Geo-blocking: European Commission publishes initial findings

In brief

The European Commission’s initial findings indicate:

• widespread agreement on the definition of geo-blocking as the practice of preventing users based in a different Member State from the online provider accessing and purchasing consumer goods/digital content services online
• widespread geo-blocking, both unilateral decisions by companies not to sell abroad and contractual barriers to cross-border purchases, and
• a variety of forms of geo-blocking and heightened geo-blocking in particular Member States and product categories.

Online providers put forward a number of justifications for the practices. A legislative package to boost e-commerce is anticipated in May 2016, as well as more detailed analysis of the Commission’s findings in the preliminary report from the e-commerce sector inquiry, due in mid-2016, which will cover both geo-blocking and any other potential competition concerns affecting European e-commerce markets that could trigger enforcement.

The initial findings

On 18 March 2016, the European Commission published its initial findings on the results of its public consultation on geo-blocking, including an issues paper on relevant practices in e-commerce, together with the results of its "mystery shopping survey", which analysed the form and prevalence of geo-blocking restrictions in the EU. The Commission’s issues paper and initial findings are based on replies submitted by over 1400 retailers and digital content providers in the EU in response to the consultation which ran from 24 September to 28 December 2015. The consultation is part of the Commission’s ongoing e-commerce sector inquiry, launched in May 2015 to consider possible competition concerns in European e-commerce markets. The sector inquiry forms part of the Commission’s broader Digital Single Market Strategy, also adopted in May 2015.

Definition of geo-blocking

A majority of the respondents agreed with the Commission’s definition of geo-blocking as commercial practices which enable an online provider to prevent users from accessing and purchasing consumer goods/digital content services offered on its website based on the location of the user in a Member State different from that of the provider. The user’s location is commonly ascertained using their IP address, postal address or debit/credit card details. Geo-blocking can be distinguished from (apparently less widespread) geo-filtering. This is where access to consumer goods and digital content is unrestricted, but with different terms and/or conditions applied depending on the location of the user.

Commission’s key initial findings

The findings of the Commission’s consultation and survey have broadly confirmed the view that geo-blocking is a widespread practice across the Member States, in relation to both consumer goods and digital content. An overwhelming majority (89.4%) of consumers and consumer organisations had experienced geo-blocking. 38% of responding consumer goods retailers and 68% of online digital content providers stated that they geo-block customers. The principle that consumers and businesses should be allowed to purchase and access services from anywhere in the EU received broad support from all stakeholder groups.

According to the Commission’s initial findings, geo-blocking occurs in various forms. For consumer goods, the most common form of geo-blocking encountered by consumers is a refusal to deliver abroad, though refusals to accept payment, re-routing and website access blocks were also found to occur to a lesser extent. Online digital content is "geo-blocked" predominantly though a denial of access to the online content service based on IP address verification. Based on the responses of retailers, cross border sales restrictions are not only included in distribution agreements but also communicated orally and appear sometimes to be driven by a desire to keep prices in different Member States at different levels.

The Commission’s initial findings indicate that there is significant variation in the prevalence of geo-blocking practices in different Member States and product categories, especially in relation to online digital content. Subscription and transaction based services, for example, were generally subject to heightened geo-blocking, while UK online digital content service providers were particularly prone to geo-blocking. The Commission’s initial findings suggest that more than 80% of respondents in Member States such as the Czech Republic, Denmark, Greece and the UK appear to implement at least one type of geo-blocking measure. The Commission states that on the basis of the information gathered, contractual restrictions to sell cross border can be found in all investigated product categories.

Companies responding to the consultation put forward a number of justifications for geo-blocking practices, including delivery costs, divergent national regulations, the absence of a single EU-wide VAT system and consumer protection laws, as well as the aim to provide a tailored service to consumers. Online digital content providers cited the cost of purchasing content for different territories as one factor in not making services available in certain Member States. A significant number of respondents stated that right holders make the licensing of their content conditional upon the service provider undertaking to apply geo-blocking. This condition will need to be assessed on a case by case basis, according to the Commission.

Commentary and next steps

Geo-blocking practices look set to remain a key priority for the Commission. The Commission expects to publish a more detailed analysis of all findings from the e-commerce sector inquiry (not only geo-blocking) in a Preliminary Report due to be published for public consultation in mid 2016, with the Final Report scheduled for the first quarter of 2017.

Legislative changes

The Commission will need to reconcile its attempt to address unjustified barriers to cross border e-commerce with the protection of retailers’ "freedom to contract". Many companies have espoused the view that there should not be an obligation on businesses to sell throughout the EU - each provider should be free to decide the geographical scope of their operations and not be forced to sell in markets where they have not previously been active. Some of the legislative options to deal with unjustified geo-blocking could include banning discriminatory blocking of access to websites and auto-rerouting, or requiring that companies explain upon request the detailed, objective and verifiable reasons why they treat customers differently based upon their location. However, any legislative changes that attempt to regulate the geo-blocking practices of businesses are likely to be difficult to implement in practice due to divergent views on the extent and shape of such regulation. For example, the Commission would have to consider whether an open-ended approach is taken to banned practices or whether there are to be lists of conduct that are justified and not justified. Whether such a list is appropriate, and if so, which conduct should be attributed to each category, is a point on which stakeholders appear to diverge.

What legislative changes the Commission will propose within the framework of the Digital Single Market to improve the transparency of cross-border parcel markets and to enforce EU consumer rules across borders will become apparent in May 2016. Other measures, such as reducing the administrative burdens for businesses of dealing with differing VAT regimes should also be forthcoming within 2016.

Competition enforcement

Most of the instances of geo-blocking identified in the report were the result of unilateral conduct which limits sales to certain territories/customer groups. Such conduct does not infringe competition law provided the undertaking concerned is not in a dominant market position. The Commission will, however, look closely at geo-blocking resulting from restrictions in agreements between suppliers and distributors. Margrethe Vestager, the Commissioner in charge of competition policy, has indicated that in the case of such "vertical agreements", the Commission will “take a close look at whether there is anti-competitive behaviour, which can be addressed by EU competition tools”. It is clear from the Commission’s statements in its issue paper that it intends to use the existing antitrust enforcement toolkit in order to deal with the potential competition law issues raised in the e-commerce sector.

The Commission is already investigating certain conduct in the e-commerce market (including the ongoing investigation into licensing agreements between large European broadcasters and US film studios). We watch with interest to see whether - and if so, how soon - further investigations will be launched. It appears that online digital content may come under the spotlight, with 59% of content providers indicating that they are contractually required by rights holders to geo-block, although with 12% of consumer goods retailers reporting contractual cross-border sales restrictions, there could also be investigations into this aspect.