In 2015, the Commission announced the EU's Digital Single Market (DSM) project. Led by Vice President Ansip and Commissioner Oettinger, DSM is promised to deliver to European consumers and businesses a truly seamless internal digital market. The ambition is big. If it continues on its current trajectory, there is a risk that DSM, and its related EU initiatives, might have some very real, but no doubt unintended, consequences:

  • Less EU content: materially undermining the content production market in the EU, leading to less EU content being produced and available to EU consumers
  • Less product choice: undermining the business models that allow an array of innovative digital services to be provided to consumers for free or at low cost
  • Regulatory overload: introducing a raft of new regulation which increases costs and complicates, rather than simplifies doing business in the EU

What is DSM?

DSM is an evolving package of consultations and proposals built around three pillars: Access, Regulatory Environment and Growth. In addition, the Commission has launched a number of competition enquiries which are driven by some of the same policies underlying DSM. The ones most relevant here are:

Finally, all this is against the backdrop of the incoming General Data Protection Regulation and the attempts to deal with the fall-out of the CJEU's Schrems decision and the resulting new Privacy Shield agreement.

A foundational misconception?

The policy drivers of DSM can be summarised in the following three themes:

  • Why has a truly European market for online services not developed organically?
  • West Coast US tech players have too much power and an unfair advantage in the market and this is inhibiting the growth of the EU digital sector.
  • Removing barriers to the internal digital market will inevitably drive up choice and drive down costs for European consumers.

Do these stack up?

It's not one market

The Commission thinks that internal market inefficiencies, such as fragmented copyright, consumer and contract laws have led to both demand and supply side problems. On the demand side, consumers and businesses lack the requisite trust to trade cross border. On the supply side, the costs of compliance with fragmented laws and/or rights clearance disincentivises suppliers from trading cross border.

The problem with the demand side analysis is that it treats the digital market as a homogenous whole when in fact it is an amalgam of multiple markets with different demand side drivers. For example, the market for online data storage services is largely agnostic as to user location. There is little evidence that there is any demand side problem with accessing or using cross-border providers. However, the online AV content market is indeed fragmented. The Commission assumes this is because of legal barriers, but the reality is much more complex. Content, and especially premium TV and film content, remains very localised on the demand side.

The supply side analysis is also flawed. There are obviously increased compliance costs where there are differing laws between member states, but, in practice, where there is a demand for cross border trade, a supplier will logically be incentivised to and does meet that demand. What the Commission is really concerned about is not increased compliance costs, but rather the fact that there remain very different economic markets within the EU for some online services. That is not to say that reduced compliance costs and regulatory burden would not be welcomed by suppliers; it would be; but one only need take a quick look at the long list of regulatory intervention proposals that form part of DSM to conclude that the likely impact of DSM is to increase the regulation of the internal digital market, which will in turn increase compliance costs.

The law is not the handbrake

The Commission is right that the digital economy in Europe is dominated by large, usually American, businesses. The Commission looks at this reality and says that fragmented legal systems must, in part at least, be the cause of this reality.

First, a mere variance in laws is not the decisive factor. To the extent that the legal system, as opposed to the talent and funding ecosystems, is a driver of innovation, it is the content of those laws and the attitude of regulators that is relevant. Many of the proposals being mooted in DSM will drive up the cost of doing business in Europe. As a rule, though not without exception, the US and its states tend to have more business friendly consumer and data protection laws, two areas of regulation integral to the digital market. They arguably also have a copyright regime more suited to fostering innovation through its having a general fair use exception to copyright infringement (albeit tempered by one of the harshest statutory damages regimes for copyright infringement in the world and a very litigious culture). Mandating overly broad standards for data portability - and creating overlapping regulatory regimes relating to data as seems to be the intent - or increasing warranty costs for businesses is not going to foster new European startups to compete with the big American players.

Second, DSM presumes that there is a market demand for cross border services that is not being met. Ironically, most of the big incumbents that the Commission has in its target are already providing their services broadly across the EU. They provide services which European consumers value and want to consume, whether free or on a paid basis. New regulation does not enable European service providers, it merely raises the regulatory burden on European and American providers alike.

Will it be more or less?

DSM is premised on the logic that if you remove barriers to trade and intervene in the market, consumers will have more choice and prices will go down. But does this proposition withstand scrutiny? Not in all markets. Consider the market for paid AV content. At the moment, consumers in countries like the UK typically pay more for their content then consumers in, say, Greece. The seminal Murphy case arose out of this very fact pattern. Remove the barriers to cross border trade and what happens? The market for AV content is unlikely to normalise down to the lowest price in the EU. Much more likely, the price will drop slightly for the UK and rise materially for Greece. In other words, the richer consumers will benefit slightly and the poorer consumers will suffer proportionately more. Similarly, the Commission's underlying premise in the Pay-TV Statement of Objections risks undermining the basis on which the local content production market is financed.

Similar concerns arise from the Commission's data plans. Two key planks of the DSM proposals are mandating that data be counter-performance in online consumer contracts for digital content and giving consumers broad portability rights for 'any data' (not just regulated personal data) generated as a result of their relationship with an online trader. It is trite to say that data is the true currency of the digital market place. The DSM proposals run the risk of devaluing it from a supplier perspective. Yes, this may in theory promote easier switching between services, but much of the stickiness of the existing platforms is to do with network effects, not data processing. Devalue the data side of the equation for the supplier and we run the risk of undermining the very varied business models that have driven the development of the digital market. Is there any true privacy concern that is not already addressed in the GDPR?

What's the answer?

DSM is not without any merit. It does seek to tackle issues where regulatory intervention can be beneficial and which should be encouraged. But the wider DSM project is not surgical regulatory intervention. Better would be to implement home country rule for European traders. In other words, if you are established in an EEA member state, then your trade with customers in Europe is governed by the laws of that member state. Nothing would deliver confidence and certainty quicker.

This editorial is a short version of an article published in the March edition of Intellectual Property Magazine, available here.

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