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I.        Introduction

In the ever-evolving landscape of digital entertainment, European consumers enjoy a broad variety of viewing options, including substantial availability of non-European content offered by large international streaming services. This availability has raised red flags for some EU policymakers, however, who are concerned that the supply of and demand for domestic cultural products might suffer. Prompted by these concerns, the European Union has opened the door for national policymakers to expand preexisting policies to support or favor domestic content by placing new obligations on foreign streaming providers to invest in EU member states’ domestic markets. The risk, however, is that member states have such broad latitude in implementing these provisions that they stoke inflationary pressures that distort local content markets.

Amended in 2018, the EU Audiovisual Media Services Directive (AVMSD)^[1] has two relevant provisions: 1. Article 13(1) sets a requirement that 30% of the works that on-demand audiovisual media service (“VOD”) providers carry be European in origin, and that these works be given those works prominent placement; and 2. Article 13(2) provides that member states may impose additional financial obligations on VOD providers and broadcasters (“media service providers”) based on the revenues these services generate in, or that are targeted toward, the member state’s territory, with the proceeds used to support the production of European works.

The second set of obligations, which depend on a member state enacting enabling legislation, can be pursued either through direct investment in the production of European works (sometimes with very prescriptive local language or independent producer sub-quotas, among other limitations), or through contributions to a national fund. Providers with no significant presence in a local market (i.e., with low turnover or an exceedingly small audience) are not typically subject to these obligations.      Member states also may waive such obligations where they would be impracticable or unjustified due to the nature or theme of the audiovisual media service in question.^[2]

The AVMSD can thus be characterized as “a unique blend of the barrier lifting liberal market approach typical of the EU’s single market and classic protectionism stemming from a history of concern that American content and media services would dominate European screens, threatening its cultures and industries.”^[3]

It is understandable, on many levels, why member states would want to ensure local production of cultural products.^[4] The history of this sort of regulation in the EU and the basic economics underlying these schemes, however, both point to the risk of serious unintended consequences if lawmakers do not take market realities adequately into account.

II.      Previous Attempts to Ensure Cultural Production in the EU Audiovisual Market

The AVMSD amendments are part of a long history in the EU of regulating media distribution, with at least a partial eye toward culture-specific measures.^[5] Although the EU has more recently been concerned with foreign streaming services, the early history of these regulations were focused on broadcast media. Under those different regulations, “EU institutions were required to take values such as cultural diversity into account. They also had to respect the fundamental contribution of public broadcasters to the ‘democratic, social and cultural needs of each society.’”^[6]

Notably, pursuant to the Television without Frontiers Directive (TwFD) of 1989, member states were required to ensure that broadcasters reserve a minimum of 50% of television programming to European works and a minimum of 10% of either their transmission time or programming budgets to independent productions.^[7]

Further, the previous version of the AVMSD (2010) imposed a general commitment for member states to ensure that VOD service providers promoted, “where practicable and by appropriate means,” the production of and the access to European works.^[8] Such promotion could “relate, inter alia, to the financial contribution made by such services to the production and rights acquisition of European works or to the share and/or prominence of European works in the catalogue of programmes offered by the on-demand audiovisual media service.”^[9]

Finally, member states are also permitted to sustain European audiovisual production through state aid (i.e., direct funding or tax incentives), which is considered an important tool in this regard by the European Commission. According to the Commission’s Communication on State Aid for Films and Audiovisual Works:

It is difficult for film producers to obtain a sufficient level of upfront commercial backing to put together a financial package so that production projects can proceed. The high risk associated with their businesses and projects, together with the perceived lack of profitability of the sector, make it dependent on State aid.^[10]

Nonetheless, these efforts had not fully delivered the expected results. Notably, analysis of the European audiovisual market between 2011 and 2016 found that, while broadcasters met the requirements set in the AVMSD 2010 to reserve a proportional majority of their transmission time for European works, when it came to nonlinear media services, European works were significantly less present in the catalogues of VOD service providers and non-European audiovisual works dominated audience demand.^[11] Against this background, the 2018 AVMSD provisions were introduced to better harmonize the treatment of traditional audiovisual players and VOD providers.^[12]

Indeed, the European audiovisual market has been described as “a collection of diverse markets, with different languages, cultures and market sizes.”^[13] In this sense, market factors (i.e., small market size and a limited number of companies) and linguistic and cultural differences make it more difficult to make profitable audiovisual content in Europe. Given that reality, the revised AVMSD aimed to provide member states with new opportunities to support their local audiovisual markets.

Earlier regulations were also not without side effects. Quotas have proven ineffective at ensuring cultural diversity and encouraging the circulation of European works. They also risk diminishing the quality of works and undermining the creation of a pan-European audiovisual industry.^[14] Moreover, although the ultimate goal of cultural diversity should be achieved through promoting the production and distribution of European works,^[15] these regulations encouraged the production of local works without adequately addressing pan-European distribution. That is, while member states would pour resources into creating new local works, they remained insufficiently committed to distributing the works of other member states. This caused an oversaturation in local markets and dried up opportunities for creators to generate revenue for their work across the EU.

National implementation of AVMSD Article 13(2) may duplicate this problem, insofar as it involves approaches that can promote “continued fragmentation” among EU member states, and “reinforce [] focus on production over circulation, and domestic over nonnational European works.”^[16] Of course the AVMSD does not aim to do this, but is explicitly designed to promote European works generally. It is, instead, implicit in the design of the AVMSD, insofar as it empowers member states to determine how to impose national sub-quotas. The history noted above suggests that member states will continue to interpret these provisions in ways that preference national content rather than pan-European content, thus exacerbating the fragmentation problem.

