Study on the Impact of the Conditional Access Directive

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Study on the Impact of the Conditional Access Directive STUDY ON THE IMPACT OF THE CONDITIONAL ACCESS DIRECTIVE Study prepared on behalf of the European Commission Directorate General for Internal Market & Services December 2007 This study was undertaken by independent experts. The views expressed are those of the authors. The report does not reflect the views of the European Commission, nor does the European Commission accept responsibility for the accuracy of the information contained herein. 2 TABLE OF CONTENT EXECUTIVE SUMMARY 6 CHAPTER I: WHAT IS THE CONDITIONAL ACCESS DIRECTIVE (CAD)? 12 1.1 GENERAL HISTORICAL CONTEXT 12 1.2 LEGAL BACKGROUND 13 1.3 OBJECTIVES 14 1.4 COVERAGE OF THE DIRECTIVE 15 1.5 METHODOLOGICAL REMARKS 16 CHAPTER II: ECONOMIC ANALYSIS 18 2.1 CONCEPTS 19 2.1.1 INFORMATION SYSTEMS, PRIVATE AND PUBLIC INFORMATION 19 2.1.2 INFORMATION EXTERNALITIES 20 2.1.3 INFORMATION GOODS 21 2.1.4 MEDIA ECONOMICS 22 2.2 CONDITIONAL ACCESS SYSTEM ECONOMICS 25 2.2.1 CAS UTILITIES 25 2.2.2 THE CASE OF NON-MEDIA ISS 26 2.2.3 CAS IN AUDIOVISUAL (AV) CONTENT DISTRIBUTION 27 2.2.4 TECHNICAL VERSIONING 28 2.2.5 CULTURAL VERSIONING 29 2.3 AV CONTENT MARKETS 31 2.3.1 AV CONTENT MARKETS IN THE EU AND THE US 31 2.3.2 DIVERSITY OF AV CONTENT MARKETS ACROSS THE EU 33 2.3.3 DEVELOPMENT PATH, COMPETITIVE STRUCTURE AND REGULATORY PARAMETERS 38 2.3.4 GEOGRAPHICAL FACTORS: SIZE AND LANGUAGE 39 2.3.5 PAY-TV MARKETS’ SIZE AND GROWTH 43 2.4 THE CONDITIONAL ACCESS INDUSTRY 44 2.5 IP RIGHT ECONOMICS IN THE DIGITAL ENVIRONMENT: IP FUNDAMENTALS, VERTICAL RELATIONS AND MORAL HAZARD 49 2.5.1 VERTICAL RELATIONS BETWEEN RIGHT HOLDERS AND PAY-TV OPERATORS, BETWEEN RIGHT HOLDERS/CONTENT AGGREGATORS AND DELIVERERS 51 2.5.2 VERTICAL RELATIONS BETWEEN CAS PROVIDERS AND PAY-TV OPERATORS 52 2.5.3 RELATIONS BETWEEN CAS PROVIDERS AND STB MANUFACTURERS, BETWEEN TV-OPERATORS AND SET-TOP BOX MANUFACTURERS 53 2.6 THE PIRACY DILEMMA: MORAL HAZARD AND HOW TO MASTER IT 57 2.6.1 CAS PIRACY 58 3 2.6.2 INTERNET PIRACY THROUGH PEER-TO-PEER 60 2.6.3 P2P AND PRIVATE COPY 62 2.6.4 GREY MARKET ISSUE 64 2.7 PRELIMINARY CONCLUSION 67 CHAPTER III: LEGAL ANALYSIS 69 3.1 METHODOLOGICAL ISSUES 69 3.2 MAPPING OUT OF THE LEGAL FRAMEWORK IN THE SELECTED SAMPLE OF MEMBER STATES 70 3.2.1 COMPETENT AUTHORITIES OVERSEEING THE IMPLEMENTATION OF THE CAD 70 3.2.2 DATE OF IMPLEMENTATION OF THE CAD 72 3.2.3 RELEVANT NATIONAL REGULATIONS IN FORCE BEFORE THE CAD 73 3.2.4 THE CAD’S IMPLEMENTATION IN THE SELECTED COUNTRIES 78 3.2.5 ALTERNATIVE LEGAL RULES USED TO FIGHT CA PIRACY 80 3.2.6 SCOPE OF THE INFRINGING ACTIVITIES 82 3.2.7 SANCTIONS AND REMEDIES 83 3.2.8 RELEVANT CASE LAW 93 3.3 PRELIMINARY CONCLUSION 98 CHAPTER IV: ASSESSMENT OF THE CAD 100 4.1 EFFECTIVENESS OF THE CAD IN TACKLING PIRACY 101 4.1.1 DIFFICULTIES EXPERIENCED IN ASSESSING THE IMPACT OF THE CAD 101 THE METHODOLOGY ADOPTED 101 4.1.1.1 PERCEPTION 101 PUBLIC AUTHORITIES AND BUSINESS STAKEHOLDERS 101 4.1.1.2 ENFORCEABILITY 103 LACK OF AWARENESS AMONGST PUBLIC AUTHORITIES 103 4.1.1.3 LACK OF ECONOMIC DATA ON PIRACY AND OF CASE LAW 104 STAKEHOLDERS’ RELUCTANCE TO PROVIDE INFORMATION 104 4.1.1.4 RELEVANCE OF CASE LAW IN ASSESSING THE CAD 105 4.1.1.5 TECHNOLOGICAL EVOLUTION 105 INTERNET PIRACY AND ITS IMPACT ON THE CONDITIONAL ACCESS MARKET 105 4.1.1.6 MORAL HAZARD ISSUES 107 4.1.2 HOW TO IMPROVE THE CAD’S EFFECTIVENESS 108 4.1.2.1 THE LACK OF HARMONISATION 108 THE ISSUE OF TRANS-FRONTIER PIRACY 108 4.1.2.2 THE LEVEL OF SANCTIONS 109 4.1.2.3 PRIVATE USE, COMMERCIAL USE 110 4.1.2.4 THE PROBLEM OF NEW FORMS OF CA PIRACY 111 4.1.2.5 THE INABILITY OF CONTENT OWNERS TO USE THE CAD 112 4.1.3 PROVISIONAL CONCLUSION 113 4.2 EFFECTIVENESS OF THE CAD IN PROMOTING CROSS-BORDER SERVICES 113 4.2.1 THE ISSUE OF TERRITORIALITY OF CONTENT 113 4.2.2 THE CAD AND THE EU REGULATORY ACQUIS 115 4 4.2.3 THE INTERNAL MARKET AND GREY MARKET ISSUES 117 4.3 THE CAD AND THE INTERNATIONAL REGULATORY FRAMEWORK 119 4.3.1 THE EU AND INTERNATIONAL IP FRAMEWORK 119 4.3.2 LEGAL PROTECTION OF MEDIA CONTENT 122 4.3.3 THE EFFECTIVENESS OF LEGAL INSTRUMENTS TO ADDRESS MEDIA CONTENT PIRACY 126 CHAPTER V: CONCLUSIONS 128 5.1 MAIN FINDINGS OF THE STUDY 128 5.1.1 THE ECONOMIC FINDINGS 128 5.1.2 THE LEGAL FINDINGS 130 5.2 IP PROTECTION AND THE CAD 131 5.2.1 THE IMPORTANCE OF RIGHT HOLDERS IN THE STRUCTURING OF AV MARKETS 132 5.2.2 TECHNICAL-ORIENTED VS IP-ORIENTED REGULATION 133 5.2.3 ISPS’ LIABILITY IN COPYRIGHT ENFORCEMENT 134 5.2.4 EXPANSION OF IP PROTECTION TO NEW RIGHT HOLDERS? 