Analyzing Public Notice 1998-82

An Open Mind?

The CRTC (1998e, p. 2) states that it has “no preliminary views with respect to either how new media should be defined, or what role, if any the Commission should play in their regulation or supervision.” This statement should not be taken at face value. There are plenty of indications that the CRTC plans to regulate the Net in the name of CanCon: as noted in this study’s introduction, it has already put forward a definition of new media; as noted in the section “Broadcasting Regulation and the Net,” the chair and vice-chair have already in public speeches indicated their desire to regulate the Net in the name of CanCon; and almost all the questions or issues raised in the Public Notice appear to be aimed at justifying more government intervention or spelling out the types of intervention that should be undertaken. For example, the CRTC (1998f, p. 5) asks, “Should on-line distributors of new media in Canada be required to contribute to the production of new media products and Canadian services?” The CRTC seems to be hinting that ISPs might be taxed as are all BDUs (5 percent of their gross revenues) to finance the Canadian Television Fund (formerly the Canada Television and Cable Production Fund) which subsidized CanCon on TV (see Stanbury, 1998a). Further, as noted in the section “New Subsidies for CanCon on the Net” above, the federal government has already begun to subsidize the supply of CanCon on the Net.

Not asking the right questions

The CRTC poses 25 questions grouped into four categories: general (n = 5); purpose of any regulatory framework (n = 8); support for access by Canadian new media producers to distribution (n = 5); and financial or other support for the development and production of Canadian new media services (n = 7). The CRTC’s questions imply that there is a need for a “broad enabling framework” to “stimulate the economic and cultural development of a new media industry.” Stimulate? Why would anyone want to “stimulate” or “enable” an industry which is both growing very rapidly and innovating rapidly at the same time?⁶⁴ Can the CRTC regulate an industry that is growing and innovating so rapidly? Are the CRTC staff and commissioners oblivious to even the print media’s accounts of what is happening to and on the Net?

In my view, the question which best helps one to understand what the CRTC intends to do with the Net is number 7: “What are the elements of any such enabling framework for Canadian new media that would best ensure the continued growth and development of the sector and, at the same time, achieve the social, cultural and economic objectives of the Broadcasting Act?” In other words, the agency wants to know how it should regulate to achieve its industrial development objectives and the various objectives of the Broadcasting Act. Both set of objectives have been used to justify expanding Canadian content requirements. In turn, the expansion of the domestic supply of CanCon for TV and radio has been used to illustrate the effectiveness (even wisdom) of the increasingly burdensome requirements.

In the “Call for Comments,” there are no questions such as: what are the market failures relating to new media which might be a basis for further government intervention; what are the best arguments for not applying the Broadcasting Act in any way to the Internet; what is the evidence that Canadian content regulations for radio and TV achieve the stated objectives of the Broadcasting Act regarding “national identity” and “cultural sovereignty”;⁶⁵ or, to what extent has the near absence of government regulation helped to speed the innovations related to the Net and the diffusion of use of the Net among Canadians?

A review of the policy-related statements of the CRTC and Heritage Canada over the past decade or so indicates that a key justification for aggressive application of the Broadcasting Act is industrial development—the creation of jobs and exports of cultural products, e.g., TV shows, and recordings (see Stanbury, 1998a, pp. 47-49). This is a convenient disguise for transferring considerable amounts of money to those Canadians who make these products by means of Canadian content regulations. It must be emphasized that CanCon as defined by the CRTC has nothing to do with Canadian content in any substantive or thematic sense. If a group of Canadian citizens made a TV program about Siberian cooking, or Tang dynasty pottery, or the glories of Swedish socialism, it would qualify as CanCon. The policy, regardless of the rhetoric, is aimed at providing jobs for the men and women who make a living making TV programs or music recordings which are broadcast on radio. Now the CRTC wants to do the same for the folks who create various types of content distributed only the Internet. A recent Globe and Mail editorial noted that

There is no oversized federal bureaucracy micro-managing the content of the nation’s book stores and newspapers. Does cyberspace need one? Just because the CRTC has a hammer doesn’t make the Internet a nail. (August 6, 1998, p. A20)

Since CanCon quotas on the Net are very likely to be ineffective, the CRTC is likely to create a tax and subsidy scheme to shovel money to Canadians who wish to produce content for the Net. But what is the evidence that such subsidies are either necessary or desirable? The CRTC has provided none. What market failure exists which might be remedied by government subsidies? Does a natural monopoly exist? Clearly not. Is content created for (or distributed over) the Net a public good in the technical sense? While free-riding is common on the Net (i.e., gaining access to valuable content for free), most of such content is free because the supplier wants to attract the largest audience or, in a growing number of cases, generates revenues from advertisers. In some cases, free-riding occurs because there is yet no easy-to-use, low-cost and secure method of charging for “chunks” of content. That is about to change. Recall that the classic public good problem results in the under supply of valued goods or services (and so the allocation of resources is inefficient). But entry barriers to the production of content for the Net are low—that’s why there is already so much material available over the Net. Further, the costs of distributing content over the Net are low and the marginal costs are nearly zero.

Content for the Net is not a sickly infant industry in need of government mothering.⁶⁶ Rather, it is a lusty, vigorous and rapidly growing industry which has no apparent need for government help. It is an industry whose characteristics, in effect, do not discriminate against the citizens of small countries. Citizenship is irrelevant. The Net focuses more than any other medium on the skills and imagination of the individual. Surely the CRTC does not wish to suggest that individual Canadians lack the skills, imagination and energy to compete effectively on the supply of many types of content on the Internet. This growing market is obviously highly competitive. Subsidizing supply (whether “CanCon” or otherwise) will result in allocative efficiency, and redistribute income in a highly questionable fashion.

The CRTC’s focus is on Broadcasting Act objectives, mainly CanCon (see paras. 15-16 and the questions the parties are asked to address by the CRTC). There is no discussion of the three broad category rationales for government intervention: market failure, desire to redistribute income, or to create rights for individuals. As its heart, this is yet another exercise in incumbent protectionism by the CRTC, and the extension of cultural nationalism to a new medium of communication. The two are closely related.

The Net as a potential tax base
for CanCon

Most regulatory agencies are creatures of habit. They tend to stay in previously-established grooves. If a strategy “works,” they tend to repeat its use—perhaps even in a new domain. This is what is likely to happen to the Net. The CRTC promotes CanCon on TV by the following means:

• mandated quotas for “Canadian” programs applied to TV stations, BDUs, and networks;
• mandated amounts of CanCon and/or minimum expenditures on CanCon by TV networks;
• a 5 percent tax on the gross revenues of BDUs which helps to finance the Canada Television and Cable Production Fund (CTCPF—renamed the Canadian Television Fund in September 1998);
• limits on the ratio of foreign to Canadian specialty, pay, and pay-per-view channels (one to one effective January 1, 1995, previously two to one);
• specification of which Canadian and US channels are included in the “basic tier” of cable and other BDU services; and
• mandated amounts of expenditure on CanCon by programming undertakings (see Stanbury, 1998a).

In addition, the federal government increases the supply of CanCon on TV by the following means:

• A grant of over $800 million to the CBC for its TV and radio services. Since 1996, CBC-TV has had a policy of 100 percent CanCon during prime time. It spends more on CanCon than all other broadcasters and BDUs combined.
• Grants by two federal entities, Telefilm Canada and the Cable Production Fund, to the CTCP Fund, which subsidizes the CBC and independent producers to make Canadian TV programs (Stanbury, 1998a).

Finally, the CRTC increases the supply of “Canadian” musical selection on radio by mandating a 30 percent quota for almost all stations, 35 percent effective January 1, 1999 (see Stanbury, 1998a).

The nature of the Net would make mandated quotas of CanCon easy to evade. All that would be necessary is for a Canadian supplier of TV programs or other digital material (e.g., educational programs) to locate its server outside Canada. This is easily done. On the Net, distance is irrelevant. Indeed, people online often have no way of knowing the location of the server from which they are “pulling in” digital material. Imposing CanCon quotas on various types of material received by citizens over the Net would be an excellent way to drive Net-related activities out of Canada. It is likely that this point will not be lost on the CRTC even though the agency evidently wants to expand the supply of CanCon on the Net.

If Cancon quotas are not practicable, the CRTC could turn to subsidies. Indeed, the Heritage Minister (to whom the CRTC reports) has already pointed the way with the “Multimedia Fund” to subsidize CanCon on the Net (see the section “New subsidies for CanCon on the Net” above). The CRTC might well look at the Net as a tax base from which to collect money to finance a higher level of subsidies for Canadian content either on the Net or on television or radio. Recall that a few years ago a task force headed by Pierre Juneau floated the idea of taxing all telephone bills to finance subsidies for CanCon.

What kind of a tax base most excites an avid tax collector? I suggest that it would have the following characteristics:

• demand for the taxed item would be price inelastic, i.e., the quantity purchased would fall less than proportionately to an increase in price;
• even a nominal tax rate would generate substantial revenues even in its first year;
• the tax base is expected to grow more rapidly than the economy for years to come; and
• there are relatively few, easy-to-identify entities from which to collect the tax dollars, for ease of administration.

The tax collector’s dream would be reinforced if the revenues were earmarked to be spent on a purpose that a majority of Canadians appear to believe is worthwhile.⁶⁷

In practice, how might the CRTC generate revenue from the users of the Net to finance subsidies paid to Canadian citizens who produce content distributed over the Net? It would not require much imagination to extend the current 5 percent tax on the gross revenues of all BDUs to the Net, and impose such a tax on the gross revenues of ISPs. It would be impossible to tax all suppliers of content on the Net, as it would be easy for them to put their material on servers outside of Canada. However, every Canadian who is online must have an ISP and in almost every case that ISP is located in Canada.⁶⁸ It is possible to obtain access to the Net from a foreign ISP, but that would involve a long distance call. Only the largest (and most determined) users could afford a leased line to a (say) US-based ISP. Based on past behaviour, it is unlikely that the CRTC would cavil at requiring all ISPs to be licensed so it could regulate them. But it need not licence the ISPs in order to tax them. It merely has to identify them and acquaint them with the regulations.

It seems apparent that a 5 percent tax on ISPs gross revenues would be very attractive to the CRTC for several reasons.

• It could generate about $50 million in the first full year and possibly more.⁶⁹ (This estimate omits any ISP revenues from businesses connected to the Net.)
• In 1998, about one-third of Canadian households are on the Net. But the number is growing rapidly. (It was 7.4 percent in 1996.) Even if the total tops out at 75 percent or 80 percent, the growth potential is huge.
• A 5 percent tax would be consistent with the maximum regarding “the importance of being unimportant.” A 5 percent tax is less than the GST (7 percent) and the provincial sales tax (usually about 7 percent) in every province but Alberta.
• A 5 percent tax on ISP gross revenues would be seen by the CRTC as a close analogy to the 5 percent tax on the gross revenues of all BDUs.
• It appears that the price elasticity of demand for ISP services or Net access services is low, i.e., less than one.⁷⁰ Not many people are going to drop off the Net because their monthly bill for access to the Net goes up by 5 percent.
• It is easy to identify all ISPs in Canada—there were about 675 in 1998 (Hamilton, 1998b). Concentration is said to be increasing (see Evans, 1998), and telephone and cable companies continue to grow as ISPs.⁷¹

Within a few years, a 5 percent tax on ISP’s gross revenues would almost certainly generate more money for the CRTC than does the 5 percent tax on BDU’s gross revenues. This would make the CRTC the godfather to those Canadians wanting subsidies for whatever material they want to distribute over the Net.

Stentor (1998, p. 71) argues that it would be “inequitable to burden the emerging and vigorously competitive ISP industry with the requirement to provide financial support to aid in the development of another emerging industry—the new media sector.” With respect, Stentor fails to understand the actual incidence of, say, a 5 percent sales or excise tax on a competitive industry such as Internet access services. Such a tax would fall almost entirely on the customers of ISPs. ISP would be forced to raise their fees by the amount of the tax. If the subsidies for new media were to come out of general revenues, they would come disproportionately from those currently online, as they tend to have higher incomes.

Because CanCon quotas won’t work, the good news is that the CRTC will not be able to restrict freedom of expression on the Net—unless it is prepared to engage in police-state tactics from which even placid Canadians are likely to recoil in disgust. However, the CRTC might require ISPs to offer a Net browser program which always displays material from Canadian sites first on the screen.⁷²

The bad news is that, once again, millions of Canadians will be taxed to provide subsidies for a rather small number of people who exploit the latent fears of Canadians who are insecure in their national identity and who mistakenly believe that CanCon requirements will actually strengthen that identity. Even worse, taxing ISPs to finance CanCon subsidies will perpetuate the endemic culture of subsidization that affects Canada. A large fraction of Canadians appear to believe that it is natural for governments to subsidize just about everything and everyone.