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What the Digital Single Market proposal really means in practice

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After months of leaks and unofficial drafts, on May 6, 2015 the European Commission finally adopted the Digital Single Market (“DSM”) Strategy: a document of paramount importance for the digital developments of the markets and societies of the EU Members States which will keep busy lots of people in Brussels for the next 5 years. Expectations and the ambitions are great, no doubt. However, since – for a matter of life – there is frequently some distance between official declarations, one one side, and concrete actions, one the other, one would wonder what and when something concrete will realistically happen. The DSM strategy of the European Commission aims at creating a single digital market in the EU without internal frontiers and segmentations. For example, it is envisaged to abolish artificial barriers (eg. by prohibiting geoblocking tools); to harmonize relevant national regulations (eg. in the matter of consumers protection and spectrum allocation ): to encourage operators to spread in and invest everywhere in the EU (eg. by rolling out broadband and high-speed networks); to regulate activities which are very relevant for digital rights and businesses but completely escaped regulation until now (eg. online platforms such as search engines, social networks and e-commerce). A list of 16 areas of actions has been tabled in order to achieve these objectives, covering various areas including copyright, electronic commerce, consumers protection, telecom regulation ecc. It is a strategic document: the priorities indicated by the Commission will be followed by the competent commissioners for specific actions. However, apart from the strong political endorsement, the destiny of the single actions is to time unpredictable. The concerned directorates general of the European Commission (mainly DG Connect, but not only) will have to carry out analyses and studies, launch public consultations, interact with stakeholders and table relevant proposals. The specific proposals may be legislative or non legislative: in the former case (most of the cases, I believe) the European Commission will have to involve European Parliament and the Council in the legislative process. This means that the entire procedure (from public consultation up to the final approval) may take 3 year or more. It’s a long way for each item then. While the need to achieve a digital single market is shared by everybody within the Commission, one should be aware that views amongst competent commissioners may be contrasting as to the concrete initiatives to be taken and the details thereof. In fact, the decision making process within the European Commission provides that there must be a majority of commissioners to approve decision, irrespective of the commissioner having competence for that. In addition, the shared competences between vice-presidents and commissioners, introduced by the new Junker Commission, will increase the likelihood of disagreements and internal conflicts. To make few examples, in the area of telecom regulation, the position of DG COMP (headed by Vestager, Denmark) appears concerned about the need to preserve effective competition within the EU, while DG Connect (leaded by Oettinger, Germany) is much more relaxed and willing to deregulate as much as possible. In the area of copyright, contrasts may emerge between Vestager and Ansip (the Vicepresident for Digital Single Market, Estonian) on one side, and Oettinger on the other, because the formers are much more convinced that the current copyright framework needs to be modernized and legacy positions must be specifically addressed: the first clear area of disagreement seems to be geo-blocking, with Oettinger more inclined to justify this instrument in some cases on the basis of consideration of culture and linguistical differentiations. Disagreements are also visible in the areas of how to tackle piracy and illegal content in the Internet, whether and to which extent a review of the current directives (Directive 2004/48 on IPR enforcement, Directive 2001/29 on copyright and Directive 2000/31 on electronic commerce) will be necessary, or whether less-intrusive initiatives will be sufficient. Also there VP Ansip seems to be more clearly in favor of a modernization of the entire copyright system rather than just focussing on enforcement, while the actual position of Oettinger is still debated. Oettinger is also reported to be very militant against large online platforms such as Google, while other commissioners may be more cautious as far as new regulations will impact also over European emerging platforms and start-ups. Considering all the above potential disagreements between commissioners, a pivotal role will be carried out by the president Junker, his cabinet and the Secretariat General, in view to find compromises. One should also consider the connection with the pending STM (Single Telecom Market). The proposal launched by Kroes in September 2013 is now been dealt by the Council and the Parliament, and a final approval may occur at the end of 2015. The STM regulation has been narrowed to just roaming and net neutrality, two areas which are however fundamental for the establishment of a single digital market. Therefore, the eyes of the Commission will continue to closely follow this dossier. However, the (unlikely) collapse or delay of the STM will not block the DSM, it will just cause some delay and difficulties to the DSM initiatives relating to telecom regulation. You can find the explanatory PR of the Commission here. And the strategy here.

Europe: no continent for small and agile operators?

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While the 6th of May – the day when the European Commission will deliver its well-expected “Digital Single Market” Strategy – is approaching, there is a considerable traffic jam of leaked documents anticipating the draft that will be finally and formally adopted.

Remarkably, one of the previous versions of the incoming communication explicitly referred to the contribution of “small an agile operators” to the achievement of the Single Digital Market. Surprisingly, this passage is no longer present in the current version, which has been sent within the Commission’s offices for a short internal consultation.

