TRANSNATIONAL OVER-THE-TOP VIDEO DISTRIBUTION AS A BUSINESS AND POLICY DISRUPTOR: THE CASE OF NETFLIX IN CANADA - OPEN ACCESS JOURNALS AT UIO

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Zboralska and Davis, The Case of Netflix in Canada

Transnational over-the-top video distribution                                                                   The Journal of Media Innovations 4.1 (2017), 4-25.
                                                                                                                DOI: http://dx.doi.org/10.5617/jmi.v4i1.2423
as a business and policy disruptor:                                                                             © Emilia Zboralska and Charles H. Davis, 2017

The case of Netflix in Canada
Emilia Zboralska                Charles H. Davis
Ryerson University              Ryerson University
emilia.zboralska@ryerson.ca     c5davis@ryerson.ca

ABSTRACT                                                                                                        INTRODUCTION

Digital disruption is often characterized as the       Talk TV” hearings of 2013-2014. Through an ex-           Domestic broadcasting industries are considered
conflict between the exponential rate of change        amination of public documents, we analyze the            vital to national cultural expression and demo-
in technology, and the slower-paced, incremen-         ways Netflix is considered an opportunity, ally, or      cratic practice, and for that reason they frequently
tal rate of change in law, economy, policy, and        a threat by consumers, broadcasters, independent         receive governmental support and protection and
society writ-large (Franklin, 2012). The rapid en-     producers, and governments. We show that in a            are regulated in the public interest. In Canada, the
croachment of over-the-top (OTT) content distri-       reprioritization of values, many of the principles       television broadcasting system serves as a major
bution raises policy issues concerning jurisdiction,   that motivated legacy broadcasting policy are be-        instrument of national policy regarding creation
access, pricing, consolidation of ownership, and       ing sidelined by a consumerist approach that gives       and distribution of domestic content, with atten-
source diversity (Holt, 2014), while undermin-         freer rein to streamed services. However, Neflix’s       dant expectations concerning national cultural
ing many of the traditional policy instruments. In     refusal to provide the Commission with informa-          expression, cultural sovereignty, and democracy
this paper, we analyze Netflix’s strategic expan-      tion it was ordered to produce suggests the most
sion and meteoric growth in Canada, and focus          serious disruption is to the notion that online video
on a landmark event in Canadian broadcasting           distribution can or should be regulated in the pub-      Keywords
policymaking: the Canadian Radio-television and        lic interest.                                            media innovation, media policy, political economy, over-the-top
Telecommunications Commission’s (CRTC) “Let’s                                                                   video distribution, broadcasting

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Zboralska and Davis, The Case of Netflix in Canada

(Armstrong, 2010; Grant & Wood, 2004; Le Goff et           The television broadcasting sector is experienc-    the review was framed primarily around the obser-
al., 2011; Picard et al., 2016).                       ing an unfamiliar pattern of disruption: “big bang”     vation that television is “evolving at an incredibly
    The “digital shift” in the media and content in-   expansion (Downes & Nunes, 2014) of highly capi-        rapid rate – and Canada’s regulatory system must
dustries is disruptive, introducing major transfor-    talized, rapidly scalable transnational online ser-     change with it” (Blais, 2013b). According to the
mations in consumer behaviour, business models,        vices which quickly develop large bases among do-       regulator, on-demand video streaming has altered
and competition, and requiring broadcasters to         mestic consumers, making domestic incumbents            Canadians’ expectations of the traditional broad-
develop multi-platform, multi-product proficien-       appear as slow-moving, self-serving rent-seekers        casting system, leading to a growing dissatisfaction
cies (Doyle, 2015; Naldi, Wikström & Von Rims-         (Cable, 2016). The case of Netflix in Canada dem-       with the status quo and a marked need to revise the
cha, 2014; Oliver, 2014). Disruption of core tech-     onstrates how the Canadian broadcast industry is        current rules regulating the operation of Canadian
nologies “inevitably creates tension for regulatory    being disrupted through “big bang” innovation in        television (CRTC 2014-190).
institutions” (Downes & Mayo 2015, p. 11), raising     the screen media sector. The U.S.-based Netflix has         Although at previous Canadian television policy
acute policy issues concerning jurisdiction, access,   been operating in Canada only since 2010, but is        hearings Netflix portrayed itself as complementary
pricing, consolidation of ownership, and source di-    estimated to have attracted nearly 50% of Anglo-        to the traditional Canadian television system, its
versity (Holt, 2014; Simon & Bogdanowicz, 2012).       phone Canadians as subscribers (MTM, 2016). Our         recent activity, messages to shareholders, and
Disruption causes the legacy regulatory regime to      paper focuses on a recent landmark event in Ca-         venture into original content show that it now has
become “unstuck” in the sense that “the old [policy]   nadian broadcasting policymaking: the Canadian          other plans. Here, we examine the entry of Netflix
instruments, like existing national mechanisms for     Radio-television and Telecommunications Com-            into a domestic broadcasting system that is already
direct support and domestic content regulations,       mission’s (CRTC) “Let’s Talk TV” hearings of 2013-      affected by a political environment favorable to
may no longer work,” while there is lack of a “clear   2014. On October 24, 2013 the Canadian broadcast        transitioning away from cultural protectionism
idea about what to replace them with” (O’Regan &       regulator (CRTC) announced the launch of a year-        towards deregulation and free market strategies,
Goldsmith, 2006, p. 82). Regulatory “unsticking”       long, three-phase review of the Canadian broad-         with a recent federal governing party that chose
exposes the mixture of entitlements and respon-        casting system. The policy process, dubbed “Let’s       consumer sovereignty as a plank in its 2015 election
sibilities constituting the legacy regime, as well     Talk TV” (LTT), invited stakeholders, including         platform. Below we discuss Netflix’s activities
as what Freedman (2015) calls “policy silences,”       individual Canadians, to “shape the future” of the      in Canada, its encounter with the country’s
pathways that are not considered or discussed          television system so that it “is adaptable for years    media regulatory agency, and the responses it
publicly.                                              to come” (CRTC Notice 2013-563). The need for           has elicited in the Canadian television industry.

