Preparing for the Swarm: Ensuring our Airwaves and Airspace can Accommodate Transformational Drone Technology
In the United States, the country’s leading online retailer, Amazon, has promised that in the not‑too‑distant future, drones will deliver packages within 30 minutes after a customer places an order. 1 In the United Kingdom, Domino’s has staged pizza delivery via drone. 2 In France, commercial drones are already providing aerial footage and agricultural data, and they are being tested for monitoring the reliability of electric and rail infrastructure. 3 In Australia, Zookal, an Australian textbook rental startup, will begin dropping off book orders to Sydney residents as soon as March 2014 using a fleet of six unmanned aerial vehicles – drones – to deliver packages within two to three minutes by locating the customer via the Flirtey Android app. 4 Meanwhile, militaries throughout the world, including the U.S., the EU, Japan, Israel, and China, use or are planning to use drones for surveillance and offensive capabilities, and, in the United States at least, some of these military functions are being incorporated domestically, with drones performing border surveillance and supporting public safety operations. 5 If current plans are fully realized, no part of our economy will be left untouched by drone technology – drones may even change the market for illicit substances. 6 Innovations in commercial aerial drone technology will fundamentally change how we live. Maybe. Whether or not this transformation occurs depends on whether drones, known variously as unmanned aircraft systems (UAS) or unmanned aerial vehicles (UAVs), will have access to both 1) airspace, a heavily regulated resource that, in most of the world, including the U.S., has not yet evolved to allow for general operation of commercial UAS technology, and 2) the wireless airwaves, a limited resource where demand is far outstripping supply. Accommodating Drones in the U.S. Airspace An immediate barrier to launching commercial UAS technology in the United States is that the U.S. Federal Aviation Administration (FAA) generally does not allow for commercial operations of UAS. 7 The status of commercial UAS operations is planned to change, but it may be a long time coming. In 2012, Congress passed an Act mandating that the FAA integrate civil UAS into the nation’s airspace by September 30, 2015, 8 and the FAA has been working to do so, even if it has been somewhat delayed. For example, in November 2013, pursuant to the FAA Modernization and Reform Act, the FAA released a five‑year roadmap for the introduction of civil UAS into the national airspace. 9 Shortly thereafter, in December 2013, the FAA announced the selection of six UAS test site operators, which will allow the FAA to develop, research, and document operational UAS as part of the process of determining how to integrate UAS into the national airspace. 10 While an important initial step towards integration, the selection of these sites does not provide access to the national airspace for commercial or civil purposes. Moreover, the selection of these sites was delayed for more than a year from the original August 2012 deadline due to privacy concerns, 11 perhaps indicating that the September 30, 2015 deadline may be difficult to meet. Even if the FAA is able to meet this 2015 deadline, the type of autonomous drone that, for example, Amazon has promised, will likely still require further regulatory reform. Under FAA’s UAS Roadmap, the FAA assumes that UAS will operate under the existing pilot‑in‑command framework. 12 In other words, autonomous operations are expressly prohibited. While numerous important UAS applications actively employ pilots, the type of drones‑ everywhere future requires automation not currently contemplated in the Roadmap. Additionally, states and localities may introduce their own set of hurdles – some localities have already introduced privacy rules related to UAS operations, and there has been discussion of controlling community airspace if widespread UAS operations come to fruition. 13 France: The First Country to Integrate Civilian Drones into Its Airspace Compared to the U.S., France is much further ahead of the curve in terms of integrating drones into its airspace. In 2012, France became the first country in the world to update its airspace regulations to accommodate civilian drones. 14 With these regulations in place, French entrepreneurs and engineers are already taking advantage of the rules. Around 350 operators have obtained licenses to fly unmanned aerial devices. 15 Companies like Skydrone 16 and Airinov 17 are using drones to capture aerial footage and collect agricultural data. Even the French National Railway Company (SNCF), together with Electricité de France EDF and the French Directorate General for Civil Aviation, are working to test drone helicopters for infrastructure inspection and reliability needs. 18 Under France’s rules, drones are specifically authorized to engage in agricultural activities, package delivery, advertising (e.g., towing a banner), firefighting, and aerial observation, among other activities. 19 To the extent that the activity requires a derogation, or exemption, to France’s air rules, the drone operator should apply for a specific administrative authorization. 20 In incorporating drones into the national airspace, France has taken a similar approach to that proposed in the U.S., although, again, France is ahead of the curve. France classifies drones based on weight and whether the drone is “captive” (i.e., physically tethered to the pilot). 21 Essentially, the lighter the drone and the more remote the area, the fewer the operating restrictions, and captive drones are allowed to be somewhat heavier. In less populated areas: A) Drones up to 25 kg (150 kg if tethered) can be operated without any specific authorization so long as the pilot is within 100 meters; B) drones up to 25 kg can be operated so long as the pilot is within 1 kilometer, but administrative authorization is required. 22 Meanwhile, in urban areas, drones up to 25 kg (150 kg if tethered) can only be flown if the pilot is within 100 meters, and they require an administrative authorization. 23 Additionally, France allows drones to operate autonomously (i.e., the flight is performed without the active control of a remote pilot). 24 However, when a UAV operates autonomously, the remote pilot should be able to regain control if there is an emergency situation. Moreover, in urban areas, for example, pilots are still required to be within meters of the UAV (whether operating autonomously or not). 25 Thus, like in the U.S., there are still some further reforms required before an automated swarm of commercial drones are delivering packages or carry‑out food. What About the Airwaves? Even if aviation regulatory issues are resolved, significant concerns remain regarding whether the airwaves, both nationally and internationally, can accommodate the coming flood of drones. While some of these challenges regarding the national airspace have received attention in the wake of Amazon’s dramatic introduction of the Prime Air concept, 26 few outside of the communications world have discussed the difficulties drones may face due to limited access to spectrum. Although no major proceedings are underway in the United States, top members of the U.S. Federal Communications Commission (FCC) appear to see this issue looming on the horizon. Acknowledging that Amazon may need spectrum for its 30‑minute “Prime Air” delivery service, recently appointed FCC Chairman Tom Wheeler joked that if Mr. Lincoln’s T-Mails, a non‑fiction book that he wrote, happened to pop up to #1 on Amazon’s site, it wouldn’t necessarily hurt their ability to obtain spectrum. Likewise, at this year’s Consumer Electronics Show FCC Commissioner Jessica Rosenworcel told wireless executives that the Commission was working hard to provide spectrum for transformative technologies such as drones. Drones come in all shapes and sizes, but one thing they have in common is that they will almost certainly need some form of access to the wireless airwaves for all different types of functions. At a very basic level, drones need to receive fundamental marching orders (e.g., go here at this time), which will likely be communicated wirelessly. Most will likely incorporate GPS systems, which will not pose a problem in terms of spectrum scarcity, but also which are not currently sufficient alone to support autonomous navigation because they do not support the requisite level of accuracy. Additionally, many drones (most or all for the near future under the FAA’s UAS integration plan) 27 require active pilots who need frequency for active “command and control” of the aircraft, including, presumably, a live video feed to carry out this function if the drone is outside of direct view. These basic functions do not begin to take account of airwaves necessary for drones to communicate actively with each other, the surrounding infrastructure, or the countless other uses for spectrum that innovators have yet to create. All of this is to say, as a 2013 U.S. Government and Accountability Office Report recognized, the U.S. has significant needs for spectrum dedicated to planned drone operations. 28 Many drones currently use unlicensed spectrum – such as the spectrum used for home WiFi, garage door openers, and baby monitors – and like those devices, drones operating in unlicensed spectrum remain vulnerable to unintentional or intentional interference. 29 Of course, unlike garage door openers, aerial drones in crowded environments have significantly greater quality of service (latency, availability, integrity, continuity) and security requirements (e.g., it could be very dangerous if a drone gets hacked). In other words, the current unlicensed regime is likely insufficient to support future UAS requirements. To some extent, commercial technology may be able to sidestep the spectrum shortage by avoiding reliance on spectrum. Take, for example, Google’s driverless car – rather than relying on a remote driver controlling the car using the wireless airwaves, it autonomously navigates city streets using an active Laser Radar (LIDAR) system together with detailed topographical maps. 30 That is, it has no or limited spectrum needs during operations. Theoretically, drones could rely on a similar type of system to avoid active radiofrequency needs during flight. However, the theoretical ability to sidestep spectrum requirements remains far off, and significant needs for spectrum still exist. In the FAA’s five‑year roadmap for integrating drones into the civilian airspace discussed above, the FAA is not planning to allow autonomous operations. 31 Therefore, any operations under the FAA’s current roadmap will need spectrum so that pilots can operate the UAS. Similarly, the leading group representing the drone ecosystem, the Association for Unmanned Vehicle Systems International (AUVSI), has developed a “Code of Conduct” for drone operations, and the Code specifically recognizes that providing adequate and reliable spectrum is a fundamental aspect of operational safety. 32 Moreover, even fully autonomous drones that do not require a live communications feed for piloting may have communications requirements to send real‑time video, receive updated directions, or carry out any other potential activities. As drones promise to transform our day‑to‑day lives, drone operators and manufacturers, national regulators and international bodies must prepare for drone spectrum requirements. AUVSI recognizes as much, including spectrum as one of its important legislative initiatives. 33 To date, however, there have only been limited regulatory actions for accommodating drone’s future spectrum needs. An important start was the international negotiations at the 2012 World Radio Conference, where countries agreed to allocate 61 MHz of spectrum between 5,030 and 5,091 MHz to drone line‑of‑sight piloting needs. 34 This step represents an agreement to allow member countries to allocate spectrum for “command and control” communications (i.e., communications required for piloting) at these frequencies so long as the transmitter can transmit directly to the receiver (i.e., the transmitter can “see” the receiver). The International Telecommunications Union (ITU) member countries also agreed to discuss an allocation for beyond‑line‑of‑sight “command and control” communications (i.e., communications from a remote pilot to a drone via a satellite) at the next World Radio Conference, WRC‑15, to be held in Geneva, Switzerland throughout November 2015. Drones will likely need far more spectrum than is currently set‑aside, and future applications will likely require more than simple command‑and‑control communication functionality. While the line‑of‑sight and beyond‑line‑ of‑sight allocations at WRC‑12 and WRC‑15 represent important starting points, national and international bodies need to start preparing for these coming spectrum needs. Meanwhile, operators must incorporate spectrum considerations into strategic business plans. The advent and rapid development of commercial drone technology holds great promise for the future. However, regulators in cooperation with drone innovators have to work hard to make sure that the regulatory regimes behind our airwaves and airspace keep pace with these fast‑moving technical advances. Wireless Medical Body Area Networks: Opportunity in a Changing Regulatory Landscape Demand for wireless medical devices has exploded in recent years and continues to grow. The market for wireless monitoring devices, for example, has doubled in the past four years to $7.1 billion and is expected to triple in the next four years, to $22.1 billion. 