Indeed, an analysis of the member states that have decided to introduce such measures suggests that these assessments have contributed to a highly fragmented regulatory framework, as the obligations differ significantly both in terms of form (i.e., levies, direct investments, or joint obligations for both levies and direct investment) and amount, ranging from 0.5% to 25% of VOD services’ revenues.^[17] Further, as national policymakers have been interested primarily in protecting domestic works, rather than supporting nonnational European content, some member states have mandated sub-quotas that direct the total share of revenues disproportionately toward the promotion of national works. These new provisions, moreover, threaten to drive up the cost of local production and ultimately crowd out many smaller local producers.

III.    The Economics of the AVMSD Financial Obligations

As reported by the European Audiovisual Observatory,[18] and recently corroborated by the European Commission,[19] the quota requirement under Article 13(1) AVMSD 2018 is already essentially met. Despite ongoing concerns regarding difficulties in monitoring prominent placement on VOD services,^[20] the share of European works in VOD catalogues currently amounts to between 32% and 37%.^[21] Further, in transactional VOD services, there is no significant gap between the share of European works in catalogues and their share of promotion.^[22]

While quota obligations originated in an era dominated by broadcast television, they have been extended over time to nonlinear services, where they have encountered a different set of challenges in securing compliance. Since the concept of “prime time” loses its essential meaning in nonlinear services as a tool to secure visibility of certain works, nonlinear providers rely on other measures of prominence. For example, some have created distinct platform categories to group European or domestic works or tags to ease search for those works.[23]

Significant doubts arise, however, about the effectiveness of Article 13(1) quotas to ensure cultural diversity and encourage the circulation of European works. Further, as previously mentioned, quotas may have the unintended consequences of lowering the quality of works and undermining the creation of a pan-European audiovisual industry.

But given that more dramatic problems can accompany poor implementation of the optional Article 13(2) AVMSD 2018, the remainder of this paper will consider the economic features of the latter, and offer recommendations for how member states should weigh the risks and benefits of various strategies to implement this provision.

A.      The Risks of Poor Article 13(2) Implementation

As noted above, Article 13(2) financial contribution requirements take several different forms. Member states can require some mixture of direct investment in local markets by VOD providers and/or mandate, by levies, contributions to national cultural funds. The former can take a number of forms, including co-production, direct development of content, or acquisition of existing rights.

It is useful to think of this scheme as a form of Pigouvian tax. Pigouvian taxes work by imposing a tax on activity that creates a negative externality.^[24] The goal is to force producers to internalize the costs of the negative externality, rather than forcing society as a whole to bear those costs. Typically, a Pigouvian tax is levied directly on the externality itself.^[25] A classic example is a tax imposed on the production of goods that create pollution or health harms, such as cigarettes. The goal of the tax is to increase the cost of producing harm such that, as a consequence, the final price of the goods will rise to a level that maximizes social benefits.

Here, the good in question is local-content production and the users/consumers in question are the producers of said content. The underlying presumption of the AVMSD seems to be that the operation of foreign streaming services displaces production and distribution of local content, and that this represents a negative externality for which foreign providers need to take account. In theory, at least, the financial obligations are intended to force VOD providers to internalize this cost.

Of course, this is not strictly a textbook case. Where member states require the tax to be directed into a national fund, it looks much more like a Pigouvian tax. Where providers are obligated to devote some percentage of their turnover directly to local production, it may look less so, depending on how those obligations are structured. Nonetheless, the basic dynamics of Article 13(2) are close enough for our purposes here.

To be clear, we do not believe that audiovisual products—whether local or foreign—should actually be regarded as harmful in the same ways that smoking or sugary foods are. But the utility of this example is to demonstrate the regulatory equivalence implicit in treating nonnational content as damaging to local cultures, particularly when local consumers have chosen to select that content.

Moreover, there is an obvious problem with the presumptions underlying the AVMSD that should serve as a limiting principle when considering possible implementation of Article 13(2). It should not be so readily assumed that foreign entities are actually or disproportionately displacing local content. The VOD providers have every incentive to provide local audiences whatever it is they want to consume, and evidence suggests that audiences demand local content.^[26]

Indeed, this underlying reality points to a very real distortion that exceedingly high financial obligations can produce. If local content production is overstimulated, as was the case under earlier versions of the legislation, member states may drive up the prices for local production, while at the same time oversaturating local markets and providing little avenue for local creators to distribute and market their works more broadly.

IV.    Getting the Financial Obligations ‘Right’

Member states’ goal is to seek the best outcome for their audiovisual sectors. Even if we assume that a tax on VOD providers is necessary in some cases, that still leaves the questions of which cases and how much the tax should be. Without answers to those questions, there is little hope of achieving a socially beneficial tax assessment or of doing more than, at best, distorting local market signals or, at worst, undermining local audiovisual production. Thus, the EU and member states need to both continue and deepen their examinations of the state of the sector, identify any market failures, and address these with the regulatory tools at their disposal. If, as a result of this analysis, any financial obligations are to be put in place—which Article 13(2) AVMSD 2018 grants them the option to do, although it does not require it—then member states should tailor any such taxes to tackle the identified problems.

