The fragmentation of the European audiovisual market

In a few weeks the European Commission will return to a controversial issue, that is, the persistent geographical segmentation of the European audiovisual market. In Europe access to audiovisual content has always been segmented, country by country, by the main sector’s operators (producers and studios, distributors, free-to-air and pay-TV broadcasters, etc.) as a result of commercial agreements based a strictly territorial logic. In fact, licenses for the exploitation of audiovisual content are not granted on a continental level, but on a strictly territorial basis, normally corresponding to a country (or more linguistically homogeneous countries, such as the United Kingdom and Ireland for instance).

The geo-blocking and the Internet

This practice is clearly in friction with the spirit of the European single market. Consequently and unfortunately, European users can access, in principle, only to schedules and television programs designed for the country where they reside. Users trying to overcome these limitations through the Internet, so as to be able to access content available in other European countries, are frequently blocked by technological measures, the so-called geo-blocking, prepared ad hoc by sector operators. Geo-blocking allows to identify the country from which an access attempt originates and to block it if it comes from a country other than the one for which the content is intended: by doing so, a geographical segmentation is artificially created in the Internet, despite the ubiquity of the network. This is common experience for many users, who may find, instead of the desired film on the Internet, a black screen with the words “this content is not available in your country for copyright reasons“. It has even happened recently with the new “Parlement” series dedicated to the European Parliament, geo-blocked and available only in France.

The geo-blocking regulation and the exception for the audiovisual sector

The geographical segmentation of the European audiovisual market constitutes a derogation from the European economic freedoms on which the EU integration is based. This derogation regime was also confirmed by the recent 2018/302 regulation on geo-blocking, which since March 2018 has instead prohibited unjustified geographic blockages and other forms of discrimination based on nationality, residence or establishment. The exception granted only to the content industry reveals how power relations work in Brussels. However, the same EU regulation provides that within 2 years from the entry into force, the European Commission must examine the effects in the market and, eventually, examine whether to expand its ambit of application to copyrighted content such as films, TV series, live sports, electronic books, software and online games. The pronouncement, expected in March 2020 but then postponed due to the Covid19 emergency, could arrive before this summer.

Geo-blocking and consumers

The theme of geo-blocking of audiovisual content has always created discontent and protests by European citizens and consumers, used to seeing the internal borders of the common market fall as a result of liberalization and technology. The problem was only mitigated for the so-called “content portability”, allowing the user who has taken out a subscription to an audiovisual service in one European country to be able to use it even when he is in another European country, provided that such use is temporary, when the user is abroad for work, study or vacation reasons (Regulation 2017/1128). But this is a niche market, while for the “bulk” of the matter, that is, the free choice of audiovisual content at the user’s home, there has never been any progress. The frustrating aspect of the story is that geo-blocking is opposed to users willing to pay for legal offers (and who are therefore incentivized, as a reaction to the block, to turn to illegal offers). Moreover, geo-blocking can also be applied when access to content is free: in 2015, for example, I was unable to attend from Brussels the online live broadcast on the opening of the Holy Door in the Vatican, precisely because the RAI Internet portal , which transmitted it to the country, did not make it accessible abroad.

Users don’t just hate geo-blocking: the most savvy people overcome the problem through the use of VPN (virtual private network) with which they camouflage their real location. This is an apparently easy trick to implement, but which presents drawbacks, in particular the cost (over 100 Euros per year), possible countermeasures by broadcasters and a general slowdown in Internet traffic. Other users transport the national decoder abroad and join the so-called gray market, by which they regularly pay for the television service while being formally in violation of the contractual (localization) clauses of the broadcaster. To give an example, in Brussels for years there has been a thriving gray market of Sky Italia, with acclaimed and famous installers of the Italian parable, although the TV services of Sky Italia were contractually limited to Italian residents.

Unfortunately, as already mentioned, many users react to geo-blocking by turning to illegal offers and thus reinforce the phenomenon of online piracy. This is regrettable behavior but somehow encouraged and caused by the questionable functioning of the audiovisual market, which does not provide users with what they would like to pay legally.

Should a reform of the European audiovisual market be possible?