35 Meanwhile, some analysts have estimated that the demand for wearable wireless medical devices alone will exceed 100 million units by 2016. 36 Just what are wireless medical devices? According to the U.S. Food and Drug Administration, they are any device or equipment that performs at least one function using wireless radiofrequency communication to support healthcare delivery. The device might transfer patient data from one device to another device, or monitor patients remotely. 37 As with many other sectors of the economy, expanded incorporation of wireless technology into healthcare promises many significant advances. Wireless medical devices can increase patient mobility by eliminating wires that might otherwise tether a patient to a bed, they can save on hospital visits by allowing healthcare professionals to remotely monitor their patients, and they can accelerate patient diagnosis, monitoring, and recovery by giving physicians the ability to continuously and remotely access patient data and adjust therapies as conditions change in real time. 38 These benefits not only improve patient comfort, but also enhance patient care. One 2006 industry survey found that manually monitoring and recording patient data consumed fully 40 percent of professionals’ patient‑care time in a standard hospital setting. 39 Replacing manual monitoring – and the costs, time, and risk of error that it entails – promises meaningful therapeutic benefits for patients as well as substantial financial and time savings for doctors, healthcare professionals, and hospitals. 40 Within the wireless medical device arena, one of the more promising technologies is Medical Body Area Networks (MBANs). MBANs are networks of small low‑power devices worn on the human body that communicate with a controller device through a wireless connection. The FCC has promulgated rules for the new technology but has not yet certified equipment. Once MBANs are deployed, MBANs will help measure and record patient information inside and outside healthcare facilities in support of diagnostic or therapeutic functions. MBANs can minimize the risk of infection, improve patient comfort and mobility during monitoring, and prevent more debilitating and costly diseases that can occur when patients are not effectively monitored. The precise configurations of MBANs will likely vary, but MBANs will generally involve a series of sensors that take readings of key patient‑specific information, which, as described by GE Healthcare, may include “temperature readings, pulse readings, blood glucose level readings, electrocardiogram readings, blood pressure level readings and readings relating to respiratory function.” 41 Transmitters incorporated into the sensors will then continuously transfer the data to a body‑worn or closely‑ located hub, eliminating the need for cables. 42 Until recently, wireless medical devices were limited to discrete, little‑used frequencies featuring limited amounts of contiguous spectrum. Instead of encouraging scale economies, a confused mix of medical spectrum bands prevented common design standards and required manufacturers to incur higher fixed costs over a smaller number of units. For example, Medical Radio applications could operate in the 401‑406 MHz, 413‑419 MHz, 426‑432 MHz, 438‑444 MHz, and 451‑457 MHz bands, all on a secondary basis. 43 Similarly, The Wireless Medical Telemetry Service (WMTS), which allows for the transmission of patient‑related telemetric medical information to a central monitoring location within a hospital or other medical facility, could operate in the 608‑614 MHz, 1395‑1400 MHz, and 1427‑1432 MHz bands on a primary basis. 44 While these and other bands are not contiguous and can sometimes be congested, the critical point for the medical community was that few, if any, of these bands featured access to a readily available, globally scaled development pipeline that would allow for the production of low‑cost devices suitable for widespread deployment. Through a series of rulemaking proceedings at the Federal Communications Commission, however, GE Healthcare and other medical equipment manufacturers and technology companies successfully convinced the Commission to make a significant amount of spectrum 40 MHz available for MBANs. On May 24, 2012, the Commission adopted new rules permitting the operation of MBAN devices in the 2360‑2400 MHz band (the “2.3 GHz band”). 45 Unlike the other medical‑band spectrum, the 2.3 GHz band is located immediately below the existing 2.4 GHz unlicensed band where billions of low‑power transceiver chips are produced for use in Bluetooth, WiFi, and similar widely adopted applications. In sharp contrast to the hodge podge of diffuse spectrum bands that had previously been available for medical devices, manufacturers seeking to develop MBAN devices in the 2.3 GHz band will be able to modify 2.4 GHz transceivers to accommodate the adjacent frequencies, which means that MBAN devices are likely to be deployed at lower prices and without the long lead times associated with more customized equipment. In its 2012 Report and Order, the Commission authorized 2.3 GHz MBANs under a so‑called “license‑by‑rule” regime: rather than issue an individual license, the Commission will authorize any devices meeting minimum performance standards to operate in the band, subject only to the condition that they not cause harmful interference to certain incumbent services. 46 In addition to certain technical rules, 47 the Commission adopted a number of service rules for MBAN operations, covering operator eligibility, permissible communications, authorized locations, and equipment authorization procedures. 48 Perhaps most importantly from an operational perspective, the Commission also adopted safeguards against harmful interference. In the years leading up to the 2012 Report and Order, several incumbent operators 53 Yantian Hou, Ming Li & Shucheng Yu, Surviving the RF Smog: Making Body Area Networks Robust to Cross-Technology Interference, available at http://digital.cs.usu.edu/~mingli/papers/Hou_ SECON_2013.pdf. 54 MBAN R&O at 13 n.70. 55 77 Fed. Reg. 55715 (Sept. 11, 2012). 56 Joint Petition for Reconsideration, Amendment of the Commission’s Rules to Provide Spectrum for the Operation of Medical Body Area Networks, ET Docket No. 08-59 (filed Oct. 11, 2012). 57 Id. 10 Hogan Lovells Global Media and Communications Quarterly Winter 2013 and vendors had voiced concerns that without some protective measures, creating a new MBAN allocation at 2.3 GHz could result in both co‑channel and adjacent‑ channel interference that might prove difficult to remedy and damaging to both incumbents and MBANs. On a co‑channel basis, concerns were raised about interference to aeronautical mobile telemetry (“AMT”) operations. Though far from ubiquitously deployed, AMT operations support sensitive flight testing operations involving with important payloads. AMT operations can include everything from flight testing by the commercial aviation industry to flight testing of aircraft, spacecraft and missiles by the United States government. 49 The Commission addressed these concerns by, among other things, limiting MBANs’ use of the 2360‑2390 MHz band to indoor locations within healthcare facilities, where there is a considerably smaller potential for interference with airborne AMT operations. The Commission also adopted certain registration and coordination rules for MBAN operations to make sharing between MBAN systems and incumbent AMT operations easier and more routine. 50 These rules require a healthcare facility that intends to operate an MBAN in the 2360‑2390 MHz band to register the MBAN with a Commission‑designated frequency coordinator that will record all MBAN operations in a database for use in identifying potential interference. 51 Furthermore, a healthcare facility may not operate the MBAN in the 2360‑2390 MHz band unless and until it receives clearance and the permissible operating parameters from the frequency coordinator. 52 MBAN operations in the 2390‑2400 MHz band, however, are not so restricted. They can occur at any geographic location, including inside the home, in ambulances and outdoors. The Commission also recognized that one of the principal benefits of the new MBAN spectrum – namely, the scale economies afforded to MBANs by the 2360‑2400 MHz band’s proximity to spectrum used for WiFi, microwave ovens, cordless phones, baby monitors and other unlicensed devices – could also pose an interference threat to MBANs. 53 The Commission found that “because Wi‑Fi channel 1 under the 802.11b standard occupies the 2401‑2423 MHz band, it may prove difficult to operate on Wi‑Fi channel 1 within close proximity of an MBAN device.” 54 Rather than require individual healthcare facilities to prioritize MBANs over improved access to Wi‑Fi, however, the Commission left the choice of which wireless services to prioritize to the healthcare providers themselves. “[H]ealth care providers,” the Commission found, “may have to consider how they deploy their various resources to best overall advantage.” The rules authorizing these devices became effective on October 11, 2012. 55 On that same day, Philips Healthcare, GE Healthcare, and the Aerospace and Flight Test Radio Coordinating Council filed a joint petition to reconsider certain aspects of the MBAN R&O (the “Joint Petition to Reconsider”). 56 The Joint Petition for Reconsideration requested the Commission to make a number of changes to the order, including: 1. Narrow the definition of a “healthcare facility” where MBANs can be operated in the 2360‑2390 MHz band on a coordinated basis to “include only hospitals and similar facilities that provide medical treatment for patient stays of 24 or more hours”. 2. Modify the definition of “body‑worn device” to include bedside devices by removing the requirement that the devices be within a “few centimeters” of the patient’s body. 3. Require all MBAN devices to cease transmitting in the absence of a control message. 4. Revise the MBAN frequency coordinator’s duties to make them clearer and more explicit. 5. Require attached antennas for MBAN devices capable of operating in the 2360‑2390 MHz band. 6. Strengthen the MBAN equipment labeling requirements to ensure that the label information is prominently displayed. 7. Publish MBAN equipment authorization requirements. 57 The American Society for Healthcare Engineering of the American Hospital Association (“ASHE”) also filed a petition for reconsideration, limited to “the issue of whether the public interest will be better served by 60 See, e.g., Ex Parte Presentation of SmartEdgeNet, LLC, Amendment of the Commission’s Rules to Provide Spectrum for the Operation of Medical Body Area Networks, ET Docket No. 08-59 (filed Dec. 20, 2012); Ex Parte Presentation of SmartEdgeNet, LLC, Amendment of the Commission’s Rules to Provide Spectrum for the Operation of Medical Body Area Networks, ET Docket No. 08-59 (filed Jan. 17, 2013); Ex Parte Presentation of Philips Healthcare, GE Healthcare, and the Aerospace and Flight Test Radio Coordinating Council, Amendment of the Commission’s Rules to Provide Spectrum for the Operation of Medical Body Area Networks, ET Docket No. 08-59 (filed Jan. 30, 2013); Ex Parte Presentation of Philips Healthcare, Amendment of the Commission’s Rules to Provide Spectrum for the Operation of Medical Body Area Networks, ET Docket No. 08-59 (filed May 6, 2013). 58 Petition for Reconsideration of the American Society for Healthcare Engineering of the American Hospital Association, Amendment of the Commission’s Rules to Provide Spectrum for the Operation of Medical Body Area Networks, ET Docket No. 08-59 (filed Oct. 10, 2012). 59 Petitions for Reconsideration of Action in Rulemaking Proceeding, Public Notice, Report No. 2966 (rel. Oct. 31, 2012). Ari Fitzgerald Partner, Washington, D.C. T +1 202 637 5423 [email protected] Trey Hanbury Partner, Washington, D.C. T +1 202 637 5534 [email protected] Hogan Lovells Global Media and Communications Quarterly Winter 2013 11 requiring all MBAN devices capable of transmitting in any portion of the 2360‑2390 MHz band to be registered with the MBAN frequency coordinator prior to deployment and operation.” 