Film Digital Exhibition Proceeding: On 4 March, the European Commission announced it would close its antitrust investigation into possible restrictive business agreements by Hollywood film studios. The Commission earlier had expressed concerns related to contracts that Hollywood entered into with intermediaries which prevented them from agreeing with “small film distributors” i.e., the independents, to finance and install digital equipment. Following changes to the agreements, the Commission said it was satisfied and would call off the investigation. The following description is mainly paraphrased from the Commission announcement.

Several Major Hollywood film studios made changes to their contracts with third party intermediaries (integrators) and cinema exhibitors for the financing and installation of digital projection equipment in European cinemas. This follows a preliminary investigation by the Commission into concerns that the contracts could restrict independent distributors’ access to cinemas with digital equipment. Like television, cinemas are switching to digital technology which - along with cost savings and the ability to maintain consistent high quality over time - provides better image and sound quality. It is estimated that over 18,000 screens, i.e. about 50% of all European screens, will be digital by the end of 2012.

The cost of digital projection systems (including installation, financing charges and warranties) is high. To encourage cinemas to install digital equipment, the major Hollywood film studios imported to Europe the commercial model they use in the U.S. Under this so-called “virtual print fee” (“VPF”) model both film distributors (including the major Hollywood film studios) and cinemas contribute towards the investment costs.

The way the VPF model typically works is that the “integrator” obtains financing, pays upfront for the digital equipment and installs it in cinemas. The film distributors pay the integrator (who remains the owner of the equipment until its repayment) over time: every time a digital film is shown in a cinema, the film distributor pays a VPF towards the recoupment of the equipment cost. VPF payments cover the majority of the costs, with the remainder paid for by the cinema exhibitors, which make an upfront payment to the integrator. Most VPF payments are expected to be made by the major Hollywood film studies.

The Commission opened an investigation into the contracts between the major Hollywood film studios and the integrators because many contracts gave the film studio the right to benefit from the most favorable terms, including lower VPF payments, that had been agreed between a given integrator and film studio or distributor. The stated rationale of these provisions was to ensure that competitors (primarily the other major Hollywood film studios) would not contribute less to the digital switchover while getting equal access to the digital projection equipment in European cinemas.

The Commission took the view that whilst the contracts provided incentives to the roll out of digital projection equipment in European cinemas, they could also hinder integrators from signing contracts with distributors of independent/art house films whose business models differed from the major Hollywood film studios. This is because under the original contract provisions, the integrators would have to offer major Hollywood film studios the same terms as those offered to smaller film distributors.

As major Hollywood film studios addressed the preliminary competition concerns at an early stage, the Commission has closed its preliminary investigation (without having had to open formal proceedings). It will continue to closely monitor the switch over from analogue to digital cinema. The European Commission itself supports the digitization of European cinemas through the European Regional Development Fund and the MEDIA programme.

Satellite Broadcasting Copyright: On 17 March, an advocate general of the European Court of Justice issued his non-binding opinion that assembling “free to air” (FTA) channels into a bouquet for satellite delivery is a separate transmission for copyright purposes that requires license clearance. This opinion by AG Niilo Jääskinen, available in French in joined cases C 431/09 and C 432/09, Airfield and Canal DIgitaal vs Sabam (the rights clearance agency) suggests that satellite broadcaster’s intervention in the signal-transmission process, as well as the fact that the satellite broadcaster serves a distinct customer base which requires a subscription and decoder card to receive the signal, means that the transmission should be considered a separate broadcast, which requires separate rights-clearance from collecting societies. The AG said that the broadcaster guarantees the audience and groups the FTA programs into bouquets, which are actions separate from the FTA channels, and that the permissions obtained by the FTA broadcaster for its separate programs cannot extend through to the satellite transmission. (Paragraphs 88 – 89) Thus, “the supplier of satellite packages actually performs an act of exploitation of works protected by copyright and related rights of copyright, which is distinct from that of the broadcaster and which constitutes a ‘communication to the public by satellite’ within the meaning of Directive 93/83 (52).” (Paragraph 92)

