EU’s e-commerce drive may expose barriers, but risks lacking focus

27 March 2015. By Matthew Newman, Lewis Crofts and Magnus Franklin.

If you’re in a digital market, chances are you’re in the crosshairs of the European Commission.

This week, the EU’s executive arm unveiled two broad policy initiatives to open up online markets and help consumers access the content and goods they want across the 28-nation bloc.

But the commission will have to be fast, firm and focused if it’s to make any impact on an already crowded territory at a time when technology and trends are outstripping the regulator’s snail’s pace.

When President Jean-Claude Juncker’s new European Commission took office on Nov. 1, he made digital markets a top priority. It’s a perfect political problem for Europe: Online markets know no borders and they have a direct impact on the day-to-day life of consumers, who are packing phones, tablets and online
subscriptions in ever greater numbers.

The first results of the political push were on view this week.

On Wednesday, EU digital chief Andrus Ansip sketched out his plans to create a “digital single market.” Ansip said concrete ideas will be published in May and will include proposals to reduce barriers to shopping online and accessing films, music and books outside of a consumer’s home country.

The next day, Ansip’s colleague responsible for antitrust cases, Margrethe Vestager, said she planned to start a sector inquiry into the e-commerce industry. She will seek answers from websites, platforms, content owners and broadcasters, in an effort to identify competition problems. These could include restricting the
sales of goods across borders or blocking access to foreign content.

The two initiatives are notable for their high level of ambition. The sector inquiry will throw out a wide net to national governments and companies. Various commission departments will contribute to the drafting of the questionnaires, Vestager told a conference* in Berlin yesterday.

She said that the probe’s “starting point” will be digital content and buying “tangible” goods such as clothes and small appliances. She acknowledged that EU regulators can’t query “everyone in Europe,” and that officials will have to have manageable results to either pursue antitrust cases or to feed into new proposals to
regulate e-commerce. She plans to release preliminary results in mid-2016.

Companies typically loathe Brussels meddling in their business. There’s a risk that the sector probe will lack focus, with commission officials torn between pressure to enforce antitrust rules and introduce new regulations.

But for every operator that feels under threat, there will be a host of others ready to seize the opportunity created by regulatory intervention. So far, companies have welcomed the commission’s initiative. That may continue until there’s more clarity
on what, exactly, the watchdog plans to do.

Many cooks

The happy talk may dissipate when two — or more — different departments of the same regulator start targeting companies with questions.

A film studio, for example, could complain that the EU is overhauling the copyright rules on which they base their business, probing allegations of anticompetitive behavior, and asking broader questions as part of a sector inquiry — all at the same time.

The query could also be counterproductive. If the EU executive suggests that something is wrong with buying goods online, consumer trust in web shopping could fall rather than increase. Only 15 percent of consumers bought online from a seller based in another EU country in 2014, according to the commission.

Industry could be forgiven for taking EU lawmakers’ promises of making business easier with a pinch of salt.

European legislators recently approved a measure to streamline the payment of value-added tax with a “mini one-stop shop” that in principle aimed at giving companies doing business online the possibility of dealing with one tax authority instead of 28.

But now the system has gone through the legislative process, the new regime is accused of putting small companies in an even more complicated regulatory environment. Companies say the new VAT system has discouraged, rather than encouraged, businesses from starting to sell their wares in other countries over the
web.

Antitrust sector inquiries are notoriously contentious. The last one — into the pharmaceutical industry — prompted industry to accuse EU officials of upsetting the multibillion-dollar drug-research market. Practices that are seen as absolutely rational, such as extending a drug’s patent protection to keep rivals from producing cheap copycats, were viewed with deep suspicion by officials in Brussels.

The new sector inquiry will straddle many open cases and open questions, adding an extra layer of complexity for companies trying to understand where the regulatory risk lies and which way the wind is blowing.

In January 2014, the commission opened an investigation into five major US movie studios — 20th Century Fox, Warner Bros, Sony Pictures, NBC Universal and Viacom’s Paramount Pictures. That case centers on potentially anticompetitive “geoblocking,” the practice of blocking an Internet user’s access to websites, videos or other content when he or she is abroad. The probe is examining restrictions in contracts that allegedly prevent consumers outside a
broadcaster’s home market from buying subscriptions.

Ansip has denounced geoblocking as “unfair”. The question is whether the practice curbs competition and thus requires scrutiny from antitrust officials —or whether it is a problem of inadequate consumer-protection rules. Now geoblocking is under scrutiny from three sides: the sector inquiry, Ansip’s reform package and the specific antitrust probe.

Beltway woes 

Like excessive international mobile-roaming fees, problems of accessing content from another country is a concern that disproportionately affects EU officials in Brussels, compared to the average EU consumer.

Brussels bureaucrats wonder why they can’t download movies the same way they do in their home countries or use their streaming services when they go on holiday. They want to tune into soccer games just as they do at home.

Companies involved in the probe have long maintained that the problem has little to do with antitrust and much to do with broadcast rights, copyright rules and digital-distribution strategies. The EU could be looking at an internal-market problem through the lens of competition law.

The commission is also investigating potential geoblocking or location-based restrictions to playing online video games.

Then there is an investigation into the sale of electronics goods via online traders. This has been going on since December 2013, and the commission conducted new raids earlier this month.

Block exemption 

All of these are small fry when compared to the overarching antitrust laws governing online sales — the Vertical Block Exemption Regulation from 2010 —which is up for renewal in 2022 and some claim is already out of date and subject to dangerously different interpretation.

For example, online hotel-booking platforms HRS, Booking.com and Expedia have been the target of probes in various European countries since 2010, when the UK’s antitrust watchdog first opened an investigation. The probes have resulted in divergent approaches.

The commission is now attempting to tackle these differences by helping to coordinate a probe by the French, Swedish and Italian authorities. Booking.com has offered to settle the investigation by removing some restrictive clauses.

The sector probe could thus help put the commission back in the driver’s seat on tackling restrictions that companies place on supply and distribution agreements.

Some of these restrictions, such as selective distribution, are perfectly legal under EU rules, but the noise coming from Brussels now is that this might change.

As things stand, companies can restrict sales into exclusive territories and require quality standards for the use of an Internet site to sell their products. The “digital single market” plan will most likely include rules banning such territorial carveups.
And let’s not forget the EU’s five-year probe of Google, which touches on some of the Internet’s largest players and the essence of what it means to sell goods and services over a platform.

So far, the commission hasn’t said whether it will pursue legislation to regulate platforms. Vestager said yesterday that she’s open to a “debate” on how to define these platforms and whether they need to be regulated.

This week has demonstrated beyond a shadow of a doubt that operators in the ecommerce space will be in for quite a ride between now and the end of 2019, when the mandate of the current commission under Jean-Claude Juncker draws to
an end.