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Why are U.S. Net Services Slow to Migrate North?

By Michael Geist

Netflix, the popular online movie rental service, launched in Canada last month, providing consumers with the option to download an unlimited number of movies and television shows for a flat monthly fee.  While the Netflix debut was marred by an ill-advised public relations stunt that involved actors masquerading as excited consumers, my weekly technology law column (Toronto Star version, homepage version) notes that the long delays in migrating the service north once again raised questions over why popular online services rarely view Canada as a priority destination.

Canada's legal framework makes for a convenient explanation, but the reality is that subtle legal differences are rarely the primary rationale for business and marketing decisions.  Moreover, Canadian privacy, e-commerce, and intellectual property laws are compliant with international standards and recent surveys have found that business executives view Canadian protections as better than those in the United States. As the Canadian government readies its national digital economy strategy, identifying the real reasons behind delayed entry into the Canadian market is a crucial piece of the puzzle.  

At least three explanations come to mind.


Topping the list is the fact that Canada's geographical advantage is lost in the online world.  In the physical world (ie. retail stores and services), Canada's close proximity to the U.S., common language, and similar culture, long made it the obvious choice for U.S. businesses thinking of expanding beyond their domestic market.

The online world diminishes those advantages.  Establishing an online presence is as easy to do in Britain or Japan as it is in Canada and the size of those markets is considerably larger.  Canada remains on the to-do list of many companies, but the small market size makes it less attractive in an environment where physical barriers are largely eliminated.

Canada's broadband market is a second key factor given the widespread use of bandwidth caps.  The caps, which are far more restrictive than comparable caps in the U.S., create a significant hidden cost for consumers anxious to use online services that require considerable bandwidth.

For example, Netflix advises consumers that the average HD movie consumes 2 gigabytes of bandwidth per hour.  Monthly bandwidth is capped at 15 gigabytes with the Rogers Lite service, with an additional charge of $4.00 for each additional gigabyte.  While there are other, more expensive options that offer more bandwidth, a Canadian consumer could easily use their entire monthly bandwidth allocation by watching one movie a week.  By comparison, Comcast, the leading U.S. cable Internet provider, has a monthly cap of 250 gigabytes (Rogers does not offer any comparable package).

A third factor appears to be licencing requirements, which are particularly complex and costly in Canada.  Online video services may be disappointed to find that popular content has already been licenced for Internet distribution on an exclusive basis by large Canadian broadcasters, effectively shutting out Internet upstarts.

Further, the licencing costs for available content is often prohibitively expensive when compared to the U.S. market.  For example, Pandora, a popular online music service in the U.S., notes that recent licencing demands for online streaming services run as high as 45 percent of gross revenues.  That places Canadian licencing costs far above those found in the U.S. and Britain forcing many providers to look for more cost-competitive markets. For a service like Pandora, the costs mean that the Canadian market is a non-starter.

Attracting new online services - as well as nurturing homegrown alternatives - depends upon a multitude of factors.  Making legislative changes may appear at first blush to be an easy fix, but a more competitive broadband and licencing market would likely to do far more to bring popular services streaming north of the border.

Full post as published by Michael Geist on October 15, 2010 (boomark / email).