Key Notes:

  • EU Sector Report identifies restrictive conduct in e-commerce for goods and digital content.
  • Particular focus on price monitoring and geo-locking behaviors in sale of goods.
  • Report finds structural advantages to incumbent digital rights holders that may adversely impact new market entrants.
  • While not final, the report may identify practices that will ultimately become enforcement priorities.

Over the past 16 months the European Commission has studied electronic commerce (including the online sale of consumer goods and digital content) within the European Union with an eye toward updating EU competition rules as they apply to electronic commerce. The Commission issued a 291-page “preliminary report” on September 15, 2016 that does not yet implement new regulation, but is likely to form the basis for new rules, stepped-up enforcement or both.

Consumer Goods Sale Restrictions

The Commission recognizes that while price is a “key parameter of competition” for retailers, brand image and product quality are key for manufacturers. It also acknowledges that consumers may now freely move between online and more traditional (brick and mortar) sales channels and that they may “free ride” by using services and information offered by one sales channel, only to make an actual purchase through another channel. One consequence is that many manufacturers now operate their own online storefronts to sell products directly to consumers, placing themselves in competition with their own retailers.

In addition, the Commission finds that 19 percent of manufacturers have introduced and two-thirds have expanded selective distribution criteria, some of which the Commission believes “may go beyond what is necessary to achieve the goals of selective distribution.” Of particular note are clauses requiring distributors to operate at least one brick-and-mortar location; the widespread use of “geo-blocking,” or contractual measures to prevent the sale of goods over national borders; and restrictions on the use of online marketplaces as sales channels, particularly for retailers with turnover below €2 million.

The Commission also reports that 9 percent of retailers have agreements with manufacturers that in some way restrict the retailer’s ability to use price comparison tools. The Commission expresses concern that such restrictions “may exclude an effective method for retailers to generate traffic to their website.” Additionally, 30 percent of manufacturers reported that they track the prices of their products sold by retailers; the Commission finds that the widespread use of price monitoring software “may facilitate or strengthen collusion between retailers and thereby impact competition.”

Digital Content Sale Restrictions

Unlike in the sale of consumer products, the Commission finds that “online distribution of content and demand for online rights does not seem to have altered the way in which right holders license their rights.” Specifically, contractual restrictions on licensed transmission technologies, timing of releases and licensed territories “are the norm in digital content markets.” In a large majority of instances, rights remain restricted to national territories and the use of geo-blocking is commonplace, including mechanisms for a rights holder to monitor implementation, suspend distribution or terminate licenses where geo-blocking mechanisms are not implemented as demanded.

The Commission additionally observes that incumbent rights holders have entrenched advantages, including the existence of “long and stable exclusive contractual relationships” exacerbated by automatic renewal clauses, first negotiation clauses and other similar restrictions, as well as the widespread use of advance payments and fixed or flat fees for licenses. The Commission indicates that it “will therefore assess on a case-by-case basis, having regard to the characteristics of the specific product and geographic markets, whether certain licensing practices may restrict competition and whether enforcement is necessary in order to ensure effective competition.”

What’s Next?

The preliminary report is intended to “trigger a facts-based exchange of views with stakeholders,” with a comment period extending through November 18, 2016. The Commission is expected to publish a final report in the first quarter of 2017. While any new regulation or enforcement based on priorities established by the final report will not follow until after its publication, manufacturers and retailers operating within the European Union may wish to consider the report’s potential impact on their e-commerce practices and operations sooner rather than later.