CRTC Hearings: Tubi Warns It’s Not Well Positioned to Absorb New Heavy Regulatory Costs

Our coverage of the Online Streaming act CRTC hearings continues. Today, we look at what Tubi had to say before the regulator.

We are continuing our coverage of the Online Streaming Act hearings at the CRTC. To our knowledge, no one else has ever been able to provide as much extensive coverage as us on these hearings.

So, whose appearances did we cover so far? Those appearances are: Spotify, Paramount, Netflix, Amazon, Apple, Google/YouTube, Bell, Rogers, Corus, Shaftesbury, Digital First Canada, ACTRA, Unifor, FRIENDS, and Michael Geist.

One of the long running themes – and this is something touched on by Geist – is the risk of a massive exodus of online streaming platforms. Numerous streaming platforms have expressed concerns that revolve around the lobbyist speak of “initial base contribution” and point out that they are unsure if they can continue in Canada should they be forced to pay millions in ransom payments to the legacy corporations in Canada. In short, “initial base contribution” is basically a multi-million dollar fee that streamers would have to shell out to legacy media corporations just for the privilege of operating in this country. Any investment they make in Canada would have to go over and above those millions in ransom payments they would be legally obligated to pay.

While it is unlikely that every streaming platform would leave the country over these types of payments, the chances are quite high that a chunk of them will. Specifically, the smaller platforms aiming to compete against Netflix. Collectively, they lost $5 billion over the course of 2023. Combine that with comments about how many of these streamers are operating on razor thin margins, for a number of these platforms, a market exit is very likely if the CRTC decides to hand the legacy media everything they demanded. Given that consumer interests is something of a foreign concept to the CRTC, that’s a pretty likely outcome.

Some are trying to advance the theory that this wouldn’t happen because of various reasons of Canadian exceptionalism. Canada is an investment destination for entertainment. Canada’s population is a high value population. This along with various other talking points. The problem, however, is that platforms exiting the market have already happened. For instance, Disney+ has already paused investments in Canada. In response to the disastrous Online News Act, Meta dropped news links on Facebook and Instagram as they exited the “market” for sharing news links. So, it’s not just some philosophical theory or speculation fuelling this. The activity of exiting the Canadian marketplace is already happening in response to these really stupid laws. The Online Streaming Act is just repeating the mistakes of the Online News Act and expecting a different result.

Today, we are looking at what another streaming service had to say before the CRTC. Tubi is arguing that they are not well positioned to absorb the new regulatory costs being imposed by the CRTC. You can read the full transcript of what Tubi has to say on the CRTC website. We’ll offer some highlights and thoughts on what was said below.

Tubi had some opening remarks and they weren’t shy about their concerns with what they may be expected to pay just for the privilege of staying in this country:

9497 It bears repeating that Tubi offers its service for free to all Canadians, providing access to a wide breadth of diverse content. Tubi is the fastest‑growing fully free TV and movie AVOD in Canada, and it serves every consumer no matter their financial status or location. Our audience is young, diverse, and incremental. We must ensure that we do not disenfranchise and limit access for this population as we work to implement Bill C‑11.

9498 Among the comments we are asking the Commission to take note of in this proceeding, Tubi submits that the Commission should recognize the unique position of small and free services like Tubi and should ensure that any new regulations do not disproportionately disadvantage free‑to‑access services in Canada and Canadians who enjoy them. A one‑size‑fits‑all approach to implementing C‑11 would unfairly disadvantage those Canadians unable or unwilling to access pay‑walled television through traditional services or streaming providers.

9499 The three points we would like to convey today are, first, smaller, free, ad‑supported services like Tubi are not well‑positioned to absorb costly new regulatory obligations such as financial contributions.

This is definitely not the first streaming service to point this out. Others such as Spotify and Paramount have also voiced concerns about how they could possibly continue on in Canada with these new financial burdens being placed on them. So, for the streaming services, the problem of being able to even make those financial “contributions” aren’t exclusive to free services in the first place.