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Zboralska and Davis, The Case of Netflix in Canada

Through an examination of publicly available           or can be regulated in the national interest. The           Although hundreds of Internet-based video ser-
documents, including filings to the CRTC, letters to   case presented here illustrates how disruption          vices have emerged since the late 1990s, most of
shareholders, leaked e-mails, and other company        of regulated media industries involves processes        these services have been marginal or niche players
texts and communications, we analyze the ways that     of “unsticking” of regulatory regimes, exposing         (Cunningham & Silver, 2013), allowing domestic
Netflix is considered to represent an opportunity      policy silences and showing that transnational          broadcasters and cable operators to enjoy a cer-
or a threat by the various players in the Canadian     challengers seek rapid expansion among domestic         tain bargaining power in architecting delivery plat-
television system: consumers, broadcasters,            consumers not just for purposes of revenue growth,      forms (Baccarne et al., 2013; D’Arma, 2010; Evens,
independent producers, and governments. We             positioning, or branding, but also to provide           2014; Meisel, 2013). However, the key architects of
show that many of the principles that motivated        leverage in domestic regulatory reform.                 the emerging media ecosystem are not these niche
and shaped legacy broadcasting policy in Canada                                                                video distributors, nor the domestic providers of
are being marginalized by a consumerist policy                                                                 fixed-line or wireless pathways to consumers, but
approach that gives much freer rein to streamed        INNOVATION, REGULATION, AND DISRUPTION                  instead providers of transnational cloud-based
services than to legacy forms of video distribution.                                                           services, which encompass storage, processing,
This places incumbent broadcasters at a relative       Digitization affects media industries by driving the    databases, software, networks, and platforms. Ac-
disadvantage vis à vis the over-the-top operators      cost of additional copies of media content to zero,     cording to Noam (2014), advantages of scale and
(OTTs), inspiring uncharacteristic expressions of      enabling multiple uses and reuses of media content.     scope are favouring the emergence of a small global
interest from incumbents in a regulatory regime        It enables interactivity and extensive data collec-     oligopoly of cloud providers who exercise consid-
they formerly portrayed as burdensome. The             tion regarding consumer behavior, provides “loca-       erable market power over users and providers of
unscripted dénouement of the LTT hearings came         tion agnostic” advantages to players who can lever-     hardware, software, transmission, and content
when Netflix publicly rejected the Commission’s        age economies of scale and scope, and disrupts and      inputs. Noam considers that the most likely cloud
jurisdiction over online streamed video services       reconfigures distribution networks. Media, IT, and      providers in the emerging online media ecosystem
in Canada and refused to provide the Commission        telecommunication sectors that were formerly sep-       will be “tech companies that have morphed into
with the information it was ordered to produce.        arate are becoming intermingled, leading to a new       media, such as Google or Apple, or ... hybrid ‘tech-
This turn of events suggests that the most serious     business ecosystem in which all segments compete        media’ firms such as Netflix or Amazon” (p. 688).
potential disruption in broadcasting’s digital         with all other segments for access to end-users and     Most of the approximately 500 OTT service provid-
transition is to policy itself, by making moot the     consumers (Simon, 2012; Simon & Bogdanovich,            ers in the world in 2016 serve local markets; the top
assumption that online content distribution should     2012).                                                  five OTT service providers (Netflix, Amazon, Hulu,

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Zboralska and Davis, The Case of Netflix in Canada

HBO, and YouTube) currently represent about half       During television’s second and third generations          (­Hasselbalch, 2014, p. 23). Two conditions must be
of the $25 billion in worldwide OTT revenues (Ar-      (multichannel satellite, cable, telecom networks,         met in order for a policy regime to become disrupt-
thofer et al., 2016).                                  and digital television), although carriage capacity       ed: 1) the innovator must move first, steering the
    The expansion of players from the computer         increased significantly, most governments contin-         market, and its development, and 2) the externali-
industry into new industries radically disrupts ex-    ued to regulate domestic broadcasting systems by          ties arising from the innovation must be considered
isting business models (Kushida, 2015). Downes         requiring licenses or notification for television dis-    controversial and enter public and political debate
& Nunes (2014) call the process of innovation in       tribution (Schweitzer et al., 2014). The fourth gen-      (Hasselbalch, 2014). Three factors allow an innova-
which newcomers take advantage of digital and          eration of television, video streamed over Internet       tor to move before the regulator: novelty (when the
cloud-based technologies to offer consumers mas-       broadband, provides high resolution, peer and per-        innovation presents something regulators have not
sively better, cheaper and more customized experi-     son-to-computer interactivity, asynchronous view-         encountered), speed (when it rapidly creates new
ences from the moment of market entry big bang         ing, multiplatform distribution, and user-generat-        markets), and obscurity (when it and its transac-
disruption. Highly capitalized transnational OTT       ed peer-to-peer content (Noam, 2014), presenting          tions develop and occur outside of the purview of
streaming video content providers have definite        significant challenges to policy regimes, their his-      regulators) (ibid.).
advantages over domestic cable, broadcasting, and      torical rationales, and regulated incumbents.                 Downes & Mayo (2014) argue that regulatory
satellite services, whose business model involves          Cable (2016) emphasizes the increased inci-           inertia in the face of disruptive innovation in the
bundling content with distribution. OTT content        dence of “reformer startups” or fast-moving, well-        communications sector stems from: 1) an increas-
providers are able to attract customers away from      capitalized newcomer firms that “operate in the           ing mismatch between regulations and the reality
domestic distributors on the basis of lower cost,      face or shadow of prohibited regulatory regimes”          that regulated markets are now consistently driven
greater choice, greater convenience, and (thanks       (p. 2). These firms rapidly gain traction in the do-      by innovation, 2) the failure of regulatory bodies to
to their huge collections of data on viewing prefer-   mestic market and grow large customer bases, de-          adapt their rules when regulations made by com-
ences) personalized playlists. They also enjoy deep    terring regulatory intervention and disrupting the        peting or complementary bodies are altered, and 3)
pockets, brand recognition, and a favorable regula-    policy regime. Policy disruptions are characterized       political forces which must navigate the institution-
tory environment (Lee, 2014).                          by “a change in the material conditions of a market       alized distribution of benefits created by previous
    Governments regulated the first generation of      (either an existing one or a new one), which leads        policy regimes. The political dimension of regula-
television, over-the-air broadcasting, justifying      to an invalidation of existing regulatory expecta-        tory decisions in the face of disruptive innovation
their licensing requirements on the grounds of         tions, norms, ideas and frameworks, and pressure          is increasingly significant in situations where the
public ownership of scarce spectrum frequencies.       to accommodate and eliminate this invalidation”           status quo is justified in terms of abstract public

