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Good afternoon, ladies and gentlemen.
[Translation]
Good afternoon, everyone.
[English]
Welcome to the 14th meeting of the Standing Committee on Industry, Science and Technology.
It's good that we've had an update on Movember now, and now we have to move to the actual meeting.
We have the following witnesses before us: from the Canadian Advanced Technology Alliance, Sorin Cohn, executive in residence; and from PayPal, Darrell MacMullin, managing director, and Martha Cass, head of public relations.
Mr. MacMullin, I understand you'll be giving the opening remarks. Is that correct?
Okay.
From the Canadian Federation of Independent Business is Dan Kelly, the senior vice-president of legislative affairs; and from the Entertainment Software Association of Canada, we have Jason Kee, director of policy and legal affairs.
Ladies and gentlemen of the committee, you'll remember that both the Canadian Federation of Independent Business and the Entertainment Software Association were previously before us and gave their opening remarks. During that meeting we had to leave for a vote, so they're back with us to actually get some time before the committee now. Since they've given their opening remarks, I'll just give them maybe two minutes to highlight some of those remarks to refresh your memory, but we'll follow the order as usual and the agenda that's before you.
Mr. Cohn, please start with your opening remarks for six minutes.
I'm very pleased and honoured to be here on behalf of the Canadian Advanced Technology Alliance, which has been leading the field for the past—
The Chair: Just one moment, Mr. Cohn. We're just waiting for the distribution of the text of your remarks to members.
Mr. Sorin Cohn: Thank you very much.
By the way, I'm going to do just the second part of the presentation that my colleague, Barry Gander, and I have prepared on the issues related to e-commerce and commercialization. I will talk about the pan-industry study CATA led over the past year, together with a number of industry associations and national and provincial organizations, to try to understand the critical issues concerning commercialization in Canada. I do this in the context of the fact that for a number of years, there has been a lot of wringing of hands and biting off of heads because of how poorly Canada is doing in terms of innovation and the huge innovation gap we are facing. E-commerce is one significant technology in the process of creating a more effective environment for commercialization in Canada.
I'll just go very quickly through these charts. If at any time you need more information, I would be pleased to come here gain, in whatever format, to discuss the issues.
Research is nothing else but the transformation of money into knowledge. The transformation of knowledge is imbedded in products and services and in an understanding of market requirements. The transformation of that knowledge into money is called commercialization. I want to point to the fact that we have been moving for some years from the industrial era, during which the name of the game in most industrial concerns was product control and direct-cost minimization. For that game companies would try to do as much as possible inside the corporation.
We are moving into what I call an integrated knowledge-services economy in which one company may do design services, another company manufacturing, another company marketing, and another company development. The name of the game is collaborative value creation in intelligent communities. Those intelligent communities may be virtual ones, which are globalized, or they may be geographic ones. In parallel, CATA is driving what we call the i-Canada initiative--meaning the intelligent Canada initiative--to try to raise the competitiveness of Canadian communities, community by community, through the use of collaborative ecosystems, ultra-fast broadband, and intelligent services. Collaboration is the key to the game.
The study we carried out was supported by BDC, EDC, the Ontario Ministry of Research and Innovation, and a number of other institutions. The goal was to understand what industry thinks and does and what it plans to do about commercialization effectiveness. We were also hoping that some of the results would be of interest to key policy-makers in terms of policy and programs that work and policy and programs that do not work.
Basically, the continuum of innovation goes from ideas to technology to product. It then goes through some good market channels to customers and then hopefully to satisfied customers. It's only through that process that you create a viable business that by itself can provide the necessary feedback for the economy to grow.
The conclusion of our study—and I'll show you a number of findings here—is that Canada does not suffer from an innovation gap. The innovation gap has received traditional support in terms of science and technology culture, in terms of discovery skills, in terms of labs, and in terms of big “R” for research and small “d” for development. But there has been no “c” for commercialization. What Canada suffers from is a commercialization gap, which requires focus and adequate support. This involves a business and product-service culture, production operations, financial processes, marketing and sales skills, global connectivity, and customer focus. If at the end of a commercialization process there is no money created and no economic value, we cannot talk about real commercialization.
One of the key findings of our study was that about 17% of the Canadian companies that participated--more than 1,000 companies actually responded to the survey--did not have any new products or services in the past five years. Unless these companies are selling iron ore or metal bars that have not changed for the past 50 years, how can they stay competitive? That's a major issue.
