Sunday, April 12, 2015

Tax Credits, Exchange Rates and Thin Ice

(Updated Below)
Canadian Animation Resources has good coverage of Nova Scotia's decision to reduce it's tax credits for film and TV production (1, 2, 3).

It's going to be a painful disruption for many people.  Undoubtedly, some studios will close, and some will shift work to another location.  Those lucky enough to be offered jobs elsewhere will have to uproot their lives and relocate to another province.  I'm sorry for everyone who will be affected by this.

This is an ongoing problem in Canada and I've seen it in multiple industries over multiple decades.  Too many companies base their existence on some kind of government protection (such as content quotas, tax rebates and before free trade, import duties) or on the exchange rate, as the Canadian dollar is generally worth less than the American.

The problem with this approach is that it adds more variables to the already difficult puzzle of making a profit.  Creating a product or service, pricing it properly, marketing it and fending off competition is never easy.  When government policy or exchange rates are added in, companies are at the mercy of things they cannot control.

There is also the upcoming issue of the CRTC's pick and pay decision.  As of next March, cable subscribers will be able to abandon packages of channels in favour of only paying for what they want to watch.  To date, YTV has been paid for by everyone in Canada who subscribes to cable, whether they have children or not.  They will undoubtedly lose subscribers.  Teletoon is part of a package, and no one knows what percentage of the people who purchase it actually watch it.

(Update: Canadian Press is reporting that the number of cable subscribers fell by 95,000 in 2014.  That compares to a drop of 13,000 in 2013.  It estimates that Netflix went from 3 million to 3.9 million subscribers in Canada last year.  Even without the CRTC decision, revenue for cable channels, where the majority of Canadian animation appears, is dropping and that is bound to have an effect on production levels, budgets and deadlines.)

While the animation business in Canada is booming at the moment, I'm not optimistic.  I worry about a contraction coming within the next two years.

Canadian gaming studios tend to be either very large or very small.  There are branches of Ubisoft, Rockstar and Electronic Arts in Canada.  There are also small indie studios that are often less than a dozen people.  Those small studios are surviving due to low overhead and a business model that allows them to sell directly to consumers over the web.

I suspect that Canadian animation studios are too married to series production and international financing to be able to work the low end of the market.  I'm waiting (and hoping) to see the entertainment equivalent of indie game companies arise, where small groups develop their own intellectual property and take it directly to the audience.

So long as Canadian studios depend on government regulations and the exchange rate, they are skating on thin ice.  We'll see how well Nova Scotia withstands the reduction of the tax credit, but what's happened in Nova Scotia could happen anywhere in Canada.   I hope that studios are preparing for that eventuality.

11 comments:

John Celestri said...

Mark, I believe that Simon Tofield is the first animator to successfully take his intellectual property ("Simon's Cat") directly to the audience.

Brubaker said...

John,

There were a few earlier ones. "Homestar Runner" existed for years before Simon's Cat, for example.

Anonymous said...

I know for us, coming to Nova Scotia has been film career suicide, and we've been residents for three years. We are Canadians, but we may have well been from Mars. Now at least we have the last nail in the coffin. Jock and Conrad were the reason we came out here - their show was great. Too bad it's time to pack it up.

John Celestri said...

Right, Charles. Just goes to show how different an audience the two of us are. I could never write "Homestar Runner" material (which touches on Mark's previous post "The Upside and Downside of Influences).

Anonymous said...

Very anecdotal, but I do know a few people who have young families who all don't have cable but do have Netflix to replace the shows missed specifically for the children (what little time the parents can spare for tv/Netflix is just a bonus). Children's education programs while being educational are frequently a digital babysitter and are deemed important enough to have access to.

Those drop off numbers are one dimensional too. They don't display a larger picture that should take into consideration all the people who leave Mom and Dads house and never get cable to begin with and go to a Netflix like service only.

Anonymous said...

I work in the NS film industry and find I can't say anything negative about the tax credit because it's become such an emotional issue. I also feel these tax credits are a double edged sword, because of how fickle they've made an already difficult industry. VFX artists in California are very familiar with this, seeing big places like Sony jump from California to New Mexico to Vancouver, chasing whichever state/provincial government would give them the most money. At least the tax credits in Nova Scotia mostly benefit Canadians, but in Vancouver most of the Sony workers are TFWs from LA. And BC pays 60% of their labor costs.

It does also create a race to the bottom, despite people thinking these tax credits are unavoidable costs of doing business. They might be, but they still can have dire economic effects and can put a hole in a province's budget.
We're all waiting for that equitable distribution model that will actually allow small teams to create great content at affordable prices for actual profit. So far that solution has not presented itself.


Anonymous said...

^By the above I meant I can't say anything negative about the tax credits to anyone else in this industry. The second you question the wisdom of the tax credit you're seen as undermining the industry and coworkers.

Robert Waldren said...

"...cable subscribers will be able to abandon packages of channels in favour of only paying for what they want to watch."
Today's announcement that the Disney Channel will be setting up in Canada through Corus, signals that Corus is setting up THE dominant kids' specialty channel to win the Pick & Pay battle. Family Channel, YTV, Disney Junior (which depended on Disney content)- these channels won't be able to compete and will vanish.

Anonymous said...

Ontario budget proposals make me think someone doesn't want Canadian taxpayer dollars funding shows going to non Canadian broadcasters. If you cant monopolize the market (not being able to block the all powerful internet) then try to restrict the deals to the competitors, kinda vibe to my skeptical eye. Curious if all provinces take their own different paths to the same outcome. If that is what this proposal does, interesting way to do it as the general public isn't going to understand why anyone is upset about it. The percent cuts do look small at face value, in isolation.

Virgil said...

Great talk Mark, eye opening and very helpful, thank you!!

Anonymous said...

Senior VFX artist Pierre Grage pointed out that as the USD rises and CAD falls, more and more work will come to Cananda. This means more and more tax credit utilization, leading to, in his estimation, a faster collapse for the Western VFX industry as governments can no longer maintain the cost of the credits. Uncertain when the government reduces or removes the tax credit for VFX if it will also affect domestic TV animation houses.

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