The European Parliament is going to be asked by two of its Commissioners, to rethink legislation and practises in pan-European online transactions. We’re not saying it is a can of worms, nor even a basket full of cans of worms, more a sea-container full of them. It opens up huge legal changes and more to the point, has massive ramifications for content companies, online trading and DRM.
We’re not saying that the changes suggested by the European telecommunications and media commissioner Viviane Reding and the consumer affairs commissioner Meglena Kuneva are bad, in fact we rather like them, but they will be driving a truck through about 5 hundred years of law-making and the changes will be painful and a long time coming, with many obstacles, including all content businesses, in the way.
Cross border shopping is just one aspect of the changes proposed and this is not just for online delivered goods (you may be able to buy jeans online from other cheaper countries which will need new international delivery logistics).
Others initiatives the EU will include are the combating spam by making it illegal and bringing punishments in line in each EU country; changing copyright laws so that personal use is universal and you will be allowed to make personal copies of content which is acquired even if DRM protected; consumer protection laws will need to be harmonized, as will privacy protection, and contract terms and the ability to reverse credit card transactions which are not honoured, otherwise you will be faced with legal actions across national borders.
Just looking at a few of the ideas which the two Commissioners have put forward gives us some idea of what resistance the new framework will run up against ‘ take the simple matter of being able to buy online from all over Europe.
So does this mean that content companies, for instance, can choose to license one company for the whole of Europe? Or will they continue to license one for each territory? Right now to set up something like iTunes or Nokia Music Store, it takes a team of about 30 people and a year in order to get licenses to content that is for the most part controlled by four major record labels. It’s just that the negotiations have to involve local distribution partners who have had rights to the content, often for decades. In many cases these are loyal supporters of the record labels, but in the digital world they become a magnet for ‘backhanders’ and get money for doing nothing in particular.
In the physical world there were physical distribution costs for each territory, and local marketing costs and long term retailer relationships. In the Digital world none of these are needed (although there are some digital counterparts), but because existing regional partners have a stranglehold on the bulk of revenues, those which go on physical storage, they remain in the digital equation and negotiate hard to be compensated for each digital sale that is made, because digital sales may take a sale away from physical sales. Also these companies are favoured by music labels because they do as they are told, unlike the Apple’s of this world who work from a vision of the new marketplace.
That means that those physical distributors will fight tooth and claw to stop any type of legislation which says that any distributor allocated in Europe may extend throughout Europe. Suddenly EMI, Universal Music, Sony BMG and Warner Music will all have not five or six physical distributors per territory, but hundreds of online players which will quickly rationalize to a handful of dominant players across all of Europe. It is far easier to put a set of Bulgarian language help messages on a web site than it is to employ locals, print new CD covers, and build relationships with a few hundred record stores, so the cost of entering a new European market will become trivial.
The EU’s point is fine, that consumers get a raw deal from the existing distribution set up, where there are only local economies of scale, and where one set of its EU citizens pay a low price and in another country a high price, funding a smaller, or less efficient distribution organization. But if these changes go through these established routes to market will be disadvantaged, and some of them will falter and fail, with job losses, and the potential also exists over time for the emergence of new European digital giants.
Now the likelihood is that those European giants will in actual fact be US companies which already benefit from the massive 301 million population market in the US, and use the financial weight of that to gain an upper hand in overseas markets like Europe.
At present the law changes are all about cross border shopping and the nature of pan-European distribution, but part and parcel of that is copyright levies and collection societies, and if they become truly Europe wide, this will kill off more century old traditional routes to market and may also create more problems.
We don’t agree with levies but once they exist the easiest way to distribute them is to share them out between the very big content companies, because the necessary admin for a one hit wonder record label, to collect its fair share of levies, is prohibitive. Perhaps it is easier with copyright and performance royalties, but even so, having less collection societies, will likely mean having even more of that money going to the major content businesses, legislating against new, smaller content entrants. That outcome would be contrary to the spirit behind this new initiative.
This will reverberate around music but also have a profound effect on TV programming, on digital games, movies, software distribution, and eBooks. In fact it will have a major impact on anything which is digital in nature, made up of bits, not atoms. Atoms need truck to carry them, bits need wires and wireless.