The previous draft was the following (pag.8):

„[…] Our overall goal is to keep our markets competitive while offering legal certainty to market players with a set of clear rules. An effective market structure would combine companies present in many or all Member States with smaller, more agile operators. […]”

Instead, the latest draft only includes following aspects (pag. 7):

[…] The Commission will present proposals in 2016 for an ambitious overhaul of the telecoms regulatory framework focusing on […] (ii) delivering the conditions for a true single market by tackling regulatory fragmentation to allow economies of scale for efficient network operators and service providers, […] (iv) incentivising investment in high speed broadband networks (including a review of broadband obligations in the context of the Universal Service Directive) and (v) an effective regulatory institutional framework. […]

Thus, small and agile operators are not relevant any longer. One should ask whether the Commission really wants to put all the eggs in the basket of big, rigid and inflexible operators

In the reality, the discrepancies between of the two drafts reveal the difficulties that the Commission shall overcome in order to find a well-balanced draft. The Commission has been strongly lobbied by these who would like to sacrifice competition in order to favor (potential) investments, and the other who believe that competition is a prerequisite for the investments themselves. The current draft does not seem unbalanced, in the sense that it reflects the different degrees of achievement of competition and broadband roll-out throughout Europe and call for adequate and coherent intervention. This said, keeping as reference to small and agile operators would have been a great signal for the European industry, since small operators and SME are a big part of it. By contrast, this opportunity seems to have been missed for the time being.

Will Google ever become a (virtual) mobile operator?

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Latest news reported that Google is negotiation an agreement with Hutchison Whampoa permitting to the US company to launch a mobile service worldwide charging the same for calls, texts and mobile data regardless of the customer’s location. This seems to be a disruptive entry of the OTT industry into the exhausting discussions about the abolition of roaming surcharges. More recently, Google announced a wider mobile strategy named Project Fi, aiming at providing mobile at a connectivity in more than 100 countries int he world. Commissioner Oettinger, some one who cannot be seen a Google’s friend, welcomed the initiative claiming that the move of Google may be seen as an incentive to close rapidly the discussion about the end of roaming.

One could wonder what could be the real aim of Google in this area. By getting wholesale access from Hutchison (or from any other mobile operator), Google may become an MVNO (mobile virtual operator) and start to operate like Virgin Mobile in UK, Postemobile in Italy, Numericable in France, Telenet in Belgium ecc. However, this scenario seems not realistic per se, because of a few simple reasons:

– the MVNO business is regulated exactly as a telecom business, and I wonder whether Google may be really willing to become part of this complex regulatory environment. Better to remain in the OTT world instead;

profitability and margins in the mobile sector are decreasing in general. A MVNO must be very efficient to get a positive result because – in the absence of mobile access regulation – the cost of the wholesale mobile agreement is unilaterally decided by the mobile telco (Hutchison in the Google’s case) providing access;

– the roaming business is going to decline in any case, in the EU and abroad, because of a regulatory and economic trend worldwide, although at different speeds (you can still make some good money in some part of the world, but how long?). Therefore, today in 2015 it is too late to enter this market. Roaming tariffs still exists just to separate national markets and avoid cross-border competition, while the absolute margins are becoming negligible for the overall business of a mobile operator. MVNO can make still an interesting business if they are efficient, however such margins are likely much lower than margins of online  advertising.

Thus, Google’s objective in this area may be somewhere else. More likely, the move of Mountain View can be seen as the irresistible rise of OTT services over connectivity, with the latter becoming a simple commodity with a value destined to decrease over time.

In fact, operating as an MVNO (and thus becoming a regulated player) could make sense only if the envisaged business is more sophisticated than providing mobile connectivity. Google could think to bundle its platform and services with connectivity in various forms, in order to reflect the market trend whereby search and video are migrating from fixed to mobile. This strategy could be reinforced by Zero-rating tariffs: in other words, Google mobile users would have a preferential price to access service supplied or simply hosted by Google. Net neutrality supporters wouldn’t like, however.

This overall business strategy may however rise antitrust concerns due to the dominance position of Google in some markets.

A way for Google to avoid telecom regulation, and maybe to minimize antitrust concerns, would be to operate as mere airtime reseller, i.e. offering to users a package of mobile data connectivity everywhere and getting a commission fee from the mobile operator. Since the connectivity service would still be formally provided by the mobile operator selling the airtime, Google would not become an MVNO, and it would escape telecom regulation. That kind of business may be combined with the commercialization of Free-sim mobile devices, as Apple is also considering to do it.

Internet tax rejected in Belgium

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A Belgian court rejected the claim of Sabam, the local collecting society, arguing that Internet Access Providers (ISPs) should pay a kind of compensation because of the potential exchange of pirated content occurring over their networks. In fact, Sabam requested Belgacom, Telenet and VOO, the main Belgian ISPs, to pay an amount equal to 3,4% of each broadband subscription.

