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.