by Matthew W. Fraser
Policy Options, June 1998
Republished with permission
The Internet is already serving as an important distribution network for the sale of cultural products. Yet an extraordinary degree of policy ambiguity prevails in this area. The aim of this paper is, first, to outline the main issues at stake with respect to the digital on-demand delivery of cultural products; and, second, to propose a solution that can be implemented to help resolve these outstanding issues.
The Internet, by definition, is borderless and hence non-territorial—much like satellite communications. This fundamental characteristic raises serious policy issues in the cultural sphere. Canada has a tradition of "technological nationalism" as new communications technologies first appear, especially when the country's political and cultural sovereignty appears to be at stake. This policy approach often has led to defensive strategies based on "picking winners"—or designating so-called "national champions" to limit the effects of foreign influence.
The consequence of this approach in satellite broadcasting is a matter of record: a burgeoning "grey market" of American satellite TV dishes that by far surpasses the number of households in Canada subscribed to domestic services officially sanctioned by regulation. The Internet is the first communications system that renders virtually impossible this traditional policy reflex. The lessons learned from the satellite TV fiasco should serve as a stern warning to those who would advocate a similar approach regarding cultural commerce on the Internet.
At present, the spectacular success of the Internet bookseller, Amazon, has shown how innovative forms of electronic commerce are challenging traditional intermediaries, whether small bookshops or major chains such as Chapters. In the compact disc market, on-line companies like US-based CDNow offer similar examples of how the Internet is being used to market and sell millions of units of cultural products that, until now, have been sold through bricks-and-mortar retail chains. The success of wholesale operations like Amazon and CDNow is due largely to the efficient bypassing of conventional intermediaries—an increasingly pervasive phenomenon known as "disintermediation."
A distinction must be made, however, between online sellers like Amazon and owners of intellectual property who distribute their products digitally directly to consumers via the Internet. When you buy a book or a CD on the Internet, it is no different from buying a shirt or a computer from a consumer catalogue. These products are hard goods that, once ordered, are delivered to your door. To employ Nicholas Negroponte's familiar distinction, Amazon sells "atoms," not "bits." Buying or renting a downloadable movie or song on-line is a different, more direct, form of distintermediation. The transaction is immediate and digital delivery is made at virtually no additional cost.
At present, digital delivery of cultural products faces a number of major obstacles. Most Hollywood studios, major record companies and other players in the entertainment industries have established "New Media" divisions and are testing consumer habits with Websites offering all manner of services, games and distractions. Still, these same companies are exceedingly reluctant to start selling or renting their intellectual property as digital products on the Internet.
There are two main reasons for this circumspection. First, owners of intellectual property are worried that their products will be copied, at no marginal cost, by individuals and distributed in millions of units throughout the world on the Internet. Most copyright holders will not start selling digital cultural products on-line until a fail-safe encryption system for encoding and decoding digital signals is universally adopted. Second, a number of critical technical obstacles must be overcome. For example, downloading video and music takes a long time and the quality is often erratic, and therefore networks must be expanded to increase bandwidth capacity.
It is only a matter of time, however, before both these problems are resolved—the copyright issue by international treaty and the market adoption of reliable encryption systems; and the technical issues by the build-out of digitized networks and the mass-market introduction of video "streaming" technology. It can be confidently predicted that the sale and rental of cultural products on-line will become a billion-dollar industry in the foreseeable future, most certainly within the next decade.
A decade is a very short period of time. Yet policy makers still seem uncertain about how digital cultural products should be regulated, if at all. In Canada, the CRTC does not regulate Internet radio stations and other forms of on-line audio, but had decided to regulate video-on-demand. The regulator has defined video-on-demand as "broadcasting"—an assertion that is highly contentious—yet remains silent on the definition of on-line music.
