EU Takes on Hollywood in European Pay TV Showdown

The five big U.S. studios descend on Brussels this week for days of closed-door hearings that could decide the future of the film licensing business in Europe.

An epic European showdown with Hollywood has entered its next round this week, with potentially billions of dollars at stake.

The European Commission, the European Union's executive body, on Monday kicked off a three-day session of closed-door hearings with the big six U.S. studios and pan-European pay TV giant Sky's U.K. unit. Some 150 executives are expected to show up to argue against the EU's antitrust regulators, who say the studios' movie-licensing deals violate Europe's rules for an open, single market across the EU's 28 nation states.

At issue are deals signed by Disney, NBCUniversal, Viacom's Paramount, Sony, 21st Century Fox's 20th Century Fox and Time Warner's Warner Bros. with European pay TV giant Sky, in which 21st Century Fox owns a 39 percent stake. In July, Margrethe Vestager, the European commissioner for competition, warned the studios that their movie licensing deals with Sky could violate EU law because they prevent EU customers outside of the U.K. or Ireland from accessing Sky U.K.

"European consumers want to watch the pay-TV channels of their choice regardless of where they live or travel in the EU," said Vestager at the time. “Our investigation shows that they cannot do this today, also because licensing agreements between the major film studios and Sky U.K. do not allow consumers in other EU countries to access Sky's U.K. and Irish pay-TV services." 

The hearings this week are part of a broader push by European politicians to create a single digital market across the EU, a move that many in the film and TV industry claim would effectively destroy copyright protections and wipe out the independent film industry here. The EU, in contrast, says breaking down the “national silos” preventing digital content from being sold across EU borders will boost cross-border consumption in Europe by nearly €18 billion ($20 billion).

The European Commission, the studios and Sky have all declined comment ahead of this week's closed-door sessions. While the hearings will only deal with Sky U.K., the outcome of the pay-TV case could have wide-ranging implications and impact how everything from sports rights to video games are sold in Europe.

The EU has already proposed creating “portability” rules allowing customers to use services such as Netflix when they travel outside their home country.

But the Sky U.K. case goes beyond that. The EU claims that the studios' deals with Sky violate EU law because they block potential customers in continental Europe from subscribing to services available in Britain and Ireland via so-called geoblocking. That, the EU claims, goes against a core European principle that people in every country of the 28-nation block should be able to access the goods and services available elsewhere in the EU.

The EU also objects to clauses found in some of the deals which stipulate that if the studios license their films to broadcasters other than Sky, those networks cannot offer their pay-TV services in Sky's territories of the U.K. or Ireland.

A key, if quite technical, focus of the debate this week will be on the concept of "passive sales," meaning to what degree can Sky be expected to accept unsolicited requests for its pay-TV services from consumers in countries where the company is not actively promoting or advertising its services.

The EU could look to end such clauses without forcing Sky or other pay-TV providers to sell its services to people abroad if it does not make business sense for the company. Since the Sky-Hollywood deals are a test case, the EU is looking at establishing principles that would affect all companies in the European Union in the space, including John Malone's pan-European cable operator Liberty Global and France's Canal Plus. 

Cecilio Madero, the EU deputy director general for antitrust, and Krzysztof Kuik, the head of its TV unit, were expected to lead the EU team in the hearings.

The accused companies face fines of up to 10 percent of their previous fiscal year's revenue, if infringement can be proved. For Sky, which reported overall revenue of just over $16 billion last year, that would mean a maximum fine of up to $1.6 billion.

Such a major fine is unlikely. The true importance of the Sky U.K. case is its potential impact on EU laws governing national broadcasting boundaries. Whatever the outcome, it will not end the debate. The case's narrow focus on contracts leaves untouched the broader issue of national copyright laws, which remain a big barrier to a single market. The EU wants to harmonize Europe's copyright legislation, but that goal is still a long way off.

Analysts say the studios are more at risk than Sky as territoriality — splitting rights into multiple national territories as opposed to selling a single, pan-European license — is a key part of their business model. Peel Hunt analyst Alex DeGroote has said the issue is "more of a concern for the studios than Sky itself."

Sanford C. Bernstein analyst Claudio Aspesi previously said studios could suffer a big financial impact beyond possible fines because not many buyers could afford buying rights throughout the continent. "There is more downside for the studios than for Sky: A move to eliminate restrictions and create a single market may carry some concerns for Sky, but these are minor (are we all going to install Estonian pay TV boxes?), while the rise of a pan-European business would favor Sky, which has a great lead over any possible competitors," he said.

Added Aspesi: "Studios, on the other side, like to see as much competition as possible for their content, and the presence of local competitors vying for content in many markets means higher revenues."