Public Policy

bites-the-dust

13 Jan 2009

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Another One Bites the Dust – and You Thought Business Was in Crisis Mode

“Another one bites the dust.
How do you think I’m going to get along,
Without you, when you’re gone”
Queen

This is a call to action where individual citizens can make a huge difference.

The recent loss of a local cultural gem, namely King Street Theatre:

Curtain Closes on Another Local Local Theatre

and the near death experience of the 87 year old cultural gem the Grand Philharmonic Choir, from cash flow challenges, has shone a spotlight on how the financial meltdown is already impacting the Waterloo area arts and cultural scene. As one who supported King Street Theatre’s original capital campaign, I feel this loss personally. Further, I am optimistic that many in our community share this sense of loss.

Many of the key funders who directly invest in our cultural sector, such as local foundations and individual donors, have seen their financial investments tank along with the rest of us. Given that 2009 contributions will largely be determined by 2008 investment returns, we are probably just seeing the tip of the iceberg.

The media cites lack of citizen interest or poor attendance as the root cause. Many business people working with social enterprises observe that many organizations lack the right management to deliver better results. While all true, I would posit that the challenges of the  cultural sector are much more complex.  I’m as much a believer in economic Darwinism, which dictates that in order to have real success, you also need to have failures. In fact, my recent post Playing the Lottery after the Meltdown underscores this notion in regard to the recent government led auto sector bail outs. Mark McArdle’s post What I Didn’t Get for Christmas makes an even stronger case for economic Darwinism.

That being said, much of the social sector, including arts, culture, the environment and many other social causes, have long operated in a marginal and underfunded state. This, for most organizations, trumps the above concerns about attendance or management quality. It is fortunate indeed that many community leaders met last September at the Prosperity Council of Waterloo Region: Task Force on Creative Enterprise to begin to put together a comprehensive, strategic initiative to invest in and develop our overall capabilities in the Creative and Cultural sphere. While from an early 2009 perspective, this might not at first appear to be the ideal time to launch such a big idea, we need to remember that such initiatives are long term and may need a number of years to properly gestate. Ideally, need to be ready so that our collective efforts can bear fruit in time for the next economic boom in the Waterloo area.

Meanwhile, I would call all citizens who care about the cultural future of the Waterloo area to respond with their support. While each of us may favour different organizations and ways to provide that support, we all need to do our part. The great community we live in depends on each of us to personally help to nurture and invest in its future.

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30trillion-poker

26 Dec 2008

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Playing the Lottery after the Meltdown

Fold or raise? Full house or three of a kind? Eager to jump start an economy that has seen almost unprecedented meltdown, governments around the world are racing to place gargantuan bets with taxpayer and treasury money. Only time will separate the profound from the boondoggle among these bets. Meanwhile, poised on the dawn of a new year, I’ll present my analysis and opinion, recognizing that the complexity of the current situation dictates that no one has the real answer.

Last year’s credit crunch and the ensuing illiquidity has generated a financial crisis whose effect that might have, only a few months ago, seemed totally inconceivable:

  • massive government ownership of banks (HBOS, Northern Rock) and insurance companies (AIG)
  • bankruptcies of some pillars of the financial system (Lehman Brothers)
  • a North American auto industry (GM, Ford, Chrysler) that stared down death, and even with bailouts, may not survive in any recognizable form
  • an estimated $30 trillion of value wiped out of global stock markets in a matter of months, according to Alan Greenspan
  • not to mention a US recession that has already lasted a surprising one year, with almost no country globally, including hitherto unstoppable China, seeming able to escape  severe slowdown.

