What is geo-blocking?
Geo-blocking is a wide-spread phenomena in the EU's digital landscape. In the inquiry launched by the EU Commission into the e-commerce sector, 38% of the responding retailers selling consumer goods and 68% of digital content providers replied that they "geo-block" consumers located in other EU member states.
Geo-blocking commonly refers to practices whereby businesses either deny consumers access to a website based on their location ("geo-blocking"), or re-rout them to another, "local" website, often with different content, offering and prices ("geo-filtering"). Aside from access to website services, geo-blocking also describes any commercial practices whereby a customer is being treated differently based on "geo-factors", i.e. nationality, place of residence or temporary location. Whereas such practices may result from unilateral decisions of the respective traders, geo-blocking sometimes is the result of bilateral arrangements, in particular of clauses in distribution/licensing agreements, pursuant to which cross-border distribution of goods or services is restricted.
Geo-blocking has been on the European legislators' radar for a while now. From the perspective of European lawmakers, geo-blocking potentially limits cross-border trade in the internal market and may result in unwanted geographical market segmentation. The Commission seems to take the view that the existing legal framework, in particular Article 20 para 2 of the Services Directive (Directive 2006/123/EC) – providing for a general non-discrimination rule – is insufficient to tackle this issue adequately. Geo-blocking thus remains to be one of the hot-topics of the Commission's Digital Single Market (DSM) initiative. Here is an update to the most recent developments:
New EU initiatives on geo-blocking take form
Portability regulation finalised
On 30 June 2017, the new regulation on the portability (Regulation (EU) 2017/1128) of digital services across the EU has been published in the Official Journal of the European Union, whereby consumers who paid for online content services in their home country will be able to access them when visiting another country within the EU. The portability regulation will apply from 20 March 2018.
Geo-blocking regulation debated in trilogues
On 25 May 2016 the Commission adopted a proposal for a regulation on geo-blocking and other forms of discrimination based on a customer's nationality, place of residence or place of establishment within the internal market (COM(2016) 289 final). The Council agreed on its position on the Commission proposal on 28 November 2016. The draft regulation was then referred to the Internal Market and Consumer Protection Committee (IMCO) of the European Parliament, which issued its report by the end of April 2017. The draft regulation is now being discussed in the course of the trilogues between Council, Commission and the Parliament.
Traders under competition law scrutiny
As a result of its e-commerce inquiry, the Commission also launched several individual investigations to scrutinize bilateral "geo-blocking" practices in the consumer electronics, video game, hotel industry and most recently also into the licensing and distribution practices of Hollywood studios. Pursuant to the Commission, the respective behaviours may breach EU competition rules (Article 101 TFEU), which prohibit anti-competitive agreements between companies.
The current draft of the geo-blocking regulation
The current draft of the geo-blocking regulation would make it mandatory for traders and marketplaces to grant cross-border customers access to country specific sites, allowing them, inter alia, to compare any country-specific pricing.
However, whether the customer is entitled to purchase goods or services from such country-specific websites (other than the website intended for the state of the customer's residence), is another question: In this respect, the proposed regulation establishes a set of circumstances in which different treatment of consumers for reasons related to the nationality, place of residence or temporary location of the consumer ("geo-factors") is deemed unjustified. To this extent, traders would be forced to grant cross-border customers equal conditions, also in regard to the (net) sales price. However, unlike what is sometimes suggested in the media, the current draft regulation does not (directly) force the trader to harmonize prices and/or deliver goods across the EU or preclude dynamic pricing (unless such pricing is based on geo-factors) as such.
What does the current draft of the geo-blocking regulation mean in practice?
The impact of the regulation will likely depend on the nature of the goods or services in question:
- Sale of physical goods: Traders will not be allowed to treat customers from other member states differently, but they won't be forced to deliver cross-border under the regulation, either. If a trader has decided to deliver only domestically, he can continue to do so under the regulation. But customers from other member states may still order goods, provided that they can provide a delivery address in the trader's member state or agree to pick up the goods there (if the trader offers a pick-up option). If, for example, a trader based in Germany operates a web shop for physical goods and offers delivery of these goods only to Germany, the geo-blocking regulation would not require the trader to offer delivery to other countries. If, however, a consumer residing in e.g. the Netherlands (or any other country except for Germany) orders goods via the web shop and is able to provide a delivery address or in Germany (or is able to provide for a shipping solution in accordance with the trader's existing shipping terms), the trader would not be allowed to apply different prices solely for the reason that the consumer has its residence in the Netherlands.