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Zboralska and Davis, The Case of Netflix in Canada

benefits (Cable, 2016). Because reformer startups      domestic content to the digital sphere, continuing        broadcasting activities in Canada. The Act provides
offer consumers immediate benefits, regulations        to focus their efforts on the legacy broadcasting         that “Canadian broadcasting shall be effectively
that negatively affect these benefits can carry sig-   system, and favoring market forces and consumer           owned and controlled by Canadians.” The Canadi-
nificant political cost (ibid.).                       satisfaction as the driver of innovation, rather than     an broadcasting system, the Act continues, should
    Thus, due to their deep pockets and their ex-      other dimensions of public interest (Freedman,            “serve to safeguard, enrich and strengthen the cul-
ponential growth that occurs in the shadow of ex-      2015b). On the whole, little effort has been made         tural, political, social and economic fabric of Cana-
isting regulatory regimes, reformer startups have      to secure new digital shared public spaces, which         da” by encouraging “the development of Canadian
substantively more clout in their interactions with    could complement, supplement, or perhaps even-            expression” by “displaying Canadian talent in en-
regulators than the less-capitalized startups of the   tually replace those shared televisual spaces his-        tertainment programming” and by “offering infor-
past (Cable, 2016). Rational choice theory predicts    torically safeguarded by legacy broadcasting policy       mation and analysis concerning Canada and other
that coalitions of opposing interest groups who de-    (Freedman, 2010; 2015b). Notably, proposals to            countries from a Canadian point of view” (Part 1,
cide on a common goal are more likely to succeed       secure and cultivate shared national spaces in the        Section 3). According to the Act, the broadcasting
in steering regulatory decisions in their collective   digital realm are treated as relics of an earlier era.    system should be reflective of Canada’s multicul-
favour than groups with dissenting goals. Yet these                                                              turalism, in both “its programming and ... employ-
coalitions ultimately may have divergent goals.                                                                  ment opportunities” (Part 1, Section 3.1.d.iii). The
Cable (2016) evokes regulatory economist Bruce         CULTURAL SOVEREIGNTY AND THE                              Act also stipulates that each broadcasting under-
Yandle’s famous “Bootleggers and Baptists” catch-      DOMESTIC POLICY ENVIRONMENT                               taking must make “predominant use, of Canadian
phrase to refer to such a situation in which makers                                                              creative and other resources in the creation and
of illegal alcohol supported religious prohibition-    Canadian broadcasting policy has developed an             presentation of programming” (Part 1, Section 3).
ists in order to drive up demand for product only      uneasy mixture of economic and cultural objectives            Achieving these policy objectives involves a
they could supply. In the present case, transnation-   to attain a measure of cultural sovereignty in the        “high-end trade off” wherein “once admitted into
al providers of online services ally with domestic     context of Canada’s small national market, which is       the market, Canadian companies are protected
consumers in support of consumer sovereignty in        now dominated by a handful of domestic vertically         from competition, especially foreign competition”
order to deter extension of domestic regulations.      and horizontally integrated media and telecom-            (Raboy & Bonin, 2008, p. 61). In return they are
    In most jurisdictions, regulatory regimes for      munications conglomerates (Edwardson, 2008;               expected to contribute to the goals and objectives
broadcasting have not extended their concerns          Winseck, 2008). The 1991 Broadcasting Act (“the           of the Broadcasting Act, including production and
about production, distribution, and exhibition of      Act”) is the preeminent legislation that governs          exhibition of unprofitable Canadian content. The

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Zboralska and Davis, The Case of Netflix in Canada

Act provides the basis for Canada’s complex broad-       ing Act and declined the CRTC’s request to provide        sive and more lucrative to import content from
casting “policy toolkit” (Grant & Wood, 2004),           information about subscribers, audiences, and the         elsewhere. Canadian broadcasters therefore gener-
which currently consists of the maintenance of a         Canadian content it distributes.                          ally treat Canadian content as a burden they must
Canadian national public broadcaster, Canadian                                                                     endure in exchange for the industrial protections
content expenditure and scheduling requirements,                                                                   they receive (Grant & Wood, 2004; Le Goff et al.,
foreign ownership restrictions on broadcasting en-       NETFLIX: FRIEND OF CANADIAN                               2011; Picard et al., 2015). When English-speaking
tities, competition policy, and subsidies and tax in-    CONSUMERS                                                 Canadians watch drama or comedy on television,
centives. The Act gives the Commission the power                                                                   it is imported content four times out of five (CRTC,
to exempt entities from any and all regulatory re-       Canada was the first target of Netflix’s international    2013). Meanwhile, Canadian consumers and crit-
quirements if it “is satisfied that compliance with      expansion. After Netflix’s 2010 entry into Canada,        ics lament the mediocrity of English-language Ca-
those requirements will not contribute in a materi-      its popularity with Canadian consumers grew rap-          nadian television content, especially drama, which
al manner to the implementation of the broadcast-        idly. Through its pricing, its advocacy of net neu-       generally has underperformed among English-
ing policy” (Part 2, Section 9.4). Since 1999, foreign   trality, and its tolerance of Canadian customers us-      speaking Canadian audiences (Coutanche, Davis &
and domestic new media in Canada operate under           ing virtual private networks (VPNs) to tap into the       Zboralska, 2015).
the Digital Media Exemption Order (DMEO), and            company’s much richer program offerings in the                 Of all the players in the domestic television
are not required to contribute to the goals ascribed     U.S. market, Netflix has positioned itself as more        ecosystem, it is the domestic broadcasters that
to the Canadian broadcasting system.                     friendly to Canadian consumers than the incum-            have developed the most problematic reputation
    Although some reports submitted to the 2014          bent domestic broadcasters. In typical big bang           among consumers, who express their dissatisfac-
“Let’s Talk TV” hearings determined that over-the-       disruptor fashion (Cable, 2016; Downes & Nunes,           tion across a multitude of fora, including interven-
top video streaming did not represent an immedi-         2014; Hasselbalch, 2014), Netflix has been able to        tions submitted to CRTC public consultations and
ate threat to Canadian incumbents, it was thought        offer greater choice, convenience, and affordability      through less formal channels such as online news-
that a tipping point could be reached in three to five   at market entry, rapidly growing its market share in      paper comments sections, social media, and blog
years. The question of how a national media regu-        the face of regulatory uncertainty.                       posts. Frequently cited complaints include: billing
latory agency might regulate a transnational video           Canadian audiences are highly attracted to im-        errors; dissatisfaction with content and the way it
streaming service, and in whose interest, burst un-      ported American drama and comedy, and domestic            is programmed (i.e. the perception that there is too
expectedly into the open when Netflix claimed to         broadcasters resist the obligation to produce and         much repetition in programming) and sold (i.e. the
operate outside the jurisdiction of the Broadcast-       exhibit Canadian content because it is less expen-        way content is bundled and organized across vari-