58 On October 31, 2012, the Commission issued a Public Notice regarding these petitions to reconsider and requested that oppositions be filed within 15 days. 59 No oppositions were filed in response to the Public Notice and there have been only limited ex parte filings since then. 60 The Commission has yet to issue a decision on these petitions for reconsideration, but a decision is expected soon. A technology standard developed by the Institute of Electrical and Electronics Engineers (IEEE), 802.15.6, has already been developed, which should hasten worldwide deployment once the FCC’s MBAN rules are finalized. Whatever the final shape of the Commission’s rules on MBANs, one thing is certain: the therapeutic and diagnostic value of wireless medical sensors will continue to place even more pressure on wireless spectrum already allocated for other, often incompatible uses. Managing competing demands for spectrum is a challenge not only in the United States, but also around the world. If proven successful, the creative mechanism developed by the U.S. Federal Communications Commission for MBANs to share AMT spectrum may point the way for other countries seeking to expand capacity for medical devices in a congested radiofrequency environment.European Court to examine blocking measures; French court blocks “allostreaming” The Court of Justice of the European Union (CJEU) is currently examining a case to determine under what conditions an Internet access provider can be ordered to block access to websites that infringe copyright. In this case 61 , a lower court in Vienna ordered the cable operator UPC Telekabel (UPC) to block access to “kino. to,” a site that offered unauthorized access to films and television series. The matter went up to the Austrian Supreme Court, which in turn sent a series of questions to the CJEU to determine whether a blocking measure of the kind ordered by the lower court is compatible with European law. The CJEU’s advocate general issued his opinion on November 26, 2013. 62 While not binding on the court, the opinion provides precious guidance on the complex legal issues involved in blocking access to Internet sites that infringe copyright. In order to be valid under European law, a blocking measure must satisfy four tests. First, there must be a copyright infringement. Second, the blocking measure must target an “intermediary” of the kind mentioned in Article 8(3) of the EU Copyright in the Information Society Directive 2001/29/EC (EU Copyright Directive). Third, the measure cannot constitute a “general monitoring” obligation prohibited by the E‑Commerce Directive 2000/31/EC (the “E‑Commerce Directive”). Finally, the measure must satisfy the proportionality test. Is there copyright infringement? The advocate general took as a given that the kino.to sites infringed copyright, and therefore did not analyze this point in detail. The Paris court in the recent “allostreaming” case 63 , as well as the High Court of England in the “SolarMovie” and “TubePlus” case 64 , examined the question of infringement much more closely, concluding that providing links to unauthorized streaming files constitutes an act of infringement. Is an Internet access provider and “intermediary” within the meaning of the EU Copyright Directive? Article 8(3) of the EU Copyright Directive (2001/29/EC) requires Member States to ensure that right holders are “in a position to apply for an injunction against intermediaries whose services are used by a third party to infringe a copyright or related right.” UPC argued that its services are not “used” by kino.to, and that UPC is therefore not an “intermediary” for the purposes of article 8(3). UPC emphasizes that it has no relationship with keno.to, and does not have an active role in making available the infringing content. UPC compares itself to a supplier of electricity, and argues that its role is too distant from the activities of kino.to to be considered an intermediary under article 8(3). The advocate general disagreed, indicating that it is not necessary for an Internet access provider to have a contract with the entity that is committing the infringement. It is sufficient that the Internet access provider intervenes in the technical routing of the infringing content. According to the advocate general, the EU Copyright Directive targets not only the hosting providers and access providers upstream, who have a direct link with the infringing website, but also the access providers downstream, who have links with end‑users. In the French case “allostreaming”, the Paris court came to the same conclusion with regard to internet access providers. The Paris court also found that a search engine could be considered an intermediary for the purposes of the French law that transposed the EU Copyright Directive (the status of search engines was not discussed by the advocate general in the kino.to case). In the French allostreaming case, Microsoft argued that search engines should not be considered an intermediary under the EU Copyright Directive because, according to Microsoft, the notion of intermediary should only apply to entities that have a role in the “carriage” of content. (Microsoft cited recital 59 of the Directive, which refers to an intermediary that “carries a third party’s infringement of a protected work.”) The Paris court did not follow Microsoft’s reasoning and found that French lawmakers intended to give courts broad power to order measures against all entities that have a role in the technical or commercial supply chain for infringing content. The scope of the Paris court’s decision could extend not only to search engines, but to other kinds of intermediaries such as payment providers, or advertising networks. Does the measure constitute a “general monitoring” prohibited by the E-Commerce Directive? The E‑Commerce Directive prohibits Member States from imposing a general obligation on technical intermediaries to monitor the information that they transmit or store. The CJEU previously held that the implementation Hogan Lovells Global Media and Communications Quarterly Winter 2013 of a general filtering obligation violated this provision, and that social media platforms cannot be required to implement a “take down and stay down” regime for the same reason. In the kino.to matter, the advocate general found that the blocking measure ordered by the Austrian court was sufficiently targeted so as not to violate the E‑Commerce Directive’s prohibition of general monitoring measures. Does the blocking measure satisfy the proportionality test? The advocate general began by considering the effectiveness of the blocking measure, taking into account various technical avoidance measures that are available to users. This argument was also raised in the French “allostreaming” case. Most blocking measures can be defeated by sophisticated Internet users. The legal question is whether a blocking measure that can be easily avoided by Internet users is an “appropriate” and “necessary” measure. On this point, the CJEU advocate general and the Paris court are in agreement: the fact that a technical measure can be avoided does not necessarily mean that the measure will not be effective in discouraging a significant number of Internet users from downloading infringing content. The advocate general believes, however, that courts must make a quantitative estimate of the efficacy of a measure as part of their balancing test. The efficacy of the measure must be balanced against the costs of its implementation by the technical intermediaries. When these costs are significant, the court should also ask whether it is appropriate for those costs to be borne by the right holders rather than by the technical intermediaries. According to the advocate general, the proportionality test may require that right holders undertake actions against the publisher of the infringing sites, as well as against the site’s upstream ISP. This point was also debated in the French “allostreaming” matter. The question is whether right holders must first go after the publisher of the infringing sites, or whether they may act immediately against the technical intermediaries. The Paris court concluded that it was not necessary for right holders to act first against the publisher of the site or against the sites’ hosting provider because “no legal provision requires claimants to bring hosting providers into this case and there exists [in the law] no principle of subsidiarity.”Christelle Coslin 14 Hogan Lovells Global Media and Communications Quarterly Winter 2013 The proportionality test naturally involves a balance of fundamental rights. The advocate general lists three of these rights: the right to the protection of property, freedom of expression, and the right to conduct a business. None of these rights is absolute; each may be restricted as long as the restriction is provided by law and is proportionate. As regards freedom of expression, the advocate general indicated that courts must ensure that blocking measures target only illegal content, and that there is no risk they also block access to legal content. This requirement is probably too strict. If one were to follow the advocate general’s reasoning to the letter, an illegal streaming platform would only have to list one public domain film in order to prevent any blocking measure from being brought against the site. The approach of the Paris court is more pragmatic: if the vast majority of the works available on the site are infringing, that is sufficient to justify a blocking measure against the site. The existence of a small minority of works that are not protected by copyright is not sufficient to protect sites such as “allostreaming” against court measures. It will be important to watch how the European Court of Justice approaches this issue in its final opinion, as the advocate general’s position could potentially weaken article 8(3) of the EU Copyright Directive. As regards freedom to conduct a business, the advocate general was critical of the Austrian court’s blocking order. He said that the measures ordered by the court were too general, and left internet access providers with doubt as to what they should do. The Austrian courts had ordered the internet access providers to implement all measures necessary to prevent access by their subscribers to the kino.to sites. According to the advocate general, the general nature of this order puts Internet access providers in a difficult position. They will not know which of several technical options ‑‑ DNS server filtering, IP address filtering, or proxy server filtering – should be implemented. Each option provides different levels of effectiveness and involves different costs. According to the advocate general, the Austrian court should have given precise instructions to UPC on which technical option to adopt. By keeping UPC in the dark, the court violated the proportionality principle with regard to UPC’s right to conduct a business. The injunction in the French “allostreaming” case is similar to the Austrian court’s injunction. At first blush, the French injunction would also violate the advocate general’s proportionality test because it is too general. However, in the French matter, the point does not seem to have been debated. The French Internet access providers and search engines apparently did not argue that the judge’s order was too general. The court left it to the parties to determine the most appropriate measure to implement. Leading U.S. Court of Appeals Strikes Down Key Network Neutrality Rules: What’s Next for the Open Internet? In a highly anticipated decision, the United States Court of Appeals for the D.C. Circuit struck down key provisions of the Federal Communication Commission’s (FCC) network neutrality regulation 65 that banned blocking lawful content and prohibited fixed broadband providers from unreasonably discriminating among content providers. 66 While the majority of the three‑judge panel concluded that section 706 of the Telecommunications Act gives the FCC authority to promulgate rules on broadband, the court concluded the FCC cannot use its section 706 authority to regulate broadband information service providers as if they were traditional common carriers. 67 The court considered three main provisions of the FCC’s Open Internet Order: (1) rules that prevent fixed broadband providers from unreasonably discriminating in transmitting data over their networks; (2) rules that prevent broadband providers from blocking consumers’ access to lawful content; and (3) rules that require disclosure of commercial terms, performance characteristics, and how broadband providers manage network congestion. 