Netflix launches Canadian Internet movie service. Good business model or wasted effort?

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Having worked for more than a decade as a senior marketer with some of the largest US telecom companies (Comcast and Verizon, among others) and previously in Calgary with what is now part of Shaw Communications, I’m surprised Canadians are not raising holy hell about the draconian bandwidth limits and extra “overage” charges they pay for “High Speed Internet,” while US cable and DSL customers by and large don’t.

Case in point: today’s Canadian launch of Netflix movies delivered over the Internet.

Netflix Canada is a pretty useless service compared to the offering in the US. That uselessness is not due to the product, which, granted, is weak out of the box but may improve. Today’s first looks by those testing Netflix Canada report that the offerings are not that great. That should have been expected, as Netflix shows only older and less popular product in the US, since its customers get their new releases through the mail. And Netflix does not have the Canadian rights to many titles available on its US service. Anyway, Netflix in the US augments its mail service with the broadband product as an “added value.” Its bread and butter is still DVD rentals.

The real problem: The Canadian product will likely fail or limp along with measly customer penetration due to the extremely limited pipeline in Canada imposed by broadband providers. Canadians suffer “some of the most restrictive broadband caps on the planet,” according to Carmi Levy, a London, Ontario tech analyst as quoted in the National Post. Levy continued, “Consumers routinely log on to find warnings that they are about to exceed their monthly bandwidth cap. And when they do, they are punished with overage charges. Making a bad situation worse, over the past year most ISPs have tightened these caps — a move which runs directly counter to the rapid expansion of bandwidth-heavy video and multimedia content.”

The first time I encountered that kind of a message was a year ago when visiting family, who live on a Rogers cable system. The only place I was ever billed for extra bandwidth was in Ukraine. Yes, in Ukraine!! And that was 3 years ago. A transplanted American friend who lives there tells me that is no longer the situation, and that he has cheaper, faster service in his small eastern Ukrainian city than that of many Canadians. In the US, paying extra for extra bandwidth was never a concern.

Even the worst cable and telco broadband suppliers in the US don’t pillage customers’ bank accounts (i.e. cap bandwidth or charge ridiculous monthly fees over bandwidth usage) like Canadian companies do with their different levels of monthly usage caps and limits — and overage fees — that only serve to reduce Canadians’ use of the Internet. So, with a big, almost unrestricted delivery pipeline, Netflix has a pretty good business model south of the 49th Parallel.

Since a standard definition streaming movie eats up to 3 GB (high-def video consumes perhaps double that), and many Canadians have very low download limits imposed by their broadband providers — a practice which is arguably years behind the times during this video-heavy and bandwidth-rich Internet atmosphere — watching only a couple or handful of movies may result in an expensive unexpected bill from Rogers or Bell for “overage charges.” Other uses of the Internet exacerbate the problem; for example, downloading a map update for my Garmin GPS devours 3 GB of bandwidth, and I have no idea how much my Vonage phone service uses, but it’s likely substantial.

Only one Canadian reseller, TekSavvy, provides 200 GB of monthly bandwidth for a reasonable price, while the major operators’ standard fare is 60 GB or under — woefully inadequate for a connected world. Many of the same websites and services Canadians enjoy (or need to access for work and school) are designed on the US “unlimited” model. Canadians are being mistreated by their providers, as there are no “barebones” versions of these sites without all the broadband-devouring flashy graphics. Most operators in the US limit only the speed, and provide unlimited amounts of data (although you might get slapped if you’re a bandwidth hog).

Bandwidth is not like buying beans at the Bulk Barn. If bandwidth was a huge bin of beans, selling 10 kilograms of beans would not cost the company much more than selling one kilogram, and the company didn’t have to buy the beans in the first place; they’re a conduit — a pipe. The infrastructure is in place to handle this amount of traffic already. Unlike increased speeds, additional overall bandwidth costs the operator next to nothing, as most customers use very little of their allowance. So, those overage charges on Canadians’ Rogers or Bell bills are essentially pure profit.

Comcast recently imposed a limit of 250 GB, but that is more than 4 times the amount of data allowed for a similarly priced service from Rogers or Bell. If you go over that limit with Comcast, the company will not charge you overage fees, but may cut your service off if you are a repeat offender, and after they give you a courtesy call. Or, it may not do anything at all depending on the amount of Internet traffic in your neighbourhood. Canadian broadband operaters could learn a thing or two from that customer-centric policy.

If Comcast and Time Warner capped bandwidth usage in the US as Rogers, Bell, et al, do in Canada — and played favourites with their own content — there would likely be many significant lawsuits along with federal and Congressional/regulatory involvement, as that action would likely be deemed anti-competitive under US law and arguably not net-neutral.

