In baseball, it’s three strikes and you’re out. By that standard, antitrust enforcers at the Federal Trade Commission should have stepped off the playing field a while ago.

In tallying up the losses, it’s hard to know where to start. The regulatory parade of follies includes the agency’s debatable effort to block Altria’s minority equity investment in Juul, a struggling e-cigarette maker; its puzzling suit to block Facebook’s acquisition of Within, a metaverse fitness app; and now a federal court’s rejection of its challenge to Microsoft’s acquisition of the video-game publisher Activision (which the FTC immediately appealed).

Read the full piece here.

Sen. Richard Durbin (D-Ill.) recently introduced legislation to regulate how credit-card transactions are routed that, if passed, would hinder competition between credit-card issuers, reduce benefits for consumers, and impede fraud detection and prevention.

Read the full piece here.

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

John Stuart Mill distilled what the Founders knew all along: majorities harnessing the power of the state are often willing to trammel minorities’ rights. The Founders drafted the Constitution to curb, in James Madison’s words, “the superior force of an interested and overbearing majority.” But how are mere “parchment barriers” to withstand overbearing majorities? “[I]t would require,” in Alexander Hamilton’s words, “an uncommon portion of fortitude in . . . judges.”

In issuing Firearms Policy Coalition v. McCraw, the first post-Bruen merits win for Second Amendment claimants, Judge Mark T. Pittman displayed just such fortitude in guarding the Second Amendment rights of eighteen-to-twenty-year-olds from a Texas statute that forbade them, with narrow exceptions, from applying for licenses to carry firearms in public.

A longstanding principle of common law in both the United States and the United Kingdom recognizes the value of establishing “common carriers”— that is, entities that transport goods, people or services for the benefit of the general public with an obligation not to discriminate among them. Unlike private or “contract” carriers, a common carrier operates under a license provided by a regulator, who retains authority to interpret the carrier’s obligations to the public.

Read the full piece here.

We thank the Office of Science and Technology Policy (OSTP) for this opportunity to provide regulatory commentary on the pivotal subject of artificial-intelligence (AI) regulation. AI technology, already a familiar part of American life, is poised to become among the most consequential technological advancements in the coming years. As the rate of innovation in AI technologies accelerates, there will be greater opportunity for an expanded spectrum of applications that increase social welfare. At the same time, we are cognizant of some potential risks that AI could pose.

The Biden administration has already taken commendable steps toward advancing innovation, safeguarding Americans’ rights and safety, and ensuring that the public can benefit from AI. The updated National AI R&D Strategic Plan,[1] the blueprint for an AI Bill of Rights,[2] and the AI Risk Management Framework,[3] among other initiatives, represent thoughtful efforts to grapple with the legal and social implications of AI technologies.

We firmly believe that the prime concern should be to avoid premature regulatory action. Each technology grouped under the broad umbrella of AI is unique and requires careful consideration and understanding on its own terms. It is crucial to take sufficient time to study these important distinctions and appreciate the specific challenges and opportunities inherent in each. Overarching or rushed regulations could stifle innovation, impede economic growth, and inadvertently undermine efforts to realize AI’s transformative potential.

Furthermore, when contemplating the adoption of a risk-based regulatory framework, we propose that the OSTP steer clear of overreliance on the precautionary principle. While intended to anticipate potential risks, the precautionary principle can over-index in the direction of caution and, due to its inherently conservative nature, serve as a barrier to innovation and progress. Instead, we recommend an approach that grounds any potential regulation in addressing real harms, with particular focus on preventing or minimizing those harms with a significant likelihood of occurring, that are more comprehensively understood, and that are tangible, rather than based on speculative or nebulous risks.

Developing a comprehensive national AI strategy is, indeed, a commendable undertaking and holds the promise that it could align various stakeholders’ interests and offer a holistic approach to address AI’s challenges. It is of paramount importance that this strategy remain responsive to the latest AI advances and global changes, considering the dynamic and evolving nature of AI technology. We are confident that the OSTP and the National AI Initiative Office will thoughtfully integrate the inputs provided through this Request for Information (RFI)[4] to inform the National AI Strategy’s development. We look forward to contributing our perspectives and suggestions to this critical dialogue.

Below we answer select questions in the RFI, we wanted to direct attention to a larger set of comments we submitted last month to the National Telecommunications and Information Administration’s separate inquiry on this topic.[5] Those comments are attached in full.