Indeed, implicit in the idea of Pigouvian taxes is the notion that we do not seek a costless end: there are always tradeoffs among competing goals. That is the very essence of using levies to mitigate externalities: there is some benefit that society is reaping, and some harm for which it has incorrectly accounted. Accounting for the harm will necessarily reduce some of the good.

One of the main problems that can arise with taxes of this type is the introduction of perverse incentives. As William Baumol noted of Pigouvian taxes:

[T]he appropriate price (compensation) to a user of a public good (victim of a public externality) is zero except, of course, for lump sum payments. Thus, perhaps, rather than saying there is no price that will yield an optimal quantity of a public good (externality), it may be more illuminating to say that a double price is required: a nonzero price (tax) to the supplier of the good, and a zero price to the consumer.^[27]

In essence, treating a Pigouvian tax as a sort of transfer payment creates a system that encourages overconsumption of the public good. Thus, to the extent that member states mandate that foreign VOD providers contribute directly to local content production—that is, via direct payments to local content producers to produce more local content—we would expect an overproduction of such content.

Even with levies to mandate contributions to national funds, there will be some of this dynamic, although national authorities may be positioned to moderate the effect. National authorities face tradeoffs, insofar as any investments they make are, to some degree, uncoupled from organic demand. Thus, these national investments will generate at least some inefficiencies, to the extent that they divert investment from opportunities that would have otherwise been realized in the marketplace.

National authorities may, for instance, determine that there is little harm in having too many locally produced movies and television shows, particularly when digital storage is next to costless. But content does not spring into existence ex nihilo. It depends on the use of a vast array of scarce local labor and resources. In short, that means that financial obligations to contribute to local production can bid up the price of every resource involved in production, leading to fewer local producers being able to afford to compete. Eventually, this will make local production relatively more dependent on a smaller number of firms that can absorb the higher costs.

More broadly, these sorts of interventions also risk distorting investment by nonlocal firms in a way that discourages entry and encourages exit, thus resulting in overall less production than would have otherwise occurred without an intervention. This is particularly true to the extent that national authorities fail to consider the profitability of their investments. Over time, funding unprofitable projects will exacerbate this dynamic by making local production more reliant on subsidies (which, in effect, means that consumers are insufficiently interested in the product). Decoupled from demand, there will be an ever greater need to demand payment from nonlocal firms to prop up relatively unsuccessful local productions.

When these financial obligations go too far, they can create inflationary pressures that may dry up local production altogether. A recent study for the European Commission identifies “[i]ncreasing costs across the board, and in particular for costs on technical crew and creative talent” as principal risk factors for European audiovisual producers.[28] Financial obligations force streamers to demand more production. As the study observes, the resulting cost increases are “no surprise,” since “increased demand would normally increase supply, which would explain the inflated costs upstream.”[29]

In a world of normal production incentives, if a particular market reaches capacity and becomes expensive, the production community will shift to a different market in a different country to avoid the higher prices. To the extent that local content production remains (thanks to the financial-contribution  requirements), while the cost of production will go up, the actual volume of production might not increase very much.

In order to find the optimal level of contributions (that is, the level at which they minimally inflate local costs of production while maximally ensuring cultural production), authorities need to engage in an incremental learning process. In short, member states will need to discover a proper equilibrium that prevents the tax from instigating a cost spiral. This argues for regulatory caution. As Baumol further noted:

[S]uch a learning process always involves wastes and irreversabilities, just like the process of convergence of competitive prices to their equilibrium values in the absence of externalities. But if we follow the usual practice of assuming away these costs, one can show that the process may be expected to converge to the optimum, provided the equilibrium is unique and stable. That is, there is then nothing inherently different about gradually moving taxes and prices towards their equilibrium here, and the process of adjustment toward competitive equilibrium when there are no externalities.^[30]

Thus, national authorities considering how to structure these obligations should bear in mind that: 1. There almost certainly will be some bidding up of prices; 2. At a certain point, the gains from trying to increase local content production will be swamped by these inflationary pressures; and 3. There is necessarily a learning process inherent in setting such financial obligations, owing to the serious danger of provoking a cost spiral.

V.      The Mirage of a ‘European Netflix’

Financial obligations imposed under Article 13(2) AVMSD 2018 may generate further unintended consequences.

As already illustrated, the extraordinary diversity of consumer preferences in, and resulting from, fragmentation of the European audiovisual market represents the main barrier to the circulation of European works. In particular, the significant linguistic and cultural differences that contribute to Europe’s celebrated cultural vibrancy also make it less feasible to treat Europe as a single      audiovisual market and more challenging to produce profitable content in Europe. The hurdles represented by language and cultural specificities have been confirmed by a recent study reporting that Netflix users have a strong preference for domestic productions.^[31]

From this perspective, it is worth acknowledging, as noted in the literature, that “it took a U.S. player to develop a service that increased the pan-European circulation of audiovisual content and gave European audiences increased access to nonnational EU content, in an accessible and user-friendly manner.”^[32]

Against this backdrop, Article 13(2) AVMSD 2018 may serve to further increase fragmentation of the European audiovisual market. Indeed, its implementation by some member states places greater emphasis on supporting domestic works than on supporting (nonnational) European content more broadly.

As a result, the AVMSD financial obligations provision will also preserve “a varied fabric” of European producers, making the emergence of European VOD service providers able to compete against foreign players on a level playing field even more unlikely.

