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All for one and one for all?

The erosion of national markets across the European Union

Gustaf Duhs, Partner and Head of Competition Law and Regulation at Stevens & Bolton LLP examines the impact of European developments on the marketing of digital content.

The gradual erosion of national markets is one of the apparent side effects of the growth of on-line commerce and the ever increasing influence of the institutions and law of the European Union (of course with Grexit and Brexit this centralising tendency may not continue). More specifically the practice of having differential prices across Europe and the related practice of geo-blocking (preventing persons located outside a certain territory from accessing websites in another territory) is coming under increased scrutiny. This is a highly relevant issue for the games industry, given that games are increasingly being sold online and in digital form, and with a specific European Commission investigation into the pricing of games. Current developments include:

  • Reports that the European Commission is investigating on competition law grounds "the alleged geo-blocking of certain video games sold online for personal computers."
  • An investigation, again on competition law grounds, into cross border restrictions in the EU of pay TV services offered by US film studios.
  • The European Commission Digital Single Market Strategy due to be launched in May, which is likely to result in the development of digital market policy and possibly legislation.
  • A European Commission Competition 'Sector Inquiry' into the E-commerce sector which is expected to conclude mid-2016.
  • Raids on producers of electronic products and small domestic appliances, based at least in part on alleged infringements of competition law in relation to on-line sales.

It is apparent that the majority of these investigations involve competition law. There can be very significant implications for any companies that have been found to have breached competition law (including fines of up to 10% of worldwide turnover). However, the wider issues could have significant implications for the games industry as a whole- with fundamental implications for how and where games are sold, the price at which they are sold and therefore the money available to develop further games. This article considers the current position in relation to the law and thoughts on the potential outcomes of the current investigations

So what is the current position with respect to the application of competition law in this context? As you might expect a lawyer to say, the position is complicated, nuanced and ultimately should be the subject of detailed and specific advice. But looking at the position broadly the following principles are relevant.

"companies cannot make agreements with third parties that have the object or effect of restricting competition"

Firstly, of some comfort to businesses, competition law acknowledges that companies have a right to determine how they conduct their own business, who they choose to deal with and the price at which they deal. However that right is not absolute and there are exceptions. Where companies have market power over competitors and customers (referred to in competition law terms as 'dominance') they have a special responsibility not to abuse that power. This can in certain circumstances require companies to deal with third parties, or not to discriminate between customers on illegitimate or arbitrary grounds (nationality is likely to be one such illegitimate ground). Typically dominance will only arise with market shares well above 30%.

However while competition law will only rarely intervene in the conduct of a business acting on its own, companies are more restricted when it comes to the relationships with third parties. More specifically, companies cannot make agreements with third parties that have the object or effect of restricting competition. Of particular relevance to this article is the law around territorial restrictions in agreements between companies.

While it is generally deemed acceptable for a manufacturer to determine how its products are actively marketed by its distributors or resellers by allotting distributors or resellers certain exclusive territories (so called active selling), it is generally not allowed for a manufacturer to prevent those same distributors or resellers from meeting unsolicited requests for product from customers outside of their territory (so called passive selling). In this way the authorities with responsibility for enforcing competition law seek to balance the pro-competitive benefits of rationalising the distribution of products within territories, with the overarching EU goal of ensuring as far as possible that there is a single market for goods and services within the EU.

"a games manufacturer in the UK can appoint an exclusive reseller to market and sell their games in Poland and prevent them actively targeting customers the UK"

So by way of example a games manufacturer in the UK can appoint an exclusive reseller to market and sell their games in Poland and prevent them actively targeting customers the UK. However, the reseller in Poland cannot typically be prevented from fulfilling unsolicited orders from gamers in the UK.

Perhaps the best example of enforcement of this principle in practice is in relation to Nintendo. In October 2002 Nintendo and its exclusive distributors were fined a total of €167.8 million (one of the highest fines for infringement of competition law at the time) for having in place general prohibitions in its distribution agreements on the trade of its consoles and games between EU member states.

Because the European Commission sees the internet as generally a passive sales channel- any absolute requirement on third party resellers not to fulfil orders from outside the territory (which is likely to include a requirement to geo-block) is likely to fall foul of the law outlined above.

There are a number of cases other than Nintendo that follow current law and illustrate that this is more than just a theoretical risk. For example:

  • In 2007 objections were raised to Apple iTunes pricing practices which were resolved by a settlement with the European Commission based on a decision by Apple to equalise prices across the EU (or more specifically reduce the price for songs in the UK). In its statement on settlement the European Commission suggests there may not have been grounds for formal action given that this was a unilateral action by Apple "The Commission's antitrust proceedings have also clarified that it is not agreements between Apple and the major record companies which determine how the iTunes store is organised in Europe. Consequently, the Commission does not intend to take further action in this case."
  • In the much publicised Murphy case in 2012 the Court of Justice of the European Union held that the use of foreign decoder cards to broadcast FAPL football matches to a pub in the UK (thus avoiding Sky's licence fee) could not be prevented on the basis that obligations not to provide decoders outside the territory are contrary to competition law. The effect of this case was not however as dramatic as it might have been, given the finding of the courts that broadcasting to the public without an appropriate license could infringe intellectual property rights.

But competition law is not the only relevant law in this area. General provisions of the Treaty on the Functioning of the European Union (TFEU), and Directives also cover these areas - for example Article 26 TFEU states that "The Union shall adopt measures with the aim of establishing or ensuring the function of the internal market....the internal market shall comprise an area without internal frontiers from which a free movement of goods, persons, services and capital is ensured". The Services Directive of the European Parliament states that "Member States shall ensure that the recipient [of a service] is not made subject to discriminatory requirements... but without precluding the possibility of providing for differences in the conditions of access where those differences that are directly justified by objective criteria".

"There is therefore a real possibility that the outcomes of the various current enforcement actions and enquiries will be great centralization of prices for games (and other products) across the EU"

As the Nintendo, Apple and Murphy cases demonstrate there is little tolerance at a European level for cross border restrictions. That is also consistent with the broader aims as outlined in the TFEU and the Services Directive, as well as those that wish to create a single EU economy. There is also a personal element to some of these concerns - Margrethe Vestager - Commissioner for Competition EU has said "I, for one, cannot understand why I can watch my favourite Danish channels on my tablet in Copenhagen - a service I paid for - but I can't when I am in Brussels."

There is therefore a real possibility that the outcomes of the various current enforcement actions and enquiries will be great centralization of prices for games (and other products) across the EU.

However there are clearly rational objections to any single market approach. Some differences in prices across the EU may be rational however- and not simply on the basis of different costs of distribution. In a digital world the cost price differences between prices in the sale of games are not likely to be significant. But discrimination between member states can be pro-competitive in ensuring that the price of the games matches the customer's ability to pay. A single price across the EU risks that games will be set at prices that are relatively cheap in North and Western Europe, and relatively expensive in South and Eastern Europe. Ultimately this could lead to respectively oversupply and undersupply depending on the area, and may limit the profits available to reinvest in producing better games and games technology. Others complain that the move towards a single market will undermine the cultural heritage across Europe, favouring instead larger companies with pan-European operations.

It remains to be seen what the outcome of the enquiries and the investigations will be. This is however something the games industry participants should monitor carefully and feed into with their views when they have the chance. The outcome of the current inquiries could have a profound impact on the way games and other digital content is market, sold and consumed in the EU.

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Gustaf Duhs