134 5.2.5 RIGHTS LICENSING 135 5.2.6 COMPETITION POLICY AND MEDIA INDUSTRY 135 5.3 FINAL REMARK 136 CHAPTER VI: ANNEXES 137 5 EXECUTIVE SUMMARY The Directive The directive on the legal protection of services based on, or consisting of, conditional access (Directive 98/84/EC, hereinafter CAD) was adopted on 20 November 1998. The objective of the CAD is to provide conditional access (CA) systems protecting services that are remunerated, effectively Pay-TV and on-demand services, with a common standard of legal protection. In other words, it aims at compelling all Member States to adopt a certain level of sanctions and remedies in order to efficiently fight CA piracy. The directive covers both broadcasting (television and radio) and interactive online services (information society services - ISS) that use some form of conditional access. The study in brief The study first examines why conditional access services (CAS) play a different role in non-media ISS and in media content distribution. It then describes the economics of audiovisual content distribution and the role played by conditional access devices in this domain, showing that piracy incentives are numerous along the distribution chain. A legal evaluation of the CAD application is then carried out, revealing that a number of weaknesses restrain the efficiency of such a regulation. The study is based on a sample of member states, selected on the basis of the importance of national markets and with a view to ensure a balanced representation of large/small, old/new member states; another criterion for the sample selection is the issue of linguistic proximity, whereby linguistic areas transcending national borders are examined. The sample therefore includes eleven countries: the United Kingdom, Germany, France, Italy, Spain, Ireland, Austria, Sweden, Belgium, Poland and Lithuania. The study conclusions justify the importance of opening a discussion at EU level on how to build systematic intellectual property (IP) protection by improving the existing regulatory framework (including the CAD) and ensuring appropriate enforcement of the existing measures, as well as improving cross-border cooperation in the monitoring and enforcement of the CAD. The economic analysis The first finding of the economic analysis is that the economic functions of encryption devices strongly differ in non media and in media applications. While in non media services, Conditional Access Systems directly participate in the utility supplied to the consumer, in the case of media content delivery CA systems are basically both an exclusion and discrimination tool. In other words they are technical means aiming at selecting among consumers and extracting from them the price they are willing to pay for media goods. The term discrimination is hereinafter used as an economic concept, and should not be confused with the notion of discriminatory practices which are forbidden by EU Internal Market rules. 6 From an economic perspective, media goods are opposed to communication services (so-called non media ISS) by the fact that their demand patterns as well as their renewal or diversity objectives require a discriminatory pricing strategy usually called “versioning”. Because of the diversity of its linguistic and cultural communities, Europe shows a highly specific distribution of media content preferences. These are largely related to territoriality but may also exceed it. Moreover, depending on its own evaluation of media externalities, each European country has followed a specific audiovisual path leading to a wide diversity in TV industrial organisation, in audiovisual (AV) content delivery systems, in AV version market structure and in national regulation. The wide differences in the penetration rates and the turnover of pay-TV markets illustrate this phenomenon. Such a cultural, industrial and regulatory landscape does not favour cross-border versioning. Compared to its American competitors, this situation places Europe in a very adverse position. While its industry is highly fragmented and ruled by national and politically sensitive media regulations, the European Union as a territory has to cope with high discrimination costs. The harmonisation of the EU media regulations which would efficiently help the reduction of these discrimination costs raises many issues regarding the legacy of the multiple media development paths, the setting up of a common evaluation of media externalities as well as common internalisation rules to be applied across the EU. By aiming at facilitating cross-border exchanges through protected discrimination devices, the CAD probably missed the sophistication of this point. However, because they are discrimination tools, CAS should be protected so to be maximally efficient. The fragmentation of the European audiovisual industry as well as the competition between Free- To-Air (FTA) and pay-TV versions create many incentives for CAS hacking or piracy.
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