VI.    Proceed with Care

Member states that have chosen to implement Article 13(2) have taken various approaches. Most of them have opted to introduce both direct investment obligations and levies to support a fund. Italy is the only country that has introduced a direct investment obligation as the sole option, while at least two member states (Germany and Poland) have introduced levies without any direct investment obligation thus far.[33]

Further fragmentation can be observed in disparities in the rates applied to turnover achieved in the respective member states. Even the base may sometimes differ. With regard to direct investment obligations, while some member states have employed fair measures, a handful have begun to impose steep obligations on VOD service providers.^[34] On the more careful end are the Czech Republic, Netherlands, Portugal, Croatia, Spain, and Greece, which assess their direct investment obligations in the 1-5% range.[35] On the less careful end are countries like France (15%-25%) and Italy (18%-20%). With regard to indirect investment obligations, the rate is usually around 2%, with the exception of Denmark, Spain, Portugal, Romania, and France, where the rate is in the 4-6% range.[36]

The regulatory caution needed to avoid trapping local content-production industries in destructive cost spirals is embodied in the “proportionality principle,” which essentially requires that the costs of regulatory intervention not be disproportionate to the benefits sought.^[37] Indeed, the risk of disproportionate implementation of Article 13(2) was so palpable to its drafters that they expressly mandated that any financial contribution required of a service provider “shall be proportionate.”

More data are needed to assess optimal financial contribution levels, but it appears highly risky to venture out as far on a limb as France and Italy have done. Assessing a total 20-25% financial obligation—whether in the form of a national fund levy or investment obligations on the turnover of multiple companies (some of them quite large)—in order to fund local production could easily have dramatic inflationary effects on local content markets.[38] Perhaps a large and wealthy country like France can absorb and offset some of these effects, but it would only be through heavy subsidization of the very industries the financial obligation otherwise threatens to destroy.

Moreover, this approach fails to deal with the distribution problems that these sorts of regulations have historically created in the EU. There is such a thing as too much content and too little distribution. Huge local catalogs can be generated and never adequately shared across member states. Indeed, as noted above, large VOD providers like Netflix have, to a large extent, actually solved this historical problem. Penalizing these providers for offering such solutions is a curious move.

An alternative approach, already pursued in some member states, is for local cultural authorities to use much more modest financial obligations to enhance cross-EU commercialization strategies for their local producers.

Of course, it should not be forgotten that member states are entirely at liberty not to implement 13(2) at all, a direction a number have taken.^[39] This option is entirely consistent with preserving a vibrant audiovisual market based on the demand of local consumers, who are free to demand as much local content as they wish.

Ultimately, however, much care should be taken, particularly for member states with markets smaller and less subsidized than France.[40] As some members choose to experiment with these financial contribution rates, they should start with impact assessments and proceed from there incrementally, consistent with the principle of proportionality.

[1] Directive (EU) 2018/1808 Amending Directive 2010/13/EU on the Coordination of Certain Provisions Laid Down by Law, Regulation or Administrative Action in Member States Concerning the Provision of Audiovisual Media Services (Audiovisual Media Services Directive) in View of Changing Market Realities, [2018] OJ L 303/69.

[2] Ibid. at Article 13(6).

[3] Sally Broughton Micova, The Audiovisual Media Services Directive: Balancing Liberalisation and Protection, in Research Handbook on EU Media Law and Policy (E. Brogi and P.L. Parcu, eds.), Cheltenham:Edward Elgar Publishing (2021) at 264.

[4] It is important to note a latent tension, however, between the AVMSD’s focus on European content, which suggests a pan-European preference, versus the practical reality that member states may choose to preference their own national content. The latter would actually frustrate the general goal of the AVMSD in some important respects.

[5] Joe?lle Farchy, Gre?goire Bideau, & Steven Tallec, Content Quotas and Prominence on VOD Services: New Challenges for European Audiovisual Regulators, 28 Int’l J. Cultural Pol’y 419 (2022).

[6] Catalina Iordache, Tim Raats, & Karen Donders, The “Netflix Tax”: An Analysis of Investment Obligations for On-Demand Audiovisual Services in the European Union, 16 Int’l J. Comm. 545, 548 (2022).

[7] Directive 89/552/EEC on the Coordination of Certain Provisions Laid Down by Law, Regulation or Administrative Action in Member States Concerning the Pursuit of Television Broadcasting Activities [1989] OJ L 298/23, Articles 4 and 5.

[8] Directive 2010/13/EU on the Coordination of Certain Provisions Laid Down by Law, Regulation or Administrative Action in Member States Concerning the Provision of Audiovisual Media Services (Audiovisual Media Services Directive), [2010] OJ L 95/1, Article 13(1).

[9] Ibid.

[10] European Commission, Communication on State Aid for Films and Other Audiovisual Works, (2013) OJ C 332/1, para. 4.

[11] Attentional, KEA European Affairs, and Valdani Vicari & Associati, supra note 3, at 17. It should be noted, further, that in this time period, providers were still early in their efforts to develop the VOD market. Thus, the relative immaturity of that market shaped these outcomes to some extent.

[12] Marlen Komorowski, Catalina Iordache, Ivana Kostovska, Stephanie Tintel, & Tim Raats, Investment Obligations for VOD Providers to Financially Contribute to the Production of European Works, a 2021 Update, Studies Media Innovation Technology (2021) at 31, available at https://smit.vub.ac.be/wp-content/uploads/2021/06/A-European-comparison-of-investment-obligations-on-VOD-providers-to-financially-contribute-to-the-production-of-European-works_Report-2021_FINAL.pdf.