Closer to home, in 2009, the Canadian province of Ontario, will for the first time have a slower GDP growth than the country as a whole and, in essence, become a have not province. As a country, Canada has a historical reputation of being:

“hewers of wood and drawers of water”

One could easily add to that old dictum:

“hackers of rock, drillers of oil and bashers of metal”

While Canada thrived on a commodity based economy, Ontario’s strategic proximity to Detroit, made the automotive industry king and made Ontarians as rich as almost any region in the world as a result. Over the last 20 years, as the economy started to transition toward knowledge intensive industries and away from basic manufacturing, Ontario did make some strategic investments in Advanced Manufacturing, involving information technologies such as robotics, automation and MRP increased basic efficiencies.

However, with the unstoppable rush of manufacturing activity to the Pearl River delta in Asia, that strategy is no longer enough.

A few months ago, I wrote a series on Public Policy for the Digital Age, which I wrote in the vain hope of stimulating some real discussion during a particularly unexciting Canadian election campaign. At that time, Canadian politicians seemed to ignore what the general public already knew “It’s the economy stupid”. Now, almost no one believes that something should but done, but the question is what?

Many believe that the making real things are the only real“jobs, and that all other jobs are just glorified hamburger flipping. Nothing could be further from the truth. Consider the pervasiveness of information technology, in all aspects of our economy, as an example:

  • the average car is really a complicated computer network, or even cloud, or hundreds (and soon to be thousands) of networked computers with unprecedented software. And the trend to IT in automobiles continues to accelerate into areas such as traffic optimization and safety.
  • for even the most sophisticated manufacturers of smartphones, such as RIM, Nokia or Apple, software complexity now signficantly outguns RF Engineering and manufacturing of the devices. The smartphone is essentially a complicated software and services ecosystem which happens to have some hardware to run on.
  • green technologies, such as green energy, increasingly harness complicated IT-based systems, to innovations in nanotechnology and industrial design.
  • healthcare and life sciences for an aging economy, is just starting to be transformed by software, web and mobile based delivery mechanisms, driven both by concerns about escalating costs but also increasingly demanding consumers.

There is no question that, even if all the actual metal-bashing manufacturing were to migrate offshore, the real value adds during the coming decades will be in such knowledge intensive industries.

It is in this context, and with best practice economic theory suggesting that, in times of recession, strategic economic stimulus is critical to drive recovery,  governments have no real choice but to act. And, the global price tag of such economic stimulus will entail trillions of dollars of spending.

Therefore, while government investments in:

  • infrastructure, like highways and bridges
  • an auto industry that has stubbornly refused to invest in future technologies

are inevitable, governments must save some “powder” to invest in our economic future. The old adage of investing in buggy whips at the dawn of the age of the automobile couldn’t be more true (not to mention ironic) today. The fact that governments don’t generally do a great job in picking winners and losers only magnifies the problem.

My message to our public policy makers here in Ontario, and probably most other OECD countries as well, is simple:

  • find a way to channel some of the economic stimulus into sectors that will be the future of the country,
  • resist the urge to make discrete investment decisions, instead finding ways to leverageor top up existing investment decisions made in the private sector, and lastly
  • measure the results so future generations can benefit from our economic experiments.

As taxpayers, it’s our money politicians are spending, topped up by money created by turning the printing presses at the Bank of Canada. Therefore, it is only reasonable that we need to be heard in determining how it should be spent.scotia-richer1

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change

9 Nov 2008

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Digital Policy #4: Reversing Canada’s Dismal State of Mobile Regulation

 

“Permanent connectivity, not motion, is the critical thing” Manuel Castells, Annenberg School for Communication

It is safe to say that mobile regulation in Canada represents a huge opportunity as the foundation for much of our future economic prosperity. It is ironic that such a geographically dispersed country, once the world leader in telecommunications through to the early 1980’s, should abandon what should be a natural competitive advantage.

Why Did the Internet Succeed?

One might expect that the mobile world would replay the software revolution dominated by Microsoft and the Internet/Web revolution of the 1990’s. Unfortunately, the mobile world is too closed for that replay to happen and, to understand why, it is instructive to look back in time.