68 The court could not find any basis in section 706 of the Telecommunications Act for allowing the FCC to prohibit carriers from discriminating among content providers – for example, by offering some content providers faster delivery while limiting others to standard service. Rules that require equal treatment of all internet traffic looked too much like traditional common carrier regulation in the court’s view. Because the Commission has designated broadband as an information service, it is statutorily prohibited from imposing common carrier requirements. The Court emphasized the section 706 authority does not give the Commission free rein to violate other statutory mandates. But the court viewed the FCC’s “no blocking” provisions of the Order a bit differently. According to the court, the FCC’s attempt to prohibit a broadband provider from blocking a consumer’s access to the lawful content of their choice could be sufficiently distinguishable from traditional common carrier regulation to be theoretically permissible. Since the FCC never addressed how these “no blocking” provisions would operate in the absence of common‑carrier type regulation, however, the court declined to uphold the “no blocking” provisions on the current record. 69 Finally, the court upheld the FCC’s disclosure rules, finding them sufficiently narrow – and sufficiently distinct from traditional common carrier regulation – to survive scrutiny. 70 As a result, the FCC will continue to be able to require broadband providers to disclose information to consumers about the providers’ network management practices. The three‑judge panel was comprised of Judge Rogers, Judge Tatel and Senior Judge Silberman. Because the majority reasoning of Judge Rogers and Judge Tatel rests heavily on the FCC’s decision to classify broadband as an information service rather than a traditional common carrier telecommunications service, this decision will likely reignite the debate around reclassifying broadband. 71 Many advocates who agreed with the Open Internet Order’s policy goals have long been concerned that the FCC had failed to undergird the rules with a solid legal foundation. 72 Reclassifying broadband as telecommunications service would allow the FCC to work around the majority’s decision, but presents its own potential legal and political challenges. The third panelist, Senior Judge Laurence Silberman, concurred in part and dissented in part. Judge Silberman took an even more limited view of the section 706 authority. 73 He agreed with the majority that section 706’s directive that the FCC shall “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability” through, among other things, “measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment” grants the FCC positive regulatory authority. But Judge Silberman also concluded that the FCC’s Open Internet Order exceeds that authority because the FCC never actually identified any broadband provider practices as “barriers to investment” that network neutrality would remove, nor did the FCC make a reasonable 74 Id. at 2-5. 75 Id. at 7. 76 Statement by FCC Chairman Tom Wheeler Regarding DC Circuit Opinion on the FCC’s Open Internet Rules, Federal Communications Commission (Jan. 14, 2014), http://transition.fcc.gov/Daily_Releases/ Daily_Business/2014/db0114/DOC-325106A1.pdf. 77 Brian Fung, Netflix’s secret weapon in the net neutrality fight, The Washington Post (Jan. 22, 2014), http://www.washingtonpost.com/ blogs/the-switch/wp/2014/01/22/netflixs-secret-weapon-in-the-netneutrality-fight/. 78 Edward Wyatt, Rebuffing F.C.C., Court Allows Deals for Faster Streaming, N.Y. Times, Jan. 15, 2014 at B1. 79 David Kravets, AT&T Thumbs Nose at Net Neutrality With ‘Sponsored’ Bandwidth Scheme, Wired (Jan. 6, 2014), http://www.wired.com/ threatlevel/2014/01/att-sponsored-data/. 80 See BEREC Guidelines for quality of service in the scope of net neutrality BoR (12) 131 (Nov. 11, 2012), available at http://berec.europa.eu/eng/ document_register/subject_matter/berec/regulatory_best_practices/ guidelines/1101-berec-guidelines-for-quality-of-service-in-the-scope-ofnet-neutrality. 81 Regulation of the European Parliament and of the Council laying down measures concerning the European single market for electronic communications and to achieve a Connected Continent , COM(2013) 627 (Sept. 11, 2013). 82 Czech regulator issues traffic management rules, telcompaper (Dec. 23, 2013), http://www.telecompaper.com/news/czech-regulator-issuestraffic-management-rules--987360. Michele Farquhar Partner, Washington D.C. T +1 202 637 5663 [email protected] Elizabeth A. Bonner “Austin” Associate, Washington, D.C. T +1 202 637 2460 [email protected] 16 Hogan Lovells Global Media and Communications Quarterly Winter 2013 case that network neutrality regulation promotes local telecommunications competition. 74 Furthermore, Judge Silberman stated that the FCC’s regulation is arbitrary and capricious because its findings lack substantial evidence. 75 Reacting to the opinion, FCC Chairman Tom Wheeler said that the FCC would consider all its available options for continuing to promote open internet principles, including appealing the decision to the Supreme Court. 76 Appealing could, however, prove risky for the FCC, as the Supreme Court could potentially reverse the D.C. Circuit’s conclusion that section 706 grants the F.C.C. authority to regulate broadband. The FCC could decide to forgo an appeal in an effort to protect that favorable ruling. The court’s decision is expected to fuel increased interest in paid prioritization programs among fixed broadband providers, a practice that the Order effectively curtailed. Lifting the “no blocking” rule may also have consequences for bandwidth‑intensive applications; operators could throttle or potentially ban bandwidth‑ intensive applications if network congestion becomes a serious issue. Netflix, which provides more than 30% of the content consumed online during the peak parts of the day, has announced its intention to resist attempts to charge content providers for access to broadband subscribers: “Were this draconian scenario to unfold with some ISP [Internet service provider], we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver.” 77 Broadband providers have sent mixed signals about their intentions to take advantage of the new regulatory landscape. At oral argument last fall, Verizon told the court that it would be pursuing different pricing models but for the FCC’s rules, but after the decision was announced Verizon stated that it “has been and remains committed to the open Internet, which provides consumers with competitive choices and unblocked access to lawful websites and content when, where and how they want” – a commitment the company said the D.C. Circuit opinion would not change. 78 Even before the ruling, AT&T had begun exploring new pricing strategies with its recently announced Sponsored Data program, which sidestepped the then‑in‑force network neutrality rules but was criticized as violating the “spirit” of the Open Internet. 79 Unlike the United States, Europe does not distinguish between “common carrier” telecommunications services and broadband information services. All Internet conveyance services are classified in Europe as “electronic communications services” and the same net neutrality rules apply both to fixed and mobile Internet access. 80 Last fall, citing the need for harmonized regulation, European Union regulators began the process of strengthening Open Internet protections. In September 2013, the European Commission (EC) adopted a far‑reaching “Connected Continent” legislative proposal that includes new network neutrality mandates. 81 The proposal is currently working its way through the European Parliament’s committee procedures and now faces a potentially lengthy process of amendments and approval by the full European Parliament and the EU Member States before it can be brought into effect. Some national regulators in Europe are already taking steps to implement similar mandates. 82Hogan Lovells Global Media and Communications Quarterly Winter 2013 17 Change Any consideration of the changes that have taken place in the TMT sector in the last five years cannot fail to take account of its diversity. Take just one example – regulation. In some areas of the market, one high profile example being data security and privacy, regulation is an established central theme. In others, regulation is trying to react quickly to the rapid evolution of new business models. A topical example is the development of over‑the‑ top (OTT) content services which not only challenge the traditional media providers but also leave regulators across the globe struggling to keep up with the pace of change in incorporating OTT into the extensive existing framework of media regulation and addressing associated issues such as the data‑rich natures of OTT service providers and the threat of tax base erosion. By contrast, for many in the industry, regulation plays only a minor role in their day‑to‑day activities. As a result we find new regulations cited as a significant change by just 38% of our respondents. This is a marked contrast to much higher percentages in the financial services, life sciences and real estate markets. Indeed, in the TMT sector, product and service innovation, and new business opportunities, were both identified by two‑thirds of our sample as areas of significant change – two aspects that are bound to be front of mind for decision makers in a dynamic industry such as this suggests that, in this space it is often the rapid pace of technological change and associated evolution in business strategies which drives regulatory change rather than regulation itself driving corporate change. In short, whereas for some in the TMT sector regulation is critical (nearly one in four say actively engaging in regulatory policy will be their primary challenge) across the sector as a whole business leads and regulation responds; a marked contrast to the role of regulation in driving the shape of financial services, life sciences and the utilities sectors. However, perhaps the most surprising finding from TMT respondents was the fact that 15% considered the industry to have experienced no change at all in the past five years; the highest percentage saying so in any of the sectors in our survey. The only conclusion we can draw from this is that this is an industry in which change has become normalised, and one in which business strategy can never stand still. Respondents in the TMT sector are highly focused on product and service innovation, with 68% citing this factor as one of the most significant changes that they have witnessed in the past five years, and a similar percentage seeing new business opportunities emerging. While this innovation presents growth opportunities, it also has a darker side, with disruptive technologies a constant concern for TMT operators. Again this is a trend exemplified by the growth of OTT services which have a huge potential to displace existing providers. There is always the potential for market leaders to be displaced by more innovative market participants meaning there is pressure to secure returns on investment ever more quickly and to spread the costs of that investment more widely, given the potential threat from competitor innovation. This may be the driver of two trends which emerge from our survey. In the face of a hotbed of innovation and new business opportunities, respondents in the TMT sector tell us that they have adapted since 2008 by entering into partnerships and strategic alliances, by moving towards operational flexibility, and by entering new geographic and product markets. New markets are certainly on the radar of TMT leaders. This is particularly true of product Change and Adaptation Extract from Hogan Lovells FT TMT Sector Report 2013 A Hogan Lovells Report Evolution: Reigniting the Global TMT Sector18 Hogan Lovells Global Media and Communications Quarterly Winter 2013 markets, where our survey shows the TMT sector to be the most active in making investments. In addition, the TMT sector appears to be the industry most in favour of partnerships and strategic alliances, according to our survey, and this may be a result of the speed of change its leaders are dealing with. In a fast‑moving market, strategic partnerships can provide a quicker, more flexible, means of entry into new product areas or geographies, or leveraging brand or technologies, than traditional M&A. Furthermore, in a difficult financing environment, partnerships can provide growth opportunities in a way that requires less capital investment and mitigates competitive risks more than would be the case if the participants pursued the same opportunities through traditional M&A transactions. Challenge Looking to the future, whilst general market weakness and volatility is seen as the greatest challenge facing the TMT market in the next two years, it is no surprise to see TMT decision makers prioritising innovation in operations and the use of technology as their number one concern going forward. The sector is certainly the most innovative of those in our survey, and innovation is cited by half of our respondents as the most important demand placed on their business in light of the economic challenges of recent years. In an innovation driven business it comes as no surprise that intellectual property issues are also a key area of focus. Most of the products which drive the industry are founded in intellectual