Also, a high number of companies have tried but have failed to commercialize their innovations. Other companies, about 56%, have not yet finished their most significant innovation in terms of its commercialization.
The obstacles to commercialization are first, lack of financing. Second, and the most significant, is insufficient marketing effort, uncertain market demand, lack of market knowledge, inappropriate customer targeting, and lack of sales experience and such. Poor collaboration is another thing that is significant in terms of success in commercialization.
Those are the major issues telling us that Canada suffers from such a commercialization gap.
In principle, Canada is very much a nation of small and medium-sized enterprises. More than 99% of companies in Canada are small and medium-sized enterprises with less than 500 people. Actually, 80% of those have less than 50 people.
A complete company, in order to be successful in its competition--and now the competition is global--requires technology and industry expertise in whatever domain it operates. It requires management and operational skills, including marketing, in whatever domain it operates. It requires market access and connectivity in whatever industry sector it operates.
A small company cannot afford to bring all of that expertise inside; in order to succeed, they need to collaborate. Among the issues is Canada are the lack of commercialization expertise, as we have seen before; a weak culture of collaboration; and insufficient funding. Startups in Canada are only getting about 36% of the funding that equivalent or similar kinds of U.S. companies get.
More significantly, we did a study and found out that the average innovation time in Canada, from the time someone gets the idea to the time a product is ready for market, is about 22 months. Surprise, surprise: the commercialization time, that is, the time from when the product is in the market to the time it breaks even, is one and a half times longer.
Also, usually companies are putting all their efforts into the innovation time, and then they find out that they do not have enough room to survive in the commercialization time; they've...[Inaudible--Editor] and are being acquired largely by U.S. businesses that reap the benefits of Canadian innovation.
Anything that can be done to enhance the commercialization effectiveness would be very significant for Canadian industry, and that includes commerce technologies. So we are making a number of recommendations—and the white paper is going to be issued by the end of this week—given the fact that greatest risk factors involve not the science and technology aspects, but the business leadership and the commercialization effectiveness of companies.
First of all, we are making recommendations to industry itself in terms of each company focusing on competitiveness, and strategizing, planning, and structuring their activities according to their business plan, collaborating to conquer, and targeting marketing and sales in advance of getting the product ready.
In terms of recommendations to governments, both federal and provincial, we are making recommendations to create a flexible framework, with accountability and coherent structures for coordinated programs—and we are very much in line with some of what the Jenkins report recommended—to revitalize the Canadian VC industry; to provide direct innovation investment in industry, as well as purchases from industry; and to support Canadian IP protection. And my surprise, there I found out that none of the government programs support Canadians saving their innovations, or protect them from other businesses. We also recommend promoting anchor company relationships, and support for marketing and e-commerce technologies--
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Good afternoon, Mr. Chairman, and members of the committee.
My name is Darrell MacMullin. I'm the Managing Director of PayPal in Canada. I'd like to thank you all for the opportunity for PayPal to be here. I'd be happy to answer any questions during the question and answer period as well.
I have personally worked in the e-commerce industry in Canada nearly since its inception, in the early days launching retailers like Chapters and Chapters online. I also helped bring eBay into Canada. About six years ago, I built up the Canadian operation for PayPal as well. I've seen the evolution of PayPal and the evolution of the marketplace into e-commerce over many years. It's intriguing to see where the industry is going and some of the things we can do as an industry to make it excel further.
From our perspective, PayPal is actually growing now at about three times the rate of e-commerce in this market, and it has been for several years. Being part of PayPal, I'm excited about that, but I don't know what that necessarily says about the state of e-commerce in this market. There is some “static-ness”, but we believe we're helping the industry grow in a lot of ways. We're helping merchants build e-commerce businesses very cost-effectively and to compete internationally. We're bringing a lot of consumer confidence to the table. But there's a lot more the overall industry can be doing as well.
First and foremost, one of the most important things is consumer confidence. This actually hasn't changed a lot over time. The whole issue encompassing privacy concerns and security is still one the biggest issues why people don't transact online.
From a merchant adoption standpoint, although we are seeing more merchants building a website presence, they have still found it very cost-prohibitive or not cost-effective to actually make transactions online.
