In our blog of 16 September 2016 we reported on the European Commission's Preliminary Findings in the E-Commerce Sector Inquiry in relation to anti-competitive restrictions in the online sales of goods. In this post we look at the Commission's preliminary findings in relation to the other aspect of the Sector Inquiry - e-commerce in digital content.
Whilst the inquiry into the online sale of goods seems to have uncovered a wide range of potentially anti-competitive restrictions on cross-border sales, the preliminary findings in relation to digital content are much more circumspect.
Digital content is protected by national copyright laws which confer exclusive rights in each of the 28 [sic] EU Member States. Territorial licensing – and often exclusive territorial licensing – of digital content is therefore the norm. Unsurprisingly, having received responses from nearly 300 providers and distributors of digital content, this is precisely what the Commission has found to be the case.
The preliminary findings also reveal the existence and use of multiple business models and a great diversity of licensing practices. These include, in addition to territorial restrictions, splitting rights according to technologies, distribution method, time (release windows) and bundling online rights with other forms of transmission. Geo-blocking is widespread, although not evenly applied in all Member States.
Licence durations are often lengthy (up to 70 years in the case of some Sports and Children's content). Payment structures often include advance payments, minimum guarantees and fixed/flat fees, although a wide variety of other payment structures was also seen, including revenue sharing and performance-based payment mechanisms.
The existence of such commercial and licensing practices is unlikely to come as surprise to those involved in the media and digital content industries.
Notable for its absence is any suggestion in the preliminary findings that digital content licensing practices are per se restrictive of competition (contrast the position in relation to physical goods where the Commission found "hardcore" restrictions of competition to be prevalent). This is undoubtedly correct given that the content in question is protected by national copyright laws which permit the kind of licensing restrictions that the Commission has identified in the Sector Inquiry. Moreover the Commission recognises that practices in relation to the splitting of rights and payment structures may serve beneficial purposes such as optimal risk sharing and incentivisation in the supply chain.
Importantly, the Commission finds that the ultimate driver of competition for the distribution of digital services remains the attractiveness of the content. In turn, digital content providers transform users' demand for popular content into wholesale demand from right holders in the form of licencing arrangements.
So, what next? Competition enforcement against anti-competitive practices remains a possibility. The Commission appears to be concerned that the licensing and commercial practices it has identified might have the effect of foreclosing new entrants or making it harder for existing players to expand into online services. However, the preliminary findings make clear that competition action would need to be linked to market power (in practice, dominance) at one or more levels of the supply chain. That will need to be analysed and assessed on a case-by-case basis.
Stakeholders are invited to submit comments on the preliminary findings by 18 November 2016. The final report is expected to be published in the first quarter of 2017.