There is no “competition” if Rogers or Bell or Telus or Videotron or Shaw meter legal services like Netflix or YouTube but do not do the same with their own content delivered via the same pipe. Otherwise, that would entail a level playing field, something Ottawa and the CRTC are in a self-imposed fog about. And if there truly was competition — as there is in the US — Canadians would be enjoying new customer offers of extremely fast 15 MB/second service for $19.99 per month for an entire year without any contracts before it increases to a reasonable $34.99, just like many American broadband customers are doing this minute.

If you think there is free enterprise and real competition in Canadian cable, satellite and telecom, you drank the Kool-Aid brewed by the industries and Ottawa.

Takeaways to consider:

1. If you want to deliver passengers or goods via jumbo jet, but the owner of the airport allows only your Cessnas to land, limits the width of the runways, and gives their own Boeing 767s a hugely better deal — and the federal regulators not only allow it but nod in approval — you should think twice about expanding business to that airport. Perhaps you should land your planes in another airport in an entirely different country.

2. If you advertise speed, don’t limit Customer Satisfaction. Canadian broadband companies are selling a 200 MPH Ferrari that has a tiny 10 litre gas tank that can be filled only once monthly.

PS… I could write about the high wireless phone rates in Canada compared to the US, but that’s a whole other column! That’s another example of Ottawa-sanctioned and approved profiteering by Canada’s telecom companies on the backs of Canadian consumers.

Jonathan Blaine

I've always called myself a "Marketing Guy." If I had a brand and logo, perhaps that would be my slogan. Measuring ROI is huge. Just because you're now using "new media" does not mean marketing fundamentals should be discarded. Customers' desires do not change. I'm a "right-brained creative analytical" guy (if you can fathom such a thing) who looks at a project several different ways. My first instinct is usually the correct one. I'm a "doer," and often a "diplomatic fixer;" someone who gets things done and still gets a thrill out of customers actually buying something because of something I mailed to them, or an ad I placed. Most of my success has come from strategy, writing, how ideas are presented to the potential customer and the actual thoughts that somehow originate within the ether between my ears. As a fan of DM guru Denny Hatch, I believe that the brand should never outweigh the message, and that art should never win over copy. The mix has to be “just right.” And continually tested. I have solid ryttan, err, written and verbal communication skills, and a reputation for consistently producing cost-effective quality work.

3 Replies to “Netflix launches Canadian Internet movie service. Good business model or wasted effort?

  1. I smell price fixing between the big 3 (or 5)….

    We should consider class suit action againist these big 3. How can we switch to a better service if they all are practically offering the same service for the same prices.

    I am switching to TekSavvy the minute it becomes available in my area.

    Every time I read or hear about the Rogers Cap, I feel exploited and used!

    How can we increase competition? Please raise that issue in your next article, thanks.

  2. Only regulatory pressure will raise limits, I fear, and Ottawa is not about to do so since the CRTC is really not in existence for Canadian consumers in my opinion, but apparently feels its mandate is to maintain the coffers of entrenched Canadian businesses and to protect Canadian telecom industries (and Canadians’ eyes and ears) from Big Bad Foreigners.

    Even in the US, “overbuilding” a cable or phone company in a region by a new entrant, which is a very expensive proposition, is usually a money loser for the new competitor, which usually goes out of business due to the deep-pocketed incumbent lowering prices, or offers reduced services for a nominally lowered price, or gets acquired by the incumbent after a price war… which then increases its prices almost immediately.

    The only high speed competition would be something like WIMAX — as long as that did not have imposed caps — that is now available in some metro US cities (Seattle and Atlanta, for example), but that is not yet available in Canada. It apparently will be available in some rural markets from Barrett Xplore, but that won’t help competition in population centers.

    Our only hope, I hate to say it, is the government, and a more consumer-centric, less business-oriented, one that is currently in power. Good luck with that!

  3. The price gouging consumers face is based on geographical restrictions, and lack of competition within each region. If you live west of Saskatchewan you have only Shaw and Telus to select from, and east of Saskatchewan, you only have Bell and Rogers. Neither company has jumped both feet into the “buffer” that Sask. seems to be, and they definitely won’t cross into each others territory. Why should they? It would cost tons of money to set up and then they have to compete to attract customers away from the established services. Where’s the profit in that? Shaw is in Saskatchewan, but only in the 2 major centers (Regina and Saskatoon). I live just 10 minutes north of Saskatoon and Shaw doesn’t come out here. So I’m limited in my choice of TV, phone and internet provider. Thankfully my current provider is owned by the provincial Government and they realize they have to compete or open the door to the big Telecoms, so for the time being I still pay less than the rest of Canada.

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