Digital Single Market: The Loser Consumer

3 Questions to Felipe Florez Duncan, co-author of The impact of cross-border access to audiovisual content on EU consumers.

The convenience of accessing film and TV programmes throughout a digitally connected Europe belies the complex and finely balanced content production industry underpinning it. Consumers value ease of access for sure, but they also value a wide choice of quality content from both international and local producers. Felipe Florez Duncan is the co-author of a recent report titled The impact of cross-border access to audiovisual content on EU consumers, which examines this trade-off in detail.  Netopia had the opportunity to ask Felipe Florez Duncan three questions.

Per Strömbäck: You have done research on the potential impact of the European Commission’s proposals on cross-border access to content – which are your main findings?

Felipe Florez Duncan: Rather than focusing on any particular measure proposed by the Commission, our research takes a broad view of the spirit of the debate. That is, the erosion of exclusive territorial licencing within Europe. As such, we abstract from the specific tools the Commission might employ which currently include the on-going pay-TV movies competition case; the recently adopted portability regulation; proposals to extend the ‘country of origin’ copyright principle to online transmissions; and the proposed geo-blocking regulation (though the most recent draft of this excludes audio-visual services).

Instead, we consider a scenario in which any audio-visual service available in Europe can be accessed by all European consumers, regardless of the Member State in which they live. This allows us to clearly examine the effect of territoriality on both industry and consumers. We find that any erosion of the established territorial licencing regime for audio-visual works will reduce the quality, quantity, and range of audio-visual productions on offer, leading to reduced welfare for European consumers.

In the short-run, consumers are expected to take advantage of the new cross-border audio-visual services available to them. There are several possible motivations for this, including cultural or linguistic preferences; price savings; quality enhancements; diversity of works available; and/or differences in timing. In response to this consumer switching, local broadcasters will reduce the price they are willing to pay when buying content from producers, to account for the de facto loss of territorial exclusivity.

We anticipate a fall of around €8.2bn in annual revenues

This has a knock-on effect on producers, who’s established funding mechanisms—such as output deals, co-production agreements or pre-sale agreements—are weakened by the resulting uncertainty around future revenues. We anticipate a fall of around €8.2bn in annual revenues, putting up to 48% of TV and up to 37% of film output at risk of not being made. This loss of content would translate into a €9.3bn reduction in consumer welfare per year.

Furthermore, over the long-run we anticipate industry would respond with a variety of measures to minimise these significant revenue losses. This could include moving towards exclusive pan-European licences; raising prices in lower-income countries to minimise cross-border revenue leakage; imposing distribution restrictions such as excluding OTT platforms; or enforcing dubbing in foreign language territories.

While these responses will reduce content loss it will also have a redistributive effect, as localised content restrictions worsen the services on offer to certain European consumers. Overall, we expect a long-run content loss of around 35%, which combined with local distribution restrictions would mean a fall of around €4.5bn in consumer welfare each year.

Importantly, as the debate has evolved, the Commission has not opposed rights holders having the freedom to licence content on a territory-by-territory basis. What the Commission objects to is absolute territorial licensing—such as the passive cross-border sales restrictions that are the focus of the pay-TV movies case.

However, when shopping online for digitally distributed audio-visual works, the active vs. passive marketing distinction is largely meaningless. Consumers already rely on passive sales tools such as social media and web-search to find the best outlets for their desired content, including from pirate or ‘grey-market’ providers. In the absence of enforceable passive sales restrictions we foresee this becoming even easier, as intermediary services spring up to help consumers find content from anywhere across Europe. As such, the freedom to license on a territorial basis may not mean much in a world where more and more content is consumed online, over-the-top.

PS: According to your research, who would be the winners if the current policy proposals on content in the Digital Single Market would come into effect?

FFD: Whereas much of the debate has focused on the short-run—asking which consumers might gain from consuming across borders—our report was careful to consider the long-run, drawing out the ‘dynamic’ effects as industry adapts to the new legal and regulatory landscape.

With this in mind, we foresee the real winners being large, multi-national platforms

With this in mind, we foresee the real winners being large, multi-national platforms as the Commission’s Digital Single Market proposals accelerate a convergence towards pan-European content licensing. These parties, which have sufficient scale and scope to both purchase and exploit the de facto pan-European broadcast rights, will be handed a significant advantage over smaller, localised operators.

However, as well as harming local broadcasters, we expect to see a knock-on detrimental effect on producers, advertisers and consumers as the market becomes more homogenised and less tailored to local markets and cultures.

PS: And who would be the losers?

FFD: Our findings are clear: the big losers will be Europe’s audio-visual consumers, who face reduced choice and quality as content producers’ European revenues decline. In the long-run, this harm is compounded further by reduced access for certain groups of European consumers in smaller and/or lower income countries, as producer licencing practices adapt to the changing incentives they face.

Overall, it is a question of priorities. Do consumers and policymakers favour a “single”, homogenised European market for digital audio-visual content at the cost of reduced output, adverse licencing incentives and redistributive welfare effects; or do they prefer exclusive territorial licencing, allowing producers to continue financing high-quality, localised works which they can make widely available at prices local consumers can afford.

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