Finally, one of our strengths that we don't leverage enough is actually Canadian innovation. From a developer's standpoint and a technology standpoint, this market is actually very ripe in terms of young entrepreneurs, universities, and people who are able to build out and leverage a lot of the new technologies. But as an industry, we haven't been able to connect them to commerce as effectively as we could.
Here I'd like to talk about PayPal in general and what we actually do. Sometimes it's confusing as to whom PayPal actually is and what we do. Probably the best way to describe PayPal is as the payments provider that sits on top of a lot of the other payment networks. If you think of the Internet, you think of a very open network that's global in scale. In you think of payments in general, they're typically closed and domestic in nature. Those two worlds often don't mesh well together in a lot of ways, and we've seen that cause a lot of issues over time, whether with domestic markets, new technologies, building out payments infrastructure, or cross-border buying and cross-border selling. Probably the best way to describe PayPal is that it's like a universal adaptor that bridges these two worlds. We enable and take a lot of the friction out of the process for both merchants and consumers to transact effectively online.
One of the reasons why we do that, from a consumer's standpoint, is that the core of our offering is what we call the PayPal account. A lot of people consider it to be the original digital wallet for the Internet. There's a lot of talk about digital wallets these days in the industry, and later on we can get into where we think the industry is going. But generally how the PayPal account works today is via a very simple process for someone to sign up for an account. It's free for any consumer to set up a PayPal account. You can enter and store your billing and shipping information. You can add credit cards, bank accounts, and maintain a cash balance in multiple currencies. It adds a lot of basic utility for you to be able to transact online very effectively. Most importantly, it delivers a much more seamless customer experience. You're not having to pull out your financial information every time you're transacting, or every time you're re-entering information for your credit card, billing, and shipping—all of those pieces where we've seen tons of data that slow down the e-commerce process and has people drop off in the conversion process.
The key component of what PayPal provides is that when a consumer makes a transaction with PayPal, they can use their existing credit card, bank account, or cash balance without any of their financial information ever being shared as part of that transaction. That's probably one of the primary reasons why consumers love using our service. No matter whom they are transacting with—a larger retailer, or a small site they've never done business with, domestically or internationally—they know that their credit card information is never shared with that merchant, and they don't know where that information is being stored if they're just entering it somewhere else. The flip side of that as well, as to why merchants love PayPal, is they don't have to worry about collecting and storing credit card information.
We know that dealing with PCI compliance has been very problematic for a lot of merchants. It's an additional cost and barrier to doing e-commerce. From PayPal's perspective, we take the merchants completely out of the scope of that whole process. They never have to deal with PCI compliance to begin with, because they never get that financial information.
Along with that, we've essentially created a very closed-loop network for merchants and consumers to be able to transact safely, and a lot more seamlessly in how their information is shared. It also allows us to monitor those transactions a lot more effectively from a fraud management standpoint. We know a lot about the buyer and the seller as part of that closed-loop network. It doesn't matter where the buyer and seller are located or what type of financial instrument they are using, we can monitor those transactions far differently compared to conventional credit card payments online.
The result is that the fraud rate through PayPal is significantly lower than any other payment network. It's less than half the overall industry average. We're protecting consumers and merchants at the same time, while delivering better buyer and seller experiences.
As we move forward this whole notion of e-commerce has historically been perceived as another channel to do business. But the way e-commerce is going, it's not about being online and offline and it's not about e-commerce. The mobile phone is certainly coming along and morphing those worlds together. In PayPal's perspective, the notion of one versus the other is going away very quickly. We embrace the idea of the convergence of the two worlds.
There are some interesting roles that PayPal can play to enable commerce to happen for merchants, whether they are looking to transact through mobile phones, tablets, televisions, or in-store with their mobile phones. There is one seamless experience and there's one wallet that can essentially deliver a lot of utility, regardless of how they are interacting.
We don't believe that taking credit card credentials and simply stuffing them on a phone is the way to transform that experience to the next level. PayPal has been very focused on actually taking PayPal credentials and making them available in the cloud. That allows people to be able to access their PayPal credentials from any device, any time, and in any way. Whether they are using a tablet, a mobile phone in a store, their card, or their Xbox gaming system, they are accessing their PayPal account at any time to make transactions at any time. Their financial information is never stored, shared, or transmitted across any of these networks.
