June, 2011

I’m planning a few blog entries about the economics of government policy, and its relationship to changes in technology. The first issue I am going to take up is Canadian content regulations.

Canadian content regulations have long generated significant debate. I’m not going to get into the classic arguments over whether these are cultural guarantees or simple protectionism. Nor will I step into the long debate about what the proper definition of “Canadian enough” ought to be. Instead, I am going to argue that these regulations are simply from a different time, and not appropriate to the new technologies that produce and deliver media. With every passing day the idea of regulating media content is less helpful to Canadian artists, more harmful to Canadian broadcasters, and in a broader sense becoming impossible.

Keep this thought in your head. The Canadian content regulation for television was first passed in 1959. Imagine what TV was like then. There were (at best) two broadcasters in a market. Producing content for TV was incredibly costly, and only a few large production companies could realistically compete. There was no alternative to TV; either you were played on TV, or you were not seen. In those days, the case could be made that the market was not very competitive, and that the returns to scale necessitated dominance by a few production companies selling to a few broadcasters. An economist might call it similar to a natural monopoly: a situation where the costs of doing business necessitate one, or few, producers. The economics textbook’s favourite example is utilities like electricity delivery. It was understandable, perhaps, to be concerned that Canadian content might be lost in the middle of these big players.

Radio wasn’t much different. It was the dominant mode of marketing music. Music production was focused at a few large publishing companies, and radio was king. Again, it might have seemed natural to worry about where the Canadian artist would fit in.

Contrast that with the state of affairs today. Music is delivered through the radio, but also through a variety of internet sources. People listen to songs directly on the web pages of the acts themselves, and sometimes buy directly from there. Developments in video technology mean that television production requires much less overhead, and there are such a large number of stations as to serve very narrow markets. There is a channel devoted to Golf. The US supports a Soccer channel, despite its low level of popularity there. It doesn’t take a huge market to generate a marketable channel. On top of the proliferation of cable channels, internet delivery of video, both televised material and material that has not reached the airwaves, is closely following the rollout of high speed internet connections capable of carrying that content. In the language of economics, technological change has reduced the “minimum efficient scale” of production. It is now possible to efficiently produce and distribute music at a much smaller scale.

What do all of these changes mean for content regulation? They mean that content regulations are less effective at encouraging Canadian works, and more of a burden for Canadian broadcasters.

In music, radio stations that are subject to these regulations now compete against other sources which do not. Music subscription services, like napster.ca, offer unlimited streaming of a large library of songs for a fixed monthly fee. Since the listener controls the playlist, there is no control over the “Canadian-ness” of the music. A listener can hear about an artist from a friend, or their favourite music review webpage, or simply by asking the music service itself what songs are typically liked by people with similar tastes. Of course the listener could also stream any of a number of US radio stations, without regard to content restrictions, directly over the internet. These new distribution technologies are making it harder for a radio station burdened by the extra restriction of Canadian content to survive. Independent record labels and internet distribution offer a democratization of music that makes the content of Canadian radio stations far less relevant. Canadian content regulations only hasten the demise of radio in Canada: it adds one more way in which radio can’t keep pace with the times.

If the competition from these new outlets seems like bad news for Canadian content, keep in mind that this reduction in minimum efficient scale is probably great news for exactly the kind of up and coming Canadian artists that content requirements seek to protect. As in many areas of industry, small is often associated with new. Content requirements mostly focus on radio stations, which by and large are entrenched outlets. That is probably why it is so hard to point to recent Canadian artists which were success stories as a result of radio airplay generated by content requirements, and why it is much easier to point to a few Canadian stars whose songs are repeated on Canadian radio to meet the content requirements. Rather than finding great new Canadian artists, the lumbering radio giants look to established Canadian stars that hardly need the exposure. This is nothing new to an economist: big firms are often not willing to take the risks that small firms will.

Some important rising Canadian artists, like Arcade Fire, were never the beneficiaries of much Canadian airplay until they broke through the independent music scene in North America generally. Their story is very telling: it illustrates avenues that are now available for Canadian bands (holding aside the issue of whether Arcade Fire, a band from Montreal but with members from Texas, would formally “count” as Canadian). They took advantage not of the content regulations, but rather benefitted from all of the new technologies that make small scale production and distribution feasible, and offer an avenue for artists who are not yet a sure thing.

TV is headed in the same direction. Streaming video is taking North America, especially the US, by storm. Hulu offers free on demand video content for many popular US shows. It is currently formally not available in Canada, but Canadian stations already offer a (diluted) version of on-demand, streaming content for shows through their webpages. Viewers choose which content plays. Even Hulu, although blocked to Canadian IP addresses, can be accessed easily through a proxy server service. Media is out there, and short of building a Great Firewall of Canada that would have to be even greater than the Great Firewall of China, there is no keeping it from Canadians. Content regulations only serve to hinder Canadian broadcasters who must compete in this environment.

Just as technological change in music gives artists new tools for finding markets, the same applies to video. Websites like Funny or Die offer video that would never see the light of day in a world with only a few broadcast channels, with some videos reaching more than 60 million views. Between the internet and specialized cable channels, video is becoming democratized in the same way as music, offering exciting new outlets for artists who want to produce content and have it be seen.

