[A2k] Letter to DG Comp re consumer concerns in the media industry

[Michelle Childs]

See below the text of a letter that Which?, a UK consumer organisation,
has sent to the EU Competition authority , DG Competition, raising  a
number of questions about IPR and competition law. They give  anumber of
examples of specific concerns  e.g iTunes pricing policy and
interoperability, DVD patents, regional encoding, Intel V AMD and DRM's


Michelle

Text of Letter



Neelie Kroes
Commissioner for Competition
European Commission
Brussels

By email and by fax

6 September 2006
Dear Ms Kroes,

Re: Consumer concerns in the media industry

Which? is writing to raise concerns regarding the application of
competition policy to intellectual property rights and the impact of the
current regime on consumer welfare. The aim of this letter is not to make
a formal complaint, but to draw attention to consumers=92 concerns and
initiate a debate on the issue.

Which? is the largest consumer organisation in Europe with around 700,000
members. Entirely independent and not-for-profit, we are funded through
the sale of our Which? range of consumer magazines and books. We exist to
make individuals as powerful as the organisations they come across in
their daily lives.

We comment below on a range of current and potential future cases where
there may be scope for tougher enforcement of competition policy in
sectors governed by intellectual property rights, providing a better
balance between the conflicting principles of competition and protection
of innovation.

iTunes =96 territorial price discrimination

On 24 February 2005, Which? lodged a complaint against Apple=92s iTunes
regarding territorial price discrimination, which had led to isolation of
the UK downloadable music market and overcharging of UK consumers.

We note that the initial price difference, whereby a UK consumer could
purchase an iTunes song for =801.17 (=A30.79) while a Eurozone consumer cou=
ld
purchase the same song for a mere =800.99, still persists. Since our
complaint, iTunes were launched in two more non-Eurozone EU countries,
Denmark and Sweden. In Denmark, an iTunes song can be purchased for 8
Danish Krone (=801.07) and in Sweden for 9 Swedish Krona (=800.96). We note
that while the UK consumer is still paying the highest price (iTunes are
18% more expensive in the UK than in the Eurozone), the Danish consumer
also seems to be getting a raw deal (iTunes are 8% more expensive in
Denmark than in the Eurozone).

We remain concerned about this practice, which appears to violate EC
competition rules. We note that the Commission has been investigating this
case for 18 months. We are keen to learn whether it has reached any
conclusions on the case.

iTunes =96 interoperability

We have followed with great interest the developments across the European
Economic Area with respect to interoperability of iTunes with other
platforms. At the moment, iTunes tracks are only downloadable to Apple=92s
MP3 player, the iPod. Ever since iTunes were launched in Europe in June
2004, consumers across Europe have demanded its opening to other MP3
players.

One example is a complaint filed by the Norwegian Consumer Council with
the Norwegian Consumer Ombudsman, arguing that Apple breached the
Norwegian Marketing Control Act by preventing consumers who purchase songs
on iTunes to download them on other devices than iPods. The Norwegian
Ombudsman ruled in favour of the consumer body.  Apparently, the Danish
and Swedish consumer bodies have filed similar complaints.

Another example is the implementation of the Copyright Directive in
France, which led to the creation of an administrative authority that
would deal with demands regarding interoperability.

These two examples raise in our view broader concerns. If these efforts
succeed and iTunes in France, Denmark and Sweden are open to other
platforms, consumers in these three countries will have a significant
advantage over consumers in the rest of the Community. If this trend is
replicated, consumers located in countries with strict digital rights
management interpretation may end up subsidizing consumers located in
countries with a more lenient approach to digital rights management. Such
divergent interpretation of EU Directives, combined with patchy digital
rights management enforcement across the Community, may lead to erosion of
the Single Market in this area.

We believe that the Commission should take leadership in this debate and
ensure that consumers across the Community benefit from comparable and
economically rational exhaustion of digital rights management.

Alleged price fixing of music downloads

We notice that the US Department of Justice (DoJ) has opened an antitrust
probe into possible collusion by the major music companies for setting
prices of music downloads on download services such as iTunes. The DoJ has
sent subpoenas to all four major music companies =96 SonyBMG Warner Music,
EMI and Universal Music.

