New technology & data privacy blog

New technology & data privacy blog

This new technology & data privacy blog provides regular news and updates, and features summaries of recent news reports, on legal issues facing the global information technology, media and internet community, in particular in the United Kingdom and France. This new technology & data privacy blog also provides timely updates and commentary on legal issues in the hardware, software and e-commerce sectors. It is curated by the IT lawyers of our law firm, who specialise in advising our information technology & internet clients in London, Paris and internationally on all their legal issues.

Crefovi practices in information technology, hardware & software since 2003, in Paris, London and internationally. Crefovi advises a wide range of clients, from start-ups in the tech world requiring legal advice on contractual, tax and intellectual property issues, to large corporations – renowned in the information technology and ‟Consumer discretionary” sectors – which require advice to negotiate and finalise their licencing or distribution deals, or to enforce their intellectual property rights. Crefovi’s ‟Internet & digital media” team participates in  high-profile transactions. It assists leading established and emerging companies in mergers and acquisitions; litigation, including intellectual property litigation; financing transactions; securities offerings; structuring cross-border international operations; technology and intellectual property transactions; joint ventures and in matters involving online speech, privacy rights, advertising, e-commerce and consumer protection, and regulatory issues. Crefovi writes and curates this new technology & data privacy blog to guide its clients through the complexities of information technology, and internet & digital media, law.

The founding and managing partner of Crefovi, Annabelle Gauberti, regularly attends, and is a speaker on panels organised during, important events from the calendar of the world of information technology and internet, such as the tradeshows CES, Slush, SXSW, Viva Technology, Wired and Web Summit.

Moreover, Crefovi has industry teams, built by experienced lawyers with a wide range of practice and geographic backgrounds. These industry teams apply their extensive industry expertise to best serve clients’ business needs. Some of these industry teams are the ‟Information technology, hardware & software”, as well as the ‟Internet & digital media” departments, which curate this new technology & data privacy blog below, for you. 

Crefovi regularly updates its social media channels, such as Linkedin, Twitter, Instagram, YouTube and Facebook. Check our latest news there!

Standard Essential Patents (SEP): is EU interventionism the solution, to ensure licencing negotiations on FRAND terms?

Crefovi : 24/04/2024 4:02 pm : Antitrust & competition, Articles, Copyright litigation, Emerging companies, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Life sciences, Litigation & dispute resolution, News, Technology transactions, Trademark litigation, Webcasts & Podcasts

Standard Essential Patents (‟SEPs”), despite only representing 2 percent of the total population of patents currently in force, are critical to the development of international standards, relating to technologies such as 4G, 5G, Wi-Fi, computer, audio/visual, in the ‟Internet of Things” ecosystem. Yet, SEP licencing is archaic, often requiring lengthy and draining court litigation to agree terms of Fair, Reasonable And Non-Discriminatory (‟FRAND”) use between SEP holders and SEP implementers. Of course, Small and Medium Entreprises, which increasingly implement standards based on SEPs in the ‟Internet of Things” ecosystem, are priced-out, and cannot negotiate FRAND terms with cash-rich SEP holders (think about all those royalties SEP owners are currently collecting right and left!). This state of affairs stifles innovation and breaches competition and antitrust law. So the European commission took the matter into its own hands, and passed its proposal on Standard Essential Patents in April 2023, which was then adopted by the European parliament in February 2024. Proposing ‟revolutionary”, yet state-controlled, sweeping reforms, such as setting up a competence centre at the EUIPO tasked with administering a SEPs’ registry and database, forcing SEP holders to register their SEPs in such EUIPO’s competence centre and mandating the EUIPO with carrying out essentiality checks and setting FRAND criteria, the proposed regulation is bold. So, how much market freedom and contractual freedom are SEP stakeholders prepared to collectively sacrifice, in order to increase transparency regarding SEPs ownership and FRAND royalties, as well as agency during negotiations of SEP licencing on FRAND terms?

1. What are Standard Essential Patents (‟SEP”)?

1.1. Background: what is a patent?

First things first: what is a patent?