What is interesting with the situation with Tubi is that they are already paying money to companies like Rogers already:

9500 Tubi’s only source of revenue is advertising. From that revenue, Tubi must pay Canadian companies like Rogers Cable, Shaw, and Bell to distribute the Tubi app to consumers. We also pay a percentage of our gross revenue derived in Canada to Rogers Media, which is Tubi’s exclusive ad sales partner in Canada. In fiscal year 2023, we spent another 40 per cent of our Canadian gross revenue to license premium content to exhibit solely in Canada. But the largest percentage of Tubi’s revenue is paid to licensors who license content for exhibition in Canada on a revenue‑share basis. That is, we split 50‑50 the revenue generated by rev share content with the licensors that license it to Tubi. Therefore, Tubi’s business model does not leave sufficient revenue to cover the increased regulatory costs which are proposed by the CRTC.

This actually raises a rather interesting prospect. If the CRTC rules that the ransom payments must be made as per the legacy media companies demands, a pullout of Tubi would actually have a huge impact on companies like Rogers and Bell as they see all those royalties suddenly dry up. It’s not clear to me how much of an impact that would have on those companies, but from the sounds of things, the impact would not be zero at the very least.

Now, as I noted off the top, I’m not convinced every streaming platform will leave Canada over a bad CRTC ruling here. However, a number of streamers will end up leaving – especially the smaller ones. This is apparently something Tubi agrees with:

9501 On the other hand, subscription video on demand, or SVOD for short, services like Netflix are more readily able to absorb regulatory costs and apportion part of its budget for Canadian productions. SVOD services can simply raise their subscription fees to cover the increased costs. Since Tubi relaunched in Canada in 2019, Netflix’s subscription costs have increased by 25 per cent, while Tubi has remained free.

An example I used in the past when talking about this is YouTube which has provisions that say that if there is a new cost associated with operating in a given country, then those costs are going to be forwarded to their customers. Whether that is through Adsense or subscription rates, that is a tool in the toolkit for YouTube. Indeed, Tubi is right in saying that an option for Netflix to respond to these new regulatory burdens is to raise subscription rates. So, our perspective on the situation tracks well with Tubi’s observations.

Another one of Tubi’s concerns is the inability to invest in Canadian content:

9510 Second, we know what kind of content our Canadian viewers want because we know what they are watching, and Canadians like Canadian content. That’s why we’ve made a proportionately larger investment in domestic content for Canada than our current viewership level in Canada might suggest. Although Canadians make up only four per cent of Tubi’s worldwide viewership, for our fiscal year ’24 budget, we will spend 10 per cent of our worldwide content budget to license content for and produce content in Canada. Directing additional revenues to a third‑party fund would undermine Tubi’s efforts to acquire the content that our Canadian viewers want.

Much like the Disney example, there is a very real fear that the amount of money being invested by streamers in Canada could quickly evaporate should the CRTC make a bad ruling. While some lobbyists decry the idea of being little more than a “service” economy, the streamers pulling investments from Canada would mean that those lobbyists will go from a “service” economy to a “no work” economy. If a streamer can’t continue to do business in Canada, then all those investment dollars disappear with it, leaving the Canadian economy worse off. Tubi, here, is being blunt about what is at stake here.

9511 Third, Tubi already makes significant and valuable contributions to the Canadian video ecosystem ‑‑ including producing, acquiring, and showcasing Canadian English‑ and French‑language content ‑‑ without any regulatory requirement to do so. New costly regulatory requirements could actually make it more challenging for us to continue to offer the same diverse range of choices to Canadians. This approach would hurt Canadian creators and consumers unnecessarily.

So, like other streaming platforms, Tubi is asking for regulatory flexibility – albeit for understandably different reasons:

9516 Tubi agrees with the Commission’s position that the new regulatory framework being established by the Commission should not be applied to smaller undertakings that do not have a material impact on the Canadian broadcasting system. The proposed contributions would be harmful to the Canadian viewing public if imposed on smaller undertakings and would only serve to burden Tubi’s ability to compete as a new entrant in the marketplace.

9517 We believe strongly that the new regulatory framework should recognize the distinct position of smaller free services, not only their relative inability to absorb costly new regulatory obligations and their need to devote their smaller resource pools to developing and promoting appealing alternatives to those services, but also their unique ability to provide choice and competition to larger, more established players.