The European Commission will therefore have to decide whether to perpetuate this system, or to make some openings and launch a debate for a possible revision. It will not be easy, because the content industry has always strenuously defended geo-blocking and the territoriality of the audiovisual market as a real matter of survival, claiming that the economic exploitation of copyright (which is the basis of licenses) can only be based on strict territorial exclusivities. According to the content industry, without such territorial exclusivities, and the relative geo-blocking to make it effective on the Internet, the audiovisual market would not work or, at least, the European sector would risk being crushed by the overwhelming power of the Hollywood studios.

In support of the thesis of the rigid territoriality of the audiovisual market, some (non-independent) studies have been produced which, in fact, faithfully reflect this market reality and report the absolute unwillingness of operators to change the system. However, these are partisan studies that merely reflect existing business models, but that say nothing about the possibility of creating different scenarios, in the interest of consumers and European culture.

The European precedents of market integration and liberalization

The history of the European common market offers numerous examples of liberalizations that seemed unworkable because certain strictly national business models were thought to be structural and unchangeable. There is plenty of cases in the markets of goods (cars, luxury, food ecc) and services. Amongst other cases, telecommunications is a relevant benchmark. For years the prices of the fundamental communication services (calls and messages) have been very high due to a structural and geographical limitation of the offer, but subsequently, thanks to the liberalizations, competition has allowed the arrival of new operators and technologies, which have contributed to lowering tariffs and breaking down barriers (including geographical ones). Of course, for some operators, in particular the historical telecom, the margins have decreased compared to the times of the monopoly or oligopoly (but here we enter another vexata quaestio, whether it is the task of the legislator to guarantee unchanging margins to certain operators).

Mutatis mutandis, the reformability of a rigid and consolidated system such as that of the audiovisual market, up to now strictly territorial, cannot therefore be excluded. It should come as no surprise that the main players in the sector are against it, because change is never welcome when the status quo allows, at least for some, to control the entire production chain and profits. But, remembering what happened with the music market – reluctant to change and then overwhelmed by peer-to-peer in 2000 – it would be better to intervene in time before technology blows up the entire system, and instead try to accompany the sector towards a path of modernization. The European Commission should therefore begin to consider whether a European market can be created where users can have access to any audiovisual content without geographical restrictions. This would be a meritorious initiative, given that the possibility of accessing content intended for an audience culturally and linguistically different from one’s own is a great form of enrichment for the European consumer, and it promotes precisely the linguistic and cultural pluralism that Europe is called to protect and encourage.

The inconsistencies behind the territorial exclusivities

A revision of the rules governing the European audiovisual sector is possible because the same economic and cultural arguments that are put forward to justify the territorial exclusivites and geographical segmentation are in fact flawed by numerous inconsistencies.

1. Territorial exclusivities should by assessed sector by sector, not a dogma  

First of all, the ratio of territorial exclusivity cannot be considered as a general principle, but should be examined in detail, by type of service or type of content. The audiovisual case is in fact different from online games, streaming is different from VOD and sporting events follow exploitation and remuneration dynamics other than films. To give a concrete example, territorial exclusivities could play a positive role at the time of the production of a film and for its distribution à la carte, but they are much less understandable when the same film must be included in a subscription bundle. In other words, a case by case analysis is needed, not a dogmatic judgment. But there is more: if is true, according to public data, that the current demand for cross-border content in Europe would be in the order of 5-10%, the risk that this new public could deeply undermine economic models, on which the audiovisual industry is based, appears remote, making absolute territorial exclusivity a disproportionate remedy.

       2. Territorial exclusivity does not help European industry

Secondly, there is no evidence that the current European audiovisual structure, based on territorial exclusives, serves to protect the European cultural industry compared to the American one, and that therefore any change would be destabilizing for the European culture. This argument only reveals that there is a problem of weakness in the European audiovisual sector, but it does not explain the causes, which could instead lie in the system itself, given that after so many years of territorial exclusivity the European audiovisual industry has never managed to growth globally. This inferiority situation has now moved to the Internet, where the new big global content producers are always American, but they are called Netflix and Amazon. This is further confirmation of the fact that the current European audiovisual organization, based on geographical fragmentation, is certainly not helping the European industry to grow and compare itself with global players. From this we can only deduce, therefore, that the European audiovisual system should certainly be reformed, albeit with all precautions, but certainly not defended.