The claim of Sabam was based on the assumption that ISPs should be liable for illicit behaviors committed by their users, including piracy of copyrighted works. However, the Belgian court has demolished this argument by reminding that pursuant to the “mere conduit” principle established by art. 12 of the Electronic Commerce Directive (Directive 2000/31/EC), providers of Internet access cannot be considered liable for the activities carried out by Internet users such as exchanging mail, files, communications and so on. The mere conduit principle is a milestone of the electronic commerce framework, in the absence of which ISPs should be obliged to check any communications occurring in their Internet to avoid liability (which is impossible, due to the size of Internet communication and the risk to affect fundamental rights of individuals).

The rejection of Sabam’s claim by the Belgian court is not a surprise, because the mere conduit principle has been clearly confirmed at European level by the legislator and also by the Court of Justice of the European Union in various cases. Accidentally, the most important European jurisprudence consists in decisions rejecting other claims by Sabam in the matter of network filtering (Sabam/Scarlet decision of 24 November 2011) and hosting filtering (Sabam/Netlog decision of 16 February 2012).

Now Sabam will decide whether to escalate the legal case via an appeal or to try to submit an interpretative question again to the CJEU. The latter case seems the real chance for Sabam, because the strategy of the collecting society may be to provoke a judgement at European level to reverse a legal framework which, until now, defends robustly the mere conduit principle. However, it is for the Belgian courts to decide whether to not to disturb again the European judges.

The move of Sabam is therefore part of a wider strategy of right holders aiming at reversing the mere conduit principle in any way. Such attempts are also visible in current debates in Brussels where there are insisting pressures by some part of the industry to open and revise the Electronic Commerce Directive. The European Commission is currently working on the Single Digital Market objective (a communication is expected by May 6, 2015) and many legislative initiatives may be contemplated therein. Although there are speculations that also a proposal of revision of the Electronic Commerce Directive may be part of it, it is however unlikely that the Commission may seriously consider to challenge the mere conduit principle for access providers, since such rule appears fundamental for the proper functioning of the Internet industry in its whole (not just for the online content) and it also constitute a guarantee for the fundamental rights of individuals, who do not want their communications to be intercepted, scanned or filtered in any way.

The data retention saga: legislation annulled also in the Netherlands

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Today a Dutch court declared the national data retention legislation to be invalid. The decision is a foreseeable effect of the previous sentence of the Court of Justice of the European Union which on April 8, 2014 annulled the European Directive on data retention (Directive 2006/24/EC).

Following the annulment by the EU jurisdiction, European Member States are hardly starting to face the consequences of that. In facts, the European judgement did not make national data retention legislations (whether or not enacted as implementation of the annulled directive) automatically invalid. However, because of the principles laid down by the European court, most of such national legislations are at risks, because they impose data retention obligations in a too general and far-reaching way. According to the European Court, data retention obligation are compatible with EU law, namely with fundamental rights and privacy, as far as they are sufficiently selective and proportionated.

In the case of Netherlands, the government made a review of the national data retention legislation and concluded that no major modifications were needed and that in any case such legislation was necessary “for the investigation and prosecution of serious criminal offenses”. Only a few adjustments were made, which mainly tightened who had access to what data and under what circumstances. However, such adjustments have been just proposed and consulted, but have not yet entered into force. The current judgment therefore only related to the “original” law.

Remarkably,  unlike the European Court, the Dutch judge did not declare the massive collection of data as such illegal. It seems that, according to the Dutch court, a limitation on the data that need to be retained would not make sense, given the purpose of the legislation, which is to fight and prevent serious crimes (§3.8. of the ruling). The court mainly focused on the safeguards around such as: where and how the data are stored? who and how can access the data for what kind of crimes ( not only serious crimes)? here a Google translation of the relevant paragraph:

In that respect it is noted that a limitation of the data to be saved to the data of suspected citizens is not conceivable in view of the purpose of the Wbt, i.e. the effective detection of serious crime. In case of a first offender it is not possible to distinguish in advance between suspicious and non-suspicious citizens. The need for providing assurances and guarantees regarding access to these data, however, is all the greater because it is a very large interference, so that should be put to that high standard.

Also other European governments, for instance Denmark, UK and Sweden, reviewed their national legislations to be in line with the European judgment.  To have a full picture see my previous post.

While the details of the case at stake still needs to be analyzed, it is clear that some European governments have underestimated the consequence of the annulment of the European directive. On the basis of this precedent, any individual can challenge national data retention rules on the basis that they do not comply with the criteria laid down by the European court. Whether or not such a legislation was enacted as implementation of the annulled directive, it is irrelevant.