I know that my colleague, Corinne Pohlmann, shared with you the views and surveys that CFIB has done on this important subject over the last couple of years. There are a couple of other points I would note.
First, governments are still trying to get their heads around how to regulate and tax firms in this world. That is a major struggle and creates a lot of uncertainty for a number of firms that are looking to be involved in this business, particularly for technology and other high-innovation sectors of the economy. I agree with Mr. Cohn's comments.
We're hearing a lot about the CRA impediments around taxing IT contractors and others in this industry. Regulations at the provincial level are often significant impediments. This is a new kind of work, and governments can't really get their heads around it, try as they might.
The other thing I want to mention quickly is the cost of accepting online payments. I know you had presentations from some in the financial services sector, and I want to throw one note of caution in there.
No impediment has been put in place by the code of conduct for the credit and debit card industries in Canada. 's code of conduct is an excellent tool. It's working well and is completely flexible to allow e-commerce and mobile payments to happen in a robust way. There is no impediment in the code to that happening. I just wanted to reinforce that message. I think Interac shared some similar views on that front.
The biggest problem we've had with electronic payments has been the cost, particularly the cost imposed by the banks, and Visa and Mastercard. Of course, that is the bridge by which PayPal often works too.
Thank you.
The Entertainment Software Association of Canada represents the Canadian video game industry. Something that some people don't know is that Canada is actually a global powerhouse in video game development. We're ranked third in the world in video game production. We directly employ over 16,000 people across the country in a wide variety of high-paying jobs. More importantly, we're actually still growing at a rate of 17% year over year. In fact, Eidos just announced that they're going to be adding 150 new employees to their roster over the next year. Given the fact that our average salaries are about two and a half times the Canadian average, it will amount to just shy of $10 million being added directly to the Quebec economy, which is great.
For our industry the e-commerce marketplace is critically important. We're in the process of transitioning from a packaged-good retail model into a digital distribution model, so the development of a robust marketplace is very important to us. There's a wide variety of issues that go into developing and maintaining a robust marketplace, but my previous statement listed three of them.
First and foremost from our perspective is updating and modernizing our copyright regime. Essentially, our products are copyrighted products; they need to be properly protected in the online marketplace. A properly updated and modern regime will include robust protection of technological protection measures, or digital locks, as they're sometimes referred to, primarily because they're used to protect products in the online marketplace and to support not just music CDs and DVDs, but also Netflix and the next generation of streaming platforms, Xbox LIVE, and those kinds of digital distribution platforms as well.
Other key points are, first, to make sure that we have widespread broadband penetration. Essentially, the e-commerce marketplace is not going to exist if everyone does not have access to it. That's a critical priority for all of us, I think. Also, similar to copyright, there's the broader range of legislation that will apply to the e-commerce marketplace, including things like anti-spam and e-commerce law, privacy, and so forth. We have to be very careful about these kinds of pieces of legislation when we're implementing them to make sure we're not having any unintended consequences that may adversely affect the development of the market.
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Thank you, Mr. Chair. Thank you witnesses for being here today.
Mr. Kelly, I think I'll start with you. We're starting to truly see the emergence of mobile payments, with everyone putting something on their phone. I think we've heard at this committee from some of the witnesses that in about 18 to 36 months, mobile payment is going to be common practice.
With that, we're starting to hear of other transaction fees. For example, when I asked Visa, Visa said they couldn't tell us if they're going to put any other type of transaction fee on a mobile payment. MasterCard came out and said they won't. Google Wallet says there are other ways of them generating revenue.
At some point I think small and medium-sized businesses are hitting that tipping point as to how long they can keep absorbing the little, tiny fees—and here I'm citing some of the witnesses—before breaking their backs, and therefore not being able to expand their businesses and hire employees, but God forbid, shutting their doors.
What are you hearing from your members in relation to mobile payments and what's coming?
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We're hearing lots. We did a fairly intensive survey to prepare for the payments task force. One of the smartest things that's happened is when Minister Flaherty put together that group to look at the future of the payments industry as a whole. It was very timely. But you're quite right, the time is ticking very quickly and we need to start making some decisions as to how this is going to happen.
My members are regulated to the point that if they offer a cup of coffee to their customers, they have to pass through a whole bunch of government inspectors—and yet there's this huge section of the economy in the payments industry has had virtually no regulation. It's effectively been the wild west.