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Zboralska and Davis, The Case of Netflix in Canada

ous tiers); a belief that broadcasters’ services are        We are a relief from the complexity and frustration      provide undue preference to themselves by raising
inflated in price; and a dissatisfaction with custom-       that embody most MVPD [multichannel video pro-           Internet rates, or lowering Internet data caps, and
er care. A recent study found that 51% of Canadian          gramming distributor] relationships with their cus-      engaging in unfair traffic management strategies,
linear television subscribers contact their providers       tomers. We strive to be extremely straightforward.       rendering the streaming of audiovisual content
for customer service, and that 33% of these individ-        There is no better example of this than our no-hassle    from third parties potentially cumbersome and un-
uals do not have their complaints resolved by their         online cancellation. Members can leave when they         affordable (Guindon & Dennie, 2010; Middleton,
service provider on the first call (J.D. Power, 2014).      want and come back when they want. (Netflix, 2015a)      2011; Quail, 2012; Winseck 2008). Internet pricing
    Canadian media scholars have argued that the                                                                     and quality fundamentally affect streaming behav-
CRTC historically has been under regulatory cap-            Although penetration rates of Internet are high          iours (Stewart, 2015), and are thus of paramount
ture by the private sector (Hoskins & McFadyen,          in Canada, the country ranks low on key indicators          importance to Netflix.
2004; Raboy, 1990; Raboy & Bonin, 2008; Skin-            related to Internet quality, value, and download                Net neutrality has emerged as a politically
ner, 2008), or alternatively that Canadian commu-        speed when compared to other OECD countries                 charged issue in Canada and abroad, and Net-
nications policy has existed in a “vacuous nether-       (Ookla, 2015a, b, c). Netflix has publicly criticized       flix has conspicuously placed itself on the side of
land,” marked by “the worst of all possible worlds”      Canadian ISPs for their cost and quality of service.        consumers in this regard. Netflix has presented
where “neither regulated monopoly, meaningful            In 2012, Netflix’s chief content officer, Ted Saran-        itself as a champion of net neutrality, giving itself
competition, [n]or regulatory responsibility pre-        dos, commented that “what they’re charging for In-          a positive aura from the perspective of advocates
vail” (Winseck, 1998, p. 257). Given Canadian rules      ternet access in Canada” is “almost a human rights          and consumers. Netflix’s advocacy of net neutral-
against majority foreign ownership of broadcast-         violation” and that Netflix’s performance in the Ca-        ity presents a powerful veneer of the greater good
ing and telecommunications entities, Canadians           nadian market would be even better were it not for          over its own economic interests. Strong net neu-
did not have many alternatives until the arrival of      the “almost third-world access to the Internet” sold        trality laws allow Netflix to profit from the sale of
Internet-based streaming services such as Netflix.       at bandwidth caps that are prohibitive to stream-           its services directly to consumers without having to
Netflix has committed itself to providing an excel-      ing (Tencer, 2012). Indeed, scholars have long              make costly investments in network infrastructure.
lent user experience, and has identified consumers’      recognized that the vertically integrated Canadian          In 2015, Netflix spent 1.32 million dollars (U.S.)
troubled relationships with domestic incumbents          incumbents, with assets in telecommunications,              on its lobbying efforts, most of which were aimed
as an opportunity to exploit:                            content creation, traditional television distribu-          at Internet-related issues (Center for Responsive
                                                         tion, and Internet distribution, have the capacity to       Politics, 2016), and U.S. federal records indicate

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Zboralska and Davis, The Case of Netflix in Canada

that in 2012, Netflix formed a political action com-    used a virtual private network (VPN) to access the         of the Canadian vertically integrated communica-
mittee (PAC), permitting it to contribute directly to   U.S. version of the service, bypassing the Canadian        tions firm Rogers, David Purdy, allegedly remarked
federal campaigns (Thier, 2012).                        rights market completely (Kwong, 2015). Canadi-            that VPNs should be made illegal by the Canadian
   Despite the fact that Netflix and consumer in-       ans were eager to access the U.S. version of the ser-      government in order to maintain a distinct rights
terests are currently closely aligned, the limits of    vice due to its richer content catalogue at the time.      market in Canada (Tencer, 2015). Bell Media presi-
this relationship have yet to be tested. Although           Netflix’s user contract has long contained a           dent Mary Ann Turcke equated Canadian consum-
publicly a champion of net neutrality, Netflix has,     clause that permits it to suspend user access on           ers’ usage of VPNs with stealing, triggering a wave
on multiple occasions, agreed to deals in which its     the suspicion of territory circumvention (Netf-            of consumer and media backlash (Dobby & Brad-
services become prioritized, effectively undermin-      lix, 2014c). For years the company did not act on          shaw, 2015). While Netflix was being permissive
ing its commitment to the principle, including a        these provisions, although it faced increasing pres-       with its tolerance of VPN-masking behaviour, old-
multi-year direct traffic access deal with Comcast      sure from rights owners to do so. Indeed, Netflix’s        media incumbent and Hollywood studio-owned
in 2014 (Brandom, 2014; Gustin, 2014), and one          (leaked) contract with Hollywood’s Sony Studios            streaming service, Hulu, had long enforced a stron-
with Australian ISPs that sees its content excluded     reveals that it is required to “use ... geolocation by-    ger, payment-based authentication system, which
from data caps (Netflix, 2015b). Now that it has        pass detection technology” to identify territory cir-      had largely eradicated out-of-market access to its
reached its current size, Netflix has indicated that    cumvention services (WikiLeaks, 2015a). Leaked             service (Van der Sar, 2014). Netflix thus could have
even if net neutrality rules were to weaken under       private e-mails between Sony executives revealed           similarly imposed stronger geolocation restrictions
the current Trump administration, its bottom line       their “deep dissatisfaction” with Netflix’s inatten-       if it had been so inclined at the time. The issue
would be materially unaffected “because we are          tion to the matter, and the apparent intentionality        was therefore not primarily a technological one,
now popular enough with consumers to keep our           of this behaviour, noting that Netflix had the incen-      as implied by Netflix when it appeared before the
relationships with ISPs stable” (Netflix as cited in    tive to be permissive with VPN usage “since they           Commission during LTT (CPAC Digital Archives,
Dunn, 2017).                                            are getting paid by subscribers in territories where       2014b).
   Another aspect of Netflix’s consumer-friendly        Netflix does not have the rights to sell our content”          Rather than enforcing stricter protocols, in
aura, adding weight to the Baptists and Bootleggers     and “have every motivation to continue” given that         2015, Netflix CEO Reed Hastings publicly com-
analogy (Cable, 2016), was Netflix’s long-time tol-     increased subscriptions lead to a higher market            mented that he hoped Netflix would be able to “get
erance of customers who surreptitiously bypassed        valuation (WikiLeaks, 2015b). Canadian rights              global and have its content be the same all around
the rights market in their own territories. In 2015,    holders also objected to Netflix’s extended toler-         the world so there’s no incentive” to use a VPN
an estimated one-third of Anglophone Canadians          ance of rights violations. The senior vice president       (Hopewell, 2015). Just one year later, after Net-