Understanding the Components of AI Must Come Before Regulation

1. What specific measures – such as standards, regulations, investments, and improved trust and safety practices – are needed to ensure that AI systems are designed, developed, and deployed in a manner that protects people’s rights and safety? Which specific entities should develop and implement these measures?[6]

Before deciding what standards are necessary to regulate AI, it is necessary to develop some meaningful definition of what “AI” means. The present enthusiasm for AI has led to an oversimplification in the public discourse that can obscure how diverse the underlying technologies and their respective applications actually are. AI, in fact, covers a spectrum of technologies from large language models[7] to recommender systems[8] and beyond. These applications differ significantly from some of the more extravagant conceptions of AI, such as artificial general intelligence (AGI). A failure to distinguish among these technologies and their particular use cases can result in what we refer to as “regulatory overaggregation”—that is, a regulatory generalization that clouds the distinct aspects of each technology and may fail to address actual harms due to an inability to adequately address granular subjects.

The contemporary urge to overgeneralize the regulation of AI has parallels with the domains of “privacy rights” and “privacy regulation,” where sharply divergent potential harms are often conflated under the same broad topic. The concept of privacy often invokes an expectation of seclusion or allowing an individual to control their personal information.[9] This framing, however, is too general and cannot capture all actionable areas of law that implicate privacy, such as “revenge porn” or the unauthorized sale of cellphone location data. Overaggregating these distinct issues under a unified “law of privacy” may lead to regulations that fail to properly address each concern.

On the other hand, the domain of intellectual property (IP) demonstrates a more nuanced approach. Though it covers an array of legal constructs like copyright, patents, and trademarks, each area has specific legislation addressing unique rights, harms, and remedies. This approach fosters legislative richness and avoids the pitfall of overaggregation.

Lessons from both privacy law and intellectual property may be instructive for AI. Overly broad AI regulations risk stifling innovation and technological advancement, while potentially failing to address specific harms. Therefore, rather than a blanket regulatory approach, a detailed understanding of AI’s various subdomains is needed to target identifiable harms. This could be aided by OSTP facilitating the development of a comprehensive catalog of AI technologies and their potential risks, which could serve as a reference for regulators and courts.

Emphasize Harm-Based Approaches to AI Regulation and Require Cost-Benefit Analysis

Drawing upon the challenges associated with regulating emergent technologies such as AI, we could begin to explore this domain by considering an analogy to an older technology: photography. If camera technology were nascent, we might project myriad potential harms. But we can reflect from our position of having nearly two centuries of experience with the technology that a universal regulatory framework to manage all aspects of camera technology would be absurd. Instead, existing general laws more adequately address the specific harms that can be facilitated by camera technology, such as infringements on privacy rights arising from covert filming, use in the furtherance of criminal enterprises, or theft of trade secrets. In these instances, it is not the camera technology itself that forms the subject of legal concern, but the illicit actions carried out through its use.

Further, when assessing potential harms facilitated by new technology, a comprehensive analysis must consider the balance between the likelihood of harmful uses and the prospects of beneficial applications. Copyright law, as exemplified in the landmark Betamax case,[10] provides an insightful precedent. That case illustrated how law could adapt to new technology, in that instance underscoring the need for copyright law to accommodate “substantial noninfringing uses” of new technologies that could reproduce protected material.[11] The decision upheld that, while the technology may facilitate some infringement, it would be inappropriate to apply a broad presumption against its use.[12] Moreover, the case stressed the importance of examining each circumstance on a case-by-case basis.[13]

Regulation and accountability in the realm of AI should echo this approach, emerging organically through bottom-up, case-by-case processes that examine the relevant facts of any given situation and how they alter (or do not alter) our legal system’s baseline assumptions. New legislation, if required, should be incremental, guided by well-defined principles, and focused on identifiable harms, thus allowing law to fit specific circumstances without conflicting with established legal and regulatory principles.

AI, like any tool, can be misused, and any such misuse should incur legal consequences. Yet, the legal analysis should focus primarily not on the AI itself, but on the malefactors’ actions and the resulting harms. Attempting to construct a foolproof regulatory framework that precludes the misuse of AI may prove futile and could potentially stifle the development of socially beneficial tools.

Moreover, the fact that AI technology remains largely in the research and development phase complicates regulatory decisions. Proactive regulation based on the precautionary principle might thwart unforeseen benefits that could emerge as these technologies mature and find unique applications.[14] Even in high-risk industries like nuclear power, precautionary regulation often results in net social harms.[15]

When imagining the harms that could occur, it is crucial to distinguish two broad categories of AI-related concerns. First is the largely theoretical fear associated with AGI—the understandable apprehension many feel about inadvertently creating a superintelligence that could potentially extinguish human life.[16] If it is even possible to create AGI, about which there remains significant doubt, it is crucial to emphasize that current AI technologies are far from AGI. AI technologies today are essentially sophisticated prediction engines for dealing with text or pixels.[17] It is highly unlikely that we will accidentally stumble onto AGI by merely chaining thousands of these prediction engines together.