property and businesses face challenges, both conceptual and practical, surrounding the worlds of patents and copyright. These challenges, and the need to address them through appropriate diligence and contractual measures are central to transactions of every kind including both M&A and the building of strategic partnerships. And yet, despite these challenges, there are clear signs of confidence returning, with only 20% expecting the market weakness to continue into the longer term and remain a challenge for the next three to five years. The greatest challenges that decision makers see on the horizon are growing competition from overseas, and the rising tax burden. The TMT market, then, finds itself set apart from many of the other industries in our survey, with regulation a less consistent theme than for many and constant drive for innovation the dominant theme. This points to a new era of growth on the horizon for many in the TMT industry with strategic alliances and M&A at the heart of many growth strategies. Outlook Respondents tell us that there will be a period of great change ahead, driven by the constant need for innovation in the pursuit of competitive advantage. They expect general market weakness to become less of a worry, but see product innovation and the protection of intellectual property as key concerns for the years ahead. Product innovation – In the TMT industry, failure to innovate can lead to extinction. Capitalising on a competitive advantage in the face of intense competitive pressure from both domestic and overseas rivals will continue to be a pre‑eminent challenge in a constantly changing landscape. Investing in the people that can drive innovation will be a fundamental tool for achieving growth, as will operational flexibility that allows for quick responses to market change. Intellectual property – Properly protecting and leveraging your ideas and innovations, your brand and your creative works, is vital in the TMT market. Intellectual property protection means a commitment to the life cycle of IP assets, from development to commercialisation and licensing, through to maturity. Failure to do so can seriously impact the ability of companies in the industry to achieve long term growth.Hogan Lovells Global Media and Communications Quarterly Winter 2013 19 One of the most popular responses to the challenges of recent years in the TMT sector has been a move towards more partnerships and strategic alliances, a strategy adopted by more than two in three of our survey participants (68%) and one that we see only increasing. Recent examples of partnerships in the TMT sector include: Technology ● Softbank/PayPal (PayPal Japan): Mobile credit card and payment services in Japan. ● Nokia/Siemens (Nokia Siemens Networks): Multinational data networking and telecommunications equipment. Media ● Disney/Univision (Fusion): English language news and life style cable network targeted to Hispanic audiences. ● Lionsgate/MGM/Paramount (EPIX): Premium entertainment network and subscription video on demand service. ● Pinewood Shepperton/Seven Stars Media (Song Lin): Film and television production in China. ● HULU (Fox/Disney/NBC/Providence): Streaming video of TV shows, movies, webisodes and other digital content. Telecoms ● AT&T/Akamai: Combining AT&T’s global IP network portfolio with Akamai’s content delivery network platform. ● Orange/Facebook: A social calling application that will allow users to call each other via mobile or desktop. ● PGi/TeliaSonera: Virtual meetings and cloud‑based collaboration systems in the Nordic and Baltic regions. The principal reasons most often cited for entering into partnerships and strategic alliances are to (i) share costs and/or risks, (ii) enter new markets (geographic or products/services), and (iii) gain access to complementary technologies, know‑how or other assets. However, as compared to traditional M&A, the potential disadvantages and risks of partnerships include sharing the upside in success, giving up control and restricting future flexibility (if exclusivity or non‑competition commitments are included or implied). Partnerships and strategic alliances can take many different forms, and can be tailored to meet the strategic, financial and operational objectives of the parties. Prior to entering into any partnership or strategic alliance, it is critical for a company to define its goals and expectations, and seek to understand those of its prospective partner. If the parties’ goals are compatible, the form, terms and conditions of the partnership or strategic alliance can be mutually agreed upon and clearly documented. Thus, critical pre‑formation issues include defining the scope of the joint venture; determining and valuing the contributions of the parties; deciding how the joint venture will be financed, managed and operated; allocating rights to share in distributions and other bi‑products of the venture’s activities (including new intellectual property); and agreeing to mechanisms for resolving disputes. Furthermore, despite the best intentions of the parties, most partnerships and strategic alliances end early. This often occurs because the parties are unable to agree on key strategic decisions, or the partnership or strategic alliance fails to achieve its original business goals (or no longer fits the overall strategy or needs of one or both of the parties). Accordingly, the legal documents prepared at the outset of the partnership or strategic alliance must anticipate these and other possibilities and provide an “exit” and/or termination rights to one or both parties. Finally, given the organic nature of partnerships and strategic alliances, the parties must be prepared to dedicate sufficient time and attention to determining whether they truly are compatible long term business partners, and then prepare a robust set of legal documents to govern their relationship as it evolves during the life cycle of the joint venture or strategic alliance. * Stephen Kay was formerly Managing Partner of Hogan Lovells’ Los Angeles office. Partnerships and strategic alliances in the TMT sector Stephen H. Kay, Senior Vice President, General Counsel, Roku, Inc.* Stephen H. Kay Senior Vice President General Counsel Roku, Inc.20 Hogan Lovells Global Media and Communications Quarterly Winter 2013 With growth firmly on the agenda for many companies going about their business in the TMT arena, the challenge has been how that growth can be achieved against a backdrop of macroeconomic stress. The answer, according to 80% of our respondents, is to move into new areas of business, which sets the sector apart as a leader in diversification. Disposals in existing markets are firmly off the agenda in TMT, again more so than in any other sector, but other strategies on the minds of business leaders include entering new geographic markets and entering into long term strategic relationships. Organic growth To realise this expansionist ambition requires supportive shareholders and first class staff. These two absorbers are seen as key priorities for making TMT businesses successful in current markets. But the main drivers behind organic growth will be enhancing efficiency and productive capacity, as well as developing new sales and distribution channels, as those across the industry move to keep one step ahead in a fast‑paced competitive environment. The entire sector is dealing with new types of hardware, software and services, new ways of producing and monetising content, and new demands on networks, alongside exponential growth in customer touch points and data sources. Organically growing sales of existing products to existing markets will not be easy. Few in the market expect to be able to achieve their ambitions in new markets through organic expansion. Instead organic growth will be focused on existing markets, and will focus on finding ways to deliver products to customers in ways that are better, more efficient, and more attractive. Factors that will inhibit our respondents’ plans for organic growth include unfavourable regulatory conditions, perhaps implying antitrust and competition legislation putting restraints on domestic growth, as well as global competition and high barriers to market entry. M&A investment The business leaders we spoke to in the TMT sector see M&A investment and consolidation being driven primarily by the need to increase market share in existing markets and fuelled by improved financing conditions. Something of an M&A boom is already alive and well in the TMT market, with the most active part of the sector being the technology field, where activity is being driven by the U.S. There the largest deals of late saw the February 2013 announcement that Dell, the world’s third largest personal computer maker, was to be acquired in a $24.9bn leveraged buyout led by Silver Lake Management. Then in September Verizon Communications agreed to pay $130bn to buy Vodafone Group out of its U.S. wireless business, in history’s third largest corporate deal announcement. In Europe the busiest part of the TMT industry has been the telecoms market, and particularly so in the 12 months to the end of Q2 2013, during which $55bn has been spent on 99 deals, or 36% of global technology spending. Whilst the biggest deal was a classic example of geographic consolidation as Virgin Media acquired by Liberty Global in a £16bn takeover, many transactions have been driven by incumbent suppliers moving to shore up their positions in the face of fierce competitors snapping at their heels. It is striking that, in the media market, the volume of M&A has remained stable since the start of 2011, but the value of transactions has significantly increased to a global average deal size of $210m, again driven by the nature of activity in the U.S. But the TMT industry does not have a good history with acquisitions, according to our respondents. 35% told us that M&A has failed to deliver what they had hoped for in past deals; the highest proportion of dissatisfied dealmakers in any of our sectors (the average dissatisfaction rate across all of our sectors was 25%). With such a fast‑paced market this is perhaps unsurprising, as valuations in the face of competitor innovation, and at the early stage of new technologies, can be extremely challenging. Indeed the fact that M&A can be viewed as too blunt an instrument in some parts of the TMT market is a significant contributor behind the rise in partnerships and strategic alliances over the last five years. This suggests that the flexibility that a joint venture brings has been seen as outweighing the relative simplicity of a “clean” M&A deal. Money matters When it comes to the challenging issue of financing deals, the majority of our TMT respondents expect to source funding over the next two years through direct lending from institutional providers, such as pension funds, insurance companies and other asset managers, as well as from existing cash deposits and the banks. Growth in Difficult Times Extract from Hogan Lovells FT TMT Sector Report 2013In terms of funding, where do TMT companies expect financing will come from over the next 12 to 24 months? And over the next 3-5 years? 0% 10% 20% 30% 40% 50% 60% 70% 80% Banks Specialist credit funds Direct lending from institutional investors Asset ﬁnancing Project ﬁnancing Capital markets Existing cash New share issues Next 12-14 months Next 3-5 years Percentage *e.g. pension funds, insurance companies, other asset managers Percentage How do you expect businesses will use their cash over the next 12-24 months? And how do you believe businesses should be using it? 0% 1% 2% 3% 4% 5% M&A investment Invest in organic growth Return money to shareholders Keep as savings Pay down debt How businesses will use cash How businesses should use cash Hogan Lovells Global Media and Communications Quarterly Winter 2013 21 In the longer term, looking over the next five years, existing cash is seen as the most likely source of financing, alongside the capital markets, and increasingly the banks. We also asked our respondents how they expect businesses to use their cash over the next two years, and we found the majority putting an emphasis on M&A investment, followed by paying down debt. Respondents said companies should instead be committing more cash to paying down debt and returning money to shareholders. Hogan Lovells research into the cash on the balance sheets of the world’s top 1,000 non‑financial companies shows TMT businesses amongst the most cash‑rich in 2013, with cash on TMT balance sheets up 19% on 2012 to exceed $1,119bn across 170 companies at the end of August. Outlook There seems a growing consensus across the TMT market that the current trend for transactional driven growth in the sector will continue, driven by consolidation thanks to the need to increase market share in existing markets and tap new ones, and fuelled by improved financing conditions that will push companies to seek growth externally. Our study shows businesses will prioritise: Talent management – After all, the greatest source of innovation comes from attracting and retaining the brightest employees, and empowering them to take the business forward. Competition for talent is fierce in all parts of the TMT sector, but getting the right people in the right positions within the company, and committing to intelligent recruitment, training and incentivisism, will be key for growth. Strategic partnerships – Increasingly seen as the nimble way to tap into the potential of new markets without taking on the risk of wholesale acquisitions, partnerships and alliances are becoming an increasing feature of the TMT world. As experienced practitioners will attest, such arrangements should not be entered into lightly, however, and call for careful consideration of strategic, business and legal issues at the outset, including pre‑negotiating dispute resolution procedures and exit rights, utilising tax efficient structures, and considering potential competition and regulatory challenges. M&A – It seems inevitable that M&A will be a significant feature of the TMT market in the coming years. But as consolidation takes hold, businesses will want to improve their success rates with transactions, so as to achieve a higher level of satisfaction with deals after completion. Here the focus will need to be around robust deal execution, which means thorough due diligence and consideration of the primary issues, namely what is the acquisition bringing to the core business, and whether the valuation is correct. 