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Zboralska and Davis, The Case of Netflix in Canada

flix’s entry into another 130 territories and Hast-     LET’S TALK TV                                            each regulatory process is “its own political econo-
ings’ declaration that the world was “witnessing                                                                 my, and we cannot assume that the benefits of in-
the birth of a global TV network” (Liedtke, 2016),      The CRTC’s review of the Canadian broadcasting           novation necessarily outweigh” traditional policy
Netflix finally began enforcing its own longstand-      system, “Let’s Talk TV,” invited stakeholders, in-       concerns (p. 12).
ing policies on out-of-market access (O’Neil, 2016;     cluding individual Canadians, to “shape the future”          Although the CRTC is an independent body that
Slater-Robins, 2016). Increased pressure on Netflix     of the television system so that it “meets the needs     is supposed to operate at arm’s length from the
to honour its agreements with rights holders is like-   of Canadians as consumers, creators and citizens”        government, it is not completely insulated from
ly behind the change in strategy. Prior to its recent   and “is adaptable for years to come” (CRTC 2013-         politics (Salter & Odartey-Wellington, 2008) and
global expansion, it made economic sense for the        563). The hearings had broad scope and examined          its orientation is certainly affected by the govern-
company to tolerate surreptitious access, given that    programming, distribution and access, and acces-         ment of the day (Raboy, 1994). The chairperson is
many paying users were only able to access the ser-     sibility issues. The Commission warned that the          appointed by the federal government. The regula-
vice through VPNs when living in areas where the        evidence collected during the LTT process could in-      tor thus brings its own conceptual lens, which de-
company was not officially a market player (Slater-     dicate the need to “remove or adapt some ... exist-      fines and limits the field of potential action, and
Robins, 2016). In view of Netflix’s recent global       ing regulations” and that the Commission was not         determines which issues are deemed to be salient
expansion, the risks associated with its permissive-    “interested in satisfying anybody’s sense of entitle-    and worthy of attention.
ness (i.e. potential legal action by rights holders)    ment, based on the way things used to be” (Blais,            Freedman’s (2010) concept of “policy silence”
now outweigh the benefits.                              2013b).                                                  is particularly useful for examining the trajectory
    In summary, with respect to its public image            The LTT process demonstrates the significant         of LTT in order to recognize potential alternative
and branding, Netflix has closely aligned itself with   political tensions that come along with the intro-       pathways that were not given consideration. Ac-
consumer interests such that many regard it as          duction of disruptive innovation into regulated          cording to Freedman (2010), policy scholars must
an emancipatory and innovative disruptor of the         markets. By making changes to existing regimes,          “dig a little deeper” than the visible spectrum of the
much-derided Canadian status quo. In the next           regulators are at once at risk of alienating voter-      policy process (p. 347). Policy silence refers to the
section, we analyze “Let’s Talk TV” interventions to    consumers, disturbing the complex set of institu-        options that are not considered, to the questions
show how OTT is perceived to disrupt the Canadian       tionalized benefits and tradeoffs developed in the       that are kept off the policy agenda ... and to the
broadcasting system.                                    previous regime, and inadvertently acting as barri-      values that are seen as unrealistic or undesirable
                                                        ers to innovation with the absence or introduction       by those best able to mobilize their policy-making
                                                        of new rules. As Cable (2016) contends, however,         power. (Freedman, 2010, p. 355)

The Journal of Media Innovations 4.1 (2017)                                                                                                                         12
Zboralska and Davis, The Case of Netflix in Canada