9518 Tubi has a unique and innovative business model that makes it particularly vulnerable to new regulatory requirements. Tubi’s only source of revenue comes from advertising. As opposed to our subscription‑based competitors, AVOD services cannot simply raise rates and pass costs on to consumers. The success of our service is offering content that viewers want to watch, and content costs make up most of our operating expenses.

Tubi then talks about the market realities it is facing:

9521 First, over the past two years, the total growth of video advertising expenditures has declined. The slowing of the growth of the video advertising market will disproportionately and adversely impact AVOD services that have no other revenue stream.

9522 Second, AVOD services are also facing increased competition as SVOD services like Netflix add their own ad‑supported tiers. And unlike Tubi, Netflix charges its users to watch even its ad‑supported tier.

9523 Third, as AVOD services continue to operate during a turbulent advertising market, they must also contend with the rising costs of acquiring content, both via licensing and production. Industry estimates indicate that the cost of acquiring content has increased by over 40 per cent over the past four years. Likewise, the costs of producing original content have only increased over the past two years and, as a result of the recent strike by the Screen Actors Guild and Writers Guild, costs will only continue to increase.

9524 Fourth, AVOD and smaller services are also competing with the streaming giants to increase their number of users. Those services can outspend Tubi to market their services and acquire new users. It is more difficult for AVOD services to increase their growth, as our marketing budgets are directly related to the ad spend, which is declining.

Online advertising has been in a state of decline for the last few years. We here at Freezenet have felt that decline for seemingly ever. Though there has been a steady growth in readership, returns just keep persistently falling, making the prospect of reaching a break even level an increasingly distant prospect. To this day, ad revenue hasn’t even come close to recovering to what it used to be. It’s an across the industry problem that, if anything, is getting worse.

Tubi then goes on to say that their service is simply not in a position to absorb the higher regulatory costs being proposed:

9526 For all of these reasons, Tubi is not in a position to absorb a percentage of revenue contribution. And if the purpose of such a contribution would be to help support the Canadian broadcasting system, we are already punching above our weight in the Canadian market. We are spending proportionately more in Canada than we are in any other country, as measured by percentage of revenue and the percentage of titles in our library that are produced in Canada.

9527 Getting this regulatory scheme wrong will have unintended consequences for free streaming services, for our viewers, and for Canadian content producers. It may become too costly for Tubi to acquire and produce the content in Canada that our Canadian viewers want. Or worst case, it may become too costly for Tubi compete in the Canadian market.

9528 As an ad‑supported service, we are closely in touch with our viewers and who they are and what they want. We are better placed to work with our partners to acquire and create Canadian content to serve that demand more than any third party could be, including any Canadian production fund.

So, what kind of flexibility is Tubi asking? It appears that they want to see a high regulatory threshold for being asked to contribute. Otherwise, the service would be exempt. They see the line at $100 million per year which seems sensible:

9529 For these reasons, Tubi has submitted that entities with total derived Canadian revenue of less than $100 million dollars should be exempt from the new regulatory regime. Unless entities like Tubi are able to limit their losses and cross that revenue threshold, they may be unable to continue to compete in Canada alongside the larger, dominant streaming services. That would only reduce the ability for Canadian viewers to select lower‑cost and, in our case, free alternative services that offer a large catalogue of diverse content offerings.

During the question and answer period, Tubi was asked about their financial position. They were quite candid with that, apparently:

9547 VICE‑CHAIRPERSON SCOTT: Okay. Yeah, so and I appreciated the slides where you walked through kind of your underlying cost structure. I found that very helpful. We had Spotify in last week, and they described their margins as razor‑thin to negative. I won’t ask you to kind of open your books in a public hearing, but how would you characterize the margins in the AVOD space? Are you in that ‑‑

9548 MS. FORREST: Razon‑thin. Razon‑thin to negative.

9549 VICE‑CHAIRPERSON SCOTT: Okay.

9550 MS. FORREST: And when you consider that out of each dollar, 99 per cent of our net revenue is split 50–50 with the rev‑share content partners, 99 per cent of our content library in Canada consists of rev‑share content. And we split net revenue 50–50 with the licensors who license it. And then, from what’s left, we also have to give a percentage to Rogers Media, because it’s our exclusive ad partner. So they keep a large percentage that I cannot disclose in this hearing. And we also have to pay the distribution carriers that carry our app as well.