The world is flat. More and more each day, media comes from everywhere, and goes everywhere. This is great news for Canadian artists who now have the tools to reach out both to Canadians and the rest of the world using these new technologies. But it also means that the idea of regulating Canadian content is starting to look as out of date as a 1959 TV set.

By Claus Vistesen: Copenhagen

(click on pictures for better viewing)

It is indeed an old adage that while goods things are to be preferred over bad things it is possible to get too much of the former. Looking at recent comments from the governor of the Reserve Bank of Australia it is not difficult to imagine how these, albeit old and worn, pearls of wisdom may well have inspired Mr. Stevens in his effort to tiptoe the thigthrope between signalling the intention to raise rates into an expected economic recovery on the one side and trying to prevent the Aussie shoot of on helium into the sun with wings of wax on the other.

(quote Bloomberg)

Australia’s central bank Governor Glenn Stevens signaled a surge in the nation’s currency to near parity with the U.S. dollar has given him scope to slow the pace of future interest-rate increases.

Stevens, who yesterday became the first central banker in the world to raise borrowing costs twice in 2009, said the 28 percent gain in the currency this year may hurt exports and cool inflation, allowing him to “gradually” raise borrowing costs. Just last month, he warned it may be “imprudent” to keep rates at “emergency levels.” The local currency and bond yields fell as traders slashed bets on another quarter-point boost next month, after Stevens raised the overnight cash rate target to 3.5 percent from 3.25 percent. Investors have been driving the Australian dollar toward parity with the greenback, betting China’s economic growth will boost exports from Australia, the biggest shipper of iron ore used in making steel.

Policy makers “are probably glad for the parity talk as it reduces the amount of work they need to do with monetary policy,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “A December move is a 50-50 proposition.” Traders are betting there is a 50 percent chance Stevens will increase the key rate by another quarter point on Dec. 1, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:22 p.m. today. Prior to Stevens’s comments, they had a 96 percent bet on such a gain.

Mr. Stevens’ comments follows in the heels of the recent push by part of the Aussie towards parity with the US dollar reflected primarily in the fact that the RBA has already raised twice in 2009 (from 3.00 to 3.5%) as well as a growing risk sentiment which is a fundamental prerequistie, in the current market, for observing investors react to (growing) yield differences. In so many words, this is all about carry trade and more specifically about the fact that in a world where the G3 and others are still fiddling with quasi- or outright QE it takes a brave sould to initiate a hiking process since it will mean an immediate reaction in the currency market. This is especially the case when the liquidity anchor effectively constitutes the US and thus; while the US pump priming keeps a floor under risky assets and volatility at low levels it becomes a veritable turkey shoot to gun for those currencies whose central banks are on the hike (see more here).

Following Mr. Stevens’ comments, the Aussie did lose a bit of its steam even if many currency punters still see it racing towards parity over the course of the coming year.

For example David Forrester who is currency economist at Barclays Capital expects the Aussie to test the parity level in 2010, a call based on the idea that the RBA will have hiked rates to a full 5.5% by the end of next year. Needless to say, in a world where risky assets continue to fly and risk aversion is kept in check this will provide a juicy interest rate differential vis-a-vis the G3 and thus the carry trade flows (be they actual carry trades or simply spot market piggy backing) will be plentiful.

The question is of course; can you blame the RBA for wanting to raise rates?

As it turns out, not really and particularly not in light of global central banks’ new found focus on asset prices in setting the policy rate. You know, it was all Greenspan’s fault and all that jazz. Still, for those worried about a too rapid V-shaped recovery, Australian house prices seem to offer plenty of things to worry about.

From Q3-08 to Q1-09 the house price index (weighted for the 8 biggest cities) fell a modest 5.6%, a drop which has been decisively paired in Q2/Q3-09 with the index rising a cumulative 8%. This picture is repeated if we look at a general gauge for consumer spending in the form of a sector break down of retail sales.

Consequently, the annual as well as monthly flow of retail trade turnover never really went decisively into negative in the context of the financial crisis which has no doubt contributed to the fact that the RBA never really contemplated a move into ZIRP and QE.

What happens next then?

Well as I noted recently, the burden of rebalancing may be tough to carry for those economies who have central banks brave enough to raise interest rates. Ironically of course and if it is really asset prices you are worried about, the risk is naturally that you just end up sucking in liquidity as you which in itself defeats the purpose of the hiking campaign (see Edward’s recent piece on Norway for a Scandinavian perspective on this). Naturally, you can retort to Brazil like capital controls, but in a world where capital flows freely and where the global economies are largely interdependent, this is like trying to stop a freight train with a VW Polo. Also, allow me to finish with a small quibble of mine in relation to the sudden urge by part of central bankers to target asset prices. I mean, this is fine and all and for those who know a little bit about monetary policy this is not something completely new. The problem is merely that targeting asset prices may not only be counterproductive in a world where asymmetric liquidity conditions and carry flows are the norm, by targeting asset prices also entail targeting a price which is considerable more volatile than traditional prices (because I assume that forecasting long term asset prices is not as easy as many believe). In this way, a steady gaze at asset prices may also conflict with central banks’ general propensity to favor incremental and gradual moves.

Whether this is the case in Australia, only time will tell. Yet, from the lovely fjords of Oslo, to the beaches of Rio, and on to the Great Barrier Reef policy makers may soon learn that you can indeed get too much of a good thing.