The second, more realistic set of concerns pertain to the misuse of AI technologies to perpetuate illicit activities. Specifically, these very impressive technologies might be misused to further discrimination and crime, or could have such a disruptive impact on areas like employment that they will quickly generate tremendous harms. When contemplating harms that could occur, however, it is also necessary to acknowledge the many significant benefits also could be generated. Moreover, as with earlier technologies, economic disruptions will provide both challenges and opportunities. It is easy to see the immediate effect on the jobs of content writers posed by ChatGPT, for example, but less easy to measure the benefits that would be realized by firms that can deploy this technology to “in-source” tasks.  Thus, static analyses of AI’s substitution power are likely to miss the bigger picture of social welfare that could be realized as organizations improve their efficiency through the adoption of AI tools.

Finally, it is important to remember that dynamic competition—where technology is continually evolving and firms are competing to provide consumers with innovative products and services—drives far more economic growth than static competition. As the economist Joseph Schumpeter noted, competition thrives not merely on price but on the advent of disruptive new commodities, technologies, and supply sources.[18]

Regulation of AI must be seen in the same light. To this end, we advocate a regulatory regime for AI that encourages sector-specific rules to emerge when regulators discover that their existing rules are inadequate for new AI-augmented technologies. This approach should be harm-based, rather than risk-based. In other words, regulations should focus on mitigating the known and likely harms caused by the misuse of AI rather than trying to predict and prevent every possible risk associated with it. A clear-eyed cost-benefit analysis should guide this process.

Rather than preemptively stifling innovation with burdensome regulations based on hypothetical risks, a more nuanced approach would be to respond to actual harms as they arise, carefully weighing the potential harms against the prospective benefits of AI technologies. Such a balanced approach would not only protect society from misuse of AI but would also allow for the continued development and beneficial application of these transformative technologies.

Adopting this approach will require an ongoing dialogue among all stakeholders and an openness to adjust our regulatory frameworks as our understanding of AI and its societal impact deepens. A harm-based, case-by-case approach to AI regulation is consistent with our common-law tradition and promises to be the most effective and flexible approach to guide the development and application of AI technologies.

The Implications of a Centralized Regulator for AI: Risks to Competition and Innovation

1. … Which specific entities should develop and implement these measures?[19]

The prospect of creating a centralized regulator for emergent technologies like AI raises important concerns, particularly those relating to market competition. A central regulator may inadvertently favor established industry players like OpenAI, as new entrants might be hindered by regulations and compliance costs, which incumbents could manipulate to increase rivals’ costs.[20] The strategic promotion of a strong central regulator can thus serve to maintain or increase incumbents’ market dominance.

In recent U.S. Senate hearings, some witnesses and senators proposed a central regulator to create and administer a licensing regime for AI.[21] While licensing might be necessary for certain AI applications, such as military weaponry, it is broadly inadvisable due to the diverse nature of AI technologies. Developers of AI tools face numerous challenges, including assuring data collection and management, anticipating downstream usage of tools, and managing the complex chain of AI-system development and deployment. A centralized AI regulator would struggle to understand the nuances of each distinct industry, leading to ineffective or inappropriate licensing requirements.

Unlike such sectors as railroads and nuclear power, which have dedicated regulators, AI is more akin to a general-purpose tool, like chemicals or combustion engines. Different agencies regulate the use of these tools as appropriate for their context, without a central regulator overseeing every aspect of development and use. A licensing requirement could introduce undesirable delays into the process of commercializing AI technologies, significantly impeding technological progress and innovation, and potentially leaving the United States behind in the global AI race.

A better advisable approach would be to create product-centric and harm-centric frameworks that other sectoral regulators or competition authorities could incorporate into their rules for goods and services. For example, safety standards for medical devices should be maintained, whether or not AI is involved. But a thoughtful framework might raise questions that the Food and Drug Administration (FDA) finds are necessary to consider when implementing new regulations. This product-centric regulatory approach would ensure safety, quality, and effectiveness without stifling innovation. With their deep industry knowledge, sectoral regulators are better positioned to address the unique challenges posed by AI technology within their spheres of influence.

