Thursday, January 20, 2011

Netflix, Zip and the Canadian broadband problem

I thought I'd write a bit more about usage-based internet billing as there seems to be quite a bit of interest in the subject and because I've heard the NDP - one of our major political parties - is set to condemn the practice today. I'd also like to address on yesterday's post that suggested my link between Canada's lack of innovation and our broadband access situation was "spurious."

I did mention in that there are likely a number of reasons why Canada hasn't produced any internationally successful internet services. Our reliance on natural resources, poor R&D spending and proximity to the U.S. (which makes our top individuals and companies eminently poachable), as well as a whole host of other issues including venture capital supply and taxation, all come into play. Broadband access is obviously not the only factor and I definitely didn't imply that. My point was that it IS an important factor, and it's becoming more so, especially because things are getting worse.

Broadband access certainly didn't inhibit Canadians from innovating during the first few years of the new millennium. Far from it - Canada actually benefited from a robust land grab between cable and phone providers, who scrambled to sign up as many customers as they could. The result was that we had cheap, fast and unlimited internet and consequently led the world in terms of adoption. Some great international websites may indeed have been forming during this time, but the fact that we have none today means some of those other issues obviously factored in. ( is a good example: it was on its way to becoming a great Canadian success story, but then it was gobbled up by News Corp.)

About five or six years ago, things started to change. The phone and cable companies had sewed up all the easy-to-get customers, so they settled into equilibrium. Competition between them died down, prices started to rise and network/speed improvements slowed. The companies are now in a predictable quarterly business cycle where they alternate between acquisition and monetization, both of which are helping to pay off some of that earlier investment. When a given company finds it didn't gain enough customers in a quarter, it introduces an incentive or two to draw in new subscribers. If those acquisition numbers are met, they settle back into extracting as much revenue as they can from those customers until they show signs of bolting for a competitor, then they ease off the throttle. In general though, no one rocks the boat.

Once in a while, something does happen that upsets the status quo - but it never comes from the telecommunications companies themselves. The best example over the past few years is the coming of the iPhone. Since Rogers had the only compatible network, it was beating the pants off Bell and Telus, both in acquiring customers and in monetizing them. The two companies were thus forced to spend hundreds of millions of dollars on a new network that was compatible with the iPhone and a bunch of other hot rivals to the device. They must have cursed Steve Jobs when he first introduced the GSM iPhone, then again last week when Apple unveiled a CDMA device that would have worked just fine on their old networks. Doh.

We recently had another boat-rocking event: the coming of Netflix to Canada. Netflix scares the bejeezus out of our telecom companies because they all make a good chunk of money from renting customers movies over their respective on-demand and pay-per-view services. And sooner or later, Hulu - or some service like it - is going to come along and eat their television lunch. There's a lot of debate going on right now about whether people are "cutting the cord" and canceling their cable in favour of watching TV online, but only a fool believes that isn't the future. (Anecdotally, I know more and more people who are doing it.)

The telecom companies aren't fools and they've been moving for years to prevent or limit the effects of this. First, they throttled services they didn't like (i.e BitTorrent), then they cut the legs out from more competitive smaller wholesale ISPs through government and regulatory lobbying, and now they've got usage-based billing coming in.

To bring this back to how it affects innovation... Let's say you want to create the next great service that beams holograms to people's living rooms via their internet connections. First, you've got all those other issues to deal with: can you get venture capital to fund it, will your business pay excessive taxes, can an American competitor spring up quickly or take you out? For the sake of argument, let's say you manage to overcome all those significant obstacles, then you've got to worry about whether your service is going to run afoul of ISPs' network management practices, which can change at any time, and ultimately whether people will be able to use what is likely to be a heavy bandwidth application.

At that point, who wouldn't just say "screw it" and move their great idea somewhere less restrictive? Like, I dunno... Sweden?

Here's a better real-world example: does anyone think - Canada's own version of Netflix, except without the deep pockets filled by successful U.S. operations - is going to be able to compete with Netflix? Like its U.S. rival, Zip started as a DVD-by-mail subscription service. But while Netflix is rapidly moving toward online streaming in the U.S., where download limits barely exist, Zip is stuck with the mail business and promises that it too will start streaming. Zip had a few years to head off Netflix's streaming entry into Canada but didn't. Venture capital, taxation, etc. may all have contributed, but the finger seems to point squarely back at what yesterday's dissenting commenter called my "favourite whipping boy:" broadband access. It seems that Zip's only two hopes are that it can hold on long enough for Netflix Canada to flop because of download limits or its crappy catalog, or that it gets bought, probably by one of the big ISPs.

The bottom line is: with all the other obstacles Canadian entrepreneurs already face, they shouldn't have to deal with still more when it comes to deploying their ideas on the internet. If anything, we should be making getting on the internet and using it to its full potential easier, not harder.

From that perspective, I don't think it's "spurious" to suggest there is a link between broadband access and innovation in general, or more specifically how able a country is to produce successful internet services. Quite the opposite: I think it's spurious to suggest there isn't a strong link.


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