11/02/2011 12:25 EDT | Updated 01/02/2012 05:12 EST

Why Isn't YouTube Canadian?

Despite the growth on the consumption side, we punch well below our weight in creating global online companies. The question is why? As a law professor, I see legal and policy failures.

Flickr: codenamecueball

Earlier this month I appeared before the Standing Committee on Industry, Science and Technology, which is conducting a study on the e-commerce market in Canada. A transcript of the hearing is available here and audio of the hearing here. The discussion that followed touched a wide range of issues including copyright reform and competitiveness in the wireless and broadband sectors. The following are my edited remarks.

Why have Canadian consumers embraced e-commerce, but Canada has failed to produce many significant global e-commerce success stories?

The Canadian consumer success story is well-known. We are among the global leaders in Internet use and online video consumption. For several years, Canada was the world's largest per-capita user of Facebook. Netflix launched online-only first in Canada and quickly grew to one million subscribers. Digital music sales have grown faster in Canada than in the U.S. for each of the past five consecutive years.

Yet despite the growth on the consumption side, we punch well below our weight in creating global online companies, an issue recognized in a recent McKinsey study prepared for the G8 meeting in France. There are exceptions of course -- Club Penguin, Flickr, AbeBooks, StumbleUpon among them -- but most are bought out by larger U.S. companies before they have the chance to grow into global players. Canada does well in producing e-commerce SMEs, but the multinationals that employ thousands and generate billions in revenue have largely eluded us.

The question is why? There are no doubt many factors -- venture capital, market size, appetite for risk -- but, as they say, when you are a hammer everything looks like a nail. As a law professor, I see legal and policy failures.

Over a decade ago, Canada established the e-commerce law basics including enforceability of online contracts, privacy rules, and some online consumer protections. But these were the just the price of admission. The success stories often lie in the countries that went further. I believe companies like YouTube, Google, and Facebook could have been Canadian but legal rules made it less likely.

YouTube could have been Canadian. The company would have been called iCraveTV, a Toronto-based online video startup that launched in 1999. It streamed television programming online supported by advertising along the bottom of the screen. It was YouTube years before there was YouTube and it relied on Canadian law to do it. The U.S. objected and within months the service was shutdown and Canadian law changed as we caved to U.S. pressure.

Google could have been Canadian. The company would have been called OpenText. OpenText is of course Canada's largest software company based in Waterloo, but before Google was a Stanford graduate student project, OpenText was providing the search technology for companies like Yahoo. U.S. copyright law has a fair use provision that Google later relied upon to index the web and become a multi-billion dollar company. Canada still has a more restrictive fair dealing approach and OpenText opted for managing content in the corporate market, which does not raise the same legal issues.

Facebook could have been Canadian. The company would have been called Nexopia. Nexopia is an Edmonton based social network that is still active. It was founded in 2003, a year before the launch of Facebook. But unlike Facebook and thousands of other U.S. companies, Canada does not have a rule that grants legal immunity to intermediaries for postings of third parties. In the U.S., CDA Section 230 has been used by all the giants -- Facebook, Amazon, Google, eBay -- to limit risk and liability for the postings of their users. In Canada, we do not have the same protections and the risks faced by anyone operating online is far greater.

I could go on. We could talk about why Skype was unlikely to be Canadian because of the regulatory and competitive environment for telecom companies. We could talk about how Zillow, the online real estate giant, couldn't be Canadian because of restrictive rules over the use of listings data. We could talk about how Amazon couldn't be Canadian, because of foreign investment restrictions.

Canada has failed to build competitive legal and policy e-commerce frameworks and we are now living with the consequences.

So what comes next?

There are numerous policy issues that should be put on the table, not all of them a matter for the federal government as some fall within provincial jurisdiction. I will highlight four and perhaps we can discuss more during the question period:

1. Moving ahead with the anti-spam rules, not diluted through regulation as some are calling for. Ensure swift passage of the just-introduced privacy measures. Moreover, the next round of privacy law review is due this year and we need tougher enforcement measures put on the table and retention of the principle of court oversight for mandatory personal information disclosure.

2. Copyright flexibility. Today and tomorrow's e-commerce businesses rely far more on the flexibility of copyright law, not the digital locks that form a cornerstone of the current copyright bill. Other countries have adopted fair use or are considering the issue. Canada should do the same.

3. An equivalent for CDA Section 230 for Internet intermediaries is absolutely critical but would require provincial cooperation.

4. Removal of foreign investment and other competitive barriers in many of the sectors that touch on e-commerce. Moreover, foster a more competitive Internet environment with a set-aside for new entrants in the forthcoming spectrum auction. Note that Canada may have been the first with an online-only Netflix, but we also hold the dubious distinction of having had Netflix offer bandwidth reduced versions of its content due to data caps and high costs. The impact extends well beyond the consumer market as it directly affects e-commerce businesses as well.

Canada may have missed out on a generation of e-commerce leaders. We must not miss out on the next one.