[13] Ibid. at 7.

[14] See Piero Papp, The Promotion of European Works: An Analysis on Quotas for European Audiovisual Works and their Effect on Culture and Industry, Stanford-Vienna European Union Law Working Paper No. 50 (2020), available at https://law.stanford.edu/wp-content/uploads/2020/10/papp_eulawwp50.pdf; and Sally Broughton Micova, Content Quotas: What and Whom are the Protecting? in Private Television in Western Europe: Content, Markets, Policies (K. Donders, C. Pauwels, and J. Loisen, eds.), Hampshire: Palgrave (2013) at 245.

[15] AVMSD 2010, supra note 8, at Recital 69.

[16] Iordache, Raats, & Donders, supra note 6, at 551.

[17] Investing in European Works: The Obligations on VOD Providers, European Audiovisual Observatory (2022), available at https://rm.coe.int/iris-plus-2022en2-financial-obligations-for-vod-services/1680a6889c.

[18] Yearbook 2022/2023 – Key Trends, European Audiovisual Observatory (2023), available at https://rm.coe.int/yearbook-key-trends-2022-2023-en/1680aa9f02.

[19] The European Media Industry Outlook, European Commission (2023), available at https://digital-strategy.ec.europa.eu/en/library/european-media-industry-outlook.

[20] Daphne R. Idiz, Kristina Irion, Joris Ebbers, & Rens Vliegenthart, European Audiovisual Media Policy in the Age of Global Video on Demand Services: A Case Study of Netflix in the Netherlands, 12 J. Digital Media & Pol’y 425 (2021).

[21] European Audiovisual Observatory, supra note 17, (finding 32%). The more recent European Commission study, supra note 19, found that EU works alone constituted 28% of VOD catalogs (evenly divided between national and nonnational works), while UK works (qualifying as European for AVMSD purposes) constituted an additional 9%, for a total of 37%.

[22] The Visibility of Audiovisual Works on TVOD – Edition 2021, European Audiovisual Observatory (2021), available at https://rm.coe.int/visibility-of-av-works-on-tvod-2021-edition/1680a59bc2.

[23] But according to the European Media Industry Outlook of the European Commission, supra 19, “Consumers are quite open to the country and language of origin.” And further: “Four out of five (80%) EU consumers say that they are likely to watch films or series from the US, followed by 76% that say they are likely to watch films or series from their home country. About seven in 10 (71%) EU consumers say that they are likely to watch films or series coming from other European countries.”

[24] See, e.g., William J. Baumol, On Taxation and the Control of Externalities, 62 Am. Econ. R. 307, 312 (1972).

[25] Ibid. at 307.

[26] For example, a recent report from the European Commission on the audiovisual market found that EU consumers expressed a roughly equal demand for both U.S. and national content. European Commission, supra 19, at 23. U.S. works represent just less than half (47%) of VOD providers’ catalogs, while EU works (national and nonnational) comprise 28% and UK works comprise 9%. Id. at 26. The report does not indicate from whence the remaining 16% originate, but we can surmise that it is material sourced from around the world.

[27] William J. Baumol, supra note 24, at 312.

[28] European Commission, supra note 28, at 48.

[29] Ibid.

[30] Ibid. at 315.

[31] Annette Broocks & Zuzanna Studnicka, Gravity and Trade in Video on Demand Services, JRC Digital Economy Working Paper 2021-12 (2021), available at https://joint-research-centre.ec.europa.eu/publications/gravity-and-trade-video-demand-services_en.

[32] Iordache, Raats, & Donders, supra note 6, 557.

[33] Svitlana Buriak & Dennis Weber, Investment Obligations and Levies on VOD Media Service Providers and Cultural Policies of Member States, 15 World Tax J. 2, 3-4 (2023), available at https://www.ibfd.org/shop/journal/investment-obligations-and-levies-vod-media-service-providers-and-cultural-policies.

[34] Ibid.

[35] Ibid. at 4.

[36] Ibid. at 28-30.

[37] The principle of proportionality requires that the legislator considering adoption of a new measure consider “the need for any burden” that that legislative act is likely to create “to be minimised and commensurate with the objective” pursued. Article 5, Protocol (No 2) on the application of the principles of subsidiarity and proportionality (OJ C 115), 9.5.2008, p. 206-209.

[38] See, e.g., Economic Analysis of the French Audiovisual Industry Main Trends and Focus on the Costs of High-End Fiction In France, Arcom (2023) at 13-18, available at https://www.arcom.fr/sites/default/files/2023-04/Presentation%20economic%20analysis%20of%20the%20french%20audiovisual%20industry_0.pdf.

[39] Svitlana Buriak & Dennis Weber, supra, note 33 at 4.

[40] In particular, smaller member states should take notice of the fact that France is pushing for aggressive obligations against the backdrop of a 2023 budget of 4.2 billion euros for the French Culture Ministry. See, Ministry of Culture Budget 2023 – Finance Bill, Ministere de la Culture (Sep. 28, 2022), https://www.culture.gouv.fr/en/Presse/Dossiers-de-presse/Budget-2023-du-ministere-de-la-Culture-Projet-de-loi-de-finances#:~:text=In%202023%2C%20the%20Ministry%20of,(up%20€527%20million).