22 Hogan Lovells Global Media and Communications Quarterly Winter 2013 While deal activity is already happening around the world and across the subsectors that make up the TMT industry, there remains an appetite for more. Respondents in the TMT space broadly agree, more than most, with the assertion that short term challenges are inhibiting long term planning in their industry, and that companies are under‑investing. And so the question comes to what it will take to bring out even further investment by businesses? Here the three biggest issues are improvement in the financing markets, reduced uncertainty in the Eurozone, and bold regulatory reform by governments. If we take the latter measure to be a call for elected leaders to kick‑start the recovery with new rules to encourage bank lending or the like, then it appears that the issues dampening the already‑fairly potent TMT markets are macroeconomic as opposed to sector specific. There is also some demand in the TMT sector for a simplification of the tax regimes. TMT businesses continue to look to international expansion as a path to growth. The focus is on Southeast Asia and Greater China over the next couple of years, and on Western Europe and Southeast Asia in the longer term. Other growth markets when we ask respondents to look five years ahead appear to be Central and Eastern Europe, South America, South Asia and North America with Africa and the Middle East appearing to lag even when looking that far ahead. It is likely that patterns of activity will vary between different strands within the sector. For example the smartphone business will continue to have a strong emphasis on China, both in terms of handset‑making and building networks whilst in European telecoms continued consolidation will continue as the as the battle between the phone companies and the broadband and cable providers to offer multi‑service bundles drives more deals like Vodafone’s acquisition of Kabel Deutschland, Germany’s biggest cable company. OTT businesses by contrast are likely to see growth across the globe. But cross‑border expansion is not without its issues: the greatest challenges to international expansion are focused again around regulatory hurdles and international tax structures. Deal outlook TMT businesses are under pressure from the pace of innovation in the sector and the ever‑present challenge of both domestic and international competitors. In that context acquisitions are likely to become increasingly attractive as a means to access new geographies and new product lines. The deal outlook for the sector is already extremely positive, and the TMT M&A market looks certain to remain active as financing conditions improve and the most difficult macroeconomic challenges are slowly addressed. We expect to see significant deal activity in Western Europe and North America across all subsectors, and within technology in particular, and in telecoms in Europe. Particularly active subsectors look likely to include cyber security and big data analytics, where we expect to see significant deal activity going forward. The media industry will also see increased M&A as new ways of producing and selling content threaten existing business models. Reigniting the Global TMT Sector Extract from Hogan Lovells FT TMT Sector Report 2013Hogan Lovells Global Media and Communications Quarterly Winter 2013 23 The U.S. telecoms market has witnessed a flurry of significant M&A transactions in recent months, most notably Verizon Communications’ $130bn deal for Vodafone Group’s U.S. assets, which is history’s third‑ largest corporate deal and gives Verizon full access to the profits from the largest mobile operator in the U.S. Other transactions include Softbank’s $21.6bn acquisition of Sprint Nextel, the number three U.S. wireless provider, and AT&T’s $1.2bn acquisition of Leap Wireless. These deals are being driven by favourable market conditions and the need for more spectrum, particularly in the absence of Federal Communications Commission (FCC) auctions, which have not happened since 2009. Many of the wireless transactions are being pushed ahead by consumer demand for more wireless services, as the move away from traditional wires towards smart phone services gathers pace. Many of the deals have at their heart the need to penetrate particular market segments, such as the prepaid market in the case of AT&T’s Leap buy, and to gain competitive edge in distinct niches. The constant need to innovate is another M&A driver, with the big telecoms providers perpetually entering new spaces, as with AT&T and Verizon’s recent moves into the mobile video arena. Often the best way to move quickly into new product areas is via acquisition. On the technology side, perhaps the most interesting deal is Microsoft’s $5bn purchase of Nokia’s mobile phone business, as the main makers of mobile‑network equipment continue to give up making handsets. The handset makers are now focused around three systems – Google’s Android, Apple’s iOS, and some way behind, Microsoft’s Windows. And the operators of mobile networks are preparing for further consolidation, both in the U.S. and worldwide. There is also change afoot at the United States Federal Communications Commission, where new chairman Tom Wheeler, a managing director at Washington, D.C., venture capital firm Core Capital Partners, has taken the helm. One of his most important challenges is a successful television spectrum incentive auction, expected within two years, and he will also need to drive efforts to increase internet connectivity in schools, but his approach is not expected to differ markedly from that of his predecessors
Hogan Lovells bolsters TMT Practice with Leading Hong Kong Hire
HONG KONG, 13 January 2014 – Hogan Lovells has recruited Mark Parsons into its Corporate/Commercial team in Hong Kong as a partner with a particular focus on complex commercial transactions and regulatory matters in the TMT sector. Mark is expected to join around the end of January 2014. Mark was formerly a partner at Freshfields Bruckhaus Deringer in Asia where he led their IP/IT practice and their work in the TMT sector. Within a practice covering a wide range of commercial, regulatory and intellectual property matters, Mark is particularly experienced in the negotiation of multi‑jurisdictional outsourcing, technology licensing and distribution agreements, as well as advising on commercial matters in the internet and e‑commerce space. Mark also has a well‑developed practice advising on Asia’s fast developing telecommunications, media and data privacy regulations. Mark is a highly regarded TMT practitioner and is listed in Chambers as a leading individual, where clients reported “He has a very positive and solution‑based approach to problems, and is an excellent technician as well.” Mark’s hire adds further breadth and depth to Hogan Lovells’ leading global Commercial practice and the well‑established multi‑disciplinary TMT practice across the Asia region. Commenting on Mark’s arrival, Peter Watts and Robert Waldman, global Co‑Heads of Hogan Lovells’ Commercial practice, said: “We are delighted that Mark Parsons will be joining us in Hong Kong to strengthen our team. Mark is a leading practitioner in the TMT sector and he brings a unique blend of genuine commercial, corporate and sector experience that perfectly aligns with our practice both in Asia and globally. Mark’s arrival in our TMT sector team comes shortly after that of LA based media and entertainment partner Sheri Jeffrey who also has a significant Asian component to her practice. This underlines our commitment to further enhance our market leading capability serving the TMT sector in Asia and across our global network.“ Mark added: “I am delighted to be joining an outstanding practice in Hong Kong and look forward to working closely with the Hogan Lovells’ teams globally to provide our clients with the highest level of support in Asia’s increasingly important and dynamic markets.” Hogan Lovells bolsters TMT Practice with Leading Hong Kong Hire26 Hogan Lovells Global Media and Communications Quarterly Winter 2013 On 6 January 2014, the Ministry of Industry and Information Technology (“MIIT”) – the internet and telecommunications services regulator – and the Shanghai municipal government jointly issued the Opinions on Further Opening Value-added Telecom Business Sector to Foreign Capitals in the Shanghai Free Trade Zone (“Opinions”). This short, but significant document provides for the liberalisation of foreign investment in certain types of value‑added telecom services (“VATS”) within the Shanghai Free Trade Zone (“FTZ”). In order to understand the significance of this development, it is necessary to understand some of the history of foreign investment in telecommunications services in China. When China joined the World Trade Organisation (“WTO”) in 2001, the opening up of telecoms was widely trumpeted as a breakthrough, as previously foreign investment in telecoms had been banned. However post‑WTO, the Ministry of Information Industry (now MIIT) took a very restrictive interpretation of China’s WTO commitments, which was at odds with that of the EU delegation that had been negotiating the China commitments with the Ministry of Commerce. The VATS commitments provide for opening up VATS to foreign investment subject to a 50% cap using the “including” formulation, which those on the other side of the table interpreted to mean “including but not limited to” and those from MIIT took to mean “namely.” The list of services that follow includes email, voice mail, online information and database retrieval, electronic data interchange, enhanced/ value added tax services (including store and forward/ store and retrieve, code and protocol conversion and online information) and/or data processing (including transaction processing). MIIT’s view, therefore, has been, that services like Internet Data Centres (“IDC”), or call centres are outside the scope of China’s WTO commitments as are Internet access services, domestic Virtual Private Networks and domestic conferencing services (which China classifies as VATS). As can be seen from the number of approved Foreign Invested Telecommunications Enterprises (“FITEs”) on the MIIT website, very few (under 30 and apparently none since 2008) FITEs have been approved by MIIT since China became a member of the WTO. If we interpret the wording of the Opinions strictly, MIIT may still grant app store and store‑and‑forward services operating permits in a selective fashion, in other words, on a pilot basis. The table below summarizes the new position on foreign investment in VATS within Shanghai FTZ. Shanghai FTZ shows its Hand on Telecoms Opening up – Could this be the Long-Awaited Breakthrough in VATS? VATS opened up in SH FTZ Previous restriction on foreign ownership Restriction on foreign ownership in FTZ Notes App store (under Internet information services) 1 50% cap No cap Other information services are still subject to the 50% cap. Store‑and‑forward services 50% cap No cap Online data processing and transaction processing (operational e‑commerce) 50% cap 55% cap Call centres Not allowed 2 No cap This item was not included in China’s WTO commitments, and hence was not previously open to foreign investment. Domestic multi‑party communications (i.e. conference call services) Not allowed 2 No cap The same as above Internet access 3 Not allowed 2 No cap The same as above Domestic IP‑VPN Not allowed 2 50% cap The same as aboveHogan Lovells Global Media and Communications