Industry Committee on Nov. 21st, 2011

[Sorin Cohn]

On broadband, it is the mission of i-Canada to work with all communities—urban and rural—to help them take advantage of broadband availability.

At last week's i-Canada conference in Windsor, Ontario, we heard from a guest speaker, Suvi Lindén, who is the Minister of Communications in Finland. In Finland they made access to broadband a fundamental right. It's the first country in the world to do that, because they realize that access to broadband is absolutely critical for the competitiveness of their entire country.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Cohn.

We're now on to Mr. Lake for five minutes.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

I'm going to direct my questions to Mr. Kee.

We spend a lot of time in a committee like this studying what's wrong and what we need to do better—and rightfully so. But I think we could learn something from where we're doing things correctly. Clearly, the entertainment software industry in Canada is a world leader.

What can we learn from the entertainment software industry as we're moving forward? Why is it a world leader? And along the line of what we can maybe do better, what are the risks you see to that?

[Jason Kee]

Certainly, it's a great question.

I would say that first and foremost, the entertainment software industry is a great example of a domestic Canadian industry that has always been global in view and scope. We haven't been focused on developing content for our domestic market, but have always been looking at the United States, Europe, and Asia as marketplaces. Because this has been pretty much baked into the industry from the get-go, it's made it a lot easier for us to transition to global marketplaces. The world has become a lot smaller in the past 10 to 15 years, and we've certainly been in a good position to capitalize on that.

In a similar vein, our industry would not exist—at least not in the way it does today—without foreign direct investment. Essentially, our industry has been built on the investments made by companies like Electronic Arts from the United States or Ubisoft from France, which have poured millions of dollars into the studios here that employ thousands of people in these high-paying jobs and develop world-class content that is distributed throughout the world.

These investments in turn led to the formation of studios. People would go off and form their own independent studios and be their own independent Canadian businesses, which has really built the entire ecosystem that we see today. It's one of the reasons among many that we actually see the clustering effect. It's also because you do have these investments that were made, and you have a kind of acorn--it's like a tree that grows and spreads out from those initial investments.

I think it's a valuable lesson to be learned and there's actually a lot to be said about it, especially when you're investing in the creation of a studio or a permanent firm. Again, there is no risk of Ubisoft picking everyone in Ubisoft Montreal and then shipping them back to France. No one is going to go; they're all Canadians and they work at a Canadian company.

As a result, we've actually seen a significant development because of that kind of investment.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

One of the things you mentioned earlier in your opening statement and the last time you were here is the digital locks. Your organization is among the biggest proponents of digital locks. You touched on it a little.

What's the risk of not having those? Maybe you can give an example of the risk to one of your creators of not having digital lock provisions in the Copyright Act.

[Jason Kee]

What we have is a wide variety of digital distribution models. I touched on this when we were discussing the different kinds of mobile platforms. Some are open, so it's whatever you want, and some are closed. Closed platforms rely on digital locks to function. With digital locks, what we often refer to as access controls also stipulate the conditions under which one can access the content.

These enable the variety we see in digital models. Without digital locks, you live in a binary world of all or nothing. You don't have the content, because no one's willing to offer it. Or you have full access to the content and you can post it online and do whatever you want with it willy-nilly. This means that as a developer of these games, you have to build that into your business model. Every single unit that's being sold has to be price adjusted for every single unit being sold out there. As a consequence, without them you're not going to be able to offer a differentiated model.

With digital locks, you can. With digital locks, you can offer a trial, for example, where someone has temporary access to your game, or access to certain levels of the game. They can try before they buy and then decide for themselves whether or not they want to purchase the game. They protect the content in digital distribution platforms like Xbox LIVE. If you didn't have digital locks, anyone could download the game from the Internet, put it onto their Xbox, and they wouldn't have to pay for it. With the digital locks in place on the Xbox or PlayStation, you find out that if you put that game in your console, it will recognize that it's a pirated game and won't let you play it.

TPMs, the digital locks, are critical to the content development of the digital economy and the e-commerce market. The reason they need to be legally protected is that they can be circumvented; they can be broken. When they're broken, it breaks the model. Without their being legally protected, anyone can go and circumvent the model, circumvent the lock that has been placed on the content, do whatever they want with it, and then make it available. That's the major problem we see.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Kee.

