21 April 2016

European Commission findings on geo-blocking in EU e-commerce sector – implications for businesses

This article was written by Agathe Mailfait (associate), Lucile Chneiweiss (associate) and Lisa Kaltenbrunner (associate).

1. Summary: what geo-blocking is, why the European Commission doesn’t like it, and what this may mean for your business 

The European Commission’s notion of “Geo-blocking” comprises the different methods which allow businesses to restrict cross-border commerce and/or access to consumer goods or digital content, including blocking access or subscription, redirecting consumers, or restricting payment or delivery to specific consumers and/or territories.

The Commission expressed its distaste for geo-blocking several times in the past year, most recently in an issues paper published on 18 March 2016 as part of its e-commerce sector inquiry, itself a part of the Commission’s Digital Single Market strategy

The Commission aims at establishing a single market in which the free movement of goods, persons, services and capital is ensured throughout all of the EU Member states, and individuals and businesses can seamlessly purchase goods online or access digital content under conditions of fair competition, and a high level of consumer and personal data protection is achieved, irrespective of nationality or place of residence. As part of this objective, the Commission intends to break down barriers to cross-border online activity, including differences in contract and copyright law.

Businesses need to take note, as sector inquiries do not just result in a set of findings. The Commission likes to take action. This sector inquiry (like previous ones) could lead to:

  • Enforcement action against businesses, following current Commission antitrust investigations such as the investigation into Hollywood studios' movie broadcasting licence practices;
  • The introduction of new legislation - the Commission announced that it would introduce new legislation as soon as May 2016 and there have been talks of amending the VAT rules applicable to cross-border sales of tangible goods;
  • The mandatory renegotiation or nullification of contracts including such cross-border restrictions and geo-blocking as the Commission will find in violation of its Digital Single Market objective.

The Commission’s initial findings do not prejudge its actions, but any initiatives it implements following the conclusion of the sector inquiry will affect licensors and suppliers who impose cross-border restrictions on the commercialisation of their products, as well as distributors, retailers and licensees, who might face a new competitive environment at the end of the line. Businesses engaging in e-commerce will have to offer products and services on the same conditions across the EU, instead of on separate national markets with different price points or user conditions.

The news is not all negative. For those businesses keen to break down cross-border barriers, this could present future opportunities to benefit from a more open EU-wide market for the online sale of products and digital content, allowing companies to expand their trading opportunities and reach new customers.

Our immediate recommendations for businesses are:

  • To check that their existing agreements and practices do not breach existing antitrust laws;
  • To start preparing for a world without contractual restrictions imposed on retailers regarding cross-border selling;
  • To consider whether they should proactively engage in the e-commerce sector inquiry, in particular for producers/suppliers/licensors, e.g. to prevent excessive regulation or to shape any regulation to create positive, new business opportunities;
  • To think ahead about what might be required to renegotiate existing agreements and contracts which impose geo-blocking measures. This may help in anticipating business partners' reactions, and to better prepare for operating in a more open digital single market going forward.

Further important details, predictions and tips for businesses are provided in the rest of this article.

2. Background and introduction to the European Commission’s geo-blocking issues paper

Objectives of the issues paper

The Commission started its antitrust sector inquiry into the e-commerce sector in the EU on 6 May 2015 and published its first issues paper in this respect. The e-commerce sector inquiry falls within the Commission’s broader Digital Single Market strategy, launched on the same day, which, in addition to competition law, considers a range of legal issues including telecommunications, intellectual property, big data, privacy and cybersecurity.

A sector inquiry is an investigatory tool to gather market information, gain a better understanding of the functioning of a sector, and identify possible restrictions or distortions of competition. At present, the Commission is investigating to what extent any barriers erected by companies, such as geo-blocking, affect EU e-commerce markets.

Scope of the issues paper

The issues paper covers responses from more than 1,400 companies active at the retail level, in particular consumer goods retailers and digital content distributors. Responses from manufacturers, suppliers and rightholders will only be covered in the Commission’s preliminary report to be issued mid-2016.

As a result, the scope of the issues paper is not as wide as it could be and the responses do not provide a full picture.

Geo-blocking as an obstacle to the Digital Single Market

This issues paper is a first step to identify obstacles to cross-border sales (such as logistics, distribution costs, compliance costs etc.) and the Commission is looking into addressing them as part of its Digital Single Market strategy.

The Commission recognises that rules applying to the sales of goods and/or provision of services are often not fully harmonised across the EU Member States, for example as regards taxes, payment systems, consumer protection or after-sales - differences in languages notwithstanding - and can lead to decisions from retailers and providers not to sell cross-border.