Other important European governments, such as Italy for instance, are silent on the matter and they risk that related data retention legislation to be entirely declared invalid by a court, with major consequence on their entire investigation activities.

The European Parliament opens the eyes over lack of competition in European telecoms

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Today the European Parliament voted an important motion for resolution on the Annual Report on EU Competition Policy.

The report concerns, inter alia, the competitiveness situation in the European Telecom sector. The European Parliament reminds the importance of competition for investments, innovation and consumer welfares, and addressed the risks if excessive market concentration.

The position of the European assembly follows straight the declarations of Competition Commissioner Vestager who, during the Mobile Forum in Barcelona and in public interviews, made clear her intentions to stop the telecom consolidation process in the EU, as far as consumers interests may be affected. It is worth-noting that the Competition Directorate of the European Commission is currently carrying out deep investigation about mergers in Spain, Danmark and UK.

Remarkably, the European Parliament expressly doubts about the market data used by the European Commission to justify some of its past policy positions. This is of paramount importance. The past European Commission (namely the former Commissioner for the Digital Agenda, Dutch Neelie Kroes) has been accused to have taken initiatives without a sufficient assessment of the market and proper consultation with stake-holders (a proceeding is currently pending with the European Ombudsman with regard to the Connected Continent proposal). Doubts have been also emerging also with regard to the comparison between US and EU broadband market data, when it became clear that Europe is performing much better than US, at least as far as the interests of consumers are concerned.

Rather then commenting the wording of the draft at stake, it is much more interesting to look directly at the relevant statements of the resolution (§§47 to 50 copied below, I added some emphasis when needed):

47. Underlines that, in the next-generation broadband sector, the former monopolies have a staggering market share of over 80 %; recalls that effective competition is the best driver of efficient investment and provides maximum consumer benefit in terms of choice, price and quality; calls on the Commission, therefore, to enforce properly both ex post and ex ante competition rules in order to prevent excessive market concentration and abuse of dominance, as competitive pressure is key to ensuring that consumers can benefit the most from high-quality services at affordable prices;
48. Stresses that limiting competition is unlikely to lead to more broadband investment, even in remote areas, as full coverage of basic broadband services has been achieved in Europe through a regulatory framework ensuring access to dominant operators’ networks;
49. Believes that investment in next-generation broadband infrastructure is clearly core to achieving a digital economy and society, but that in order to maximise investments, telecoms policies should enable all players to make efficient investments by providing them with effective access to non-duplicable network assets and fit-for-purpose wholesale access products;
50. Calls on the Commission to base its decisions and policy proposals on a thorough and impartial analysis of correct, relevant and independent datasets; highlights, in particular, doubts about the correctness of data presented on the EU’s under-performance in high- speed broadband including speeds received by end-users, infrastructure investments and the financial state of the sector in a global comparison;

No VAT reduction for electronic books, EU court says

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According to the Court of Justice of the European Union (decision of March 5, case C-479/13 and C-502/13 Commission v France and Commission v Luxembourg), European Members States cannot apply to electronic books a reduced VAT rate, whereas such reduction is applicable to physical books pursuant to Annex III of the VAT Directive (Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax). This judgement will probably shake the debate amongst these who believe that the European institutions should contribute more to the digitalization of the European economy.

Digital or electronic books are immaterial goods which may include books supplied by download or web streaming from a website, so that they can be viewed on a computer, a smartphone, electronic book readers or other reading system. The European court rejected the idea that electronic books may be seen as substitutes of physical books (at least in order to benefit of the reduced VAT rate under the relevant rules). Fact is, electronic books are different from physical books because their sale basically consists in licensing rights, whereas a physical book is sold via the sale of its physical medium. Therefore, in order to treat them in the same way, at least from VAT point of view, one should modify the existing legislation, which reserves the VAT reduction only to physical books, while the same advantage is excluded for electronic services (the electronic books fall into the latter category).

As stated above, this judgement will probably disappoint many digital supporters, however the judges have just interpreted the European tax legislation as it stands at present. When the VAT directive was adopted in 2006 the European legislator considered sufficient to support culture and education through a specific regime for normal books, while the impact of electronic books was not conceivable yet. At least for the tax experts of the European Union.

The sentence of the European court has been adopted in the frame of infringements procedures launched by the European Commission against Luxembourg and France which, in fact, applied a reduced VAT rate to electronic books. Accordingly, since 1 January 2012, France has applied a VAT rate of 5.5% and Luxembourg a rate of 3% to the supply of electronic books.

If the European tax legislation will not be changed, then further litigations will arise, because other European Members States have chosen to apply to electronic books a reduced VAT rate, despite the European directives – namely Italy.

As stated above, the judgment delivered by the Court today does not prevent Member States from introducing a reduced rate of VAT for books on physical support, such as paper books.