Digital Single Market- The Good, The Bad, and The Future of the European Film Industry

Ever wondered why your Netflix subscription or iTunes account have different catalogues of content across Europe, or why a particular film can be in theatres in one country and not in another until weeks later? It’s because of licensing and rights issues, the business of how films and shows are bought and traded. In Europe today this is a fragmented process, where each film will require a separate piece of negotiation and license for each EU country.

Producers in the US and Canada have a much easier time releasing and profiting from their content and now the European Commission is set to eliminate these complications through the creation of a Digital Single Market, its response to keep the union of European countries relevant in the digital age.

On December 9th, after several months of research and debates with stakeholders, the European Commission announced the first round of proposed measures for creating the European Digital Single Market (DSM). These first measures include portability of digital content across national borders within the EU, a revamped legal framework for copyright as well as digital contracts.

The measures of the DSM proposal span e-commerce, big data, as well as the creative industries (including music, film, TV). They are quite different sectors, developed at different times. This also creates differences in their business models. Grouping all these industries together creates a bumpy landscape which the European Commission hopes to transform into a level playing field. The major goal, as clearly outlined by Andrus Ansip (the European Commission’s Vice-President for Digital Single Market), is strenghtening Europe’s position globally when it comes to all things digital. Ansip argued that the EU needs to attain this goal fast in order to ensure that it maintains its relevance and competitiveness on a global scale.

“We have to hurry up…or we will get left behind,” Ansip said. Currently, not a single market leader among Internet providers in the EU is European. According to the EU’s own figures, GDP in Europe could be increased by $466 billion (€415 billion) a year if a harmonized market in digital services were to be set up. (Hollywood Reporter)

His fears were echoed in an analysis by Alex Hern published a week before in The Guardian, which focused on how Europe has failed to produce a major technology company up until now.

But while it’s intrinsically linked with the tech industry, the DSM has in its aim a number of other industries for which technology is not the main object. There have been voices arguing that this digital market could have disastrous effects on the physical market if it treats all players by the same measure. By far the most vocal group against the DSM have been representatives of the European film industry who fear its adoption will eliminate much of the existing players in the market, to the benefit of international behemoths such as Netflix and Apple.

We are going to analyse the pros and cons regarding the effect the Digital Market can potentially have on the European film industry, in the attempt to identify whether adopting the measures proposed today and the DSM as a whole is more likely to help or hurt the field.

The Consumers

One of the main points highlighted by the Commission is the benefit that the DSM will create for consumers. With entertainment in particular, a big point of the proposed measures is ensuring cross-border portability for online content. Which means that content purchased in a European country would no longer be geo-blocked in other countries. This looks like good news for consumers, but it has deep implications for content producers (which we will discuss later on). What’s more, it is not very clear that this measure actually responds to a need in the market. As it can be seen below, a study conducted by the European Commission itself revealed that this is potentially not a pressing issue for most consumers.

This measure is likely to be a first step meant to be supported by other policies in the effort to encourage European audiences to consume more European content.

Another benefit for consumers highlighted in the measures is that they envision “exceptions to copyright rules for an innovative and inclusive society”. So far these seem be focused mainly on making data available for research. But any intellectual property policies and legislation inevitably touches on audiovisual content as well, and in this case it addresses geo-blocking which is one of the main pain points for the way the film industry is financed.

The Creators

The European Commission also highlighted the advantages the DSM brings for creators. By harmonising the law for digital contracts and that for copyright, the measures are meant to ensure better protection of intellectual property and guarantee fair remuneration for creation. But, as producers and distributors argue, if the strategy backfires the way they expect it to, the amount of money circulated between European stakeholders will be considerably diminished, which will ultimately affect creators strongly as well- both financially and in terms of a decrease in diversity.

The Industry

The main argument the Commission has been using to soothe the industry representatives is that the DSM will create a bigger market for national films and it will boost cross-border consumption through measures such as the creation of “licencing hubs” which would “[foster] the distribution of films which are only available in a few Member States”. These measures are seen as extremely disruptive for the current model of financing films and as leaving the gates wide open for competition from outside the EU.

The territoriality that the DSM aims to alter is essential to the current financing model in the industry. Pre-selling rights to a number of territories is part of a producer’s work of getting a film’s budget together, something that will be turned impossible if the model becomes “buy one (territory), get 27 free” (as head of film and TV at Constantin Film, Mark Moszkowicz puts it). Furthermore, it takes a strong toll on co-productions which are currently the European films that tend to do best commercially- especially through traditional distribution. The ripple effect, the industry representatives argue, will hit producers and distributors and it will also severely affect exhibitors, as it poses a strong likelihood that cinema attendance will decrease for national films. The films that perform best commercially, across all European territories, are consistently US productions. With the hurdle of licensing each territory separately removed, distributors argue, these films will sweep an even larger portion of the viewership. Over all, the prevalent opinion in the industry is that the DSM will achieve the opposite of its goals and will in fact lead to Hollywood films cannibalising local productions and killing diversity.

Leading to the proposal of the new measures announced this week, the approach of the European Commission towards territoriality has softened (compared to the time when the DSM was first announced).

Does the Commission want to change the principle of the territoriality of rights?