We have promoted and have seen a voluntary code of conduct adopted, which we feel is working. There are flexibilities within that code to make mobile payments work, but we do need to move quickly.
The payments task force is looking at this. We're part of it, so we're at the table. They've been taking the views of small and medium-sized businesses seriously.
The point that has been made with some of the provisions of the code of conduct that disallow the idea of co-badging—that of having, say, an Interac capacity and a VISA or MasterCard debit capacity on the same card, or perhaps even a PayPal initiative along those lines—is whether that means, if it's applied to the mobile payment technology, that you have to carry four cellphones with one type of payment on each.
Those kind of things can be resolved. There are infrastructure changes that can be made to comply with the code of conduct and still allow the adoption of mobile technologies. But you're quite right that many small businesses are afraid of this because they've seen the abuse that VISA and MasterCard have imposed on small and medium-sized firms over the last number of years.
We're very open to and interested in how this is all going to roll out. We think it is possible. The code is our best defence. We need to make sure that the code continues to be a living document to make that happen.
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It depends a lot on the specific platform. In fact, this is one of the fantastic things that we've seen developing.
We've seen a proliferation of these platforms, such as the App World for RIM, the App Store for Apple, and the Android marketplace for Android-based devices, all of which are subject to their own philosophies and each of which has benefits and drawbacks.
What happens, for example, if you submit an app to the App Store is that it goes through a pretty rigorous quality assurance process, so that when it finally makes it into the App Store and you can purchase it, you can basically be assured that it's going to work, and so forth. The drawbacks of that is it means that Apple acts as the gatekeeper. It has a series of policies that it can implement and there are circumstances where it won't let apps through, which has led to some complaints.
The Android, on the other hand, is a much more open marketplace and, as a consequence, it's a bit more like the wild west. Essentially the apps that make it into the Android marketplace don't go through this kind of vetting process, so as a consumer buying the app, you're frankly taking a bigger chance, because you don't know if it is going to work or not. However, my understanding is that Google has policies in place that you can get a refund or a return, if things aren't properly functioning.
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I guess what you're talking about is the advantage that PayPal brings from optimizing the checkout.
We've studied this for years now. The average shopping cart abandonment rate, as we call it, meaning the number of people who browse and search on a website, drop things into the shopping cart, and actually complete their purchase is about 50% to 53%. It hasn't changed much in years.
One of the big barriers that we've seen at a lot of different checkouts is having to register for the website, having to enter billing and shipping information. The average time it takes is 15 minutes, and it's a lot of inconvenience to go through that hassle.
We've created something called PayPal Express Checkout. This came from our own customers who said that we had their information already and asked us why they couldn't only click once, log into their Paypal account, complete the purchase, and be done. Your billing and shipping information is already verified and validated and passed over to the merchant, so you can complete that purchase significantly faster.
Completion rates, on average, have gone up from the low 50s to 72% to 73% when PayPal is enabled. We're helping sites that are driving traffic to their website to convert those browsing the site into buyers just by streamlining the checkout process.
That gets even more complicated when you're talking about mobile phones. Sitting there and entering all that information on your phone can be very cost prohibitive. Cineplex Entertainment is a great example, where you can browse movie theatre show times. Now you can pick the movie, the theatre, and the time you want and pay with PayPal in one click. Your tickets are then brought up to your phone right there, and then you can walk into the theatre.
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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.
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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.
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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.
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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—
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Absolument. There are a number of aspects described in my presentation and, again, if I have the occasion, I would like to talk at length with you and the other members of the committee about this aspect.
For instance, there is a federal program called IRAP, the industrial research assistance program, which is of great value as a direct investment in the development of technologies and innovations in Canadian companies. Unfortunately, this program is quite low in value, at about $80 million a year, and runs out of funds by September. Small companies are being told: wait until next year, that maybe we are going to have money for you next year. But, again, for a small company waiting six months to maybe get or not get some support is quite critical. They cannot afford to do that. That's very uncompetitive for them, as timing is so critical to success in the global market.
There is another good program that has been positioned as an exploratory program. It belongs to Public Works and Government Services Canada, part of the Office of Small and Medium Enterprises. It's called the Canadian innovation commercialization program, which enables federal agencies and departments to purchase innovations from Canadian companies. It's a very small program, but is very effective in helping companies raise their commercialization capabilities.