The opportunity to create the modern software industry, separate from the then dominant computer hardware industry, emerged because of an IBM Consent Decree first concluded in 1956 and strengthened by increasing anti-trust action through the 1970’s. This regulatory action ensured that IBM, although dominating the computer industry, had to publish open specifications for their hardware and price software separately from hardware. Thus, in some measure through appropriate government regulation, the modern unbundled software industry was created. The 1975 founding of Microsoft by Bill Gates can be directly traced to this mandated constraint on IBM’s market dominance.

At almost the same time, starting in 1969, the US Defense Advanced Research Projects Agency (DARPA), in the midst of the cold war, funded a project to build a redundant communications infrastructure that could withstand a nuclear attack on its switching systems and continue to operate. Ironically, for an organization better known for strong “command and control” management, the modern internet that emerged from this project was endorsed by both academia and the military and, counter-intuitively, built in a relatively unstructured manner with completely open standards and operating culture. This was in stark contrast to the highly structured, and hence relatively inflexible, circuit switched telephony system of the day, managed by the monopoly “One Bell System”.

As a result of this, we’ve come to expect and rely on a software and internet ecosystem that is competitive, open and which, as a result, has grown explosively and discovered seemingly boundless new applications.

Mobile Regulation is a Very Different Story

With hindsight, it is ironic that modern mobile telephony was first commercially launched in the United States, with the first AMPS cell phone service in Chicago. However, it is notable that by the 1990’s Europe had regained the lead, partly through good regulation, especially in comparison to the US approach. Being a late entrant to the mobile revolution, regulators in Europe mandated the new GSM (Global System for Mobile) standard be used by all competing mobile operators. The United States, by contrast, under the tutelage of the Federal Communications Commission (FCC) carved the US into about 80 separate regions and didn’t mandate a single standard, ensuring market fragmentation.

As a result, the US mobile industry had to expend tremendous energy and capital to consolidate regional players simply to provide the national mobile service footprint customers demanded. And the competing GSM and CDMA standards (not to mention the persistence of legacy DAMPS) kept the markets fragmented in the US, and by extension also in Canada. As a result, simple things like interoperability of SMS between  carriers arrived at least 5 years later in US and Canada than in Europe. Until very recently, North American mobile innovation has lagged much of the world, notably including many developing countries.

Furthermore, the lack of an open environment to develop mobile applications stifled the creation of the vibrant startup ecosystem that the software and web revolutions witnessed. Last year’s victory of “Open Access” provisions for the 700 MHz (the former analogue television broadcast) spectrum in the US, was a great example of forward thinking regulation by the FCC, albeit with much prodding by Google. Regulatory leadership is critical because the incumbent carriers, although they aspire to be more than “pipes” for data, have over the last decade made almost zero progress in building the mobile applications framework. And, it is even more important for mobile, because carriers are in effect stewards of the scarce radio spectrum upon which the mobile industry is built.

The GSM standard (and its 3G successors) is inherently open. Operators have tried to close the handset and interropability market through tactics like “SIM Locking” and exorbitant inter-carrier “roaming” charges. The European Union has, once again, taken leadership by crafting a regulatory framework that, in return for the right to use the public spectrum, levels the playing field by opening up each of these issues.

The Way Forward

Clearly, the US Federal Communications Commission is starting to recognize the importance of regulation in building an economically vital industry of the future. The Canadian Government and the Candian Radio-television and Telecommunications Commission (CRTC) need to show leadership in this area as well. The first step is understanding the issue. Greater engagement with experts and visionaries who represent the various industry and both business and consumer customers is vital to our future economic prosperity. Canada has the skills and ambition to be a major player in the new mobile internet revolution. Let’s ensure that government regulation is a competitive advantage and not the impediment to global leadership it is today.

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iphone-early-adopters

13 Oct 2008

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Digital Policy #3: Startup Investment and Taxes

During the current credit crunch, you can imagine that getting startups financed is a big challenge. And, you’d be totally right. In Canada, with our rapidly diminishing venture capital system, startup financing was tough long before the current financial situation.