So take today’s movie market. Currently it has good but dwindling attention in theatrical distribution, which is being jazzed up by the introduction of digital cinemas. Then it has perhaps 55% of its revenues (or more) through DVD sales and rental and some pay per view, and then it has not much of a long tail with TV repeats, cable, and very little in the way of online distribution. But as an online business model is established, which is bound to come as HD video streaming becomes more of a predictable delivery route, this will undermine the other routes to market. As online is more reliable as a revenue stream, and because piracy remains a reality it will become so, suddenly multiple operations could be streaming a movie (alright across Europe we have linguistic barriers) and this could be consumed in any EU country ‘ so one service could rapidly displace many distribution partners ‘ cinema chains, DVD retailers ‘ potentially overnight.
Over the past 7 years we have seen the studios have done their utmost to NOT embrace online because it looked dangerous and confusing, but they will not be able to resist it forever, and companies like Disney has openly told its distribution channels that it wishes to go down that route aggressively.
What that could lead to is companies like Disney going to market with its own movies ‘ after all it has its own Buena Vista distribution company today, but at the same time has strong ties with Apple due to its CEO Steve Jobs being the biggest individual shareholder at Disney.
There is the potential over perhaps five or six years after any legal changes in Europe, for the entire movie exploitation cycle to be fundamentally altered ‘ an outcome which might leave cinemas in cobwebs and consign DVD and Blu-ray to the dustbin of history.
And for consumers think about the change to film costs. A trip to the cinema today might be $7 per ticket, so for a family of four that’s $28, and around another $28 in concessions and car fuel and parking, so $56 to see a movie. The DVD costs just $20 and the film can be seen lots and lots of time, no wonder average cinema attendance per sitting is plummeting. But take that down a notch or two and allow online streaming or download and a new movie might bring just $10 per household. The difference is that almost ALL of that might go to Disney if it runs its own distribution. Right now the European legal situation prevents this, which is why all the experimentation for this type of service comes out of US companies. Once Europe tidies up its legal act, this drift to online will accelerate.
There are similar stories for the other markets ‘ what about TV programming. A studio might license BSkyB in the UK and a TV series such as 24 might show exclusively on Sky, but if it is also available with an English soundtrack legally streamed from France for non-Sky subscribers, then there is less incentive for consumers to buy Sky subscriptions in the first place and less incentive for Sky to sign up the film. And that conundrum is coming as soon as any of this becomes EU law and once new businesses spring up to take advantage of it.
Obviously something like iTunes does really well out of this ‘ a single platform for Europe, a single license negotiation for each piece of content. Broadcast licenses would remain national, because spectrum is a national resource (for now, though that is gradually changing), while the online would be entirely international.
It’s not what Europe wants, but big would be beautiful in this environment and services able to negotiate good pricing would be at a huge advantage and currently that’s the larger companies. OK there might eventually be a law that says all distributors must pay the same across Europe, but we don’t think that would happen at first as there are existing long term contracts and only those which offer access to big enough markets (like say Nokia) could expect to get most favoured nation clauses from content companies.
All of the aggregation companies out there must be both slavering over the idea of a change in this legislation, but also shivering, because it will invite bigger money into the aggregation business. Because online now includes mobiles, and anything mobile invites the cellular operators to play.
There are many issues to overcome legally and we cannot say that this effort will be entirely successful, simply because it is so far reaching. Would the new digital distribution rules also apply to Flash memory versions of content, which are physically posted. And as the EU changes and adds new countries will the DVD region codes have to change, or will this be the stimulus to eliminate them entirely.,
Our guess is that the first thing that European Parliament lobbyists for content and other sectors will do is try to slow this juggernaut legislation down, to give them more time to think and come up with ways to retain the status quo after the changes.
This legislation may take more than one attempt to get through and it may end up as a series of piecemeal changes over the next fives years and Viviane Reding doesn’t have that long in office. But the European Commission has a track record in seeing through initiatives and before we reach 2020, the online content distribution landscape in Europe will change radically and other law makers around the world will follow suit, changing the markets for video, music, games, software and the written word, irrevocably.