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Shomi, Crave TV highlight vertical integration problems

Bigger problems will emerge regardless of whether complaints to the CRTC succeed.

orange is the new black, netflix, vertical integration

Could Netflix’s Orange is the New Black some day end up on Shomi?

Vertical Integration:

Here’s a thought exercise. What happens if the CRTC takes to heart the complaints lodged by consumer groups last week and forces Rogers, Shaw and Bell to open up Shomi and Crave TV, their respective streaming services, to all Canadians?

If they’re forced to become full-on competitors to Netflix, will the companies still want to offer the services? And, considering that such an order would change the economics of those services, would they be offered at the same price? And what would be the larger spillover effects on competition between media providers in Canada?

At the heart of all these questions is the issue of vertical integration, the term for when one company controls the supply chain that allows for the delivery of its main products or services. In the case of Rogers, Shaw and Bell – all broadcast and telecommunications providers – the vertical integration is so deep and entrenched it’s hard to distinguish between what is the supply chain and what is the product.

Canada has indeed been found to have among the highest levels of media and telecommunications vertical integration in the world. The forced opening up of the streaming services could therefore lead to even bigger problems.

Currently, Rogers and Shaw require subscribers to their Shomi joint venture, available for $8.99 a month, to also be internet or television customers. Similarly, Bell and its Crave TV partners – Telus, Eastlink and Northwestel, for now – require subscribers to carry their television services. Crave TV costs an additional $4 a month.

Both are defensive plays aimed at keeping customers signed up to the companies’ more lucrative businesses, rather than true competitors to Netflix, the juggernaut that has become the global streaming leader.

The complaints from the Public Interest Advocacy Centre and the Consumers Association of Canada take issue with the companies’ extra service requirements. They say it’s a form of anti-competitive tied selling that limits consumer choice and disadvantages other internet providers.

the wire, hbo, crave tv

Could The Wire end up on Netflix?

Let’s imagine a scenario where the Canadian Radio-television and Telecommunications Commission agrees and issues an order requiring Rogers, Shaw and Bell to sell Shomi and Crave TV to anyone who wants it – no specific internet or TV subscription required.

Assuming the companies wouldn’t fold them out of spite, the services would then become true competitors to Netflix. The three services would compete on their libraries of content, the ease of accessing them, and of course, price.

Each of those factors would provoke their own skirmishes, and some already have.

On the first front, all three have made exclusive content part of their value propositions.

Rogers, Shaw and Bell have spent undisclosed millions on acquiring exclusive shows from U.S. producers including HBO, Showtime and FX, largely to keep them out of Netflix’s hands. Netflix, on the other hand, is increasingly producing its own content such as House of Cards and Marco Polo, which is programming that is unlikely to show up any time soon on Shomi or Crave TV.

In many ways, this mirrors the traditional television system, where certain broadcasters get certain shows. It’s why new episodes of The Big Bang Theory, for example, are on CTV but not also on Global and CityTV.

But it’s also different in one key way. Existing CRTC rules aimed at mitigating vertical integration require such programming as a whole to be made available to competitors on an access level, which is why consumers who get their television service from Rogers are still able to watch Bell-owned CTV and Shaw-owned Global.

Streaming services are still relatively new, but a similar situation is foreseeable. The argument could be made that consumers shouldn’t be forced to subscribe to a myriad of different streaming services just to see the specific shows they want, the same way they don’t have to get regular TV service from both Bell and Rogers.

The consumer groups touch on this in their complaints by citing the CRTC’s New Media Exemption Order:

The Commission considers that permitting [vertically integrated] entities to exercise exclusivity with respect to the distribution on new media platforms of programming designed primarily for conventional television, specialty, pay and [video-on-demand] services would result in harm to consumers and the competitiveness of the industry. The Commission further considers that the same harm would result if industry players that are not [vertically integrated] entities exercised such exclusivity.

Could Shomi, Crave TV and Netflix eventually be barred from exercising exclusivity on their respective shows? Could regulation eventually result in Orange is the New Black on Shomi or The Sopranos on Netflix? It seems crazy, but it’s an argument that could take place soon.

The second competitive issue would centre on access, and it’s here that the CRTC has already made some progress. In its ruling on mobile TV two weeks ago, the regulator firmly declared it will not tolerate “zero rating,” where wireless providers such as Bell and Videotron don’t count their own video services against customers’ monthly data usage caps.

The situation is more complicated when it comes to Shomi and Crave TV because both are offered over traditional television infrastructure and as true internet streaming services. Customers get unlimited usage when they access them via TV set-top boxes, but viewing through phone, computer, tablet or game console apps counts against those caps.

PIAC and CAC say this is unfair. If the CRTC decision goes against Rogers, Shaw and Bell, the companies could simply pull the internet streaming part of their services. But, as the consumer groups point out, this would probably require them to get broadcasting licenses since the services would then be more akin to traditional TV channels.

big bang theory, tv, television, cbs, netflix, hbo, cable, comcast, rogers

Could The Big Bang Theory end up on Crave TV? No, wait, it already is.

Net neutrality issues aside, it’s safe to declare Netflix with a significant access advantage when it comes to usability, interface and availability. Having a few years’ headstart, the Silicon Valley company has perfected the art of delivering streamed video across virtually every device, and it is continually investing heavily in improving that aspect of its business.

Which brings us to price. If ordered to open up to the public, would Bell still offer Crave TV at $4 a month? Would Shomi, which is currently priced the same as Netflix, lower its price to make up for its deficiencies when compared to its rivals?

Price competition is normally a good sign of a healthy, competitive market but there would certainly be complaints of predatory pricing if either service were to sell for less than Netflix. As mega-companies with many businesses, Rogers, Shaw and Bell can afford to sell one of their services cheaper or even at a loss if it means slowing down or hurting competitors – especially ones with singular revenue streams.

There are numerous examples of the companies doing just that. Rogers’ launch of discount wireless provider Chatr in 2010 just as Wind and Mobility were getting off the ground is a great example.

All told, while the complaints against Shomi and Crave TV are on the surface about fair access to the streaming services, they are merely the start of a much larger argument.

The spectre of vertical media and telecom integration looms large over streaming services. When the same companies that own the pipes are selling the content that comes over those pipes in competition with other non-integrated providers, the problems are only going to multiply.

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