Geo-blocking appears to be widely used in e-commerce across the EU, and the Commission finds that it could represent an obstacle to cross-border e-commerce. Absent unjustified geo-blocking practices, e-commerce could be more advantageous for European consumers than traveling across countries to buy goods or services or access digital content. Geo-blocking may therefore run counter to the objective of establishing a Digital Single Market.

The Commission's initial findings concerning geo-blocking do not prejudge any anticompetitive concerns or the opening of any antitrust cases, but raise a number of questions, notably concerning both sales of consumer goods and provision of digital content.

3. Consumer goods

Scope of the issues paper in relation to cross-border supply of consumer goods and services

The issues paper is based notably on responses by online retailers, marketplaces, price comparison websites/apps and payment service providers. Most were active in the sales of clothes, shoes and accessories, for which geo-blocking mainly takes the form of a refusal to deliver abroad.   

Geo-blocking practices

Geo-blocking practices as regards consumer goods can take several forms, in order of importance:

  • refusal to deliver abroad (the most widespread) or to accept foreign payment; 
  • re-routing users to another website (possibly with a different price); and 
  • blocking access to the website. 

Geo-filtering is a different practice, which consists of offering different sales conditions depending on the location of the user.

On average, 38% of retailers indicated that they collected user data for geo-blocking purposes.

While an average of 36% of online retailers reported not selling cross-border for at least one of their products, online cross-border selling appears more prominent in marketplaces, a vast majority allowing retailers to choose whether they want to deliver abroad. As a result, retailers that use online marketplaces are more likely to sell cross-border compared to those who sell only via their own websites. In addition, 56% of price comparison websites/apps responded that they provide product listings from other EU Member States.

Competition assessment

While the issues paper does not aim to provide guidance on the self-assessment to be conducted by businesses of the legality of their geo-blocking practices under EU competition law, we provide some general guidance.

The Commission’s preliminary observation is that most of the respondents were making unilateral business decisions not to sell abroad, linked to various factors including their country of incorporation, turnover, or the number of websites that they operated out of.

Unilateral imposition of such restrictions by non-dominant businesses does not infringe current EU competition laws. For example, a small French wine online retailer refusing of its own accord to ship bottles of wine to consumers located outside France due to increased shipping costs is unlikely to infringe EU competition law.

However, service providers should be extra cautious as their unilateral decisions to geo-block consumers may be caught by another set of EU rules, prohibiting the supply of services in a discriminatory manner without objective justifications (objective justifications can include: increased costs of providing cross-border services, different regulations or market conditions).

The Commission notes that agreements between suppliers and distributors/retailers, especially territorial restrictions, restricting cross-border distribution, may raise competition concerns. These agreements range from bans on selling consumer goods outside one or more EU Member State, to varying restrictions on cross-border sales, sometimes formulated as requirements for approval by the supplier, which amount to a sales restriction.

In total, 12% of the respondents stated that they were under an obligation to restrict cross-border sales in at least one product category as a result of contractual agreements with, or commercial pressure from, their supplier.

Reading between the lines of the issues paper, it appears that businesses presented in the fictional scenarios below may be in breach of the EU prohibition of anticompetitive agreements:

  • Shiny, a cosmetic producer, makes it extremely difficult, costly and time-consuming for its distributors to market its products online, by requiring them to obtain its prior approval and imposing specific fees related to online sales;
  • Pantaloni, an Italian suits manufacturer, agrees with its Spanish online retailer Camisa and its German online retailer Hemd, that Camisa will only deliver suits in Spain and France, while Hemd will only deliver them in Germany and Austria, although neither retailer has been granted exclusivity in those countries;
  • Cloudy, a software editor, forbids its non-exclusive distributors from selling software online to end-users (consumers) located outside their country, e.g. restricting its Polish distributor Cloudski from accepting orders from end-users located in Austria, even if the Austrian consumer placed the order on Cloudski’s Polish website; and restricting its Dutch distributor, Van Cloud, from accepting orders by consumers located outside Holland, even if the consumer placed the order on Van Cloud’s Dutch website.

4. Digital content

Scope of the issues paper in relation to cross-border supply of digital content

The issues paper only covers responses from the retail level of the online distribution of digital content, e.g. news and media outlet providers, providers of films and music.