       3. Territorial exclusivity does help, instead, non- European players

Third, the current system of territorial exclusives seems to benefit the large global audiovisual networks, which are American, rather than European producers. Hollywood studios certainly could not afford to geo-block their films in the 50 states of the USA, but they could instead do so in the 27 EU member states, thus being able to maximize profits more in Europe than in their home. On the other hand, it seems surreal that the system of territoriality, invoked to defend the European cultural exception, is profitably used in Europe by American networks. Why must these extra-European operators be granted the privilege of territorial exclusives, when the relative productions (with investments, related activities and taxation) take place somewhere in California? Mystery. Wouldn’t it make sense to limit geoblocking only to those film productions that were genuinely produced in Europe and therefore need some “protection”?

      4. Geo-blocking should not be applied upon EU-financed content

Fourth. The issue of European aid raises concerns. Many European productions are financed and facilitated through financial support programs (Media, for example), yet these productions are subject to geo-blocking. Would European citizens not have the right to have unlimited access to products that are financed with European taxpayers’ money? And wouldn’t it make sense to eliminate geo-blocking for those European productions that already receive protection, as they are included in the mandatory European programming quotas?

The roaming reform as a benchmark for the audiovisual sector

The foregoing highlights that the topic of European cultural defense is only apparently persuasive, but in truth it reveals, upon careful analysis, strong contradictions. Therefore, the European Commission would do well to open a debate to evaluate hypotheses and solutions to modernize the sector and rethink the audiovisual policy, in order to guarantee a wider and unconditional access to content on a European basis. However, it is a matter of understanding how to establish such a process of change, given the vigorous resistance of the sector.

Some precedents already experienced in the European home can help us. A relevant case is that of international roaming, a sector that has, and above all had, prior to the 2017 reform, strong affinities with copyright: in fact, even in the mobile market most operators have an interest in artificially segmenting the European market with bilateral and reciprocal agreements (the equivalent of territorial exclusivities in the audiovisual sector) in order to maximize profits by raising wholesale and retail rates (similarly to what happens in the audiovisual sector with territorial exclusivities). When Commissioner Reding’s first proposal for a reform of roaming was announced in 2006, mobile operators rejected it claiming that the territorial structure of the mobile network market could not support such a change. The European Commission did not give up and implemented the reform, on the one hand by eliminating the advantage of geographical segmentation (through the imposition of ceilings on wholesale and retail prices), on the other by ensuring that regulatory intervention was gradual and not immediate, thus giving the industry time to adapt. About 15 years later, we know that the elimination of roaming charges has therefore been possible and that it is, moreover, one of the reforms (launched from Brussels) that is most appreciated and recognized by European citizens.

But it is still a process to be analyzed carefully, because the Commission’s regulatory intervention in the roaming matter has revealed that a purely retail measure (the elimination of roaming charges) can have a different competitive impact depending on the characteristics of the operators involved (network operators, MVNO, reseller, etc.), so much so that the current European roaming regime is still under scrutiny for precisely this reason. In the case of the audiovisual sector this means, as already mentioned above, that it will be necessary to analyze the ratio of the territorial exclusivities by type of service and not in general, taking into account the characteristics of each sector and therefore applying the proportionality criterion accordingly.

Conclusions

In conclusion, the fact that the audiovisual industry operates according to a rigid system of territorial exclusivities is certainly a fact, but this does not mean that the system cannot be changed. As mentioned, the history of European integration provides numerous examples of business that have converted from purely national and / or oligopolistic models to open and pan-European systems. These reforms did not showed up “out of the blue”, but a step-by-step approach was normally applied, such as with the liberalization of telecommunications and the elimination of roaming charges. The gradualness has made possible to achieve objectives that the industry considered otherwise unimaginable. These are successful examples of the modernizing activity of the European Union which constitute an excellent basis for opening the debate also for the audiovisual sector.