Thus, while "savvy" consumers may in theory be able to obtain products from other member states' shops, it seems questionable whether this could become a widespread practice in the Internal Market, given that the consumer will have to provide its own shipping solution. This may be an incentive for logistics providers to offer innovative services letting consumers more easily use cross-border delivery services. This also seems to be one of the reasons why the Commission also proposed a regulation to facilitate better and cheaper cross-border parcel delivery services.
- Supply of services: Under the proposal, providers of electronically supplied services such as data warehousing, website hosting, remote system administration, installation of filters, firewalls, banner-blockers and so forth will be able to continue to apply different general conditions of access (including net sale prices) only if such differences are not solely based on geo-factors. This means that any differentiation must be otherwise justified, if not, service providers may as a result have to provide uniform terms (incl. net prices) to all of their EU customers. The same is true in respect of services which are received at a place determined by the trader other than the place of residence of the consumer. This refers to services such as hotel accommodation, sport events, car rental, and entry tickets to music festivals or leisure parks.
Whereas audio-visual and broadcasting services (e.g. sports broadcasting, films, etc.) are not covered by the draft regulation, the most recent draft at least partially includes copyright protected content such as e-books, e-music, games or software, provided and to the extent that the trader owns the necessary rights to distribute such content in the relevant member states.
Therefore, other than in relation to the sale of (physical) goods, for which there is no cross-border delivery obligation, the practical effect of the regulation could be more significant in the service industry: Customers will be able to obtain such services – including some content services – from other member states' shops on the same terms offered to "local" customers. Price differentiation could become more challenging and may ultimately lead to a harmonization of pricing. This will benefit the "savvy" customer who takes the effort to compare prices and may spark new services for cross-border price comparisons.
It has to be stressed, however, that quite significant service industries (e.g. financial, transport, electronic communication, healthcare and audio-visual and broadcasting services), are not covered by the draft regulation.
In addition, the draft regulation limits the possibility for traders (of both goods and services) to apply different conditions for a payment transaction, i.e. if the trader accepts payment by credit card, it will (under certain conditions) not be lawful to accept only credit cards issued in a certain member state.
The new draft also includes new language on the applicable law and jurisdiction. Therein it is inter alia clarified that a traders' mere compliance with the regulation does not entail an obligation for a trader to comply with national legal requirements or to inform customers about these requirements when a trader does not pursue or direct his or her activities to the specific Member State.
What action do businesses need to take?
The Commission's recent investigations and (proposed) laws on geo-blocking clearly show that geo-blocking is on the legislators' radar and is taken seriously. Businesses are well-advised to review their current approach in this regard.
This raises a number of questions, in particular:
- Are geo-blocking practices in place (e.g. auto-forwarding of customers in online-shops, application of different pricing or refusal of foreign credit cards based on the customers' nationality, place of residence or temporary location …) or agreed to (e.g. geo-blocking obligations in distribution agreements)?
- If yes, are these practices and/or obligations covered by the respective laws on geo-blocking?
- If yes, can these practices be justified under the current and new legal regime?
- If not, is it necessary to modify the online interface mechanisms and processes (blocking/auto-forwarding on websites/online shops), respective terms and conditions and/or distribution agreements?
It remains to be seen, when and in what form the draft regulation on geo-blocking will be adopted, as key questions, such as the (partial) inclusion of copyright protected content into the scope of the geo-blocking regulation and its applicability in the B2B-context are still being debated. However, both the Commission and IMCO seem to favour a rather short transition period (in general: six months).
Having in mind that the Commission is obviously eager to continue its investigations into (bilateral) geo-blocking practices and that the portability regulation will start to apply in the first quarter of 2018, businesses are well advised not to wait until the geo-blocking regulation is adopted to review their current practices. Reviewing and implementing changes can take a substantial period of time and, ideally, the implications of the Commission's wider geo-blocking initiative should be factored into the sales strategy and contractual agreements from this point onwards.