The Netflix Effect in Canada

Authors Peter H. Miller and Randal Rudniski introduced the “Market Impact and Indicators of Over the Top Television in Canada: 2012” report they wrote for the CRTC in March 2012 with the following observation:

“Barely a day – and certainly not a week – goes by without an announcement or pronouncement on something to do with competitive online or ‘over the top’ television (OTT): Netflix’s growth, evolving strategy or demise; Google, Apple, Intel; and consumers doing this that or the other with OTT or TV.”

A year has passed and their introduction is still right on the money. The reality remains that barely a day – and certainly not a week – goes by without someone making an announcement, publishing the results of an analysis or taking a stand on over-the-top TV, or OTT, as it is now known. Call it what you will, OTT services is the new digital service that bypasses regulations and airwaves to deliver audiovisual content to viewers. And the top provider of this service is Netflix.

Does over-the-top television have any kind of impact on traditional TV which still operates on a set schedule despite today’s motto of anytime, anywhere and on any device? The report isn’t looking to answer this question but rather to suggest a framework for analysis that will enable us to monitor the situation through a series of indicators.

The Media Technology Monitor (MTM) reports that the percentage of Canadian households subscribing to Netflix – one of the most revealing indicators researchers have – is growing fast, at least in the English-speaking market. The number went from 10% of all Canadian households in March 2012 to 20% of English-speaking households and 5% of French-speaking households (or 17% of all Canadian households) in November 2012, just two years after the service was made available here.

A 20% subscription rate makes the Netflix service profitable and provides the company with noticeable benefits in local markets with regard to content acquisition and subscribership. In their “Netflix Long Term View” document published on April 25, 2013, the company states: “At that percentage of households, our advantages in content acquisition and member acquisition are considerable.

A Netflix effect on the Canadian broadcasting system?

The authors of the report on OTT TV concluded that “it is implausible to see OTT as a threat to the existence or viability of the Canadian broadcasting system in the foreseeable future. The argument made by some that new IP based, on demand technologies and platforms, require a slow managed phase out of our current regulatory system are, at best, woefully premature.

A few indicators that could spell the end of TV as we’ve known it for over 60 years now often make headlines, such as an increase in the sales of OTT TV technologies (compatible boxes and connected TVs), a growing number of subscribers to new telecommunications technologies, an increase in online TV show and video viewership and a decrease in cable subscribership, with certain demographics abandoning cable all together.

But there’s more to this issue than what makes the headlines. A topic that is rarely discussed is how the Netflix effect and/or the potential impact of OTT TV indicators listed in the report might affect the Canadian broadcasting system’s ability to stay in line with one of the key objectives set forth by the Broadcasting Act, which is to make “predominant use of Canadian creative and other resources in the creation and presentation of programming.”

So is there really such a thing as the “Netflix effect”? For example, can we assume that every point in market share that Netflix gains is at the expense of pay TV (whose audience is the most similar to that of online TV) and the resources it can allocate to Canadian programming?

And at the opposite end of the spectrum, can we hypothesize that the growing number of subscribers to OTT TV services and the growth in revenue these providers have reported might lead to more funding for Canadian content production? That’s what a few CRTC stakeholders were saying back in 2011 when the Commission decided to gather data on OTT TV. Based on its findings the CRTC believed that OTT TV would create new business opportunities for Canadian producers and promote wider-spread distribution of Canadian content since OTT TV providers would need to offer Canadian content to stay competitive in the Canadian market.

According to an MTM study conducted in 2012, the second hypothesis is the more likely of the two because Netflix subscribers are huge TV consumers. Not only do more than 80% of them subscribe to traditional TV services, but over one third of them also subscribe to pay TV services like TMN and Movie Central.

Miller and Rudniski estimated Netflix Canada invests somewhere around $5 million a year in Canadian content production, which pales in comparison to the almost $3 billion invested in the production and distribution of Canadian programming by the Canadian powers that be in 2011.

But the Netflix effect is much more impressive when its impact is measured in terms of the company’s annual global investments as presented in “Netflix Long Term View.” The OTT TV giant is spending $450 million on marketing, $350 million on improving their services and apps so they can be made accessible to more than 1000 devices being used in more than 40 countries, and $2 billion on acquiring and producing content.

Eventually the Netflix effect will come to include the impact that other foreign OTT TV service providers – who are also investing increasingly larger amounts in original content production – will have on the Canadian market.

The Netflix effect in other parts of the world

Just recently the CEO of Netflix posted a comment on his Facebook page saying that his subscribers had watched 4 billion hours of content in the first quarter of 2013. Scaled down to the US market (28 million subscribers) that number translates into a daily average of 87 minutes per subscriber, making Netflix the “hypothetical” top cable network alongside The Disney Channel.

It appears the next markets targeted by Netflix are Europe and Asia. But with media chronology being much less flexible in France than in the US, access to the French cinema content market by a future Netflix France is already restricted. However, the rules of media chronology don’t apply to television series so Netflix would most likely focus on this market instead.

Should the Canadian content production industry fear Netflix? Maybe not just yet. At the moment the company is positioning itself as an “add-on” to the system in place based on its vision of the future of television. It’s also stressing the fact that it’s in fierce competition with traditional networks to captivate the part of our brain time devoted to entertainment. Lucky for them, it appears this “share” of viewer brains is growing. For example, the latest data published by BBM reveals the average Canadian adult watches a whopping 30 hours of television a week.

es the Netflix effect have an impact on the Canadian broadcasting system? It’s hard to tell right now. But one thing’s for sure: even though we can’t measure the company’s impact in any concrete way we all know it exists, and that we’re not finished hearing about it.

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