Abstract

This paper assesses a common view that has surfaced recently in a growing number of Government, industry and academic studies, that first claims streaming media services are likely to have adversely affected competition in media markets (both screen and music), and second recommends additional regulation of competition, or market power in streaming media markets. This paper exposes a number of common fundamental mistakes in the economic analysis underlying this view, in order to minimise the risk these mistakes are perpetuated, and adversely affect law and policy.

For this purpose the focus of analysis in this paper is on an assessment of a 2021 report commissioned by Screen Producers Australia (SPA), and prepared by Lateral Economics (LE) that focuses on screen production in Australia. The LE report is fairly representative of analysis that promotes competition law interventions into streaming media markets globally for two reasons. First the LE report is fundamentally based on the hypothesis that there is significant oligopsony market power, indeed LE claims a “profound imbalance in market power”, in this case between buyers and production companies in the screen production market in Australia. Second LE recommends additional regulation. Specifically LE recommends adoption of a UK-style terms of trade regulatory regime for the screen production market in Australia. The regime would regulate screen production contracts, and essentially require collective bargaining between a coalition of screen producers represented by an industry peak body (i.e. SPA) on the one hand, and streaming companies, as well as commercial and public service broadcasters on the other. LE recommends that the Australian Competition and Consumer Commission oversee this.

I explore four common general mistakes made by those advocating more regulation of competition in streaming markets, that are clearly manifest in the LE Report. The first common general mistake is lack of clarity about the objective of the additional recommended regulation. As I show the LE report poses multiple narrow goals or objectives for its proposal. This multiplicity of goals begs questions about which goal takes primacy, and how to make trade-offs between them, while the narrow goals chosen neglect significant relevant wider concerns. I instead focus on the Government’s more fundamental, overarching, or higher-level objective, namely, the promotion of overall wellbeing, or social welfare as a whole. This is consistent with the Australian Competition and Consumer Act 2010 (CCA) that declares the general object of the law is “to enhance the welfare of Australians”. In this regard, LE explicitly acknowledges that it fails to address the impact of its proposed UK-style regulation on consumer welfare in Australia, claiming its discussion is only concerned with the relationship between buyers and sellers of screen productions. This is a serious mistake, as consumers will be considerably worse off under LE’s proposal, implying significant harm to the welfare of Australians, and therefore weighing heavily against LE’s recommended policy change.

The second common general mistake made by LE (and others) is that they do not clearly establish the problem their policy recommendation is supposed to solve. The common basis, or reason LE (and others) claim there is a need for additional regulation is the alleged existence of oligopsony market power – in LE’s case an alleged “profound imbalance in market power between buyers and production companies”. On the contrary however as I show there is no imbalance in market power. LE (like others) simply makes mistakes on three issues underlying market power, as follows.

• Market definition. The usual mistake made by those advocating more regulation of competition in streaming media is to adopt a market definition that is too narrow, which increases the likelihood of market power. LE made this mistake by focusing solely on incumbent streaming companies. As a result LE result calculated that the four firm market share of this narrowly defined market in Australia was 70-80% suggesting a high market concentration result. Given free-to-air (FTA), Internet-based protocol television (IPTV), and pay-tv services are however part of the same market, market shares should be calculated for the combined market, not separately as LE does. When one analyses streaming, FTA, IPTV and pay-tv services in one combined market, the level of the four firm market share (or concentration) is clearly very low, between 35% and 40% – much lower than the 70-80% cited by LE. This does not reveal a “profound imbalance” or very high concentration as claimed by LE.

• Barriers to entry. Another common mistake made by LE and others, is the failure to recognize that even if there is high market shares, or high concentration, low barriers to entry would limit any attempt to abuse market power, as such attempted abuse would encourage new entrants into the market, and therefore be disciplined by loss of market share to new entrants. LE does not carefully identify or assess barriers to entry. Relevant media markets however are contestable, with low barriers to entry, as shown by the recent entry of streaming companies into the Australian market.

• Cartel or collusive behaviors. A further common mistake is the failure to recognize that the abuse of oligopsony power requires explicit or tacit cartel or collusive behaviors. However, such behaviours would be hard to sustain in the current market, given the incentives for cartel participants to compete and cheat on any tacit or explicit cartel agreement to capture market share off other cartel participants, and the low barriers to entry. LE provides no evidence of the existence of cartel or collusive behaviors to refute this.

A third general common general mistake made by LE (and others) is to rely on little or nor evidence, and ignore alternative legitimate or efficient business or market explanations for the contractual or commercial behaviours they allege to be problematic. Despite the absence of any reason to be concerned with a profound imbalance of market power I nevertheless review the changes in contract terms that LE describes as evidence of abuse of market power between screen producers as sellers, and the buyers of their productions, including;

1) Price falls, or claims that Australian screen producers’ incomes have fallen; and
2) Scope widening: or claims the rights transferred to buyers by contract has widened to cover worldwide distribution and sequels; and
3) Duration Increases: or claims the rights transferred to buyers by contract has increased, from 2 to 4 year contracts, to 7 and 10 years, and even in perpetuity.