Spectrum and Admin Fees: On 10 March, the European Court of Justice interpreted provisions of the 1997 Authorisation Directive on telecoms spectrum fees. In Case C85/10, Telefonica Moviles Espana SA vs Spain, the court ruled that the Spanish government is not prevented from charging wireless spectrum licensees provided that the fee is supposed to ensure optimal use of scarce resources and takes into account the need to foster the development of innovative services and competition. The judgment permits a government to levy different fees amongst different types of users – surprisingly, no discrimination argument apparently was raised – and says that it is up to the government how it wants to use the resulting money. The core of the judgment is expressed in the following three paragraphs:

Furthermore, the requirements that a charge imposed on operators of telecommunications services for the use of scarce resources must ensure an optimal use of those resources and must take account of the need to foster the development of innovative services and competition cannot, in light of the foregoing, preclude Member States from establishing, for the purposes of determining the amount of that charge, a distinction – even a significant one – between, on the one hand, the digital or analogue technology used and, on the other, within each technology, the different uses which are made of it, so that equality of opportunity is secured as between the various economic operators.

In addition, those requirements cannot, in principle, prevent Member States from increasing, even significantly, the charge payable for a particular technology in response to both technical and economic developments on the market for telecommunications services, but leaving unchanged the charge for another technology, provided that the different amounts imposed reflect the respective economic values of the uses made of the scarce resource at issue.

Lastly, the sole fact that such an increase in the amount of the charge is substantial – which, in the present case, is common ground between the parties which submitted written observations to the Court – does not in itself mean that this is incompatible with the purpose that a charge for the use of scarce resources must have under Article 11(2) of Directive 97/13, in so far as the requirements arising from that purpose are respected, that is to say, provided that the charge is neither excessive nor too low.

The Court held that these conditions are factual matters for the national courts to determine, and that the directive does not oblige administrations to use funds for any particular purpose (para. 38). Paragraph 34 is not entirely clear, but seems to say that governments can distinguish between different types of use for setting fees. That holding seems to be implicit in the “optimal use” principle.

By contrast to the relative lack of limits on spectrum fees, the Commission on 14 March announced it was taking France and Spain to court over telecoms fees and has initiated infringement action against Hungary over a similar law that seeks to impose administrative fees in excess of what is permitted in the Authorisation Directive. In IP/11/309, the Commission announced its decision to refer France and Spain to the Court of Justice over national charges introduced when those Member States ended paid advertising on public television. The Commission considers these taxes to be incompatible with the directive, because they are not directly related to covering the costs of regulating the telecoms sector. The Commission requested the French and Spanish authorities in October 2010 to put an end to these “telecoms taxes” (IP/10/1211), but they are still in place. The Commission has also opened an infringement case against Hungary concerning another such telecoms tax (see IP/11/308). Hungary has two months to answer this infringement letter.

Internet Interconnection: On 4 May, the European Network and Information Security Agency issued a press release on its new report concerning “The Internet Interconnection ‘ecosystem’ – top risks for resilient interconnection of IT networks”. ENISA says that the report identifies the top risks for resilient interconnection of IT networks. It “identifies a number of concerns, for example by unveiling a striking lack of information of the size and shape of the Internet infrastructure. The study also recommends that incidents should be investigated by an independent body in order to understand the nature of success and failures.” It argues that any systematic failure of the Internet would have significant adverse results in major fields. The concerns identified in the announcement include:

  • The Internet is vulnerable to technical failures, risks, cyber attacks and simultaneous disruptions; service could be substantially disrupted by other failures e.g. in the electricity supply.
  • There is remarkably little information about the size and shape of the Internet infrastructure or its daily operation.
  • Dependability and economics interact in potentially pernicious ways, leading to a potential ‘tragedy of the commons’ for the interconnections ecosystem.

Among the ENISA recommendations, aside from independent investigation, is more research on “inter-domain routing, traffic engineering, traffic redirection and prioritisation, especially during a crisis,” as well as identification of good practices, such as “e.g., diverse service provision (pluralism), auditing practices and independent testing of equipment and protocols.”