Yet, for our economy the healthy generation and regeneration of young companies is a motor that drives our future economic well being – or doesn’t. The startup economy represents the most likely path to diversify beyond such industries as automotive manufacturing (a just over 100 year old industry), not to mention to find the next Research in Motion’s.

Hot sectors like web, mobile, green technology and life sciences, transform knowledge and research into valuable commercial businesses via a healthy appetite for capital. In another post, we’ll examine why, particularly in Canada, there is less insitutional capital, such as venture capital, available to these startups. We’ll also examine issues like international visibility of Canadian technology, LSIFs, historical returns and the like.

With institutional capital frozen like never before, we are reliant upon angels, high net worth individuals, strategic investors and friends and family like never before to build our startup future. As a result, I’d like to focus on measures that our federal and provincial governments can take to increase capital investment flowing to startups.

Here, in no particular order, are a few sample issues with our tax system and recommended approaches to removing such barriers investment:

  1. Simplify those parts of our tax system, such as the necessity to have complex and expensive Exchangeable Shares to implement many cross border structures and M&A transactions. In particular, many startups build Canadian-based global business and, as such, need to have global (often US) structures around Canadian-centred operations. Right now, the strctures necessary to achieve global value, are unreasonably expensive.
  2. Likewise, the key Scientific Research and Experimental Development (SR&ED) refundable tax credit is critical for many early stage companies. The costly structural intricacies of keeping Canadian Controlled Private Corporation (CCPC) status through many cross-border and financing transactions needs to be simplied. Almost every company I’ve worked with or invested in has spent tens (if not hundreds) of thousands of dollars in CCPC workarounds.
  3. Many common early stage investment approaches, such as convertible debentures, can be a challenge for angel investors. These typically pay a “coupon rate” of interest which is almost never actually paid out, but instead converted into additional equity in the early stage business. Although received in equity rather than cash, CRA treats this “accrued interest” as income. While many individuals and big institutional investors with their Limited Partnership structures generally get tax deferral on this accrued interest, simpler corporate and holding company structures don’t. The increased legal and accounting complexity to work around this often acts as another barrier to early stage investment.
  4. Many of the issues that affect employees and management of startups that we discussed in Digital Policy #2: Taxing Talent Down the (Brain) Drain also intersect with the angel investment community. For example, many serial entrepreneurs adopt a “hands-on” investment model in which they invest both talents and returns garnered from previous successes.
  5. Ideally, without the government getting into the problematic business of “picking winners”, taxes could really jump start investment. For example, a tax strategy to allow tax free “roll overs” on gains from one investment to be injected into another business without triggering the gain, could be extremely effective. In this model, the tax would be payable only when the money was taken out of active investment.
  6. Going even further, instead of LSIFs, tax policy could be designed to top up certain qualifying angel rounds. Clearly good design would be essential, but the main strategy would be to piggy back on investment decisions and risks being taken by investors. This could be implemented either as a tax credit (as with LSIFs) or potentially through a separate matching investment body which would back existing deals.

A direct outcome of undue tax system complexity, is that it acts as a brake on investment. As a country our future depends on healthy investment in the businesses that will build future prosperity. We are a nation of talented, global thinkers. But, without the capital to harness that passion and energy, we risk losing the economic strength we all have come to take for granted.While it may not be the sexiest topic during our current campaign, this area may well be one of the most important.

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harper-artless

26 Sep 2008

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Guest Post by David Craig: Stephen Harper Provides an Ironic Twist to Arts Investment

In an ironic turn of events, the same day as almost 150 very senior business, educational and municipal leaders in Waterloo Region rallied around dramatically enhanced arts and culture investment at the Task Force on Creative Enterprise, Stephen Harper was quoted by the Toronto Star as saying “that ordinary Canadians do not support nor care about art or artists in this country.”