The debate over video-on-demand offers an illustration of how the CRTC tends to respond to conceptual ambiguitity by asserting its own authority in areas where there is some doubt on the matter. On July 2, 1997, the CRTC issued video-on-demand (VOD) licences to several Canadian applicants—all of them major players in the Canadian broadcasting system. The CRTC took a light-touch approach when granting these VOD licences, insisting only on guaranteed "shelfspace" for Canadian products and financial contributions for Canadian content production. In issuing the VOD licences, the CRTC followed the same approach it had adopted in the past: facilitating the market entry of a limited number of established Canadian players so they could "occupy the field" before an incursion of foreign-based operators. In satellite TV, this strategy—if well-intended—backfired catastrophically. In 1994, the US-based satellite TV operator, DirecTV, launched its all-digital service, including a vast array of pay-perview channels, at a time when the CRTC-designated companies were still constricted by limited bandwidth and low set-top box penetration on Canadian cable TV, which still had not converted from analogue to digital. Result: 300,000 Canadian households quickly bought "illegal" DirecTVdishes and bypassed the Canadian system, while the CRTC blocked market entry of DirecTV under the control of a Canadian partner, Power Corporation.
There is no reason to believe that the market logic of VOD will respect national territories and obey national regulations. A computer server from which on-demand movies are retrieved does not have to be located on Canadian soil. Consequently, there is no reason why those who control foreign-based digital retrieval systems will feel compelled to gain access to the Canadian market through CRTC approval.
In Canada, the dispute over video-on-demand and multimedia services has been part of the ongoing battle between the cable TV and telephone companies. Cable companies and other established players in the Canadian broadcasting system have been fighting for a broad definition of "broadcasting" in order to capture on-demand services and thus limit the impact of competition by imposing regulation and market-entry barriers. The phone companies and computer industry— both new players in the provision of content to homes —have been seeking a restrictive definition so they can exploit VOD and other multimedia services with no fear of onerous regulations and other market-entry barriers.
To offer some comparative perspective, the European Commission considers video-on-demand to be telecommunications, not broadcasting. "VOD services, like all genuinely interactive services," stated the EC in its "Television Without Frontiers" directive, "are classed as telecommunications in that transmission is in response to individual demand." In other words, VOD is switched, point-to-point communications—not point-to-multipoint broadcasting. Or to put it differently, VOD is "pull" technology (individuals order movies that they "pull" down from servers), whereas broadcasting is "push" technology (the same signals are sent out to all TV sets indiscriminately).
Some have argued that the CRTC could avoid past pitfalls by acknowledging, like the European Commission, that services like video-on-demand and multimedia cannot be considered "broadcasting"—and therefore should not be subject to regulation. This argument, however valid, neglects two powerful factors: the CRTC's defensive tendency to assert is jurisdiction broadly in order to validate its own legitimacy; and the tremendous pressures exerted on the CRTC by established players fearing that unregulated media services will pose a serious competitive threat to their market dominance.
It should not be surprising, therefore, that the CRTC has insisted on a broad interpretation of "broadcasting" as it appears in the 1991 Broadcasting Act. The regulator similarly has interpreted "program" very broadly. By doing so, the CRTC has asserted its jurisdiction over video-on-demand—and thus, as noted, justified the issuance of VOD licences to a group of major players in the Canadian broadcasting system. The function of this "picking winners" approach is to neutralize the impact of new types of cultural products by bringing them under the regulatory control of the CRTC, which authorizes designated Canadian players the right to exploit them commercially.
The CRTC was aware of respected legal opinions arguing that video-on-demand is not in fact a "broadcasting" activity, and therefore should not be regulated. As noted, video-on-demand entails a point-to-point transaction between a supplier and a particular individual. Broadcasting, on the other hand, entails a point-to-multipoint sending of pre-scheduled signals to the general public. The original version of the current Broadcasting Act, when it was being debated in the late 1980s as Bill C-136, stated explicitly that programs "made on the demand of a particular person for reception only by that person" would be excluded from the definition of "broadcasting." That particular clause was removed, however, after intense lobbying by the cable industry and other players whose regulated commercial interests were threatened by a narrower definition of "broadcasting" that might have encouraged competition from unregulated video-on-demand operators.