    From our analysis of the major LTT documents,       ming if it is going to increase the price for consum-    posed the forced unbundling of cable and satellite
it seems clear that the Commission never intended       ers” (CRTC, 2014b). Although Jenny’s statement           program packaging in the linear television realm so
to impose any regulatory requirements on Netf-          did not mention costs, and expressed only a convic-      that it more closely resembles the responsiveness
lix or any other foreign OTTs. Notably, a question      tion that OTTs should contribute to the creation of      and consumer choice offered by OTTs.
about whether foreign OTT services should be sub-       Canadian jobs and content, the implicit suggestion           The Commission seems not to have intended to
ject to domestic content requirements was absent        that such requirements would automatically result        modify the Digital Media Exemption Order under
from the 80 questions the Commission posed to           in increased costs to consumers was reinforced by        which foreign OTTs such as Netflix operate. In-
stakeholders in the Notice of Consultation (CRTC        John’s statement. The survey thus made the no-           stead, the Commission sought to showcase Netflix
2014-190) it issued to launch the final, most formal    tion of OTT contributions to domestic content            in the LTT hearings as a beacon of innovation and
phase of the LTT process, or in the later working       unattractive to survey participants, 67% of whom         a model for Canadian incumbents. However, this
document (CRTC 2014-190-3), which proposed              agreed with John.                                        approach backfired when Netflix refused to pro-
various concrete policies for consideration. There          The Commission’s active concern throughout           vide the Commission with the information needed
was no question regarding what to do with foreign       the policy process was the identification and re-        to make the case, and the hearings concluded with
OTTs, and no policy options concerning the issue        moval of regulatory “barriers” that supposedly           Netflix’s outright rejection of the Commission’s ju-
were put forward for consideration. Although ex-        have impeded the Canadian broadcasting system in         risdiction over its operations in Canada.
plicit questions about the imposition of cultural ob-   “adapting to change” (CRTC 2014-190). The Com-               In the following sections, we discuss the major
ligations on OTTs never made it to the more formal      mission portrayed Netflix and other OTTs as ushers       arguments presented by the various stakeholders,
documents introduced later in the LTT process, the      of the change, noting that Canadian consumption          including Netflix, on the topic of foreign OTTs in
early “Choicebook” survey, designed for participa-      of video is increasingly moving from “scheduled          Canada. Most broadcast industry stakeholders
tion from the general public, did feature one ques-     and packaged programming services to on-demand           (other than Netflix) perceived the Commission’s
tion on the topic. The question asked the public        and tailored programs” (CRTC 2014-190). Accord-          use of Netflix as exemplary of a 21st century broad-
to side with one of two statements, made by two         ing to the Commission, the rise of on-demand             cast model as deeply flawed, and argued against us-
fictional characters, Jenny and John. John’s state-     viewing on the Internet has changed viewers’ ex-         ing this model as the basis for making wide-ranging
ment associated the imposition of Canadian con-         pectations more generally, and has led to a growing      and substantive changes to the regulation of tradi-
tent requirements on OTTs with increased costs:         dissatisfaction with the Canadian traditional sys-       tional linear broadcasting.
John “does not think online services should be re-      tem at large (CRTC 2014-190; Blais, 2013b). Using
quired to contribute to Canadian-made program-          OTTs as the exemplar, the Commission then pro-

The Journal of Media Innovations 4.1 (2017)                                                                                                                       13
Zboralska and Davis, The Case of Netflix in Canada

STAKEHOLDER POSITIONS                                  Additionally, we found that of the 137 interventions     – including Canada’s net neutrality policy – and
                                                       from individual Anglophone Canadians to the Com-         undue preference rules, but do not contribute in a
Broadcasting regulatory proceedings such as LTT        mission’s final phase of the policy process that ex-     reciprocal manner (CBC, 2014; MTCS, 2014).
often engender stark divisions of opinion among        pressed a definitive statement either for or against         2) Stakeholder groups pushed back against the
stakeholder groups. In the case of LTT, major in-      the issue, all but three were in favour of extending     Commission’s apparent embrace of the “digital
dustry stakeholders unanimously agreed that for-       cultural obligations to Netflix and other OTTs.          sublime” (Mosco, 2005), or belief in the unquali-
eign OTTs such as Netflix are having a profound            Three key arguments pertaining to foreign            fied transformational power of the Internet – in
and tangible impact on the Canadian broadcast-         OTTs recurred regularly in the submissions from          this case, as a new global distribution platform,
ing system. Most of Canada’s major Anglophone          major industry stakeholders (broadcasters, creator       and the solution to Canada’s problem of having a
broadcasters either expressly recommended that         groups, and governments):                                domestic market that is too small to support the
the Commission impose contribution require-                1) Industry stakeholders believed that the Cana-     production of expensive content. In a speech to in-
ments on foreign OTTs such as Netflix (Bell, 2014;     dian government has created an environment that          dustry delegates prior to the launch of LTT, CRTC
CBC, 2014), or argued that if the Commission is        is more favourable to foreign firms than to Cana-        Chairman Jean-Pierre Blais remarked that new
not prepared or able to impose such requirements,      dian ones: Netflix does not pay sales tax in Canada,     broadband-based technologies and services offer
it should similarly refrain from imposing them         incur expenses related to regulatory processes, or       Canadian creators an “unprecedented opportuni-
on domestic services (Corus 2014; Rogers, 2014;        make financial contributions toward the funding          ty,” “extraordinary possibilities,” and open “doors
Shaw, 2014). Only one major (Anglophone) broad-        of Canadian content. According to one incumbent,         to niche markets unimaginable even a decade ago”
caster (Shaw, 2014), argued against the applica-       this amounts to a cost advantage of 19-20% (Bell,        (Blais, 2013a).
tion of regulatory requirements on foreign OTT         2014). In addition, Netflix has no regulatory con-           Stakeholders were skeptical about the value of
services such as Netflix. Canada’s principal trade     straints, including no restrictions on sources of        these opportunities. One intervention represent-
associations and guilds representing actors, direc-    programming, no limits on advertising, no acces-         ing Canada’s writers summarized the concern well.
tors, writers, and independent production firms        sibility expenditures for described video or closed      The organization argued that the notion that the
(ACTRA, 2014; CMPA, 2014; DGC 2014; WGC,               captioning, and does not contribute toward the           Internet eradicates barriers to the creation and dis-
2014), and the province of Ontario (the epicentre of   infrastructure costs required for service delivery       tribution of quality content is mistaken, and leads
Canadian television production), each argued that      (Bell, 2014; Corus, 2014; Rogers, 2014). The bot-        to a conviction in neoliberal economics and dereg-
Netflix and other foreign OTTs should be required      tom line is that foreign OTTs benefit financially and    ulation, in the belief that the new “perfect markets”
to contribute to the creation of Canadian content.     strategically from Canada’s regulatory protections       created by the Internet will naturally lead to the

