Smart Screen Exclusive

By Paul Sweeting

The practice of restricting access to digital services outside their home markets in order to protect exclusive territorial content licenses came under fire this week.

On Thursday, the European Commission charged six major Hollywood studios — Disney, NBCUniversal, Paramount Pictures, Sony, Twentieth Century Fox and Warner Bros . — along with British pay-TV service Sky UK, with violating European Union competition laws by preventing users from outside the U.K. from accessing movies and TV content on the service.

“European consumers want to watch the pay-TV channels of their choice regardless of where they live or travel in the EU,” European commissioner for competition Margrethe Vestager said in a statement.

Sky UK, like most pay-TV and video-on-demand services in Europe, use geo-blocking technology to restrict access outside their home markets, largely at the insistence of the studios, who typically pre-sell distribution rights to their content on an exclusive territory by territory basis. But the practice has come under intense scrutiny in the EU as the 28-nation bloc works to establish a single, borderless market for digital goods and services to mirror the borderless market for real goods.

The European Commission began investigating the practice 18 months ago in connection with pay-TV services in France, Italy, Germany and Spain, which may still face charges.

“Given the size of the broadcaster and the popularity of English-language content, the Commission decided to proceed first with Sky UK.,” Commission spokesperson Ricardo Cardoso said. “This decision does not prejudge its ongoing assessment of cross-border pay TV-services in other member states.”

Ironically, the charges against the six Hollywood studios and Sky UK came the same week that a report released by Global Web Index, based on data going back to November, 2014, found widespread use of virtual private networks (VPNs) in countries like China, India and Indonesia to circumvent geo-blocks on popular Western digital services such as Netflix, Amazon Prime and BBC iPlayer, raising questions about how effective such technology is at protecting exclusive territory licenses.

Some 64.3 million people around the world use VPNs to access BBC iPlayer, according to the report.

The practice has long-plagued digital services. As many as 200,000 Australians, for instance, were estimated to have been using VPNs to access Netflix content before the service officially launched in that country. Netflix has often looked the other way when it comes to VPN use in territories it eventually plans to enter, assuming many if not most of those users will switch to being legitimate subscribers once service launches. But the practice has led to friction with rights owners.

Leaked Sony emails included in the Wikileaks cache, for instance, reveal the studio pressuring Netflix to crack down on VPN use. “We have asked Netflix to take steps to more closely monitor circumvention websites, and to restrict methods of payment to more clearly weed out subscribers signing up for the service illegally,” Sony Pictures president of distribution Keith Le Goy wrote of a 2013 meeting with Netflix. “”We are now hearing from clients in Australia, South Africa, and Iceland (to name a few), where significant numbers of people are able to subscribe to Netflix. Netflix of course get to collect sub [subscription] revenues and inflate their sub count, which in turn boosts their stock on Wall St, so they have every motivation to continue.”

The Australian government, meanwhile, is advancing legislation that would protect consumers’ use of VPNs, despite objections from local content distributors over competition from Netflix and other non-Australian services.

In Europe, the drive to create a digital single market sputtered on and off for several years. But in June, the European Council, representing all 28-member countries, approved the latest plan put forth by German commissioner Gunther Oettinger.

Whether the latest plan will fare any better than previous efforts remains an open question in Europe. But the antitrust charges brought this week against the U.S. studios shows how high the stakes could get.