profile example of a series of changes that are using technology to remake the economics of television,” reads the paper. “Common sense and fairness demand that the tax issues be resolved, but public policy should also be looking farther ahead to deal with future structural change.”
“To do otherwise would be to leave our regulatory mechanisms in the position of regulating more and more of less and less.”
As well, it’s not just Canada facing these structural shifts. The BBC admitted last month it is no longer the dominant force in TV in the U.K. and the pubcaster’s annual plan admitted young Brits are spending more time with Netflix than the Beeb, says CMI, quoting recent news reports.
The Netflix impact is being felt on the advertising portion of the ledgers, too – even though Netflix does not yet offer advertising on its platform – thanks to audience displacement. Billions of dollars, globally, have slipped away from TV advertising because many of the viewers that ad clients need to reach have migrated to OTT platforms.
All of this should shake policy makers (hopefully those in the federal government trying to modernize the Telecom and Broadcasting Acts!, ed) into finally abandoning all of the silos we still maintain (broadcast, specialty, VOD, free OTT, subscription OTT, etc.) says the report. The video market must be measured differently and include everything.
Media markets “will have to be defined to include all of the sources that consumers might use to access information and entertainment, and the way we regulate those components that fall within Canadian jurisdiction will have to evolve to take that into account,” says the report.
“To do otherwise would be to leave our regulatory mechanisms in the position of regulating more and more of less and less – the application of regulatory obligations that made sense when broadcasting was an oligopoly, but are no longer realistic when competition is unlimited and borderless."
For the full report, please click here.