LE however fails to clearly establish factually that these contractual outcomes have actually occurred, and more importantly fails to refute reasonable alternative explanations for them: namely, that the new terms result from legitimate or efficient competitive market arrangements. On price falls for example, I conclude that even if they were to exist, they are most likely due to the more competitive market putting pressures on costs, or prices paid to producers, and that this is good for consumer’s welfare. On the other two alleged problems, contract scope widening and duration increases, again no evidence is presented that even support the claims made, but even if there were, these are likely to be efficient outcomes as the large streaming companies are likely to need broad scope and long duration contracts to justify the higher investment in the projects they fund, as well as in technology and in worldwide marketing and distribution. More efficient terms on scope and duration would also benefit consumers, and any regulation that threatens to alter such terms would be damaging to consumer interests.

A fourth general common mistake made by LE (and others) is their failure to consider whether current law adequately deals with any of the alleged problems or risks with contract terms. I show however that current Australian law in fact already clearly addresses the problems raised by LE. I also show that LE makes the further common related mistake of failing to look at the marginal effect of the proposed UK style law, compared to the current competitive market outcome and regulatory regime. I identify substantial marginal costs and little to no benefits to the regime as proposed by LE. In essence I show the proposed collective bargaining under the law involves the unnecessary legalisation and facilitation of cartel co-ordination on both sides of the market. It will enable buyers and sellers on the two sides of the market to share information and co-ordinate (in effect form an “unholy alliance”) and put up both of their prices, passing the price rises through to the end consumer, while reducing output and quality, further harming consumers. The regime will also add significantly to market transaction costs and regulatory costs, creating inefficiencies. As I show this will have significant adverse consequences for the welfare of Australians.

In short, my high-level cost-benefit, or regulatory impact analysis highlights that the additional regulation of competition in streaming media markets of the kind proposed by LE is very likely to be highly costly to the welfare of Australians. The exact opposite to that predicted by LE will occur. My analysis reveals LE’s proposals are likely to harm competition and create significant harm to the welfare of Australians. LE’s recommendations should not be followed. Instead, reliance should be placed on the highly competitive market that currently exists, with continued reliance on current law to deliver better outcomes for Australians.

“Just when I thought I was out, they pull me back in!” says Al Pacino’s character, Michael Corleone, in Godfather III. That’s how Facebook and Google must feel about S. 673, the Journalism Competition and Preservation Act (JCPA).

Read the full piece here.

Background…

As leaders of the U.S. Senate work to pass the National Defense Authorization Act (NDAA) in the ongoing lame-duck session, some reports suggest that S. 673, the Journalism Competition and Preservation Act (JCPA), could be added to the legislative package. Approved in September 2022 by the Senate Judiciary Committee, the JCPA aims to boost the fortunes of traditional media companies by forcing “covered” online platforms to pay for digital journalism accessed via their services. The bill would require that platforms continue to display digital journalism, while setting out an intricate process whereby digital-journalism providers would collectively negotiate the price of content with platforms.

But…

This quixotic attempt to prop up flailing media firms will create legally sanctioned cartels that harm consumers, while forcing online platforms to carry and pay for content in ways that violate long-established principles of intellectual property, economic efficiency, and the U.S. Constitution.

Read the full explainer here.

Recent commentary on the proposed merger between WarnerMedia and Discovery, as well as Amazon’s acquisition of MGM, often has included the suggestion that the online content-creation and video-streaming markets are excessively consolidated, or that they will become so absent regulatory intervention. For example, in a recent letter to the U.S. Justice Department (DOJ), the American Antitrust Institute and Public Knowledge opine that…

Read the full piece here.

Introduction

Economist Ronald Coase devoted an article in the 1974 edition of the American Economic Review to an idea he had observed to be common among his academic colleagues:

(I)n the market for goods, government regulation is desirable whereas, in the market for ideas, government regulation is undesirable and should be strictly limited.

He found the idea strange because, as he argued in the paper, the two markets are not relevantly different. The case for regulation is no weaker in the market for ideas than in the market for goods. After all, it is usually easier for a consumer to know when ordinary goods are faulty than when ideas are bogus. Anyone can tell when a television doesn’t work. It takes unusual dedication to figure out, for example, that Hegel was wrong when he said that “absolute form and absolute content [are] identical — substance is in itself identical with knowledge.”

Coase hoped that devotion to consistency would inspire his peers to adopt a more skeptical attitude toward regulation of the market for goods. He got half of what he hoped for. Academics arguably have become more consistent, but rather than favor laissez-faire in the market for goods, they favor regulation in the market for ideas. This goes to show that consistency is not always something you should seek in your opponents.

Many professors are now keen to restrict the ideas their students hear; or, at least, they are willing to go along quietly with the enthusiasts for such restrictions. They do not seek to protect their students from the incoherent abstractions of 19^th century German philosophers or from any other kind of intellectual error. Rather, they seek to protect them from encountering ideas that will offend them or otherwise make them feel uncomfortable, especially when the topics concern race, sex, sexuality, or some other aspect of “identity.”

Universities are not national or state governments, of course. Their regulatory powers stop at the campus gates. But that doesn’t change the point, which is that many academics appear no longer to believe that the benefits of a free market in ideas are worth the harms that accompany it.

Some outside of universities take the same view, not always drawing the line at private organizations being able to constrain the speech of those with whom they have voluntarily entered contracts. Rather, they want governments to protect consumers of ideas by restricting what can be said. Just as government regulation ensures that only cars meeting certain safety standards are offered for sale, so too should government regulation ensure that only ideas meeting certain safety standards are expressed.