Mr. Cohn, we can let you go graciously now. We thank you for your participation here.

Now we'll move on to the third round and Mr. Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you, and my thanks to our remaining witnesses.

Mr. Kelly, you mentioned earlier that you found the credit card code of conduct to be particularly effective. You also described it as a living, growing document. Let's pretend there's a crystal ball in front of you. How do you think the code of conduct should evolve over the next two to three years?

[Dan Kelly]

There are a few things we have publicly asked Minister Flaherty for. One is to ensure that the issues under review by the Competition Bureau are codified. The Competition Bureau is asking to allow firms to refuse to accept certain cards if they don't like the price. It will also allow them to surcharge for accepting a credit card.

These are powers that would be seldom used by small business. But they would be important in pushing back against the tidal wave of fees that small and medium-sized firms have experienced over the last couple of years. These are powers that the Competition Bureau has said are anti-competitive on the part of VISA and MasterCard, and it is taking them to the Competition Tribunal on that. We're asking for those to be codified. We're also asking for some better dispute settlement processes in the code.

As to the whole e-commerce field, though, the code doesn't speak terribly loudly about mobile technologies. I think we need some additional provisions to ensure that we can offer mobile technologies compliant with the code. There are easy ways to make that happen. We're not suggesting for a second that anyone needs to carry multiple cellphones to be able to make different types of mobile payments. These things can happen. Our concern was about the attempts of VISA and MasterCard to piggyback on Interac's debit card network across Canada, to use it to expand their marketplace.

The most important provision is that VISA and MasterCard need to go out there, as PayPal has done, and try to convince individual merchants and consumers of the benefits of their model. If that's happening, we're happy. But under the earlier VISA and MasterCard proposals on debit, even with online debit, as happened with VISA and CIBC, there were some provisions that didn't allow that to happen.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much.

Mr. Kee, I have a couple of questions for you.

You mentioned that as part of the entertainment software industry, there's very much a digital distribution model now. I think I know what that is, but could you briefly describe what the digital distribution model is and how it works?

[Jason Kee]

Certainly, and it's actually a very complex question.

The key way that it works is that instead of actually taking your game and basically printing it onto plastic discs that you then give to retailers, so that you are basically putting them into a box and selling them, the game is instead distributed by some kind of centralized platform. In the case of a video game console, it's because Xbox has a platform called Xbox LIVE that you can use to download games. PlayStation has the PlayStation Network for the same thing. For mobile devices, it would be something like the App World for RIM, the App Store for Apple, or there's also a wide variety of open platforms that are available on the web. You can download games or play games online through the web.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Great. Thank you.

Applying our current study of e-commerce to that, does the e-commerce platform, if you will, work well for your industry? Are there any friction points? Are there opportunities for improvement, because, again, as you've pointed out, this is very much a globalized industry.

[Jason Kee]

By and large, it actually works fairly well. One of the reasons that it works fairly well for us is that payment providers like PayPal, and for Apple for its App Store, and RIM for its App World, frankly, make it work a lot more easily for us. To their credit, especially Apple and RIM, they changed the entire mobile gaming sector because they developed a model where they basically said, “Give us your content, and we'll distribute it for you, we'll do a 70/30 split where you get 70% and we'll get 30%, and we'll take care of all the transactions and all the back-end”. That was a huge change for us. As a consequence, it revolutionized the industry and made the markets much more accessible to small and independent gaming developers, the shops of one to five people, that wouldn't before have been able to afford the investment of $10 million to $15 million to make a game, but who can now actually afford to make a game for the Blackberry for, say, $15,000, $20,000, $50,000.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Kee. I'm sorry, that's all the time we have there.

Now to Mr. Thibeault for five minutes.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Chair. I'm also splitting my time with Mr. Caron.

Very quickly then, Mr. Kelly, we've been talking a lot about merchant fees and everything else, but this is not just coming, it's here. Let's be clear, e-commerce is here. Mobile payments are here.

What are the obstacles out there facing the small and medium-sized businesses, and is there anything we can do at this committee, at the government level, to ensure that we're helping Canadian small businesses prosper in e-commerce?