Patents are governmentally awarded monopoly rights over new inventions that are industrially applicable. Products or processes may be patented but irrespective of the form of the patent, the product or process must satisfy the substantive criteria of the United Kingdom’s (‟UK”) Patents Act 1977 (‟PA 1977”). These are:

  • Restrictions as to subject-matter. There must be an invention, but not ‟as such” inventions or non-patentable inventions (Sections 1(2), 1(3) and Sch. A2, para. 3 PA 1977);

The same criteria exist under French law, pursuant to article L. 611-10 1. of the French intellectual property code, which provides ‟are patentable, in all technological domains, new inventions implying an inventive activity and susceptible of industrial application”. To these three positive conditions to the patentability of an intellectual asset (i.e. industrial character, novelty and inventive activity), a fourth condition must be added, which is the sufficiency of the description (since the non-compliance with this fourth condition triggers the invalidity of the patent title, which is the same sanction than in case of non-compliance with the three above-mentioned fundamental patentability criteria).

At the European level, the 1973 Munich convention, called ‟European Patent Convention” (‟EPC”), established a uniform patenting system for all countries signatory to the EPC (including the UK and France, which have both been signatories since 1977). In addition to providing a legal framework for the granting of European patents, via a single, harmonised procedure before the Munich-headquartered European Patent Office (‟EPO”), article 52 EPC provides that ‟European patents shall be granted for any inventions, in all fields of technology, provided that they are new, involve an inventive step and are susceptible of industrial application”.

In the UK, a UK patent lasts 5 years, renewable every year after the first 5 years’ period, up to a maximum of 20 years.

In France, a French patent can also be renewed for a maximum term of 20 years, but it is renewable each year at the anniversary date of the patent application provided that some annual renewal fees are paid.

At the European level, the maximum term of a European patent is also 20 years from its filing date. The patent may lapse earlier if the annual renewal fees are not paid (or if the patent is revoked by the patentee or after opposition proceedings, of course).

1.2. The rise and rise of Standard Essential Patents (‟SEP”)

A Standard Essential Patent (‟SEP”) is a patent that protects technology which is essential to implementing a technical standard.

A standard is an agreed or established technical description. It is also referred to as a ‟technical standard” or ‟technical interoperability standard”. These descriptions can cover ideas, products, services or ways of doing things and make sure different technologies can interact and work together. For example, mobile phones, wireless connectivity, navigation systems in cars and smart meters all use technical standards.

Technical standards are usually produced by Standard Development Organisations (‟SDOs”), such as the International Organization for Standardization (‟ISO”), the International Electrotechnical Commission (‟IEC”) and the International Telecommunication Union (‟ITU”), established for the purpose of creating standards, with inputs from industry and technical experts. Trade bodies, government organisations and similar entities can also create technical standards.

For example, regional standards bodies include:

Once a technical standard has been agreed, manufacturers are required to make their products standard-compliant.

In some cases, these standards require the use of specific technologies protected by patents. A patent that protects technology which is essential to implementing a standard is known as a SEP.

Without using the methods or devices protected by technical standards and SEPs, it is difficult for a manufacturer (or ‟implementer” of the standard) to create standard-compliant products, such as smartphones or tablets.

Intellectual property offices, such as the UK IPO, are looking at SEPs because not only are these offices responsible for granting patents – including SEPs, those patents that end up being declared essential to a technical standard -, but they also want to work hand-in-hand with their respective governments to foster an intellectual property framework which enables creativity and incentivises innovation, to become – or remain – global leaders of innovation.

So, patent holders are incentivised to declare their patents as essential to a technical standard, in order to gain access to the market and generate royalties. This could provide significant power to the SEP holder and to balance this, these SEP owners are obligated to offer their SEPs on Fair, Reasonable And Non-Discriminatory (‟FRAND”) licencing terms.