We believe that, if collusion is taking place, it is likely to be
worldwide in scope and therefore to affect both European and US consumers.

We would be interested to know whether the Commission is considering
opening a similar probe alongside the US authorities and if not why it did
not think it appropriate.

DVD patents

We understand that the Commission is investigating a complaint by iODRA
(International Optical Disc Replicators Association) against the 4C DVD,
6C DVD and MPEG-LA DVD patent pools regarding the licensing conditions
imposed by the pools on iODRA members. The iODRA case raises in our view a
number of points of principle that we believe the Commission should
address.

First, we are concerned about the opacity of the licensing decisions and
protracted negotiations. Under these conditions, businesses may be exposed
to a =93cat and mouse=94 situation whereby reluctant patent holders may
endlessly prolong patent negotiations, avoid stipulating what essential
patents are, include non-essential patents in patent pools and in the end
set discriminatory or exclusionary royalty fees. We believe that these
practices will lead to consumer detriment in the downstream markets.

Secondly, we are concerned about the fact that patent pools members do not
enforce royalty fees with respect to all replicators in the same manner.
While iODRA members are subject to royalty fees, other replicators can
avoid them. Given that patent pools members do not feel the need to
enforce their patent rights with respect to these companies, we conclude
that the patent rights within the existing patent pools are unlikely to be
essential to protect innovation by the pool members.

Thirdly, we are of course aware of the patchy patent coverage across the
Community, which may render competition analysis more complicated.
However, we believe that this complexity should not prevent competition
policy from being applied.

Fourthly, we understand that the Commission is currently reviewing its
policy on exclusionary practices. At the moment, the Commission seems to
favour the =93as efficient competitor=94 test to assess when anticompetitiv=
e
exclusion can occur.  iODRA members argue that patent pools members are
imposing on them =93unreasonable=94 royalties with respect to the patent po=
ol
members=92 own subsidiaries and with respect to companies who currently
evade the licensing scheme. They further argue that the royalties are
preventing =93reasonably efficient=94 replicators from obtaining =93normal
profit=94.  Should this prove to be true, the =93as efficient competitor te=
st=94
would be likely to apply.

Finally, we believe that this case raises important points of principle
that need to be clarified for the future. While, as a consumer body, we
have no view on how economic rent is being distributed between companies,
we seek assurance that licensing negotiations are transparent and speedy,
and that efficient competitors are not being discriminated against.

Regional encoding

Over the years, Which? has received a stream of complaints and queries
from consumers regarding regional encoding of electronic goods, in
particular DVD players. Consumers typically complain that they cannot
purchase often cheaper region 1 DVDs (the US region) and make them work on
their region 2 (Europe) DVD player.

Consumers can avoid encoding if they purchase a multi-region DVD player.
There are two ways in which consumers can obtain a multi-region DVD
player. The first option is to purchase a multi-region DVD player directly
from a retailer. In our experience, well-established, large brands do not
offer multi-region players and only the less well-known, cheaper and
possibly less durable brands do so.  The second option is to override the
regional encoding. This can be done in two different ways. First,
consumers can input a specific =93engineer=92s=94 code using the remote con=
trol
or front panel buttons of their player.  Alternatively some retailers will
modify a region-specific player to override encoding. However, such
=93tampering=94 with the device may invalidate its warranty.

Acquiring a multi-region DVD player will not in itself ensure that
consumers can purchase DVDs from other regions than their own. First,
studios increasingly apply =93Regional Coding Enhancement=94 which prevents
even multi-region DVD players from playing their DVDs.  And secondly,
consumers will apparently face a parallel import prohibition under the
2001 Copyright Directive.

Among the many reasons presented in support of regional encoding were
protection against piracy, the need to ensure smooth roll-out of films (to
ensure that they are not available on DVD before they get to the cinema),
and so on. We are not convinced that these reasons are valid and justify
the restriction. We believe that the aim of the restriction was to exploit
the generally higher willingness to pay of European consumers in
comparison to US consumers.