The removal of that clause was a strategic error that, if avoided, might have prevented the current ambiguity over how to deal with on-line services. Today, Internet based services like America On Line are starting to offer video and music and other multimedia products that, according to the CRTC broad interpretation, clearly would be considered "broadcasting" and hence would require regulation. Yet the CRTC cannot assert any regulatory control over these services—and indeed, it consciously does not even attempt to regulate Internet radio stations operating on Canadian soil. When the provincial phone company, SaskTel, openly defied the CRTC by offering video-on-demand service without regulatory approval on the grounds that VOD is "point-to-point" communications, the CRTC backed down. When foreign-based VOD operators emerge, the CRTC's impotence in this area will be even more obvious. These inconsistencies cannot be maintained without making a mockery of the entire policy and regulatory structure in Canada.
A solution to this ambiguity calls first for some conceptual clarity. Video-on-demand is precisely like walking into a bookshop or a video store—only the method of delivery is different. The CRTC itself evoked the bookstore analogy when discussing video-on-demand in its 1995 Convergence Report: "True VOD, on the other hand, is not scheduled. These services will be akin to a book store or library, where individual programs are stored on electronic shelves and customers access the titles they want by navigating through a series of menus."
Neither bookstores nor video stores are regulated or taxed for the purposes of Canadian cultural policy. Yet the CRTC has decided to regulate video-on-demand. The CRTC's rationale: "Because of their nature and scale, however, certain mass-appeal, on-demand applications such as movies can and should be regulated where this would contribute materially to the cultural objectives of the Broadcasting Act." Do books, magazines, videocassettes and CDs not have "mass appeal" too? In truth, the CRTC has decided to regulate VOD merely because its delivery system—wires to the home —is owned by companies under its regulatory authority. By focussing on the delivery system, however, the CRTC has once again fallen into the trap of putting its own legitimacy and the commercial interests of its major clients before the rigours of conceptual consistency and good public policy.
What is the solution? The CRTC itself has recommended a legislative amendment to exclude services like "commercial on-line multimedia services," "interactive courses" offered by accredited schools and "educational multimedia materials." This recommendation appears to be exceedingly conservative. However, it could be argued that America On Line, Microsoft Network and any other Internet-based service could be described as "commercial on-line multimedia service." These Internet suppliers of multimedia content soon will be offering video-on-demand and many other digitally delivered cultural products. Does that mean that some VOD services in Canada need a licence, while the CRTC admits it cannot regulate others?
If policy makers do not move quickly to clarify these issues, the realities of the marketplace will impose their own facts—and, once again, the policy process vvill be exposed to the old criticism of "lag" as it attempts to play a losing game of catch-up with the real world. The CRTC itself could, as it has done in the past, impose clarity without specific policy direction—indeed, it did so in 1997 by licensing Canadian VOD services. This type of action has the disadvantage of exacerbating tensions between the CRTC and the government—or between the "adjudicative" policy making of the regulator and the legitimate role of government officials to make policy and draft laws.
As astounding as it might seem today, when the Broadcasting Act (1991) and the Telecommunication Act ( 1993) were drafted, the Internet had not registered on the policy radar screen. Nearly a decade later, perhaps it is time to redraft these statues to bring them into the digital Information Age. If policy makers are disinclined to take on this challenge, they should, at a minimum, undertake in a timely fashion the necessary amendments to bring some clarity to the issues discussed above. Failing that, a policy directive to the CRTC instructing the regulator to issue a public notice on these questions could also impose some needed clarity. The CRTC's planned public hearings to examine the impact of multimedia content is a positive step in the right direction.
Matthew William Fraser is a Professor of Broadcasting Policy, Communications and Converging Technologies in Ryerson Polytechnic University's School of Radio and Television Arts. His forthcoming book, Death Stars: The Canadian Conundrum in the Digital Universe, will be published in early 1999 by Stoddart.