Quarterly Winter 2013 27 The Opinions require that companies applying for operating permits for the VATS listed in the Appendix must register the company and have their infrastructure located within the Shanghai FTZ. However, it is important to note that all services may be made available nationwide, except for Internet access services, which will be confined to the FTZ, which presumably means only subscribers physically located within the FTZ can use the service. The Opinions state that implementation of the Foreign-invested Telecom Enterprise Administrative Procedures (“FITE Regulations”) promulgated by the State Council with effect from 1 January 2002 will be suspended in the FTZ. This is necessary to allow exceeding the 50% cap on foreign investment in VATS set out in the FITE Regulations. There is a further breakthrough in that for the first time the Opinions will permit Wholly Foreign‑owned Enterprises (“WFOEs”) to engage in certain VATS services. The news release from MIIT confirms this to be the case (see http://www.miit.gov.cn/n11293472/ n11293832/n11293907/n11368223/15825208.html). The news release provides that the following services will be opened up to WFOEs: ● app stores (under information services) ● store and forward services ● call centres ● domestic multi‑party communications ● Internet access. This is consistent with the table (left) reflecting the position under the Opinions. The MIIT news release also indicates that new pilot measures are to be promulgated to simplify the approval procedures and shorten the review period in the Shanghai FTZ. One interesting development is that we understand that Yi Hao Dian 4 has established a Sino‑Foreign Joint Venture within the Shanghai FTZ and that the MIIT granted the joint venture an ICP operating permit and an operating permit for online data processing and transaction processing in late 2013. The Opinions give rise to the possibility that MIIT will actually grant VATS operating permits to foreign‑invested enterprises established within the Shanghai FTZ on a regular basis. As a result, it is anticipated that more and more multinationals will consider setting up subsidiaries in, or relocation to, the FTZ. However the proof of the pudding is in the eating, and it will be some time before it becomes clear that issuing telecoms operating permits within the FTZ is becoming routine and that this is indeed the breakthrough that industry participants and their advisors have long been waiting for. 1 Also known as Internet Content Provider or ICP services. 2 However under the Closer Economic Partnership Arrangement (“CEPA”) and CEPA IV, qualified Hong Kong Service providers were allowed to set up joint ventures in China to provide the following VATS, subject to a foreign investment cap of 50%: internet data centre services; store and forward services; call centre services; internet access services; content services and domestic IP-based VPNs. 3 Also known as Internet Service Provider or ISP services. 4 One of the largest and fastest growing online retailers in China, majority controlled by Wal-Mart. Andrew McGinty Partner, Shanghai T +86 21 6122 3866 [email protected] Hogan Lovells Global Media and Communications Quarterly Winter 2013 On 14 June 2012, Hong Kong entered into an era for competition law. That day, the Competition Ordinance was enacted. Since then, however, progress has been slow. At the moment, the Hong Kong government is busy with the establishment of the two new institutions in charge of enforcing the ordinance – the Competition Commission and the Competition Tribunal. The substantive provisions of the Competition Ordinance have yet to come into effect. While people are waiting for the antitrust regime revolving around the Competition Ordinance to take shape, Hong Kong has witnessed the adoption of one of its first antitrust decisions: in September 2013, the Hong Kong Communications Authority (“Authority”), formerly the Broadcasting Authority, issued its decision to sanction Television Broadcasts Limited (“TVB”) for anti‑competitive practices. Its decision was adopted under the Broadcasting Ordinance (“BO”) – which contains sector‑specific antitrust rules – but the implications may be broader. The decision may give a boost to the antitrust “institution building,” as the Authority will also have powers to enforce the Competition Ordinance in the broadcasting and telecommunications sectors. Timeline The Authority announced the ruling against TVB after a three‑year investigation. The investigation was initiated by a formal complaint from Asia Television Limited in December 2009 alleging that certain clauses in TVB’s contracts with its artists and singers and certain informal policies and practices pursued by TVB were in violation of the BO. On 28 August 2010, the Authority decided to launch a full‑blown investigation into some of the contractual clauses and policies of TVB, and its final decision was released on 19 September 2013. On 17 October 2013, TVB appealed the Authority’s decision to the Chief Executive in Council. In December, TVB filed an application for judicial review of the decision. The Relevant Market The Authority started its analysis by defining the ‘relevant markets.’ It noted that the case concerned an issue of “two‑sided markets,” with TV viewers on one side and TV advertisers on the other side. As to the TV viewer side, the Authority ultimately left open the question of which products/services comprise the relevant market. Its analysis assumed that ‘all TV viewing’ would be the broadest possible relevant market, and focused on that area. The Authority proceeded on the basis of the broad scope of the relevant market as this approach was more favourable for the defendant. It concluded that TVB possessed a dominant position in this broad market as a result of variety of factors. Perhaps most importantly, the Authority found that TVB had a market share above 60% in the ‘all TV viewing market.’ As for the TV advertiser side, the Authority found that ‘TV advertising’ was the relevant market. It examined and ruled out the possibility that other types of advertising – such as advertising through traditional media including cinema, radio, print, billboards and buses, or Internet display advertising – would be in the same relevant market. TVB’s share in the TV advertising market was found to be approximately 56‑59% from 2006‑2009, dropping to 47% in 2010. Again, the Authority looked at other factors such as high entry barriers, substantial sunk costs, brand loyalty, and weak countervailing buyer and supplier power to reach its finding of dominance. The Anti-Competitive Conduct In terms of anti‑competitive conduct, the Authority concluded that TVB restricted competition in the TV programme service market by foreclosing rivals’ access to artists and singers, thereby impairing their ability to compete with TVB and raising their costs. TVB’s contracts contained restrictive clauses requiring artists to be totally exclusive to TVB during the contractual period or requiring them to obtain consent from TVB before engaging in outside work. The Authority found that the consent requirement worked as de facto exclusivity. Artists did not frequently apply for consent between 2007 and 2010, perhaps concerned about detrimental effects on their careers at TVB. And, in none of the instances was consent granted for artists working for rival TV stations in Hong Kong. In short, the Authority held that TVB had “secure[d] for itself exclusive supply of a large portion of an essential input in TV and music programme production, i.e. artistes and singers.” Referring to guidelines issued by itself and the European Commission, the Authority examined the degree of “foreclosure” of the exclusivity practice, finding among other things that over 90% of singers in Hong Kong had signed contracts with TVB. Hong Kong Regulator Fines Broadcaster for Anti-Competitive PracticesHogan Lovells Global Media and Communications Quarterly Winter 2013 In addition, the Authority held that TVB had put in place so‑called “no original voice,” “no promotion,” and “no Cantonese” policies to back up its exclusivity practices. As such, TVB’s contracts with artists prohibited them from performing in other TV stations’ programs with their original voices and from attending promotional activities. It also prohibited them from speaking Cantonese on the programs of other TV stations in Hong Kong, a prohibition the Authority found to be “implicitly imposed” rather than spelled out in contractual clauses. Overall, the Authority seemed to hold that these three policies were ancillary to the main issue, the contractually imposed exclusivity. It held that these ancillary policies “extend the reach of TVB’s exclusivity provisions. They create an additional hurdle for other local TV stations…” The Authority also examined a variety of defences and justifications put forward by TVB, but all of them were rejected. Sanctions and Remedies The Authority ordered the adoption of a series of sanctions and remedies. In particular, it ● imposed a fine of HK$ 900,000 (approximately US$ 115,000) on TVB (the maximum penalty for the relevant violations being HK$ 1 million) ● directed TVB to bring the infringement to an end and refrain from repeating or engaging in equivalent conduct going forward ● ordered TVB to communicate to all artists and singers with contracts that it was abandoning the challenged contractual clauses and policies ● requested that TVB report back on the steps it was taking to comply with the decision. Comments This decision is one of the first antitrust decisions in Hong Kong. With its adoption, the Authority signals that it is a force to be reckoned with before and after the Competition Ordinance is in effect – given its concurrent enforcement powers with the Competition Commission. In a broader sense, the decision may be an indication that Hong Kong authorities are keen to demonstrate their commitment – and ability – to deal with anti‑competitive practices.30 Hogan Lovells Global Media and Communications Quarterly Winter 2013 The decision provides important reading for antitrust aficionados and companies looking for guidance on how to comply with the BO and, perhaps more importantly, the Competition Ordinance. There is plenty of information as the full decision of the Authority spans over 115 pages. The Authority’s decision is about abuse of dominance, and focuses to a large extent on contractual exclusivity. In a way, contractual exclusivity is one of the most straightforward examples of potentially exclusionary conduct in situations where foreclosure is significant enough in terms of scope, intensity, and time. The decision’s finding that TVB engaged in de facto exclusivity is less straightforward but perhaps even more interesting. This seems to be an indication that the Authority takes an effects‑based approach, seeing through the form of the alleged restraint. Finally, it is also interesting to see that the Authority referenced European Union competition law at various points. In its assessment of “dominance,” the Authority even explicitly stated that it will pay regard to European case law while bearing in mind that “the law of Hong Kong demands independent interpretation.” Clarice Kan Associate, Shanghai T +86 21 6122 3856 [email protected] Lovells Global Media and Communications Quarterly Winter 2013 31 Despite the apparent side‑lining of the draft Personal Data Protection Law (“Draft Personal Data Law”), which has been circulating since 2006 but appears to have little prospect of becoming law in the foreseeable future, China has nonetheless been very busy stepping up the battle against the abuse of personal data from a legislative perspective in recent years. As China does not have a single comprehensive data protection law, many actions that historically relate to personal data protection have been brought under different guises, such as actions for infringement of rights to reputation or rights to image under the General Principles of Civil Law first effective 1 January 1987 (as amended) (“GPCC”). In fact, rights to privacy can be traced back to the People’s Republic of China Constitution (“Constitution”) which treats a citizen’s communications (e.g., telephone conversations, letters, emails) as private information. Other regulations such as the Telecommunications Regulations and the Internet and E-Mail Services Administrative Measures (“E-mail Measures”) reflect the language of the Constitution in their respective domains. Until recently, those whose rights to privacy had been infringed upon were limited to relying on Article 140 of the Opinions of the Supreme People’s Court on Several Issues Concerning the Implementation of the General Principles of Civil Law (Trial) (“Supreme People’s Court Opinions”), which provides that “disseminating the privacy of another person” is regarded as damage to that person’s right to reputation (rather than a direct infringement or invasion of privacy) as well as various other disparate provisions in