Last week, the European Commission published its Preliminary Report in the e-commerce sector inquiry. The Report focuses on two main areas: goods and digital content. In each case, the Report surveys the responses received to the requests for information sent over the past 15 months and sets out the Commission’s preliminary findings. We reported on those findings on goods here, and now examine the preliminary conclusions on digital content, which focus in particular on audio-visual and music products.
Contractual restrictions in licensing agreements
Based on the market data received, the Commission concludes that contractual restrictions, in terms of licensed transmission technologies, timing of releases and licensed territories, are the norm in digital content markets. Exclusivity is also widespread and can be granted along one or more of a number of different dimensions. For example:
- Technological restrictions: Rights may be split according to method of transmission (e.g. satellite, online, mobile), whether content was streamed, downloaded or watched on a standard TV set, licences may also cover ancillary/usage rights on features such as catch-up services or use of multiple screens.
- Temporal restrictions: This includes the use of “release windows” which can be the subject of complex negotiations with significant price differences depending on the period secured.
- Territorial restrictions: Here the concerns in relation to digital content closely mirror those identified in relation to goods (as we have discussed here). ‘Geo-blocking’ is common, but causes are multiple.
For example, the Report finds that the main reasons why digital content providers do not typically make their services available in more than one territory are: (a) the cost of purchasing content for new territories, and (b) that the rights for the content are not available for licensing in some territories. Even those digital content providers that do make their services available in more than one Member State often offer different catalogues in each Member State, normally because they are unable to obtain licences for all of the Member States in which they are active.
Where geo-blocking was used, many of the agreements submitted to the Commission contained clauses enabling the right holder to monitor the implementation of geo-blocking measures and to suspend distribution or even terminate the agreement if the measures weren’t implemented to its satisfaction. Almost 60% of digital content provider respondents are contractually required by right holders to geo-block, although the percentage varies considerably between licensing business models and Member States. In Italy, for example, only a minority of respondents reported that geo-blocking occurred, whereas in the UK the majority did so.
Overall, contractual restrictions of these kinds are found to be prevalent in a number of sectors investigated, and are often included in contracts of long duration. (An exception is noted in relation to music content, where less use is made of exclusive licensing.) The Commission notes the difficulties to which this can give rise for new entrants and smaller players. The same is true of certain prevalent payment structures, such as requirement for advance payment, minimum guarantees and fixed/flat fees. All of these are said to make it difficult to compete with large established providers. (The results do also indicate that certain flexible payment arrangements have been used for certain types of digital products, which allow for payments proportionate to the number of users and facilitate competition. The Commission indicates that it is likely to encourage the wider use of such payment mechanisms, as they might promote risk sharing and streamlining of incentives along the supply chain.)
Lost in translation?
As every good competition lawyer knows, contractual restrictions do not always translate into restrictions on competition. The conclusion announced by the Commission, that it “will assess on a case-by-case basis whether enforcement action is necessary to ensure effective competition” is thus hardly surprising. The question for companies active in the licensing or distribution of digital content will be to translate the Commission’s preliminary conclusions into a concrete risk assessment as to the status of existing licensing agreements and practices.
This is of course only a preliminary report, on which comments are requested. Past sector inquiries (such as that in the pharmaceutical sector) suggest, however, that amendments after the first report are likely to be around tone and details rather than on the substance. The data gathered by the Commission will already be under intensive analysis and case teams may already have been put together to start to pursue individual cases.
It appears likely that such cases will be one of two main types:
- Geo-blocking cases in which a breach of Article 101 is identified, akin to the ongoing Hollywood Studios investigation (as to which, see here), the outcome of which is likely to turn on eventual review by the EU courts (or potential further commitment decisions of the type entered into by Paramount).
- Abuse of dominance cases based around foreclosure of new entrants. In principle, such cases could be brought against either content providers or rights holders, depending on the source of market power. The Commission will want to try to focus such cases around the use of contractual provisions (e.g. the use of long-term exclusivity) rather than on refusal to license per se, where the existing law is likely to make new cases in this complex field very difficult.
It is early days, but we question how many abuse of dominance cases of this kind are likely. The Report suggests that many of the perceived market access problems arise from widespread structural issues, rather than the conduct of individual undertakings. As content markets are currently likely to be national in scope (due to language requirements, if nothing else), it may be for national competition authorities to take the lead in this. The Commission can of course also sponsor new legislation, as it has already done in relation to geo-blocking as it relates to goods (see here). If that is on the agenda, a number of rounds of further consultation can be expected. Stakeholders are invited to submit responses to this particular Report by 18 November 2016.