(by Andreas Stephan) Yesterday the European Commission issued a to Sky UK and six major US film studios, taking the preliminary view that restrictions put in place to prevent consumers located elsewhere in the EU from subscribing to pay TV services amount to a breach of competition law. The question is whether these entertainment companies can respond with a real justification for dividing the market for European Pay TV services along national lines.

The Problem

At the heart of this case lies the single market imperative; the elimination of obstacles to free movement within the internal market. The European Commission and Community courts apply EU Competition Law to prevent markets from being effectively divided along national lines. Article 101 TFEU prohibits both geographical market sharing between competitors and vertical distribution arrangements that prevent passive sales to consumers elsewhere in the EU. This means that vertical arrangements can prevent a national distributor from actively approaching individual customers outside their geographical area, but they cannot prevent the firm from responding to unsolicited requests from those customers.

The present restrictions emanate from the way in which rights to show popular programmes are licensed within Europe. Pay TV providers in each Member State buy the rights to show the programme in their country only. This means that providing their Pay TV services to customers outside their country amounts to a breach of the license. It is also important because the amount paid by the network for the license is partly determined by the size of the market. Thus Sky UK pays less for a UK license to show a particular programme than they would for a EU-wide license.

The Reality

Yet the reality of pay TV broadcasting in Europe borders on the absurd. Sky UK services are bought by thousands of British customers who actually live in Spain, Greece and elsewhere. Ostensibly these subscriptions are to customers based in the UK; payment is made from UK banks and subscriptions linked to UK addresses, but the Sky digital receivers are located in those other countries. Indeed one wonders how much money Sky UK would lose in subscriptions if this practice were ever effectively stamped out. In addition, residents living in the Irish Republic, Northern France, Belgium, Holland and parts of Germany, can receive the UK’s ‘Freesat’ service. This is not a subscription service but includes channels showing programmes licensed for the UK market only and all of the BBC’s services, which are funded by a TV license of £145.50 a year paid by each UK household with a television set. There are examples of services from other EU Member States breaching license agreements in a similar way. Indeed this issue has been litigated over in relation to premium football TV rights, notably in the landlady showing UK football matches using a Greek Nova pay TV subscription.

Can the licensing arrangement be justified?

On the face of it, licensing arrangements that prevent even the passive sale of subscriptions to consumers in other EU Member States benefit only the Pay TV providers and the film studios. They allow the studios to discriminate on price and ensure that greater revenues are earned from consumers in more affluent European Member States. They also allow domestic pay TV providers to charge higher prices by shielding them from all potential competition from abroad. The prospect of Sky UK selling subscriptions in other EU Member States would be particularly damaging to this arrangement because of the proportion of Europeans who speak enough English to understand premium programming without the aid of subtitles or dubbing.

On the other hand, there may also be some legitimate arguments for maintaining licensing along national lines. The first is the classic free rider problem. Pay TV providers invest significant amounts of money promoting films and television series. Many of these would not be successfully launched without this investment. The second is that exclusivity allows the national pay TV providers to produce translation services and supplementary programming in the viewers’ first language, thus enhancing their viewing experience. Finally, there is a danger that removing absolute territorial exclusivity could result in significantly higher prices for consumers in poorer Member States, as the studios would focus on maximising their revenues from the more affluent States.

Nevertheless, it is unclear how these arguments – along with any others Sky and the studios might formulate in response to the Commission’s Statement of Objections – justify an exemption from normal EU competition rules in relation to vertical agreements. Licensing laws that prohibit active sales of pay TV subscriptions to consumers in other Member States should provide sufficient protection to avoid the sorts of problems outlined above. EU Competition Law rules do not oblige distributors to seek customers elsewhere; simply not to impose an absolute territorial exclusivity that has the effect of dividing the EU market along national lines.

The European Commission has in the past been criticised for allowing the single market imperative to override genuine principles of competition in relation to parallel imports, but it appears that the Commission’s main concern here is to ensure EU citizens travelling or living in Member States other than their own, are able to access cultural and news content from home and justifiably so.

Case C-56/64 Consten and Grundig [1966] ECR 429; Commission Notice, Guidelines on Vertical Agreements C(2010) 2365

See P Rey and JS Venit, ‘Parallel trade of prescription medicines: the Glaxo Dual Pricing case’ in B Lyons, ed., Cases in European Competition Policy: The Economic Analysis (Cambridge: CUP, 2009) pp 268-282