laws, administrative regulations, and other rules relating to areas as diverse as banking, medical services, and the protection of minors and HIV‑infected persons. Many of the provisions that come closest to general data protection provisions are set out in rules related to consumer protection such as the Shanghai Municipality Protection of the Interests of Consumers Regulations effective 1 January 2003. Recent Key Legislative Developments In terms of employers’ data protection obligations towards their employees, the main set of rules is the Regulations on Employment Service and Employment Management (“Employment Information Regulations”) 1 which govern the protection of personal information of employees. Employers in China now have an obligation to maintain the confidentiality of their employees’ personal information. According to the Employment Information Regulations, an employer must keep its employees’ personal information confidential and must obtain an employee’s written consent if the employer wants to make the employee’s personal information public. The Employment Information Regulations do not clearly define the employee’s “personal information,” a term that appears to vary by industry. Officials we spoke with suggested that the scope of the term would be left to the discretion of the labour authorities on a case‑ by‑case basis. However, one should note that China’s Internet and telecommunications industry regulator, the Ministry of Industry and Information Technology (“MIIT”), promulgated rules in 2011 defining “personal information” within the telecoms space (see below). A legislative landmark was achieved when China amended the People’s Republic of China Criminal Law (the “Criminal Law”) in 2009, such that it is now a criminal offence for “government or private sector employees in the financial, telecommunications, transportation, medical, or other such like sectors to sell or otherwise unlawfully provide the personal data that has been obtained by them in the course of performing their work duties to third parties, or for any person to obtain such information by means of this or other unlawful means.” This section of the Criminal Law does not, however, provide guidance on how to construe “personal data” or what would constitute the “unlawful provision” of personal data. Subsequent to this development, China went a step further when the Tortious Liability Law, effective 1 July 2010, specifically cited rights to privacy as one of the group of protected personal and property rights on which a tortious claim may be based. In December 2011, MIIT promulgated the Regulating the Internet Information Service Market Order Several Provisions (“Internet Information Service Provisions”) which became effective on 15 March 2012. The Internet Information Service Provisions apply to entities in China providing information services through the Internet – also known as Internet content providers (or “ICPs”) or engage in related activities, and have a special focus on protecting Internet users’ legitimate expectation of privacy from perceived abuses. China Turns Up the Heat in the Battle Against Abuses of Personal Data 1 Issued by the Ministry of Labour and Social Security (the predecessor to the Ministry of Human Resources and Social Security), effective 1 January 2008. 2 Jointly issued by the General Administration of Quality Supervision, Inspection and Quarantine and the Standardization Administration of China, effective 1 February 2013.32 Hogan Lovells Global Media and Communications Quarterly Winter 2013 The Internet Information Service Provisions contain rules on the treatment of “users’ personal information,” which is defined as “any information associated with a user which, either independently or when combined with other information, is able to identify such user” (our emphasis). The rules, among other things, provide limitations and consent requirements on ICPs for the collection and dissemination of personal information. More recently China passed the Guidelines of Personal Information Protection within Information System for Public and Commercial Services on Information Security Technology (“Guidelines”) 2 , governing the protection of personal information in general. The Guidelines are intended to regulate all organizations and entities with respect to the protection of personal information (except for government bodies that exercise any public administration function). The Guidelines contain a set of rules and principles for the collection, processing, transferring and deletion of personal information on “computer information systems” (as opposed to other data storage media in hard copy form). The Guidelines constitute recommended standards rather than mandatory standards, and a company may choose to adopt the Guidance in whole or in part. However, they are as close as China currently gets to data protection best practices and hence worthy of consideration by companies with operations in China, as they provide a taste of things to come. Under the Guidelines, personal information is defined very broadly to be “any computer data relating to a specific natural person which can be processed by an information system and which is capable of identifying such natural person, either individually or in conjunction with other information.” The Guidelines set out two categories of personal information: “sensitive personal information” (i.e., information that, if divulged, may have negative implications on the owner of the information) and “general personal information” (i.e., everything other than sensitive personal information). The collection and use of “sensitive personal information” requires the owner’s express consent, and evidence of such consent must be kept. The collection and use of “general personal information” requires implied consent (that is, where the owner raises no objection to its collection). In either case, express consent is required to transfer any personal information outside China under these non‑mandatory guidelines.Hogan Lovells Global Media and Communications Quarterly Winter 2013 33 In parallel to these developments, there has been a notable trend for local legislation such as the Jiangsu Province Information Regulations 3 which seem to be designed to fill in the perceived gap in the law left by the failure of the draft Personal Data Protection Law to gain traction. It is against this background that two additional major pieces of legislation on the collection and use of personal data by network services providers, enterprises, other institutions, and even individuals have emerged. It is notable how the emphasis remains very much on regulating the conduct of service providers despite the raft of prior legislation in this regard, suggesting the problem persists. The Personal Information Provisions and the Network Information Protection Decision The Provisions on Protection of Personal Information of Telecommunications and Internet Users (“Personal Information Provisions”) were released by MIIT on 16 July 2013 and came into force on 1 September 2013. The Personal Information Provisions follow a decision by the National People’s Congress Standing Committee – the Decision on the Strengthening of the Protection of Network Information (“Network Information Protection Decision”) – that came into force on 28 December 2012. In terms of their relationship, the Network Information Protection Decision is a top‑down ‘helicopter’ view that sets out the framework and provides overarching principles with regard to personal data protection. However the scope of application of the Network Information Protection Decision is very wide, as it regulates the collection and use of “personal electronic information” of network service providers and by all other enterprises and institutional organizations in the course by their operations, and requires that the collection and use of personal electronic personal data must be on the basis of informed consent and information owners must be notified about the purpose of data collection, the method and the scope. Policies in relation to the collection and use of electronic personal information must be made public. The Personal Information Provisions follow the same principles, but are much more detailed. The Personal Information Provisions address the collection and use of the personal information of individual users such as passwords, names, date of birth, addresses, account numbers and so forth by providers of telecommunications services and Internet information services within China (“Service Providers”). The Personal Information Provisions include standards, security measures, and penalties concerning collection, use of information, and violations in respect thereof by Service Providers and third parties engaged to handle collection and use of such information (i.e., outsourcing). Key Obligations and Penalties under the Personal Information Provisions The Personal Information Provisions set out a number of security measures regarding collection and use of personal information which Service Providers must adopt to prevent disclosure, damage, and loss of personal information. These measures include: ● limiting the right to access to users’ personal information to certain employees only ● ensuring safe storage ● maintaining records of staff who handle user data ● setting internal policies on data collection and use ● training staff on personal information protection. Service Providers are also required to formulate rules on the collection and use of personal information of users, which must be displayed at their business premises, websites, etc. Unlike the Network Information Protection Decision, under which enforcement through the imposition of (fairly vague) penalties is uncertain without further implementing legislation, the Personal Information Provisions are more concrete and specific. Penalties are linked to Service Providers’ level of implementation of rules and security measures. Fines of up to RMB 10,000 may be imposed for failure to formulate or display rules, or to set up a mechanism for user complaints. Other breaches may lead to fines between RMB 10,000 and 30,000. The Personal Information Provisions also refer to potential criminal liability, presumably referring to criminal data protection violations set out in the Criminal Law. 3 Issued by the Standing Committee of the Jiangsu Province People’s Congress, effective 1 January 2012. 34 Hogan Lovells Global Media and Communications Quarterly Winter 2013 Conclusion: Practical Implications of the New Rules It has been suggested that one of the reasons why the drafting of the Draft Personal Data Law appears to have been side‑lined and has fallen off the legislative calendar is because there was no consensus among key stakeholders as to whether China was ready for, or even needed, a ‘full‑on’ law on data protection. Yet some consumers in China, who have to live with very high levels of spam on mobile telephones and in email accounts, may beg to differ. Nonetheless, China’s legislative machine appears to have been notched up a gear in recent years in response to concerns regarding the issue, although there seems to be substantial overlap between that legislation that has surfaced. China’s decision to enforce the Criminal Law provisions on data protection in certain recent high‑profile cases is the clearest indication that China increasingly views data protection as a serious issue. The increase in legislation in this area must be understood against the backdrop of mounting public discontent with Service Providers’ use of personal data. While responsive to such concerns, the Personal Information Provisions have drawn criticism for lacking teeth. Critics argue that even a fine of RMB 30,000 is miniscule in comparison to revenues of major operators that tally into the billions of RMB, and it has been suggested that the purpose of these regulations is more to head off public discontent than a genuine effort to protect personal information. Some note that the provisions regarding reputational damage – alluded to in the Network Information Protection Decision, for example – may be more potent. While the Personal Information Provisions certainly appear to have important business implications for entities falling within the definition of “Service Provider” and are more specifically discussed in this article, the Network Protection Decision has implications for all enterprises collecting data in China. These businesses will now be required to comply with the core principles of “lawfulness, appropriateness, and necessity” when collecting personal electronic data of individuals while engaging in business activities. They will also, henceforth, need to specify the method and scope of collection and use and obtain the consent of the subject of the data collection. That is a significant change, and as more data protection‑related legislation and regulations surface, domestic and foreign‑invested enterprises in China may need to regularly review their data collection models and practices.