We understand that before this practice was introduced, film studios and
DVD player producers agreed on the encoding regime. The encoding regime
became a part of the DVD Content Scrambling System, a =91patented piece of
software that must be included in a DVD player to meet the requirement of
the patented DVD Format and Logo=92 . We believe that the existing
agreements between film studios and DVD players should be scrutinized by
competition authorities. Intellectual property rights do not shield their
holders entirely from the application of competition policy and, if any
anticompetitive agreement has taken place, the Commission should have the
scope to investigate it.

We are aware the Australian competition authority has already analysed the
practice and that their conclusions support our view. We also know that
previous European Competition Commissioner, Mario Monti, showed a keen
interest in this issue and initiated contact with major studios to clarify
the problem.  We are unclear as to whether this initial interest led to a
fully fledged investigation.

We recognize that the European Commission may face jurisdictional
difficulties when addressing this issue. We tend to agree with the
conclusions of the Australian competition authority that the collective
effort of a number of jurisdictions may be required to overcome this
problem. We also recognize that competition policy may be superseded by
intellectual property rights, in particular the existing Copyright
Directive. However, we imagine that, when Mario Monti made his statement
about tackling regional encoding in 2001, he was fully aware of these
complications and did not consider them to be insurmountable.


Intel v AMD

We are aware the European Commission is investigating exclusionary
practices by Intel with respect to AMD. As with DVD replication, this case
raises a number of points of principle that we believe are important for
maintaining healthy competition in the production chain and ensuring that
consumers have a wide choice of affordable products.

As the Commission knows, Intel dominates the market for computer chips
with 80-90% market share. In a market with high barriers to entry, AMD is
the only viable alternative to Intel=92s monopoly.

We understand that Intel engages in a number of practices aimed at
preventing computer manufacturers from using AMD chips and thus forcing
AMD out of the market. As AMD has at present capacity constraints and
therefore cannot satisfy the whole demand, computer manufacturers rely on
Intel to supply them with chips and cannot afford to ignore its requests
or refuse its offers. Upon the evidence that we have seen in this case, it
appears that Intel is indeed abusing its market power and engaging in
anticompetitive practices.

We are of course aware that large firms may often benefit from economies
of scale and efficiencies superior to smaller firms. They may also deploy
larger resources to innovation. However, AMD seems to keep pace with Intel
in terms of innovation and offers competitive prices. We therefore believe
that AMD would meet the =93as efficient competitor=94 test as currently
proposed by the DG Competition=92s Discussion Paper on exclusionary
practices.

Finally, we also believe that should AMD exit the chip market, the
pressure on Intel to keep innovating would disappear and given the high
barriers to entry to this industry, Intel would be likely to enjoy =91the
quiet life of a monopolist=92. This situation is likely to have detrimental
effect on consumer welfare in the final product market.


Digital rights management and intellectual property rights in general

Digital rights management and intellectual property rights are becoming
increasingly important in consumer markets. Yet, while protection of
intellectual property rights has developed considerably over the past
years, competition scrutiny of the impact of intellectual property rights
on competition and consumer welfare has been rare.

We believe that the time is ripe for competition authorities to start
shaping the intellectual property rights regime to ensure that it protects
innovation without unnecessarily thwarting competition and overcharging
consumers.

We would be grateful if the Commission could clarify the extent to which
competition rules apply to products carrying intellectual property rights
and which rules it considers being superior when there appears to be a
conflict between the two regimes.

Should you have any questions regarding the issues raised in this letter,
please do not hesitate to contact me or my colleague Alena Kozakova
(alena.kozakova at which.co.uk).

Yours sincerely,

Nick Stace
Campaigns and Communications Director

Cc.: Philip Lowe, Angel Tradacete-Cocera, Arianna Vannini, Cecilio
Madero-Villarejo



--
Michelle Childs -Head of European Affairs
Consumer Project on Technology in London
24, Highbury Crescent, London, N5 1RX,UK.
Tel:+44(0)207 226 6663 ex 252.
Mob:+44(0)790 386 4642. Fax: +44(0)207 354 0607
http://www.cptech.org

Consumer Project on Technology in Washington, DC
1621 Connecticut Ave, NW, Washington, DC 20009 USA .Tel.:
+1.202.332.2670,Fax: +1.202.332.2673

Consumer Project on Technology in Geneva
1 Route des  Morillons, CP 2100, 1211 Geneva 2, Switzerland
Tel: +41 22 791 6727