Not surprisingly for a country populated by extraordinary people, the response has been swift and and widespread. See the rapidly growing Facebook group Ordinary Canadians DO SUPPORT the Arts, Mr. Harper. You are dead wrong.

It is fitting that our first, of many, guest posts, which follows directly, is a view from the front lines of theatre penned by David Craig,  Artistic Director of Roseneath Theatre, Roseneath is a fabulous and, typical of Canadian arts organizations, undercapitalized, gem providing professional theatre for young audiences. I am volunteer Treasurer and Board member of Roseneath Theatre.

Credit: Diana Hamblyn, FacebookCredit: Garnet Hertz (Facebook)

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roseneath-logo

26 Sep 2008

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Rosebud (Citizen Harper)

David Craig is Artistic Director of Roseneath Theatre, which is Ontario’s largest professional (Canadian Actors Equity) touring theatre, as well as Ontario’s largest disseminator of Theatre to Young Audiences. David resides in Toronto. This note was a direct response to the Harper arts funding cuts and proclamation that “ordinary Canadians do not support nor care about art or artists in this country.”

Much is being said about Prime Minister’s Harper’s comments depicting artists attending “galas” on taxpayers money, whining about their grants.  I don’t know what artists Mr Harper is referring to.

Astrid Van Wieren, who is playing Louise in Danny King of the Basement is 43 and is being paid $700 for a 50 hour week. She says she loves acting.  She describes it as the air she needs to breathe. 

Young Zarrin Martin Darnell, who is playing Penelope, has just graduated from the National Theatre School and has a $13,000 student loan.  She was in the hospital last night, but is performing the play this morning.  She loves playing Penelope and is excited to have her first professional job.

The biggest supporter of the arts are the artists. Their output represents 7.4% of the gross national product, none of which can be outsourced.  All of us here are disappointed that the Prime Minister is so out of touch with these realities. 

On the bright side, at our preview performance last Friday, a teacher said Danny King of the Basement was the best presentation he had seen in thirty years of teaching.

Have a great weekend. As ever, David

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creative_enterprise

24 Sep 2008

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Prosperity Council of Waterloo Region: Task Force on Creative Enterprise

Earlier today, a much heralded conference took on the heady task of defining the future cultural landscape of the Waterloo area. Called “Creative Dimensions in Prosperity”, it was a major milestone for the Prosperity Council of Waterloo Region which is an initiative of Communitech, Canada’s Technology Triangle and the Chambers of Kitchener/Waterloo and Cambridge.

Over the last few decades, the Waterloo area has, quietly but spectacularly, taken a quantum leap in economic stature and quality of life by:

  • leading the charge with a world class technology cluster with companies like Google, RIM, COM DEV, Open Text, Descartes, Dalsa, Desire2Learn, MKS and Christie Digital;
  • investing heavily in post-secondary education  at University of Waterloo, Wilfrid Laurier University, University of Guelph and Conestoga College, not to mention the new life sciences campus and major research parks in Waterloo and Guelph;
  • delivering over $300 million in capital spending on healthcare (which was admittedly catch up for past under-investment), including the Grand River Regional Cancer Centre, St. Mary’s Regional Cardiac Centre and Mental Health Centre and
  • development of major public institutions such as Perimeter Institute for Theoretical Physics, The Centre for International Governance Innovation and the Balsillie School of International Affairs.

It is in this context that we are overdue for a strategy, driven by significant injections of capital investment, to move our creative (artistic and cultural) sector to the next level as well. The conference was both about educating community leaders on what this entails, but more importantly setting the wheels in motion to make it happen. For me, personally, harnessing the entrepreneurial energy of our Region more strongly to our arts and culture sector is an exciting prospect, indeed. With about 150 invited  community leaders, it was a good size to balance influence with the efficiency of achieving real, tangible results.