Measures that may result in geo-blocking in relation to digital content

According to the Commission’s market testing, an average of 68% of respondents across the EU use at least one of the following geo-blocking practices, which are aimed at:

  • managing access to content, e.g. full service blocking (65%);
  • controlling the ability to sign-up for an account or subscription (35%); and 
  • redirecting users to a different website (23%).

IP address verification was the prevalent form of technical implementation. This is only an average, for example, in the UK, 83% of respondents that provide digital content use at least one geo-blocking measure. Another form of geo-blocking could be to limit online subscriptions of a magazine to customers with UK-registered credit cards and so preventing other customers from signing-up to such online content.

Competition concerns 

Geo-blocking practices limiting the ability of European users to use digital content across borders may be the result of a unilateral decision by the digital content provider or the owner of the content (e.g. the owner of rights in music or TV), and may occur for economic and/or legal reasons (as discussed below).

However, in many cases online geo-blocking – as a matter of EU competition law – is not justified and should be expressly prohibited so that EU consumers and businesses can take full advantage of the single market, in terms of choice and lower prices.

The Commission’s market testing indicates that geo-blocking occurs as a result of agreements between digital content providers and their suppliers, for example the rightholders of the digital content, as such agreements can include geo-blocking requirements.

Of the supply agreements that the Commission reviewed as part of its market testing to date, 59% include geo-blocking requirements, whilst 69% of digital content providers informed the Commission that they geo-block. The Commission will surely be interested in better understanding the reason for this discrepancy, in particular whether the 10% of digital content providers that are not required to geo-block as a result of their supply agreements do so based on unilateral independent decisions.

Competition law vs. copyright protection

There are a number of reasons for retailers and service providers not to sell cross-border and the freedom to choose one's trading partner remains the basic principle.

Sometimes these restrictions on supply are the result of the national/territorial scope of the copyright that protects the use of digital content, in particular as copyright:

  • does not enjoy unitary protection in the EU;
  • is enforced under the national laws of each EU Member State; and
  • users of copyright protected work must obtain a licence from the relevant rightholders and/or collecting societies.

At this stage of its investigation, the Commission has not provided any guidance as to the legality/illegality of geo-blocking, but noted that licensing agreements should be reviewed individually to assess their compliance with EU competition law rules.

Providers of digital content have indicated to the Commission that geo-blocking restrictions can be in place for the following reasons (in order of priority):

  • the cost of purchasing digital content outside the provider’s territory;
  • the unavailability of digital content outside the provider’s territory;
  • the cost of adapting a business model to obtain revenues from foreign users;
  • insufficient consumer demand;
  • cost of translation; 
  • unavailability of digital content in a foreign language;
  • cost of customer interface translation;
  • compliance cost; and
  • infrastructure cost in another territory.

However, at present, the Commission does not appear to have been swayed by such reasons and is more likely to take further active enforcement measures.

At present, for example, the Commission is investigating the geo-blocking restrictions in the licensing agreements between US film studios and a UK broadcaster. These licensing restrictions require the broadcaster to block access to films through its online pay-TV services or through its satellite pay-TV services to consumers outside its licensed territory and could potentially “eliminate cross-border competition between pay-TV broadcasters and partition the internal market along national borders.” Similarly, the German competition regulator has recently criticised internet sales restrictions (e.g. prohibition of using online marketplaces such as eBay or Amazon).

However, geo-blocking restrictions can also be in place as a result of agreements among competitors to share the market, which would be likely to result in an anticompetitive agreement.

5. How businesses can get involved and shape the regulatory future

The Commission’s sector inquiry does not target specific companies, but it can bring to light certain business practices that are not in line with the Commission’s single market strategy.

To remove existing barriers to intra-EU trade or to prevent the creation of new barriers, the Commission may decide to investigate certain businesses to ensure their compliance with EU competition rules.

Against this background, it may be timely for businesses to take the following steps:

  • first, to proactively review their approach to cross-border sale of goods or digital content, and to seek professional competition law advice in relation to their distribution and supply agreements to ensure they comply with the current rules; and
  • second, to proactively engage with the Commission’s sector inquiry, as this presents an opportunity for businesses to submit their own views and proposals to the Commission, on a voluntary basis, in order to send a message to all EU stakeholders and to represent their interests. Such views from the market and various industries are more likely to have an impact on the Commission’s thinking if they are carefully calibrated to the Commission’s way of looking at markets and are supported by empirical data.

The Commission will publish a more detailed Preliminary Report on the sector inquiry mid-2016, which will be followed by a public consultation.  The Commission’s Final Report is scheduled for early 2017.

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