Assessing Indirect Impacts of the EC Proposals for Video Regulation

Ofcom is today publishing an independent study conducted by RAND Europe, which looks at the potential indirect impact of the European Commission’s proposed Audiovisual Media Services (AVMS) Directive.

Since 1989, television services in Europe have been regulated by the Television without Frontiers Directive, which created a single market for the provision of television services and established minimum content rules in areas such as protection of minors and advertising. In December last year, the European Commission published a proposal for a new directive. The draft is currently being considered by the European Council and the European Parliament, and adoption is expected by 2007, at the earliest.

The Commission proposes to extend the scope of regulation to all audiovisual media services, which have been defined as services the principal purpose of which is the provision of moving images, with or without sound, to the general public, in order to inform, educate or entertain. Nine months into the discussions, it remains unclear which services are exactly caught by these proposals. However, it appears that a number of strategically significant new media sectors could potentially fall within the scope of the new Directive, including mobile multimedia, online gaming and IP television.

The proposal has raised serious concerns among UK and European industry, on the grounds that it will significantly increase regulatory costs and uncertainty. Further, it has been argued that it will negatively impact on innovation, European competitiveness, and the Lisbon Agenda goals.

For its’ part, Ofcom has expressed serious doubts about the practicability and appropriateness of extending broadcasting regulation to a whole range of new media services which are very different from traditional TV, both in nature and in the manner in which they are consumed.

Clearly, in accordance with better regulation principles, it is important to be able to understand the potential impact that the Commission’s proposals will have on these strategic sectors. The Commission, as required, published a regulatory impact assessment along with the draft Directive and asked RAND Europe to provide some supporting economic analysis as part of that process. RAND Europe identified a number of key factors which would determine whether the benefits of extending the scope would outweigh the costs. However, it was not possible within the study’s timeframe for RAND Europe to look at the potential impact on specific industry sectors.

Ofcom believes such an analysis is critical for the purposes of assessing the full impact of the Commission’s proposals. It therefore asked RAND Europe to undertake further research and to look in particular at the potential indirect effects in three key sectors: IPTV, mobile multimedia and online games. Indirect effects refer, in particular, to the possible effect that regulation could have on companies’ investment and location decisions. RAND Europe concludes that these indirect effects, whilst difficult to quantify with precision, could be significant given that (a) the new media industries affected by this proposal may be at an early stage of development, with major investment and location decisions still to be made; (b) each of the sectors identified has elements within it that could be relocated relatively easily outside of the European Union; and (c) new media industries are often characterised by a significant number of small and medium sized firms which previous studies have shown are particularly vulnerable to regulatory risk.

The study concludes that:

• The new media sectors affected by this proposal are strategically significant for the EU economy. They can be expected to contribute above average growth compared with other sectors, and, critically, have a significant enabling role in relation to other key markets such as broadband deployment.
• There remains a significant problem of ‘regulatory risk’ as a result of the definitions in the Directive being insufficiently precise. The risk arises because firms cannot state with any degree of certainty what the actual application of the Directive will be, and whether or to what degree they will be affected by it.
• In general, ‘light touch’ regulation, wherever possible delivered through industry self-regulation, is important in both reducing the size of regulatory costs and reducing regulatory risk and uncertainty.
• In the case of IPTV, there are major uncertainties about the future trajectory of the industry, which is at an early stage of development. It is unclear whether IPTV will predominantly develop in a closed or ‘walled garden’ environment, where content is separately licensed by its creators and owners to local or national distributors, for instance commercial broadcasters, cable and telecoms companies; or whether content owners and creators will simply distribute their own material via the open internet, bypassing the need for any form of commercial relationship with other distributors.
• If the latter model prevails, it is highly probable that much of the activity regulated by the draft AVMS Directive will take place outside Europe and hence be outside the remit of the directive. As a result, no economic benefit would accrue to Europe from this economic activity. RAND Europe recommends that more analysis is done to understand the likely direction of this industry. RAND Europe also notes that it will be important to avoid the situation in which the costs of compliance with the AVMS Directive become a critical factor in determining the prevalence of the latter model.
• In the case of mobile multimedia services, RAND Europe notes that the risk of ‘offshoring’ of activity, which is significant in the case of IPTV, is here reduced because mobile companies have greater scope to control the services made available to their customers (and hence to restrict access to third party services offered over the open internet). But RAND Europe points out that the regulatory costs of compliance with the new AVMS regime need nonetheless to be proportionate, because otherwise there is a risk that mobile companies will have incentives to artificially structure businesses so that the regulatable activity of making and creating content takes place outside the EU. RAND Europe recommends that existing, light touch self-regulatory regimes should form the ongoing basis of regulation in the mobile sector.
• As for online games, RAND Europe finds that this industry is global, and that the added value activity of creating and developing games is highly ‘portable’. This industry is therefore highly susceptible to increases in regulation in one territory, however small, especially when that regulation does not have parallels in other territories where development activities could easily be shifted RAND Europe recommends that serious consideration be given to excluding online games altogether from the scope of the AVMS Directive.

Ofcom believes that this report highlights some important economic risks inherent in the Commission’s proposals. These risks are particularly important in relation to the new media industries that RAND Europe has examined and which are strategic for European future competitiveness. These risks accrue not just to shareholders of the companies concerned, but to the EU economy as a whole and hence to EU citizens. The worst case scenario for Europe is that economic activity which would have taken place in Europe, providing jobs and stimulating growth here, will take place elsewhere, be it in the US or in the Far East. The results of the RAND Europe study are in accordance with feedback to Ofcom and the UK Government from businesses and investors.

Our conclusion is that legislators should:

• Make further efforts to clarify the scope of the services caught by the Directive.
• In addition to the general need for greater certainty, we think the RAND Europe study makes a compelling case for the complete exclusion from the proposals of the online games industry.
• Ensure that there is clear guidance to the Commission and national authorities to ensure that the implementation of the Directive is conducted in a proportionate, transparent, evidence-based and light touch way. Critical to this is to encourage that IPTV and mobile multimedia industries, amongst others, play a full part through self and co-regulation in shaping the rules that will apply to individual industry sectors.
• Emphasise that, when conducting a review of the Directive, and in accordance with Better Regulation principles, the Commission should examine whether or not there is a continued need for regulatory measures. Over-regulation risks otherwise driving key strategic activities outside of the EU.

The full document is available below: