Industry Committee on Nov. 21st, 2011

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you.

This question is for the CFIB. Our government is committed to removing the red tape for businesses, and you are a part of that Red Tape Reduction Commission headed by Minister Bernier. Can you speak to the importance of reducing red tape for your members, and possibly speak to any red tape that's harming the adoption of digital technologies in e-commerce?

[Dan Kelly]

There has been a lot of progress made. But there is a huge road still to go on that front.

Briefly, on your question about deposit fees, virtually every institution has deposit fees for businesses. If they receive it from Visa, MasterCard, or their processor, or from PayPal, the bank will charge a fee for each transaction. Desjardins was one of the holdouts. They didn't charge these fees. But now these have just been imposed. So now it's across the board. When you get paid by whoever provides the money to you—Chase Paymentech or Menarys or PayPal—you will receive a fee as a merchant when the money hits your bank account. I just wanted to answer that quickly.

Those fees are in the few-dollar range, but if you're settling Visa, MasterCard, Interac, or PayPal on a daily basis, you could be hit with a fee for each of those every single day. This is adding up to significant dollars for members. Our members in Quebec have been sensitive about this very point, so it was a good question.

You asked about regulations affecting the adoption of e-commerce. The CRA is the main thing that most businesses are concerned about, quite apart from e-commerce. With respect to e-commerce, one of the impediments is the ability for small companies in the IT field to be able to work and still gain access to things like the small business deduction, and things like that. The CRA has a very black-and-white view of this kind of thing. It's the employer-contractor rules that are at play here. This is an area that absolutely needs to be fixed to ensure that people in the IT business can gain access to the same tax advantages that any other small business enjoys.

[The Chair, Conservative, David Sweet]

Thanks, Mr. Kelly.

Now on to Mr. Hsu.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Thank you, Mr. Chair.

My first question is for Mr. MacMullin. It's about PayPal. I've used PayPal from both sides: as a customer and as a merchant. It's nice for people to be able to purchase something and know that their credit card information is not going to a merchant they haven't dealt with before.

My question is related to the costs for small businesses. I want to know what the competitive landscape is in your business. What other companies comparable to PayPal remove the need to send credit card information to vendors and then remove the need for merchants to manage credit card information? Who are your competitors? Is it easy for a competitor to come into this sector?

[Darrell MacMullin]

That's a good question.

In terms of competitors, we look at a lot of different people. There may not be an exact replica of, say, a PayPal, but merchants have many different choices for accepting different forms of payment. Obviously there are different acquirers in Canada. There are different technology companies that have tried many different ways of forming digital wallets.

What's been interesting over the last several years is that we have seen more and more of the industry trying to look a lot more like PayPal. Even last week, Visa announced its initiative to look like a PayPal digital wallet. And there are other technology companies like Google and the like that have imitated us. I think it was six years ago that Google launched Google Checkout, which was an exact replica of PayPal's checkout system.

So many companies have come along and provided different and similar technologies. I think PayPal plays in the middle in a sense. One of the things we've been able to establish very closely with our users is trust. Payments are what we do; we don't do anything else. So the PayPal account provides this inherent utility that seems a little bit more ubiquitous and neutral than just another feature or function. PayPal works very hard at listening to our customers. I would say that we are probably one of the technology companies most maniacally focused on consumers. We've adopted a “customer to code” philosophy in everything we build.

I think probably the biggest advantage that we've been able to provide is for the developer community. It's not actually about the products we're trying to sell, because we've enabled the developer community with a rich set of APIs, from which they can go off and build different products and new business opportunities.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

I like PayPal. I guess what I'm getting at is whether in the longer term there's a risk of a monopoly developing here, and I'm wondering what effect that would have on transaction costs and the whole e-commerce part of the economy.

[Darrell MacMullin]

I think we're trying actually to provide a choice more than anything else. So I think especially on the consumer side--and I'll use this country as an example--there's always been a drastic difference between offline and online transactions in terms of the number of debit versus credit card transactions. Before PayPal came along in Canada, the credit card was the only way to pay online. So PayPal has been able to provide people the ability to pay with debit, the ability to do bank transfers or manage cash balances, to be able to accept purchases internationally. That's the one really unique thing about small to medium-sized businesses. Offline, they think locally. Online, they absolutely think globally, and they want to be able to accept transactions from people in Europe or the United States or in emerging markets. But they don't want to bear that risk. And there are a lot of Canadian merchants I talk to all the time who will actually use their merchant account for domestic business along with PayPal. But internationally, PayPal might be the only form of payment they accept, because if they get a credit card from Sweden, they don't know how to call up that Bank in Sweden and to figure out how to get an authorization on that card, whereas PayPal bears all of that risk and manages the front of that transaction for them.

There isn't anything in what we're doing that's prohibiting other companies from doing the same. I think by listening to our customers really well, we've been able to build really good solutions for them.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Okay.

My second question is for Mr. Kee, and it's related to international e-commerce. We like to see a lot of the entertainment software that's developed in Canada being sold around the world. Especially now with digital distribution, are there things that we should be paying attention to in negotiations of international trade agreements with regards to their effect on the entertainment software industry in Canada?

[Jason Kee]

Absolutely. It relates, actually, to what Darrell was just saying. The video game industry has always been a global industry. We have never made content that we sold purely domestically. The Canadian market is not big enough to sustain our industry. So we actually always sell overseas and are predominantly export-oriented. As a consequence, issues such as market access and so forth become critically important to us.

Because our products have been predominantly digital, and because the rules that apply to markets in the digital sphere versus the physical sphere have been different, we actually haven't had to deal with some of the customs tariffs and other challenges that some of the other industries have dealt with—although these still actually apply in some jurisdictions. So the rules that are developed around this are actually critically important.

In fact, the WTO has been doing an e-commerce moratorium that it renews every two years as part of the Doha Round that has somewhat faded into the background. That is something that we support, that is, the moratorium on e-commerce. We don't want to see e-commerce transactions getting caught in the same kinds of tariff issues that sometimes the physical transactions can.

There's a whole series of issues that actually now interrelate when it comes to these international trade issues. It's not only the issue of market access any more—which is critically important—but also labour mobility, which is a huge issue for us. We're a global industry. We actually tend to have a lot of labour that comes and goes in our industry. In Canada the biggest challenge we have is that the growth of our industry has outstripped our ability to staff it. So while we get a lot of great undergrads coming out of university at the junior levels, at the intermediate and senior levels we are actually running into major problems finding domestic talent to staff these positions. So we need to look abroad. But then we run into challenges with respect to temporary foreign workers, issues with respect to work permits, and so forth.

So the ability to leverage international agreements to take some of the friction out of that is actually hugely important to us, and making sure there's an equal amount of intellectual property protection across the board. As I say, when you're in a global marketplace, when you have differing levels of IP protection in Canada versus the States versus Europe versus Japan versus China, it's a huge problem because it means that each market is being treated differently.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Okay.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Kee, and Mr. Hsu. The time is up.

We've finished our first round of seven minutes, which means we've done something that is a landmark—at least in recent times—in moving into our second round without the bells having gone off. So we're okay.

Now we'll go to Mr. Richardson for five minutes.

[Lee Richardson, Conservative, Calgary Centre, AB]

I want to ask you, Mr. Kee, this. If your business is changing, what percentage of it is downloaded as opposed to sold in boxes?

[Jason Kee]

It has changed pretty significantly. It went from 5% being downloaded in 2009 to 20% this year—and to 50% by 2013 is what we project. So it's pretty significant.

[Lee Richardson, Conservative, Calgary Centre, AB]

I'm asking you this because we have an ongoing concern on another related matter, and that is the copyright modernization act and the digital locks you touched upon. I take it, then, that it's the same software that someone would download as they would buy in a box, and that the lock is obtained whether you download the software or buy it in the box.

[Jason Kee]

That's generally the case. That's right.

[Lee Richardson, Conservative, Calgary Centre, AB]

There's still some debate out there from consumers about individual and personal use. We try to find the right balance in developing this act. How do you respond to consumers who really just don't get why they must have digital locks on some of your software?

[Jason Kee]

It's primarily to protect the content itself. The biggest challenge we have when people discuss tying the notion of circumvention to infringement—because the issue is that we prohibit circumvention of these digital locks, these TPMs—is that from an enforcement perspective, which is the practical way we are looking at it, it makes the provisions almost useless to us. The problem is that there are these services that exist out there that literally hack the Xbox. They hack the various devices, and basically do so for money, to enable people to play pirated games. People can go onto the Internet, download a free copy of the game, and play that instead of actually going to the digital retail store to download the proper, legitimate copy of it.

By tying those two together, the people who offer those services will basically just say that they don't know what anyone is doing with this product; they're just doing the hacking and not enabling anything. It basically makes it impossible for us to actually enforce. That's the biggest challenge. So it's a matter of trying to hold that line and find where the balance is there.

In our view, the TPM provisions, the anti-circumvention provisions, in legislation as crafted actually are balanced, because they do include a wide array of specific exceptions to deal with specific circumstances. They have a regulation-making power that allows additional exceptions to be added as needed.

The important things is that the big challenge for all of the content industry is that we're in a massive period of transition, which your first question highlights. As we move into the online environment, the notion of actually having to make a backup copy or transfer is actually fading away.

When you are a Netflix subscriber, for example, you have access to Netflix across all devices. You pay a subscription. You get access to it everywhere. It doesn't matter that you need to make a transfer or don't have to transfer, because there's nothing to transfer any more. You literally are just watching the movie and downloading it or streaming it as you go. Similarly with the digital distribution platforms for games, what happens is that you buy the game online. You get the digital copy of the game that can sit on your PlayStation or Xbox. You can delete it and you can download it again. There's no notion of needing to make a backup, because you have a perpetual backup. It's stored in the cloud. In fact, it means you don't have to worry about the physical media any more. It's already permanently stored for you because you bought that game. As a result, a lot of—

[Lee Richardson, Conservative, Calgary Centre, AB]

I presume that you can retrieve it from the cloud with any device.

[Jason Kee]

Precisely. Actually, in the case of games you can retrieve it from the cloud on the device that it will play on. If you buy a game for a PlayStation, it won't work on a Xbox because it's a different platform.

[Lee Richardson, Conservative, Calgary Centre, AB]

So it has to be the same Xbox.

[Jason Kee]

That's right. That's exactly right. In fact, actually, if you buy the next Xbox, the new one, for example, you can actually just transfer everything, transfer your account, onto the new device and just pull all the content down again. And so it doesn't require you to buy the content again and again and again.

[Lee Richardson, Conservative, Calgary Centre, AB]

I have one final one. What's the sense of piracy now in your business? What kind of percentage is there?

[Jason Kee]

It is significant. It does vary from platform to platform, but it's been growing year over year. The main problem that we have, particularly in Canada, is that because we haven't had a prohibition on these hacking devices, these circumvention devices, we've actually become a major transshipment point. It's not just an issue in Canada, where about 22% of people have basically reported having hacked their consoles, but it's actually people who are importing these devices in from Asia and then exporting them to the United States that's becoming a major problem.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Lee.

Ms. LeBlanc, you now have five minutes.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Thank you, Mr. Chairman.

Thanks to the witnesses for coming to provide us with even more information.

My question is for Mr. Cohn. Your "Innovation Nation" strategy recommends a major transfer of resources of $3.5 billion, granted in the form of tax credits under a program known as the scientific research and experimental development program, SR&ED. You're in favour of direct funding measures for small and medium-sized businesses.

Could you explain what currently isn't working in the funding program known as the SR&ED program, these tax credits granted by the government?