European Union: E-Commerce: The European Commission Completes Its Preliminary Report On The E-Commerce Sector Inquiry

In May 2015, the European Commission (the Commission) launched a sector inquiry in the field of e-commerce in the context of its Digital Single Market strategy. Its aim was to obtain an overview of prevailing market trends, gather evidence on potential barriers to competition linked to the growth of e-commerce and understand the prevalence of certain, potentially restrictive, business practices and the underlying rationale for their use.

In the course of this inquiry, the Commission gathered evidence from nearly 1,800 companies active in the e-commerce of consumer goods and digital content and analyzed around 8,000 distribution contracts. On 18 March 2016, the Commission published its initial findings showing that geo-blocking is widespread in the European Union due to unilateral decisions by companies not to sell abroad as well as contractual barriers set up by companies preventing consumers from shopping online across EU borders.

On 15 September 2016, the Commission completed its preliminary report (the Preliminary Report), which confirms the fast growth of e-commerce in the European Union and identified business practices that might restrict competition and limit consumer choice.

The Commission's Preliminary Report will be open to public consultation for a period of two months, between 15 September 2016 and 14 November 2015, with all interested stakeholders invited to comment on the Commission's findings, submit additional information and raise further issues.

The Commission intends to publish its final report in the first quarter of 2017.

The Commission's Main Findings Regarding Consumer Goods

With regards to e-commerce markets of consumer goods, the Commission's main factual findings are the following:

  • High degree of price transparency leading to an increase in price competition: Increased online price transparency is the market feature that most affects the behavior of market players and consumers, with 53 percent of respondent retailers tracking the online prices of competitors, and almost 70 percent using automatic software programs to do so.
  • Increased direct retail activities by manufacturers: 64 percent of respondent manufacturers opened their own online shops in the last 10 years. Cosmetics and health care is the product category with the highest proportion of manufacturers with their own online shop. As a result of this trend, in the last decade many retailers have found themselves competing against their own suppliers.
  • Expansion of selective distribution: In the last 10 years, in response to the growth of e-commerce, around 20 percent of respondent manufacturers introduced selective distribution systems for the first time and 67 percent of those who use selective distribution introduced new selection criteria, in particular for online sales. Selective distribution is particularly prevalent in some sectors, such as clothing and shoes. Almost 50 percent of the manufacturers using selective distribution reported that they do not allow pure online players to join their selective distribution network.
  • Contractual sales restrictions: The Preliminary Report identified several types of contractual sales restrictions in the context of distribution, such as pricing limitations or recommendations, restrictions on distributors to sell or advertise on their own website, on marketplaces (e.g., eBay) or cross-border, as well as restrictions on the use of price comparison tools. These restrictions may, under certain circumstances, make cross-border shopping or online shopping more difficult and ultimately harm consumers by preventing them from benefiting from greater choice and lower prices in e-commerce.
  • Free-riding: Customers can switch swiftly from one sales channel to another. Many of them use the pre-sales services offered by one sales channel (such as a product demonstration, personal advice in a brick and mortar shop or search for product information online) but then purchase the product through another sales channel. In such cases the costs of pre-sales services become difficult to recoup (there is "free-riding"). This is a major concern for many manufacturers.

The Commission's Main Findings Regarding Digital Content

With regard to e-commerce of digital content, the Commission found that one of the key determinants of competition in digital content markets is the availability of licenses from the holders of copyright in the content.

As such, copyright licensing agreements are complex and often exclusive, and tend to be split between technologies (such as the right to transmit online and to deliver the content via a certain technology, such as streaming), territories (for example on a national basis) and release windows (i.e., concerning certain release periods):

  • Contractual restrictions in relation to transmission technologies, timing of releases and territories: The Preliminary Report shows widespread geo-blocking across the European Union, with more than 60 percent of respondents having contractually agreed with rights holders to restrict users from other Member States from accessing their online digital content services by means of geo-blocking. According to the Commission, if geo-blocking is the result of agreements between suppliers and distributors, it may restrict competition in the Single Market in breach of the EU antitrust rules. However, any competition enforcement measure against geo-blocking would have to be based on a case-by-case assessment, which would also include an analysis of potential justifications for restrictions that have been identified.
  • Duration of licensing agreements and contractual relationships: The Preliminary Report found that the vast majority of licensing agreements with digital content providers were relatively long-term (i.e., with durations of at least two years and up to 10 years, which may create difficulties for digital content providers seeking to enter a certain market or expand their existing commercial activities). According to the Commission, this issue may be exacerbated by certain contractual clauses that are part of licensing agreements (e.g. first negotiation clauses, which provide for the contractual right to first renewal of the licensing agreement, automatic renewal clauses or other similar clauses).

E-Commerce: The European Commission Completes Its Preliminary Report on the E-Commerce Sector Inquiry

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