[Dan Kelly]

To the second part of that, we need to ensure that the payments task force reports quickly, and that any provisions related to mobile technologies are embedded in the code of conduct quickly. Those would be helpful measures, from our perspective. Ensuring that the game is not entirely a Visa or MasterCard game would also be very helpful, from our perspective.

The reason we've not been excited about the idea of regulating fees is that there are all sorts of unintended consequences that happen when you regulate fees. We've seen that happen in the U.S. where they regulated debit, and for many small merchants their fees actually went up, as opposed to down. The code is really the solution to that. There are fairly easy ways of making that happen to allow mobile payments, without necessarily getting to the glue of a fee palooza that took place on the in-store side.

[Glenn Thibeault, NDP, Sudbury, ON]

Thanks.

Mr. Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

I'd like to go back to the phishing issue. Mr. MacMullin, you gave a lot of answers, but they were mainly about what you were doing to deal with the problem. I'd like to have some more quantifiable points regarding the barrier that can represent.

How much of a problem is phishing at this point? How far are you in terms of consumer confidence in solving the problem to the point at which consumers who haven't adopted, say, PayPal or online banking services, are convinced that the problem has been solved?

[Darrell MacMullin]

I think fraud is never 100% solved; it's continually evolving. It doesn't matter if you are creating new technologies or new forms of payment, there is always going to be some sort of an arms race. As soon as you think you've solved it, there's something else that's new. We've prided ourselves as a technology in being ahead of that curve, particularly for both merchants and consumers.

When we look at the number of instances that have happened, in particular with PayPal, they are down dramatically. I don't have the numbers off the top of my head, but I'd be happy to give you a written answer afterwards on what our stats have shown over the last several years.

Part of that is our building up better ways of identifying these frauds. But we're also working with other technology providers. With email distributors like Hotmail and Gmail, browser technology has improved to be able to identify what are true digital signatures, digital certificates within e-mails and websites. So if you click on an email that takes you to a website that looks like PayPal or looks like your bank, it's not only PayPal that's protecting you but also other technologies, such as browsers and the like, are helping there.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I guess my question is more a question of perception. You're making efforts, obviously, to clamp down on fraud, but do you feel these efforts are recognized by consumers to the point where they might actually join or adopt a system of payment, like yours or like online banking, that they wouldn't previously have used? Do they have a perception that the problem is being addressed?

[Darrell MacMullin]

I'll go back to my comment in my opening remarks: we're still growing at three times the rate of e-commerce in this market. Canadians are transacting on PayPal once every second, and once every minute through mobile phones already, so they're typically already trying new technologies and are using them with PayPal because they're trusting us at that level.

Could it be better? Sure. We're always looking for ways to improve, always knowing that it's an evolutionary process. You always have to keep your eye out for what's next.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

As for the increase in that market share you're talking about, is it more because people are using it more often or because you have a broader—

[Darrell MacMullin]

Great question. It's actually both.

More and more merchants are accepting PayPal as a form of payment. Consumers are adopting us in more ways. If you had thought, years ago, that eBay might have been the only place to use it, now you would see its use in more and more places.

We're helping more businesses start up and they're using PayPal as perhaps one of their only ways of accepting payment, because they haven't figured out how to set up a merchant account yet, or because they are often declined merchant accounts due to their having no history yet, if they're just starting up. It's a very cost-prohibitive way for the acquiring side to service those small merchants, because they don't want to take on that risk, as well as for the merchants to bear any of the costs that get associated with a merchant account.

So we're enabling a lot of the startup community to actually get going a lot more effectively.

[The Chair, Conservative, David Sweet]

Merci, Monsieur MacMullin et Monsieur Caron.

Now on to Mr. Carmichael for five minutes.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you, Mr. Chair.

Mr. Kelly, maybe we can go back to where we finished off, and I'll add to my initial question a little bit.

We talked about the trends and about the fees, and I think the merchants are becoming more and more accustomed to the fee structures. Do you see any trends that are evolving there?

In addition to that, you talked about codifying some of the credit card fees and the structure. As we wrap up our study and come to the end of that journey, I wonder if you have any recommendations you might leave for us, working on the other side with the reduction of red tape, etc. What are your thoughts on this whole area?