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Will the Netflix revolution crush the Canadian broadcasting model?

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Why does anyone continue to pay for cable TV? With a $90 digital antenna you can pick up basic channels that bring news, hockey playoffs and award shows. A $7.99 monthly subscription to Netflix will get you a cornucopia of feature movies, documentaries and TV series, supplemented by new releases downloaded through iTunes and routed to your TV with a $99 Apple TV box. Do the math: unless you're addicted to new releases, international sports and premium cable shows, the savings are compelling compared with the average $62 per month Canadian households pay.

Of course, it is the latter offerings that are missing from the picture, which is why relatively few Canadians have cut the cord. But it's not hard to imagine a day when enough programming is available through the Internet that subscribing to cable makes less and less sense. At a certain level, maybe 10 per cent of Canadians cancelling their cable or satellite service by one industry estimate, it will start to make a real difference to industry dynamics.

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The growth of on-demand Internet content distribution services such as Netflix is the loose thread in the highly regulated Canadian broadcasting system – a fact that is lost on none of the producers, broadcasters, cable and satellite distributors and regulators. Unregulated Netflix doesn't have to give back any revenues to fund Canadian productions like cable and satellite distribution companies do, nor meet Canadian content requirements, and likely never will. Those funds, in addition to tax credits and other fees, provided about half of the $2.58-billion in financing for Canadian television production in 2011/12.

Looking ahead, the integrated companies who offer cable/satellite and Internet services– the likes of BCE, Rogers and Shaw – will probably be indifferent to losing subscribers to cable if they can capture more revenue from the other segments, which deliver higher operating margins.

The industry shifts will affect everyone, none more so than the producers, who support tens of thousands of jobs and would stand to lose a good chunk of their financing. That is because part of the money – more than $300-million last year – was largely financed through a regulated percentage of cable/satellite distribution revenues. If those revenues decline, industry sources speculate, distributors could ask for a break on their required contributions to producers, arguing they face an unlevel playing field competing against Netflix.

Fortunately, the producers have a multiyear head start. They are flush with contributions through the public funding system and can expect more in the medium term, as BCE doles out a nine-figure sum to meet regulatory requirements related to the Astral deal. They're already doing well – Canadian TV shows earned a record $440-million in international sales in the 2011/12 fiscal year, propelled by successful programs such as Flashpoint and international co-productions like The Tudors .

But they had better keep moving. CRTC chair Jean-Pierre Blais was explicit in a speech to a Canadian Media Production Association conference two months ago: Canada needs "well-financed global champions" to create content for the global market, but "that's not an outcome we can achieve through regulatory edict," he said. Calling himself "a promotionist," not a protectionist, and told producers "you will need to compete, just like any other sector … There's no guarantee that the subsidies will always be there."

It's a daunting challenge for an industry that has grown cozy within the confines of the protected Canadian system. Fortunately, the CRTC recognizes it can't regulate away change and has no intention of trying to do so. The ultimate outcome should leave viewers – and those industry players who can meet their demands – better off.

Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More

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