By contrast, there is a risk that a centralized regulator, operating with an overaggregated concept of AI, might design rules that slow or prevent AI-infused technologies from coming to market if they cannot navigate the complex tradeoffs among interested parties across all such technologies.[22] This could make society worse off and strengthen the position of global competitors. Therefore, it is crucial to approach the regulation of AI with careful consideration of its impacts on competition and innovation, advocating for a framework that encourages diversity and flexibility.

17. What will the principal benefits of AI be for the people of the United States? How can the United States best capture the benefits of AI across the economy, in domains such as education, health, and transportation? How can AI be harnessed to improve consumer access to and reduce costs associated with products and services? How can AI be used to increase competition and lower barriers to entry across the economy?[23]

The advent of AI promises transformative potential across various domains, heralding numerous benefits for the people of the United States and beyond. Foremost, AI can drastically improve worker efficiency. Advanced AI algorithms could handle repetitive tasks swiftly and accurately, allowing employees to focus on more complex and strategic aspects of their jobs. In sectors ranging from manufacturing to health care to customer service, AI-driven automation can accelerate processes, minimize errors, and enhance productivity, ultimately leading to improved business performance and growth.

For instance, in health care, AI can help practitioners analyze complex medical data rapidly, improving diagnostic accuracy and speed. In manufacturing, AI-powered machines can manage labor-intensive tasks, reducing the possibility of human error and occupational injuries. These efficiencies can reduce costs, with the potential for savings to be passed on to consumers.

Furthermore, AI technology, like many disruptive technologies before it, may be capable not only of augmenting existing workforces but also of fostering new types of industries and opportunities. As AI becomes more sophisticated, we anticipate the emergence of entirely new job categories, similar to how the advent of the internet spurred professions in web design, digital marketing, and e-commerce.

AI can also improve consumer access to, and reduce costs associated with, various products and services. For instance, we have already seen AI-powered recommendation systems personalize the shopping experience, allowing consumers to find relevant products with ease. And in education, we’ve seen AI personalize learning for individual students, tailoring educational content to match each learner’s needs and pace and, in turn, improving educational outcomes and accessibility.

The promise of AI extends to increasing competition and lowering barriers to entry across the economy. By providing businesses with more information and greater efficiency, AI can give rise to more effective business strategies and models. It could level the playing field for small and medium-size enterprises, allowing them to compete with larger corporations by offering cost-effective solutions that previously required significant capital or resources.

19. What specific measures – such as sector-specific policies, standards, and regulations – are needed to promote innovation, economic growth, competition, job creation, and a beneficial integration of advanced AI systems into everyday life for all Americans? Which specific entities should develop and implement these measures?[24]

As noted above, we believe that specific measures to promote innovation and the safety of advanced AI systems are best approached with a sector-specific focus. Due to the diverse nature of AI applications and the varying impacts on diverse industries, sector-specific policies and standards will be more effective and beneficial than broad, sweeping regulations.

For instance, in the health-care sector, safety and privacy standards must be upheld when deploying AI tools for diagnosing diseases or managing patient data. In such cases, regulators like the FDA or the Department of Health and Human Services could leverage their expertise to develop and implement targeted regulations that ensure safety without stifling innovation.

Similarly, in the automotive sector, where AI is used for autonomous vehicles, transportation authorities could create guidelines and standards to ensure road safety, while also promoting innovation. In finance, where AI algorithms are used for trading, credit scoring, and risk management, the Securities and Exchange Commission (SEC) and other relevant financial regulators can establish rules to prevent unfair practices and ensure market stability.

Conclusion

We again thank the OSTP for initiating this important and timely inquiry into AI regulation. It is through dialogues like these that we can collectively explore AI’s impacts on society. It is crucial to reiterate that regulation, while necessary, should be formulated with a nuanced understanding of the technology. Being eager to impose regulations prematurely could stifle the very innovation that we seek to cultivate and the potential benefits that we aim to harvest. AI has the potential to be a transformative force for the United States and the world, providing a multitude of benefits, and empowering us with the tools to address some of the most pressing challenges of our time. A measured and informed approach to AI regulation would further reinforce our nation’s position as a global leader in technological innovation.

[1] National Artificial Intelligence Research And Development Strategic Plan 2023 Update, Select Committee On Artificial Intelligence Of The National Science And Technology Council (May 2023), available at https://www.whitehouse.gov/wp-content/uploads/2023/05/National-Artificial-Intelligence-Research-and-Development-Strategic-Plan-2023-Update.pdf.

[2] Blueprint for an AI Bill of Rights, White House Office of Science and Technology Policy (2023), available at https://www.whitehouse.gov/ostp/ai-bill-of-rights.

[3] Artificial Intelligence Risk Management Framework (AI RMF 1.0), National Institute of Standards and Technology (Jan. 2023), available at https://nvlpubs.nist.gov/nistpubs/ai/NIST.AI.100-1.pdf.