Of course, the market for ideas is already constrained by some safety regulations. For example, an American may not advocate violence or other illegal activity when directed at “producing imminent lawless action.” But beyond this and a few other constraints established by legislation and the courts—such as those entailed by defamation law—the First Amendment to the U.S. Constitution guarantees Americans the freedom to say all manner of harmful things. Some see this as a problem. For example, Richard Stengel, a former managing editor of Time magazine, argued in a 2019 Washington Post op-ed that the United States should follow the lead of other developed nations and develop a hate-speech law. Harvard University law professor Cass Sunstein proposed in his 2021 book Liars that speech deemed by the government to be false and harmful should lose its constitutional protection.

Section 230 of the Communications Decency Act of 1996, which protects “interactive computer services” from being treated as publishers or speakers of the content they host, is also becoming unpopular among those who worry about excessive freedom in the market for ideas. Some of its critics, usually from the political right, think it gives social media firms such as Facebook and Twitter too much freedom to indulge their political biases when moderating content. Other critics, usually from the political left, think it gives such firms too much freedom to host harmful content. Both President Joe Biden and former President Donald Trump have been critical of Section 230, if for very different reasons.

The fashion for private-sector speech prohibitions and proposals for more restrictive legal regimes agitate those who prize freedom of speech. It’s a hot topic in newspaper columns and on talk radio shows. Organizations have even been established to defend free speech, such as the Free Speech Project at Georgetown University and the U.K.’s Free Speech Union.

But defenders of free speech are generally doing their job poorly. Too many merely assert that “you should not have a right not to be offended,” when this is precisely what is at issue. Others follow the 19^th century English philosopher John Stuart Mill and claim that being offended, or suffering hurt feelings more generally, does not count as harm. Again, most seem to simply take this for granted, offering no reason why the offended are unharmed.

The right way to understand harm is economic. Something harms someone if he would pay to avoid it. Since offense and other hurt feelings can pass this test, they can be genuine harm (Section 1). And since speech can cause this harm—and most people believe that legal restrictions on causing harm are generally justified—we have a prima facie case for the regulation of speech.

Indeed, standard economics seems to provide more reason to regulate speech than ordinary goods. If a new car is defective and harms its drivers, people will be reluctant to buy it and its producer will suffer losses. Because the same goes for most goods, regulations that impose product standards are arguably unnecessary (at least, for this reason). Suppliers already have good reason to make their products safe. Speakers, by contrast, often do not bear the cost of the hurt feelings they cause. In other words, hurt feelings are an “external cost” of offensive speech. When someone doesn’t bear all the costs of an action, he tends to do it too much. That is to say, he does it even when the total social cost exceeds the total social benefit.

In his famous 1960 paper “The Problem of Social Cost,” Coase showed that one party holding a legal right not to suffer the external cost of some activity—such as being disturbed by noisy neighbors—needn’t stop it from happening. Nor would giving the neighbors the right to make noise guarantee that the noise continued. This is because, when certain conditions are met, the legally disfavored party will pay the favored party not to enforce his right (Section 2). When this happens, the outcome is efficient: in other words, it maximizes social welfare. Alas, the conditions for such rights trading are rarely met. When they are not, the initial allocation of rights determines the outcome. Which party’s interests should be protected by law therefore depends on who can avoid the harm at the lower cost. The efficient outcome will be produced by giving legal protection to the party facing the higher cost.

Coase’s conditions for trading rights aren’t met in the case of offensive speech (Section 2). We must therefore consider the costs faced by the offenders and by the offended when trying to avoid the offense. This appears to favor speech restrictions. After all, being offended is expensive, keeping your mouth shut is cheap, and each offensive speaker usually offends many hearers. For these reasons, Coasean analysis would seem on first impression to favor revisions to Section 230 that oblige social media platforms to be more assiduous in their moderation of offensive content. A post that would offend millions of the platform’s users can be removed at a low cost to the platform.

But that is merely a first impression. In this paper, I argue that the Coasean case for legal restrictions on offensive speech collapses when confronted with three facts: that being offended is often a masochistic pleasure; that most of the offensive speech that concerns would-be censors occurs on privately owned platforms; and that the proposed restrictions would impose large costs on society. Neither the First Amendment nor Section 230 of the Communications Decency Act should be weakened to remove protection for offensive speech.

Before answering the prima facie Coasean case for restrictions on offensive speech, however, we need to appreciate its force, which begins with recognizing that offense can be a real harm.

Read the full white paper here.

California Democratic Reps. Anna Eshoo and Jerry McNerney are upset with what they perceive as “misinformation” coming from right-wing news outlets like Fox News, Newsmax and OneAmerica News Network, and now they’re seeking to enlist the nation’s cable companies in the campaign to shut it down.

Read the full piece here.

This week, Facebook blocked news articles on its apps for all Australian users, and is blocking Australian news articles for users worldwide. This is a drastic step, but it is probably the least bad option the company has left. The Australian government has forced it into this position, with an attempted shake-down of Big Tech that leaves Australians worse off.

Read the full piece here.

One of the themes that has run throughout this symposium has been that, throughout his tenure as both a commissioner and as chairman, Ajit Pai has brought consistency and careful analysis to the Federal Communications Commission (McDowell, Wright). The reflections offered by the various authors in this symposium make one thing clear: the next administration would do well to learn from the considered, bipartisan, and transparent approach to policy that characterized Chairman Pai’s tenure at the FCC.

Read the full piece here.