The Commission does not want to change this principle and understands it is important for the creative sector, especially for the film industry. Each film has its distribution strategy, its release windows system. The Commission aims to facilitate the licensing of rights and ensure a better access in the digital world. This means, for example, that if a film is available on a video-on demand service in an EU country, Europeans outside the country can also pay to see it. This is not about opening access to all content for free. It is about a win-win situation for creators and users; this is about nurturing cultural diversity in the digital age. (Questions and answers — Digital Single Market Strategy)

Focusing in particular on video on demand, the industry looks fearful towards the likes of Netflix and Apple which, they argue, will be given through these measures the perfect conditions to expand their influence and strengthen their position at the expense of local players. Netflix’s roll out in Europe is already going at quite a fast pace which will only increase if they can easily license content across all the territories. It will play it’s economies of scale card, banking on weak competitors and a poor competing infrastructure at European level. And this would be done providing little to no return to the European film industry, producers and distributors argue. These international companies have set up shop in EU countries such as Netherlands and Luxembourg that do not oblige them to contribute to co-production funds, as they do for local companies. Neither do they have any obligation or even incentive to share their data at European level, a lack of transparency that the European industry representatives find threatening.

No geo-blocking means no geo-blocking for everybody, and local players simply don’t have the know-how and the speed to adapt in order to stay in the game. This too is a point where the Commission- particularly through Günther Oettinger, EU Commissioner for Digital Economy and Society- is trying to show flexibility when it comes to the film industry:

Will the copyright modernisation address geo-blocking?

One of the aims of the copyright modernisation is to facilitate the licensing of rights for online distribution of audiovisual content. Being able to legally access content online cross-border will help deal with geo-blocking concerns, while respecting the value of rights in the audiovisual sector. The financing of the audiovisual sector widely relies on a system based on territorial exclusivity, which as such cannot be considered as unjustified geo-blocking. (Questions and answers — Digital Single Market Strategy)

As when explaining the changes in terms of territoriality, this answer keeps a positive tone and tries to ensure that the special needs of the film industry are being considered. But so far there is very little practical relevance to these answers. While it is mentioned that geo-blocking cannot be considered unjustified when it comes to financing films, it is not at all clear how this will be set up in the policy and legal framework to ensure the current financing method or what alternatives are envisioned to support and even boost local production.

Both in terms of territoriality and geo-blocking, inquiries with the European Commission have not given us much insight. Members in the team of Andrus Ansip and Günther Oettinger indicated that these aspects are yet to be backed by a concrete set of proposed measures which will be announced in the spring of 2016.

All in all, the European Commission estimated an added 415 billion euros annually for the European GDP with the introduction of the DSM. It’s an ambitious goal, as well as an unclear one- the various fact sheets and press releases mention this figure without explaining how it will be attained. According to members in the team working on the framework of the DSM this sum was generated as a result of an analysis by the European Parliament. As of yet, there is no information available regarding how much of this growth is expected to come from the film industry. The concerns are that there will be no growth at all in the sector- but the contrary. Industry representatives fear that current businesses will be affected to the point that they will cease to exist. And while new companies might rise to the occasion and the requirements of the DSM, it’s unclear how and if any foreseen gain will cover the loss that this can cause.

It is possible that the Commission foresees part of this increase in GDP as a direct result of the measures the DSM proposes to fight piracy, which include a EU framework to “follow the money” (in order to ensure that providers of pirated content are traced down) and improved rules for enforcing intellectual property rights.

In 2014 the Directorate-General for Education and Culture of the European Commission published a report, largely based on the European Film Audience survey. The report, titled A profile of current and future audiovisual audience, takes a close look at piracy, revealing that across the EU, 55% of the people interviewed had downloaded films illegaly. Some countries had higher than the average percentages- Lithuania (83%), Romania (77%), Poland (69%) and Spain (65%)- while others fell below- Germany (24%), the UK (32%) and Denmark (32%). The main reasons included:

• cost — 50% users admitted that the cost was too high for their budget (either VOD, Cinema);
• risk — 37% found the films they downloaded interesting but not worth the risk of forking out for a ticket or a download;
• ease of access — 31% consider that ‘many films are available online and don’t see the point in paying’;
• lack of availability — 30% say that ‘many films they want to see are not available in their country’;
• missed opportunities — 27% that ‘many films they want to see are too slow to come to their country’.

The measures that the Commission aims to implement through the DSM touch on all these points. But there are two caveats. Firstly, the results of this survey focuses on the audiences of films in general, which does not say much about European films. Secondly, while the DSM argues for digital empowerment and access, this might act as a double sword. The same survey reveales that “the percentage of “pirates” (55%) rises in households who own a smart TV (61%), a home cinema system (66%), and a VOD subscription (69%).” The latter of these three should be most worrying- all the energy and resources invested in the boost of VOD could also further boost piracy without adequate measures to protect against it.

Overall, these measures disrupt a whole industry that is based on audiovisual production being a cultural activity, as opposed to a business activity. This either does not apply to other sectors targeted by the DSM (such as e-commerce) or, where it does- as in the case of the music industry- it’s dealing with a different business model (largely influenced by the way this kind of content is produced and distributed). The fact that the film industry needs to perform better within Europe and become more competitive abroad is not generally rejected by industry representatives. But it’s questionable whether these measures will lead to those outcomes, or rather to the opposite, exposing the local market to an even stronger hit from outside competition. Changes are certainly necessary, but the kind of changes proposed and the pace sought for their adoption might not be well chosen.