One of the proposals that CATA is making is to create a program similar to the industrial research assistance program, a program that would be aimed at commercialization readiness assistance. What technology companies are doing, as I mentioned, is that they put all their efforts into making the product, expecting that the product will sell overnight, which doesn't happen. It takes years for the products to be accepted by the market and companies do not have enough capabilities to handle those difficult years. So a program aimed at commercialization readiness preparedness would help Canadian companies tremendously in becoming more competitive globally.
:
Thank you, Mr. Chair, and thank you to our guests today.
Mr. MacMullin, I'd like to ask you a couple of questions about the fee structure again, because I'm just not getting it. I apologize if it's redundant.
Mr. Kelly, I'll hopefully leverage over to you.
As a merchant, I'm trying to clearly understand this. When I as a business person complete a transaction in selling a product out of my business through one of the card carriers, I pre-agreed to a fee structure, and those fees range from some of the higher cost fees down to the lower costs. One thing we were told early on in this study is that the fees are one of the largest hurdles to the whole e-commerce evolution of business, small business in particular.
Am I correct in understanding that your fee structure is a simple, all-inclusive deal? If I do business with your company, regardless of which credit card or plastic is used to pay for the product, it's a single fee, consistently time after time, and it's all inclusive with that credit card fee built into it?
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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.
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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.
On the first part of the question, with respect to the merchant fees, there are a couple of conflicting trends. One is that the only major change in credit card fees, after the adoption of the code of conduct, was MasterCard's issuance of even higher merchant fees with its new MasterCard World and World Elite credit cards that are even more costly for our members. They're approaching the 3% mark, the upper end of PayPal's segment. So that has been an unfortunate trend on the part of MasterCard.
There was a positive trend too. After urging both Visa and MasterCard to give us the list of the types of all of their different card categories and the rates associated with each of those card categories, CIBC actually voluntarily lowered one of its credit cards, the one that can flip from low-cost to higher cost. They actually voluntarily lowered it to the lowest level of interchange, a move on their part that we appreciated. That was a positive development that came out of the disclosure provisions that were built in to the code of conduct itself.
So there are some conflicting trends on the credit card side. MasterCard is also looking at some other major changes, which we're waiting for anxiously, that may have some positive or potentially not-so-positive impacts on our membership. So that's something we're waiting for—another shoe to drop.
On the regulatory side, the one area I would urge you to explore, which I mentioned briefly before, is that of regulations on IT professionals. Our other presenter, Mr. Cohn, talked about the collaborative nature of a lot of IT enterprises, where self-employed individuals are working across many different spectrums with many different partners on projects, and sometimes internationally. The regulatory setup in Canada, particularly the CRA setup in Canada, just doesn't know how to recognize that at all. It is still caught in this negative spiral where somebody's either an employee or they're an employer; but there are all sorts of enterprises now that are just different from that.
We need to make sure that those businesses are treated legitimately; they are legitimate businesses. They may, for two years as an IT professional, work on one project specifically, yet down the road are then deemed to be an employee and back payroll tax are then assessed on the contracting employer. These are the kinds of things that are just not recognized. There were some earlier recommendations made by either this committee or another that they have access to things like the small business deduction, etc.
So there are some simple regulatory steps that need to be made, particularly with respect to the tax treatment by the CRA, that we think would help a lot of IT professionals who are in this industry succeed.
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Just to elaborate on that point, when we look at the transaction cost, there is the per-transaction cost, but there are also other costs associated with transactions. For instance, if you refund a transaction, are the fees refunded? Often acquirers don't refund the fees. PayPal does refund the fees.
Probably one of the biggest issues, and also one reason that a lot of larger retailers like PayPal as well, is that if our fraud rates are at least half that, they can lower their fraud costs. So at the end of the month, when you look at your costs, between credit card processing, any other monthly fees, and fraud losses, for your full end-to-end costs against your sales, there are significant savings beyond just the per-transaction fee.
Whatever your rate is, I think is a little bit of window dressing, if you don't know the variable costs of which basic cards and premium cards and how many cards you're actually going to process. The reality is that most credit cards in Canada have some sort of premium loyalty linked to them. I don't know the exact distribution—
A voice: It's about a third.
Mr. Darrell MacMullin: Is it about a third? Okay.
That's of sales volume.
It's one of those things we're trying to make as simple as possible for customers to understand so they can build their business.