EU final report on the E-commerce Sector Inquiry

On 6 May 2015, the Commission launched a sector inquiry into the electronic commerce (‘e-commerce’) of consumer goods and digital content in the EU (‘e-commerce sector inquiry’). For the purposes of the e-commerce sector inquiry, requests for information (‘questionnaires’) were addressed to stakeholders between June 2015 and March 2016. Respondents submitted in total 2 605 agreements related to the distribution of consumer goods and 6 426 licensing agreements related to the distribution of digital content.

The e-commerce sector inquiry covered the product categories most sold online: clothing and shoes; consumer electronics; electrical household appliances; computer games and software; toys and childcare articles; media (books, CDs, DVDs and Blu-ray discs); cosmetics and healthcare products; sports and outdoor equipment, and house and garden products. Respondents to the questionnaires could also comment on any ‘other’ product categories.

First, price transparency has increased with online trade. Consumers are now able to instantaneously obtain and compare product and price information online, and switch swiftly from one channel (online/offline) to another. While this allows consumers to find the best deal online, it may also result in free-riding behaviour: consumers can use pre-sale services of brick and mortar shops before purchasing the product online; alternatively, consumers can search and compare products online before purchasing in brick and mortar shops.

Second, the ability to compare prices of products across several online retailers leads to increased price competition affecting both online and offline sales. While such increased price competition has beneficial effects for consumers, it may affect competition on parameters other than price, such as quality, brand and innovation.

Third, increased price transparency allows companies to monitor more easily their prices. A majority of retailers track the online prices of competitors. Two thirds of them use automatic software programmes that adjust their own prices based on the observed prices of competitors. Fourth, alternative online distribution models such as online marketplaces have made it easier for retailers to access customers.

Online transmission allows for lower transmission costs per user compared to other transmission technologies, such as terrestrial transmission. It also provides more flexibility and scalability than other transmission technologies, such as satellite transmission. Online transmission further allows digital content providers to create user interfaces that can be accessed on multiple devices in a seamless way and are easily adaptable.

The results of the e-commerce sector inquiry indicate that the key determinant for competition in digital content markets is the availability of the relevant rights. The online transmission of copyright-protected digital content requires the acquisition of rights in order to lawfully market the content — typically including the right to transmit via internet, broadband or cable technologies, and to allow users to stream or download the content via a receiving device.

Licensing agreements between right holders and digital content providers use complex definitions to precisely define the scope of rights. It is also common for rights to be split up in the same or in different licensing agreements, particularly in terms of their technological, temporal and territorial scope. Exclusivity is widely used in relation to the licensed rights since access to exclusive content increases the attractiveness of the offer of digital content providers. The Commission considers that the use of exclusivity is not problematic in and of itself.

Right holders tend to split up the rights into several components, and license part or all of them to different content providers in different Member States. The scope of the licensed rights, as determined by the licensing agreement, might vary as regards: (i) the technology used to distribute and access content, in terms of transmission, reception and usage technologies; (ii) the product release and/or the duration of the licensed rights; and (iii) the territorial scope.

Bundling technology rights is also common. Rights for online transmission of digital content are to a large extent licensed together with the rights for other transmission technologies. Agreements submitted by digital content providers indicate that online rights in particular are most often licensed together with rights for mobile transmission, terrestrial transmission and satellite transmission.

Bundling rights for online transmission with rights in other transmission technologies protects exclusive rights to a digital content product and thus confers to a single content provider the possibility to use them in relation to the same product. Any alternative allocation of rights would imply that different content providers can offer the same product.

However, bundling online rights may hinder existing operators and new entrants from competing and developing new innovative services, which in turn may reduce consumer choice. Bundling may be of particular concern when it leads to a restriction of output, in situations where online rights have been acquired but are not, or are only partly, exploited by the licensee.

Online rights are to a large extent licensed on a national basis or for the territory of a limited number of Member States which share a common language. This is particularly prevalent in relation to content types that may contain premium products, such as sport (60 %), films (60 %) and fiction TV (56 %).

The duration of licensing agreements is, together with the technological and territorial scope of the agreement, a key component of rights licensing. Relatively long contract durations are common, with more than 50 % of agreements lasting more than 3 years and 23 % of them more than 5 years. Contractual relationships tend to last even longer, with average durations of more than 10 or even 20 years, possibly as a result of clauses favouring their extension.

While the payment structures for non-premium content (such as news and non-fiction TV) vary greatly, right holders licensing attractive content tend to make use of payment structures such as advance payments, minimum guarantees and fixed fees per product irrespective of the number of users. These practices implicitly privilege more established content providers, which are typically able to commit to greater levels of investments upfront.