[4] Request for Information National Priorities for Artificial Intelligence, 3270-F1, 88 FR 34194,White House Office of Science and Technology Policy (May 26, 2023) (“RFI”).

[5] Kristian Stout et al., ICLE Response to the AI Accountability Policy Request for Comment, International Center for Law & Economics (Jun. 2023), https://laweconcenter.org/resources/icle-response-to-the-ai-accountability-policy-request-for-comment (“ICLE NTIA Comments”).

[6] RFI at 34195.

[7] LLMs are a type of artificial-intelligence model designed to parse and generate human language at a highly sophisticated level. The deployment of LLMs has driven progress in fields such as conversational AI, automated content creation, and improved language understanding across a multitude of applications, even suggesting that these models might represent an initial step toward the achievement of artificial general intelligence (AGI). See Alejandro Pen?a et al., Leveraging Large Language Models for Topic Classification in the Domain of Public Affairs, arXiv (Jun. 5, 2023), https://arxiv.org/abs/2306.02864v1.

[8] Recommender systems are advanced tools currently used across a wide array of applications, including web services, books, e-learning, tourism, movies, music, e-commerce, news, and television programs, where they provide personalized recommendations to users. Despite recent advancements, there is a pressing need for further improvements and research in order to offer more efficient recommendations that can be applied across a broader range of applications. See Deepjyoti Roy & Mala Dutta, A Systematic Review and Research Perspective on Recommender Systems, 9 J. Big Data 59 (2022), available at https://journalofbigdata.springeropen.com/counter/pdf/10.1186/s40537-022-00592-5.pdf.

[9] The prototypical framing of this view is captured by the seminal work by Samuel D. Warren & Louis D. Brandeis, The Right to Privacy, 4 Harv. L. Rev. 193 (1890).

[10] Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 439 (1984).

[11] Id. In this case, the Supreme Court imported the doctrine of “substantial noninfringing uses” into copyright law from patent law.

[12] Id.

[13] Id.

[14] See Adam Thierer, Permissionless Innovation: The Continuing Case For Comprehensive Technological Freedom (2016).

[15] See, e.g., Matthew J. Neidell, Shinsuke Uchida, & Marcella Veronesi, The Unintended Effects from Halting Nuclear Power Production: Evidence from Fukushima Daiichi Accident, NBER Working Paper 26395 (2022), https://www.nber.org/papers/w26395 (Japan abandoning nuclear energy in the wake of the Fukushima disaster led to decreased energy consumption, which in turn led to increased mortality).

[16] See, e.g., Eliezer Yudkowsky, Pausing AI Developments Isn’t Enough. We Need to Shut it All Down, Time (Mar. 29, 2023), https://time.com/6266923/ai-eliezer-yudkowsky-open-letter-not-enough.

[17] See, e.g., Will Knight, Some Glimpse AGI in ChatGPT. Others Call It a Mirage, Wired (Apr. 10, 2023), https://www.wired.com/story/chatgpt-agi-intelligence (“GPT-4, like its predecessors, had been fed massive amounts of text and code and trained to use the statistical patterns in that corpus to predict the words that should be generated in reply to a piece of text input.”)

[18] Joseph A. Schumpeter, Capitalism, Socialism And Democracy 74 (1976).

[19] RFI at 34195.

[20] This competition concern is one that is widely shared across the political spectrum. See, e.g., Cristiano Lima, Biden’s Former Tech Adviser on What Washington Is Missing about AI, The Washington Post (May 30, 2023), https://www.washingtonpost.com/politics/2023/05/30/biden-former-tech-adviser-what-washington-is-missing-about-ai (Tim Wu noting that he’s “not in favor of an approach that would create heavy compliance costs for market entry and that would sort of regulate more abstract harms”).

[21] Oversight of A.I.: Rules for Artificial Intelligence: Hearing Before the Subcomm. on Privacy, Technology, and the Law of the S. Comm. on the Judiciary, 118th Cong. (2023) (statement of Sam Altman, at 11), https://www.judiciary.senate.gov/download/2023-05-16-testimony-altman.

[22] This is a well-known problem that occurs in numerous regulatory contexts. See, e.g., Raymond J. March, The FDA and the COVID?19: A Political Economy Perspective, 87(4) S. Econ. J. 1210, 1213-16 (2021), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8012986 (discussing the political economy that drives bureaucratic agencies’ incentives in the context of the FDA’s drug-approval process).

[23] RFI at 34196.

[24] RFI at 34196.

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