The format, which mixed presentations of research into other model communities with small group workshops sandwiched between a number of local and national keynotes, was quite effective. I kept notes in the millenial way, namely by propagating some of the key comments and concepts out to the Twittosphere. Thus, here are a few observations of the speakers, which of course don’t begin to capture the knowledge and energy at Whistle Bear.

Gerry Remers, CEO of Christie Digital, kicked things off with his thoughtful and energetic take on:

  • “intersections of arts and business”
  • “profound arts experience that can turn even Conservatives into human beings?”, then went on to
  • “… contrast known arts investment multiplier effect with contentious $45 Million Tory arts spending cuts”
  • He proudly talked about the “Christie Digital sale of 150 projectors to IOC for Beijing Olympics – a $6.5 million deal!”
  • although we pat ourselves on the back, in truth “… Waterloo Region still has underdeveloped arts and culture sector”

Gerry, in particular, was a great choice both because of his personal passion and global knowledge in this area, but also because his company, Christie Digital, is an excellent exemplar to the audience, positioned as it is right on the boundary of the high-tech for profit area and the creative industries.

One of the two consultants, Janet Meredith, talked about 7 different “model” communities, including Austin, Calgary, Denver, Dublin, Edmonton, Glasgow and Portland. One observation was that there is “stiff competition for top talent. Creative community values are a key differentiater in winning this battle.  Waterloo needs to look at other global creative clusters for inspiration”. The other consultant, Liz Westerfield, mentioned that “… Denver Art Gallery gets $5 million annually from city sales tax levy”, out of an approximate total payout of $40 million per annum, funded by a 0.1% city sales tax.

During a panel, co-chair Tim Jackson made the significant observation that “arts underfunding leaves no latitude to innovate, take risks or make mistakes.” Like the for profit sector, risk taking and competition are key to a vibrant arts and culture ecosystem.

After the breakouts and lunch, William Thorsell, CEO of the Royal Ontario Museum, gave an insightful keynote delivered with the voice of deep experience in exactly what our own initiative needs to achieve. As such, he outlined how in a very short window of time, Toronto has invested in 10 arts and culture megaprojects, totalling $1.5 billion, including Royal Ontario Museum, Art Gallery of Ontario, Four Seasons Opera Centre, etc.

  • He councilled the group to clearly understand their strategic antecedents, surprisingly citing that the southern “German car cluster (BMW & Mercedes) only happened there because of Roman occupation 2000 years ago.”
  • Strongly reinforced the notion that “competition in philanthropy is a key success factor” which helped the audience underestand the dynamic betwen having loads of “bottom up” initiatives balanced with a strong top down strategy. Perhaps because of its existing size and stature, there seemed little need to have an overall strategy driving the 10 Toronto Arts and Culture megaprojects.

David Johnston, President of University of Waterloo (aka “Mr. Book”) gave a learned and inspiring talk providing both historical context and insights to help us shape the parameters of today’s discussion:

  • David noted that to “prosper is to grow well (thoughts on name Prosperity council)”
  • “individuals do make a difference and leadership is key to building the future”,
  • So much so, in fact, that the best results happen when there is a “cluster effect of great leaders working with other great leaders to make eagles soar”
  • David defined “Social Capital as intelligent people interacting with each other”

Overall, it was a great agenda. Kudos to the organizers for the wisdom to balance education with initiative. This is definitely a “big tent” strategic agenda. It will take time, leadership, competition and, above all, major investment to bring it about. It speaks volumes about the entrepreneurial spirit of our Region that we are even considering embarking upon this journey.

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talent-tax

18 Sep 2008

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Digital Policy #2: Taxing Talent Down the (Brain) Drain

The knowledge based economy is all about businesses finding, motivating and retaining the very best talent. And the quest for top talent goes way beyond the lofty C-suite and includes top developers, product managers, sales people, marketers — i.e. pretty well everyone in a knowledge-based company.