2. What is Fair, Reasonable and Non-Discriminatory (‟FRAND”)?

If a patent is declared essential to a standard (i.e. it is a SEP), the SEP owner agrees that the patent is subject to the FRAND declaration, i.e. that licences to the SEP will be granted on a Fair, Reasonable And Non-Discriminatory basis.

These FRAND terms denote a voluntary licencing commitment that SDOs often request from the owner of an intellectual property right (usually a patent) that is, or may become, essential to practising a technical standard.

In other words, a FRAND commitment is a voluntary agreement between the SDO and the SEP holder. Because a patent, under most countries’ legal regimes, grants its owner an exclusive right to exclude others from making, using, selling or importing the invention, a SDO generally must obtain permission from the patent holder to include their patented technology in its standard. So, the SDO will often request that a patent holder clarify their willingness to licence its SEPs on FRAND terms. If the patent holder refuses upon request to licence their patent that has become essential to a standard, then the SDO must exclude that technology.

Viewed in this light, the FRAND commitment serves to harmonise the private interests of SEP holders and the public interests of SDOs.

However, various judiciary courts have found that, in appropriate circumstances, the implementer of a standard – i.e. a firm or entity that uses a standard to render a service or manufacture a product – is also an intended third-party beneficiary of the FRAND agreement, and, as such, is entitled to certain rights conferred by that agreement.

3. Why are FRAND terms so contentious?

3.1. Anti-Suit Injunctions (‟ASI”)

In the case of SEPs, the first issue that confronts the patent holder and the company implementing the SEP is whether a licence has been asked, offered and/or granted on FRAND terms, and how the licence fee should be determined.

The judiciary court tasked with resolving such a dispute will often deal with multinational companies with worldwide operations and a worldwide interest in the determination of FRAND terms and the licence fee, not only in the country where the relevant court is located, but also worldwide.

Therefore, the court may determine licence fees on FRAND terms limited to the country in which it is located and the patents enforceable there, or it may determine licence fees on FRAND terms applicable worldwide between the parties.

In such cases, the common view of the courts in Europe and the United States of America (‟USA”) is that, since FRAND disputes are essentially contractual disputes, a global rate for the entire patent portfolio licenced under the contract in question can be determined by a single court.

In 2018, in the Unwired Planet v Huawei case, the UK supreme court held that it had jurisdiction to determine the terms of a global FRAND licence agreement between the parties, covering not only the SEP holder’s UK patents, but also foreign patents valid in other countries covered by FRAND commitments.

Similar judgments regularly continue to be issued, by China’s, the UK (such as the InterDigital v Lenovo judgment handed down in March 2023 and the Optis v Apple judgment handed down in February 2024) and US courts alike, where such courts have decided that they have jurisdiction to determine global FRAND terms and conditions in specific cases, even without the consent of both parties, which may have an impact on the European Union (‟EU”) industry.

However, the fact that the court of a certain country determines the licence terms that apply globally for the parties has led to the operation of different legal mechanisms. Indeed, in such disputes, while a dispute regarding the licence under FRAND terms is pending before a court in one country, the patent holder may file an infringement action in another country claiming infringement of the same patents. And while the parties have not yet resolved the ongoing litigation over a licence fee on FRAND terms, a preliminary injunction grounding on patent infringement may be granted by a court in another country. The legal mechanism that has started to be used for such situations is the Anti-Suit Injunction (‟ASI”), which we hear of frequently, especially in decisions of European and US courts. The ASI prevents the patent owner from filing a lawsuit in foreign countries or enforcing the preliminary injunctions granted by foreign courts in favour of the patent holder, pending the outcome of the litigation in the court in charge of determining the licence under FRAND terms, in first place.

The first notable ASI decision in a case concerning the determination of a licence fee on FRAND terms was handed down by the US district court for the state of Washington in Microsoft v Motorola case, in 2012. Microsoft alleged that Motorola breached its commitment to offer Microsoft a licence on FRAND terms. While this case was pending, Motorola filed a patent infringement lawsuit against Microsoft in Germany. The German court upheld the patent infringement claim and enjoined Microsoft from selling the infringing products in Germany. In response to the German court’s judgment, Microsoft applied to the US court just before the judgment was enforced and sought an ASI decision to prevent Motorola from enforcing the judgment in Germany. The US court granted the ASI to Microsoft, which prevented Motorola from filing a lawsuit that would enforce the judicial decision it obtained against Microsoft in Germany for patent infringement.