The Journal of Media Innovations 4.1 (2017)                                                                                                                       14
Zboralska and Davis, The Case of Netflix in Canada

creation of the best content, which will automati-       content producers to learn their crafts. Stakehold-         tain key objectives codified in the Act. Among its
cally find its ideal audience online, with the finan-    ers were concerned that an OTT model could not              most substantive claims, Netflix (2014) maintained
cial rewards of such content flowing to those who        provide the same training grounds for new artists           that it serves “diverse communities,” unlike tradi-
most deserve them. (WGC, 2014)                           since Netflix does not produce nearly the same              tional broadcasters who, due to a reliance on ad-
    Other stakeholders pointed out that the low          quantity of content, in Canada, that is produced by         vertising, focus primarily on content with mass ap-
barriers to entry in the digital space lead to the er-   the legacy system (Corus, 2014; WGC, 2014).                 peal. Netflix further argued that through consumer
roneous belief that “one can compete in the digital         3) Finally, a recurrent argument pertaining to           demand and market forces alone, it has stimulated
interactive world with cottage industries” (Corus,       Netflix relates to its refusal to divulge data about its    innovation in the delivery of, and access to, pro-
2014, para. 49). Stakeholders called attention to        audiences, an issue frequently reported by industry         gramming; that it grows demand for Canadian au-
the difference in size: While the major Canadian         observers (for example, Stilson, 2014). In their sub-       diovisual content and expands content production
broadcasters may be large players in the Canadian        missions, stakeholders (ACTRA, 2014; Bell, 2014a;           sources; and that it extends the reach of the public
industry, transnational digital companies have a         DGC, 2014; MTCS, 2014) urged the Commission to              broadcaster and Canadian content more generally
substantial scale advantage that Canadian com-           require foreign OTTs to submit annual reports on            by disseminating this content to global audiences.
panies do not (Corus, 2014). The major industry          their levels of spending on Canadian content, and              Although Netflix did not request to present at
stakeholders also contended that Netflix’s business      their revenues in the Canadian market so industry           the oral hearing, the Commission invited it to ap-
model cannot be adopted by broadcasters since            and audience developments can be better moni-               pear. During the oral component, the Commission,
they have many other obligations that Netflix does       tored.                                                      looking for evidence to “support the conclusions
not have, including obligations to be responsive                                                                     that Netflix is advocating – that Internet video pro-
to local communities through news and informa-                                                                       viders can support the policy objectives under the
tion services, upgrading costs, and investments in       NETFLIX AND THE REGULATORY                                  Broadcasting Act ... without the need for any addi-
human capital and skills retraining (Bell, 2014b;        SHOWDOWN                                                    tional regulatory action” (CRTC, 2014c), requested
CMPA, 2014; Corus, 2014; WGC, 2014). Others                                                                          information from Netflix to substantiate the claims
pointed out the curious economics of Netflix, not-       Netflix’s own written intervention to the LTT pro-          made in its written submission. Specifically, the
ing that it has built its empire with content that       cess demonstrated a clear understanding of tra-             regulator was seeking information about the num-
was produced by the legacy broadcasting and film         ditional Canadian broadcasting policy goals, and            ber of Netflix’s Canadian subscribers, how Canadi-
systems, which provided the training grounds for         many of its arguments responded directly to cer-            an content performs globally, how much Canadian

The Journal of Media Innovations 4.1 (2017)                                                                                                                            15
Zboralska and Davis, The Case of Netflix in Canada

content is watched by Canadians, how much of           DISRUPTION, CONSUMER SOVEREIGNTY,                        parency in the broadcasting system (ACTRA, 2014;
Netflix’s library is Canadian, and how much Netflix    AND ELECTORAL POLITICS                                   Bell, 2014; DGC, 2014). This would have required
spends on Canadian original content (CPAC Digital                                                               the Commission to strongly assert its jurisdiction
Archives, 2014b).                                      Despite the lack of concrete (and requested) evi-        over non-Canadian broadcaster affiliated OTTs.
    After several requests by the CRTC and a heated    dence from the major foreign OTT provider of pro-        These overlooked potential policy pathways could
debate, Netflix refused to comply. In a letter ad-     fessional screen programming in Canada on how            have been part of a larger initiative to design a cul-
dressed to the Commission following the hearing,       it contributes to the goals of the Broadcasting Act      tural policy toolkit for the digital age.
Netflix stated that the Commission’s orders for        without any formal regulatory requirements to do            Further evidence that the Commission regarded
the information “are not applicable to Netflix un-     so, and with reasons for concern provided by other       Netflix as an exemplar to be emulated by incum-
der Canadian broadcasting law” (Vlessing, 2014)        industry stakeholders regarding OTT distribution         bents can be seen in its decision to incentivize the
and that Netflix’s responses are filed “voluntarily”   of video content, the Commission concluded that          adoption of an open OTT model. The Commis-
and do not represent “an acknowledgment of or          “licensing digital media broadcasting undertakings       sion created a new “hybrid” category of service
attornment to either the jurisdiction of the Com-      is generally not necessary to achieve the broad-         (CRTC 2015-86) that exempts previously regulated
mission by Netflix, or the substantive application     casting policy objectives set out in the Act” (CRTC      video-on-demand platforms based in traditional
of Canadian law (including the provisions of the       2015-86). Notably, the Commission opted not to           delivery systems (cable, satellite, IPTV) from all
Broadcasting Act) to Netflix” (Netflix, 2014d). Fol-   initiate a separate review of the Digital Media Ex-      Canadian content requirements and restrictions,
lowing Netflix’s refusal to provide the requested      emption Order, as was suggested by some indus-           provided that broadcasters make the same pay ser-
information, the Commission struck its participa-      try interveners (Bell, 2014; OMTCS, 2014; WGC,           vice available online to all Canadians on an OTT
tion from the public record completely, removing       2014) who requested a review in order to be able         video-on-demand platform. In an effort to encour-
its written submission and even the transcripts of     to derive a more complete picture of the over-the-       age incumbents to move into the online space, the
its oral participation at the hearing from LTT docu-   top environment and its effects on the Canadian in-      Commission initially proposed that incumbent
mentation, thereby adding to the accumulation of       dustry. It similarly decided not to institute annual     broadcasters be able to count their expenditures
policy silences.                                       requirements for non-Canadian broadcaster affili-        on Canadian content placed online as part of their
                                                       ated OTTs, such as Netflix, to disclose information      required spending on Canadian programs (CRTC
                                                       regarding their Canadian business operations and         2014-190-3), but ultimately decided not to imple-
                                                       expenditures, as was also suggested by other in-         ment this measure. Without any Canadian content
                                                       dustry interveners in order to restore overall trans-    requirements in the online space, and now linked