I personally view building talented teams as the number one determinant of business success

Technology startups tend to use stock-based compensation, mostly Employee Stock Option Plans, most liberally in part as a way to level the playing field in competing with larger companies in the talent search and in part because the “lift” in value as startups grow from zero to exit can be quite significant.

With that in mind, it is ironic that stock options were originally adopted as a key strategy in the Silicon Valley employed to leverage equity in cash-strapped startups and because of their tax efficiency. Today in the US, and even more so in Canada, they can also be a real headache as people negotiate the tax maze of CRA and IRS.

The labyrinth of unfair taxation problems relating to stock options is unbelievably complex, and more importantly, potentially punitive. And, it is important to note that this issue doesn’t just affect founders and senior management, but can cause real stress for all levels in a corporation. This issue is agnostic to level.

Typical problems are:

  • Option Gains Taxed at Employment Rate: Counterintuitively, the CRA taxes gains on stock options at the rate of employment income, rather than as a Capital Gain which is half the tax rate of employment income. There are special rules and exemptions which attempt to drop the tax rate down to be equivalent to a capital gain, but the the sheer complexity of the Income Tax Act means that this system fails far too often. You’d get a capital gain investing in the stock market, so why not in your own company?
  • Taxation on Phantom Income: It gets worse. There are numerous cases where, depending on the timing of a rise in stock price relative to stock option exercise with the actual redemption of the stock at a later date and lower price, an employee can be taxed on gains that they don’t actually receive. In other words, CRA demands tax on monies never received. One egregious example reports “a single mother of two children who sold her options stock for $2000 and was taxed $50,000.”
  • Cross Border Issues: There are many tax provisions that work in Canada, but completely break down when companies are structured across borders, such as between US and Canada, which is very common. Furthermore, cross border acquisitions, which are extremely common, are a real source of taxation headache, not to mention generating unnecessarily complex structuring costs.

For those interested in a deeper understanding of this issue, some sources containing extensive analysis and documentation of the anomalous world of unfair talent taxation are:

Clearly, such taxation is unfair. But, more importantly, it is an example of how a complex and inadequately debugged taxation system can put a significant brake on our future economic development. It is important to understand that this is not about people paying their fair share of tax. Instead, the issue stems from complex rules that create surprisingly unfair outcomes that, because they are codified in taxation law, must be enforced. Only governments have the power to fix these serious anomalies.

Future economic prosperity in Canada will be driven by successful knowledge based businesses, and thus we should be encouraging our top talent to be motivated to work long hours and provide the motor of the economic growth provided by knowledge based startups.

While it may never top of the charts in the current election campaign, in fact, this taxation issue might well be one of the most important for our government to address. Is anyone in Ottawa listening? The current election provides citizens a great time to engage and educate politicians of all parties in this issue.

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RaidS0013CB

3 Sep 2008

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Digital Policy #1: Why Bill C-61 Is a Bad Idea for Canada’s Digital Economy

As we approach a Canadian Federal Election, the long simmering issue of proposed Bill C-61 copyright “reform” (often known as Canada’s even more onerous Digital Millenium Copyright Act, patterned after its US counterpart) has surfaced as a potentially big election issue, at least among those who participate in our digital economy. This is the first in a series of posts around  public policy for the digital age.

A recent blog post by my colleague Alec Saunders, “Why I will be voting against Stephen Harper’s Conservatives when an election is called”, reminded me of some of the key reasons why this represents such bad public policy. In Alec’s words, “Bill C-61 would make most ordinary Canadian families into criminals”, because the law’s focus is so askew that ordinary consumer actions would create infringement. Furthermore, the law as drafted gives too much power to the industry to levy fines in ways that short change our cherished judicial process.

Alec isn’t alone. A good example of the grassroots protest is the Facebook Group, “Fair Copyright for Canada”, created by noted Canadian internet legal authority Michael Geist. Notably, this group has grown quickly to 92 000 members, unprecedented for a legal topic as arcane as Copyright. Clearly, this legislation has struck a nerve, and it should be noted that many of these group members are quite influential in the digital media and computer industry.

