Judge Roy Bean and the Closing of the Digital Frontier

Ken Whyte Blog

One of Paul Newman’s most underrated performances came in The Life and Times of Judge Roy Bean. It was released at the end of 1972, right between Butch Cassidy and the Sundance Kid and The Sting. Not a bad little run for any actor.

Roy Bean was one of those irreverent westerns popular at the time (think Little Big Man to Blazing Saddles). Newman plays the title role, a semi-historical rascal who, after getting beaten up in Vinegaroon, a lawless border town, shoots all of his tormentors and appoints himself judge. He designates the actress Lillie Langtry, whom he admires but has never met, as the local sovereign and hangs her picture on his courtroom wall.

Bean is a legal amateur but he’s got that self-confidence and resourcefulness characteristic of frontiersmen. While the justice he dispenses is rough – “do you have anything to say before we find you guilty?” -- it does fill a vacuum, and it contains an intuitive sort of reasonableness. Prostitutes, for instance, are sentenced to remain in Vinegaroon, which is otherwise short on women. Outlaws passing through town with ill-gotten gains are summarily hung, providing a nice addition to the local revenue base. The town prospers. Factories spring up. The judge gets rich. The railroad arrives, bringing more people, more amenities, and, unfortunately for Bean, a real lawyer.

Representing the onslaught of civilization, the real lawyer spells the end for the judge and his free-wheeling brand of justice. He applies the law with a fastidiousness that never interested Bean, insisting on property rights, due process, what have you.

That, in the nutshell, is the history of Roy Bean, the history of the American frontier, the history of every frontier, and a lesson in particular for the digital frontier.

Over-the-top (OTT) services like Netflix and YouTube have flourished in the largely unregulated digital environment that has prevailed since the 1990s. They have brought a certain order to the anarchic world of on-line video distribution. Many millions of people around the globe (myself included) have enjoyed their services and their success.

Part of the appeal of the OTTs has been that they operate outside the rules of conventional video, notably cable television, which by comparison appears cumbersome, expensive, and monopolistic. They have lived beyond the reach of regulators, avoiding copyright rules and skirting rights markets. They have evaded many forms of taxation. They are unencumbered by most consumer protection legislation and content requirements (no quotas for minority interests or educational content, etc). There are few rules in the OTT borderlands beyond technological capacities and free market disciplines.

Life can be pretty good on a frontier. But frontiers, by their nature, close. (They begin closing, in fact, the very moment they are discovered because we, as a species, can’t leave anything alone). Civilization, for better or worse, always catches up, and it’s got posses on the heels of the OTTs right now.

You might have noticed Canadian Heritage Minister Melanie Joly on CTV’s Question Period last weekend suggesting that Netflix could be required to collect HST from its customers in the future. This idea seems to have surprised a lot of people. It shouldn’t have. As early as 1998, the OECD looked into the issue of taxing digital commerce. In something called its 2015 Final Report on Base Erosion and Profit Shifting (BEPS), Action 1: Addressing the Tax Challenges of the Digital Economy, it advised on the best ways to make international digital businesses pay taxes in countries where they transact business (at the top of the list was forcing the companies to register with relevant tax authorities in every market).

In January 2015, the European Union implemented a new framework to facilitate the collection of sales tax (VAT) on digital goods. It required digital suppliers to pay sales tax in all of the countries where their customers are located. This upped the ante from previous regulations that allowed companies to remit sales tax through one country, a regime that had encouraged them to shop EU jurisdictions for low tax rates.

Australia, New Zealand, South Africa, Japan, and South Korea are sending posses of their own after OTTs. While details vary from country to country, there are three consistent elements: 1) they target all retail websites and electronic distribution platforms selling digital goods and services, with a special focus on offshore companies; 2) they require digital businesses to register with the national tax authority, submit tax returns, and pay sales taxes; 3) with the exception of South Africa, they focus on business-to-consumer sales, not business-to-business transactions.

All that sounds rather tame compared to what’s happening in the US, where local communities are tar-and-feathering OTTs. Chicago just enacted a 9 percent “cloud tax” on digital entertainment services. Pennsylvania extended its 6 percent sales tax to electronic distribution platforms. Pasadena is adopting a “video services” tax. Given the taxing authority of different levels of government in the U.S., and the absence of a federal sales tax, there is almost no end to the variety of local punishments to which digital companies might be subjected. Mercifully, draft legislation has been presented to the U.S. Congress that would impose a uniform digital tax regime across the country.

This is only the beginning. Governments, like ours, are as adept as Bean at taking their cut of whatever moneys flow through the jurisdiction, whether under the guise of leveling the competitive playing field, or aligning with international norms. In addition to charging sales taxes, corporate taxes have become a hot topic. France is going still further, asking Netflix to contribute to its national content creation funds (a measure Joly has ruled out). Another gambit favored by the EU is to demand that Netflix and Amazon include 20% European content in their catalogues.

It’s only a matter of time before further rules around content rating, terms of service, and other consumer protections are applied in addition to taxes. It would seem likely, as well, that the competition authorities are going to notice that services like Netflix and You Tube are as monopolistic as cable companies. After all, if you want to start your own one-man, low-cost, video channel, do you have an alternative to YouTube and its non-negotiable revenue sharing agreements? And if you want to sell your TV show to an OTT in Canada, your choices are Netflix or Crave, which is to say not much of a choice.

And so it will go. The distinctions between OTT video services and cable will deteriorate over time. Your cable provider will adopt the interfaces and programming approaches made popular in the OTT world (for this, Netflix, we will always be in your debt!). OTT services, particularly Netflix, will get more expensive. They will have to pay taxes, and pass them along to consumers. They will have to submit to consumer regulation. Eventually, they will have to make a profit (Netflix, like Amazon, earns almost nothing at the moment). Prices are already climbing at Netflix, from a uniform $8 several years ago to $12 now for its four-screen plan. Add HST to that and you’ll be close to 14, and the company is still not making money. The question is not if Netflix will cross the $20 mark but how soon.

I’m ambivalent about all this, just as I’m ambivalent about Roy Bean, but the story always ends the same: there is no escaping the lawyers, the accountants, the regulators, and the long arm of civilization.