The Journal of Media Innovations 4.1 (2017)                                                                                                                        16
Zboralska and Davis, The Case of Netflix in Canada

video-on-demand services on traditional televi-          regulator has demonstrated a rupture from some            quire channels to be unbundled” (ibid.). Shortly
sion, the Commission’s decisions assume that in-         of the public good values and goals related to cul-       thereafter, the Commission received an Order-in-
cumbents will voluntarily produce or acquire Cana-       tural sovereignty that it previously sought to secure     Council requiring it to submit a report about how
dian content for online distribution.                    in the legacy broadcasting space. In its reprioritiza-    consumer access to programming on a per-channel
    In its desire to align the linear environment with   tion of values, consumer concerns – the desire for        (unbundled) basis “can be maximized in a manner
the more flexible OTT space, the LTT process con-        convenience and more control, for example – have          that most appropriately furthers the implementa-
cluded with the regulator requiring the unbundling       been given top billing.                                   tion of the broadcasting policy for Canada” (Order-
of cable and satellite channels by December 2016             It is important to mention also that the timing       in-Council 2013-1167).
(CRTC 2015-96). While maintaining requirements           of the Commission’s major television policy review            There were thus clear political expectations
that broadcasters spend a set portion of revenues        coincided with an upcoming federal election. The          that the Commission conduct the LTT hearings in
on Canadian content, the Commission eliminated           party then in power, the Conservative Party, select-      a manner consistent with the consumerist orienta-
all requirements for exhibition of Canadian content      ed a consumerist platform for this election. At the       tion endorsed by the federal conservatives. While
from television except in the prime time evening         start of CRTC Chairman Blais’ appointment, the            the LTT hearings were still ongoing, and before the
hours. These changes, taken together, are expected       Minister of Heritage sent a letter to the new appoin-     Commission took any decisions, the (Conservative)
to affect the quantity of Canadian content that is       tee expressing his belief that the Commission could       Minister of Heritage publicly commented that the
commissioned, and the range of available choices,        do a better job of addressing consumer issues, by,        federal government would “not allow any moves to
with spending on domestic Canadian content over          among other things, ensuring that consumers have          impose new regulations and taxes on Internet vid-
the next four years forecast to decline to one-third     access to “more” and “affordable” programming             eo” (Bradshaw, 2014a). Although the CRTC publicly
of what it is today (Nordicity & Miller, 2015). The      choices across all distribution platforms, includ-        made assurances about the fairness of the hearing
forced unbundling of channels is expected to re-         ing the Internet (Moore, 2012). The Minister also         (ibid.), the independence of the Commission from
duce content diversity since special interest chan-      expressed his hope that the Commission “regulate          government became a topic of debate amongst in-
nels that could never survive in the small Canadian      broadcasting undertakings only to the extent nec-         dustry observers and news organizations (see for
marketplace on their own are currently sold in bun-      essary” (ibid; emphasis added).                           example O’Brien, 2014; Winseck, 2014). During
dles with other, more successful channels. Without           In the 2013 Speech from the Throne, the fed-          the federal election, and to much public ridicule
this bundling, the channels are unlikely to achieve      eral government announced (long before any LTT            (including several YouTube parody videos, as well
the audience share necessary to thrive in the Ca-        decisions were made by the CRTC) that in order to         as a substantial Twitter backlash), then Prime Min-
nadian domestic market. It is in this sense that the     protect “everyday Canadians,” it intended to “re-         ister Stephen Harper launched a campaign video

The Journal of Media Innovations 4.1 (2017)                                                                                                                        17
Zboralska and Davis, The Case of Netflix in Canada

in which he is shown sitting in front of a television    nature, and inclusivity (Downes & Mayo, 2015, p.        sion appears to have used the seeming inevitability
screen with the Netflix logo prominently displayed,      23).                                                    of the changes related to technological disruption,
assuring voters that only his political party could be       The “digital revolution,” and the “tornado” of      and the unsubstantiated claim that OTTs contrib-
trusted not to impose a “Netflix tax” and to “focus      digital disruption that accompanies it, are being       ute to the goals of the Broadcasting Act through
on the needs of Canadian consumers, and to keep          framed by many as not merely unstoppable, but           market forces alone, to ease regulatory require-
your taxes low” (Harper, 2015).                          also as intrinsically good (Morley, 2006; Mosco,        ments. Policy silences (Freedman, 2010), notably
    Regardless of how direct an influence the feder-     2005). Thus, in many countries the rationale for        the lack of consideration of alternative measures to
al election and the government’s stated hopes had        regulatory intervention in broadcasting has shifted     deal with OTTs, have supported the hands-off ap-
on the CRTC, it is clear that the regulator was op-      from spectrum scarcity to the interests of “citizen-    proach to streaming services, and failed to consider
erating under prevailing assumptions that certain        consumers” who seek a greater range of choices          the development of shared, non-commercial, digi-
policy pathways were to be favoured over others.         from domestic broadcasters (Freedman, 2015a;            tal public spaces.
                                                         Freedman, 2015b; Lunt & Livingstone, 2011).                 Although Netflix received the majority of pub-
                                                             Our examination has revealed the complex-           lic attention due to its ostentatious rejection of the
CONCLUSION: REGULATE OR CHILL                            ity of Netflix’s presence in Canada, and how it has     Commission’s jurisdiction, Google also ran afoul of
                                                         been able to capture such a substantial share of the    the Commission’s requests for the company to pro-
According to a popular theme, digital disruption         Canadian market in such a short period of time.         vide evidence to substantiate claims it made dur-
arises from a collision between exponential rates        Canada has provided ideal conditions within which       ing LTT about how it contributes to the goals of the
of technological change and slower-paced or incre-       Netflix can thrive, disrupt, and induce regulatory      Broadcasting Act (CRTC, 2014d). Unlike Netflix,
mental rates of change in law, economy, policy, and      policy to become unstuck. The regulator’s commit-       Google did not publicly reject the Commission’s ju-
society (Franklin, 2012). Broadcasting policy, in        ment to a greater reliance on market forces, and        risdiction, noting “we stand by the submissions we
particular, is often portrayed as being reactive and     its overall prioritization of consumer choice, have     made in this process and believe we made a positive
more sensitive to the welfare of incumbent broad-        made Netflix’s entry and continued presence an          contribution to the discussion” (Google spokesper-
casters than to the welfare of citizens or consum-       easy one. Netflix and OTTs have furthermore pro-        son, as quoted in Bradshaw, 2014b). However, the
ers. The “near-glacial pace” of regulatory change        vided a way for the Commission to legitimize its        result was the same – the Commission was forced
in democratic systems is attributed to its intrinsic     application of wider deregulatory measures to the       to make its decisions without complete informa-
features including its public character, deliberative    Canadian linear television system. The Commis-          tion, “based on the remaining evidence on the re-

The Journal of Media Innovations 4.1 (2017)                                                                                                                         18
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