I have an even more fundamental objection.  Bill C-61’s provision which attempts to stop people reverse engineering Digital Rights Management measures, quoting from the Draft legislation, prohibits any “… technological measure to descramble a scrambled work or decrypt an encrypted work or to otherwise avoid, bypass, remove, deactivate or impair the technological measure, unless done with the authority of the copyright owner”. By way of analogy, this is like criminalizing locksmiths.

There is no question that such legislation would put a chill on large segments of the software and digital media industry in Canada, simply because it makes innovation and new business models more difficult to develop. An example is that antivirus/security companies often have to reverse engineer security systems to build their perfectly legal product. Make no mistake, those jobs in digital media will be created. The only question is whether, thanks to a lasting chill from Bill C-61, they will be in Canada or elsewhere in our increasingly globalized world.

My message to legislators is that this bill appears woefully unbalanced. I believe there needs to be Copyright legislation. But, like anything else, a balance needs to be struck between technological and business model innovation and the need to protect the incumbent industry. My concern is that our legislators likely lack the detailed technical and economic knowledge of how the digital and internet economies actually function. My suggestion to those in leadership positions in the new economy is to speak up before it is too late. A big slice of our future prosperity is certainly worth lobbying to address the serious flaws in this draft legislation.

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asuseeepcbeach

2 Sep 2008

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Public Policy for the Digital Age

With the imminent federal election call in Canada, it seems timely to start a discussion on public policy principles that our governments (federal and provincial) should be considering. From the context of the information technology industry (web, mobile, digital media, etc.), why is this important?

Firstly, as more and more traditional manufacturing jobs migrate to the Pearl River Delta, the knowledge-based industries, given the right macroeconomic environment, could well be one of our best job growth options. By “macroeconomic environment”, we are referring to the complex web of legislation providing fair regulation, securities legislation and tax code that better encourages the growth of a globally competitive IT industry.

Secondly, it should be noted that the Silicon Valley, where most of the IT industry originated, has not historically been that engaged with government, policy or lobbying. In fact, many in the technology industry have proudly worn the badge of libertarianism, erroneously believing they represent a future that has transcended the need for government intervention or regulation. In fact, all the time, these people may have been simply living in a sheltered world created, ironically and in large measure, by big government and the military industrial complex. The Defense Advanced Research Projects Agency (DARPA) of the US Department of Defense, funded massive research during the 1960’s and 1970’s that led directly to the creation of the modern internet. As it happens, the very openness (if not the counter-cultural flavour) of today’s web, arose directly from creating a redundant fabric that would potentially survive nuclear attack.

Thirdly, and not to overgeneralize, many elected officials lack proficiency in technology and the future of the digital and wireless economy to make good policy decisions. Rather than being a criticism, it’s just a fact of life. In that environment, it behooves technology industry leaders to work to inform our government representatives, and the civil service, on important matters.

A key complicating factor is that the political process has a tendency to pander to public opinion rather than cold harsh economic realities. Spending tens or even hundreds of millions trying to subsidize dying industries is like trying to extend the life of the proverbial buggy whip. Spending money on programs to lessen the impact of social and economic change is quite another story. But, even then, governments generally don’t excel at picking winners and losers. Generally, it is better to simply level the playing field and stand back to let the market perform.

Accordingly, over the next few weeks, we’ll choose a few topics that have direct relevance to our digital future and, quite likely, our overall prosperity in the coming decades:

  • “Why Bill C-61 is a Bad Idea for Canada’s Digital Economy”,
  • “Taxing Talent in Startups”,
  • “Startup Investment Discouraged by Tax Laws” and
  • “The Sorry State of Mobile Regulation in Canada

Stay tuned. We encourage your input on any issue we discuss. If you feel there are other key issues to the future of our knowledge based economy, then, by all means, include that in comments as well.

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