9551 So when you start deducting the large cost of rev‑share content and then the cost to license premium content, paying a cash licence rather than a rev share, and the cost of producing content in Canada, you can see how each dollar is becoming smaller and smaller.

9552 And the only way that Tubi can remain competitive is to scale, so the cost per consuming viewer goes down. If you don’t give us room to grow and to scale, to reach more viewers in Canada, then the costs are so high that it makes it untenable to survive against giants who are making billions when we are not making anywhere near that.

The CRTC seemed interested in whether or not Tubi can survive if they impose an initial base contribution as well:

9558 VICE‑CHAIRPERSON SCOTT: Thank you. So I’m going to continue on a theme, here, and you’ve discussed it considerably already, but it’s maybe the most important theme, so I’m going to continue to dig deeper. What would be the practical implication in very concrete terms if the Commission were to impose an initial contribution? And maybe let’s take the Netflix number, which they said is based on global norms, the two per cent. So what would you do tomorrow if you woke up and the Commission had imposed a two per cent initial contribution? What would that mean for what you can offer and provide to Canadians?

9559 MS. FORREST: We would have to examine the viability of Tubi in Canada. This is a public hearing, and we are not going to disclose revenue. But suffice it to say that, again, with content costs being our most expensive costs, and advertising being our only source of revenue, if we have to pay two per cent of revenue into a fund so that that fund can produce content, and then we have to pay to license content that is being produced by the producers who benefit from the fund, then we’re paying twice.

9560 And that’s the part you’re not understanding, that Tubi has to have enough content to attract Canadian viewers, so we have to spend for content anyway. We have to have original titles that are produced in Canada. We have to acquire content for Indigenous populations in Canada. We have create content in Canada for Canadians just for our platform to attract viewership. If we don’t have viewership, advertisers won’t advertise on Tubi. So that we have to do.

9561 And then you say in addition to everything that you’re spending on content for your platform, take some more money and give it to a fund so that the fund can give it to producers to produce content. And we don’t have access to that content, so it’s just another cost to Tubi.

9562 And given that 99 per cent of the content that we exhibit is on a rev‑share basis, we’re already losing 50 per cent of our total revenue immediately on day one. And then we spend money to acquire content. And then we spend money to produce content. And then you’re asking for us to pay a percentage to allow others to produce content that does not benefit Tubi, while Tubi is already doing the very thing that you want to happen by asking for the contribution to a fund. And what you’re asking for is help these funds fund producers to create content for Canadians. We’re doing that. We’re creating content in Canada. We’re creating content for Canadians.

9563 So we’re already spending much more than two per cent. As I said to you, we spent 40 per cent of Tubi’s gross revenue in 2023 to acquire content for Tubi through licence payments. That does not include all of the payments we made to the partners from rev‑share content.

9564 So if we’re already spending 40 percent of our gross revenue on content for Canada and Canadians, the margins are razor thin and you’re asking us to take another two percent off of our gross revenue.

Some people I speak to tend to react with surprise when I say that a bad ruling at the CRTC after these hearings could result in numerous streaming services leaving Canada. It’s commentary like I see above along with the evidence I was able to gather that says that it’s a foregone conclusion that a bad ruling will cause an exodus. The only real question is just how severe that innovation exodus will be. Will it be just a handful of smaller players that only affect specific parts of the community or would it be dramatic enough to see platforms like Spotify leave the country as well? That remains to be seen in such a (very probable) scenario.

Obviously, this nightmare scenario won’t be happening tomorrow. It will take years for this process to get sorted out. The problem is that there is little really stopping this train at this point. The gears of government have already begun turning and when the process is completed, the only question is: how bad are things going to get?

Drew Wilson on Twitter: @icecube85 and Facebook.