The end of geo-blocking? What the Commission's Regulation really means for your business

On 25 May 2016, the European Commission published its proposed Regulation on geo-blocking and other forms of geographical discrimination within the Single Market. In its Explanatory Memorandum, the Commission states that the proposal “prohibits the blocking of access to websites and the re-routing of customers from one country version to another”. However, despite these bold claims, the Memorandum also makes it clear that:

• the proposal does not address pricing;
• audio-visual content is excluded from the prohibition; and
• traders will not be forced to make cross-border deliveries of physical goods.

So, to what extent will the proposed Regulation really affect the day to day business of most traders in Europe?

Background

The prohibition of ‘unjustified’ geo-blocking was a key component of the European Commission’s Digital Single Market strategy (DSM) when it was announced in May last year (read more here). The goal was complete ‘accessibility’, with consumers able to purchase cross-border without impediment. It followed the investigation into Pay TV, which looks set to confirm the Commission’s view that agreements to geo-block online content breach competition law (read more here) and are therefore unenforceable.

However, the Commission quickly discovered that defining ‘unjustified geo-blocking’ would not be straightforward. For digital content, aside from the need to comply with legal regulation across Europe and to ensure the protection of intellectual property, removing geo-blocking would undermine the territorial exploitation of rights and the very way that such content is financed. For physical goods, the high cost of international delivery, as well as differing tax and consumer laws, meant that any obligation to supply cross-border could place an undue burden on business. In both cases, harmonisation of pricing across Europe could lead to higher prices for many consumers.

In this proposal, the Commission clearly aims to balance these concerns with the overarching aims of the DSM. The proposal prohibits:

• geo-blocking of an ‘online interface’ for reasons relating to the nationality, place of residence or place of establishment of the customer;
• automatic/compulsory redirection to a local version of a website – customers must be given a choice on redirection (and be free to change their minds later). The proposal does not prohibit differential pricing, but it does mean that consumers will be free to view the pricing available in other Member States;
• different conditions of access to goods or services in three specific situations:
  • where there is no cross-border delivery of the goods to the Member State of the customer by or on behalf of the trader. This means that the trader must offer the same delivery services as it offers local customers – e.g. domestic delivery and/or click and collect from the country of supply;
  • where the trader provides electronically supplied services (except where the main feature is access to/use of protected works); and
  • where the trader provides services which are received by the customer in the premises of a trader or in a physical location where the trader operates outside the customer’s home Member State. This has been a key focus for the Commission and means that services such as hotels and car hire should not be subject to discrimination on the basis of the customer’s Member State.

So, what do these proposals mean in practice?

Digital content

As mentioned, the Regulation explicitly excludes audio visual services, such as films, television programmes and sports broadcasts, from its scope. However, the Commission is of course also pushing through the Portability Regulation, which is likely to require suppliers of audio visual service to provide their customers with access to that content when they are temporarily resident in another Member State.

As well as audio visual services, the Regulation also excludes radio broadcasts. However, the provision of other digital content such as videogames, e-books and music, will be covered by the Regulation. This means that traders will not be able to block access to online interfaces or websites that make such digital content available, and must obtain consent for any redirection to local versions.

This does not mean that traders will have to make all their digital content available to all customers. The prohibition on traders applying different conditions of access for electronically supplied services does not apply to services, the main feature of which is the supply of copyright protected works. This means that rights holders will still be able to licence content on a territory-by-territory basis, and that suppliers of such content will be able to limit access to such content dependent on the Member State the customer is resident in. The Regulation does contain a review clause and explicitly mentions that this carve out should be reviewed after two years to see whether the prohibition on applying different conditions of access should be extended to services.

Physical goods

Although the sale of physical goods may not be complicated by issues around copyright and territorial licensing, the burden of complying with local VAT rules and the cost of cross-border delivery does pose a very real barrier to cross-border trade for many businesses. The Commission also recognises that “the majority of businesses oppose an obligation to sell and deliver throughout the EU and emphasize the importance of tailoring prices on different national markets, highlighting the need to respect their contractual freedom.”

The Commission has taken this on board. Although it will no longer be permissible to geo-block a website – or to automatically redirect customers to their local website – traders are not required to make cross-border deliveries where this is not already in place. However, traders are obliged to sell to customers based in other Member States, provided that the customer can accept delivery in the trader’s home territory – or arrange collection. This is because local VAT will apply and there is no cross-border delivery, meaning refusal to supply cannot be justified.

In addition, customers will be able to see a company’s offering in other countries – including pricing – and it is possible that this will put pressure on some companies to move closer to harmonised pricing and/or service offerings.

Where a company operates out of a single legal entity and/or from cross-border logistics hubs, the wording of the proposal suggests that it will now be required to fulfil orders from consumers in those Member States where it currently delivers. This may affect some major pan-European companies.

Services

The proposal may have a greater impact for service providers, particularly electronic services, whose main feature is not the provision of copyright-protected works. Here, the Commission is clear that traders cannot provide different conditions of access to customers in other Member States, because this discrimination cannot be justified on the basis of delivery or tax. As a result, providers of services such as data warehousing, cloud services, website hosting and firewall provision will have to provide the same offering and the same terms and conditions to all EU customers.

The same rules apply to services performed in a different Member State to the customer – so that different terms and conditions cannot be applied to hotels or car hire, for example, on the basis of the location of the customer.

What now?

The Commission sees the Regulation as a significant step for the benefit of consumers, offering them greater choice when shopping online or receiving cross-border services and searching for the best offers across the EU. As a consequence, companies will need to adjust their distribution policies, taking into account different rules for different types of goods or services.

For electronically-supplied services that are not related to copyright-protected content, providers will benefit from an extended adaption period. The Commission acknowledges the specific characteristics of such services and the corresponding need for service providers to adjust to the changes. Non-discrimination of prices for these services will therefore only come into force on 1 July 2018.

The draft Regulation will now go to the European Parliament and the Council of the European Union for approval. The Commission envisages that the Regulation will come into force in 2017 as it does not need to be transposed into the national laws of the 28 EU Member States.

In particular, suppliers of physical goods will need to adapt much more quickly to these significant changes of the commercial environment for trade in the internal market and review their distribution policies.