Crucially, ASI judgments are ‟in personam”, i.e. they bind the parties, not the courts. In the above example, the US court has issued an ASI that binds Motorola and has the power to impose sanctions on it within the authorisation and jurisdiction of the USA, in case of non-compliance.

In addition to this territorial limitation of ASI judgments, the parties litigating in the courts of another country may request the court deciding a FRAND case involving a global FRAND rate, to enjoin the filing or execution of its ASI – i.e. by obtaining an anti-anti-suit injunction (‟AASI”). Therefore, the extraterritorial effects of both ASIs and AASIs may unduly impede court proceedings. While ASIs and AASIs may in certain cases legitimately protect the interests that sovereign states have in undisturbed court proceedings, self-restraint should be exercised because each ASI/AASI contains the risk of escalation. There is rising awareness among policymakers that it is high time to implement internationally binding rules which ease these conflicts.

3.2. Existing situation: a combination of uncertainty and high transaction costs, according to the EU

There are no specific EU or national rules on SEPs, and so far they have only been subject to competition law limitations.

Meanwhile, market dynamics are changing. Standards based on SEPs traditionally used by producers of telecommunications equipment, mobile phones, computers, tablets and TV sets are increasingly implemented by small and medium-sized enterprises (‟SMEs”), active in the internet of things (‟IoT”) ecosystem. As a result, SEPs licencing is now more strongly oriented towards the growing IoT market, including automotive, smart energy (smart meters and smart grids), payment terminals, tracking devices, drones, medical devices, wireless charging stations and other products. Although SEPs represent only approximatively 2 percent of the population of the patents that are currently in force, SEPs licencing is increasingly crucial for those industries – such as communications, computer technology and audio/visual – in which technical standards have become ubiquitous.

In addition, while cross licencing is traditionally done by companies (i.e. companies are licencing their SEPs to each other), in recent times, pure SEPs holders and pure SEPs users have been entering the market at increasing rates. Indeed, some companies are incorporating standards into their products (without owning SEPs covering such standards) and others are focusing on licencing their SEPs (without making products incorporating such standards).

Within the EU, SEPs licencing and FRAND determination have been governed by rules and procedures developed in EU case law (including the Samsung, Motorola and Huawei v ZTE cases) and in the recently revised European commission guidelines on horizontal agreements.

However, in its 2020 intellectual property action plan, the European commission (the ‟Commission”) highlighted the existing dispute and litigation issues surrounding the licencing of SEPs, which is often a cumbersome and costly exercise for both patent holders and technology implementers (especially SMEs). Thus, the Commission announced that it considered reforms to further clarify and improve the framework governing the declaration, licencing and enforcement of SEPs. In addition, the SEPs Expert Group, set up by the Commission in 2021, found that some key policy questions – such as how to bring greater clarity to the SEPs’ landscape and how to develop FRAND terms and conditions, need thorough examination.

Against this background and following multiple public consultations in 2022, the Commission highlighted in its 2023 impact assessment that the overarching problem – a combination of uncertainty and high transaction costs – affects differently the behaviour of SEPs holders and SEPs implementers. SEPs holders, on the one hand, in particular those who pursue bilateral licencing, face two main challenges: lengthy negotiations prior to obtaining a SEP and a costly SEP licencing procedure. Implementers, on the other hand, encounter great uncertainty and prospects of much-higher-than-anticipated costs associated with the use of standards, potentially discouraging the implementation of these new technologies.

According to the Commission, there are a number of main drivers of the above problems, such as:

  • there is insufficient transparency regarding SEPs ownership (who owns the patents). Furthermore, it is not certain that all patents sought to be licenced are really necessary for implementing a standard (essentiality);

  • there is a lack of information about FRAND royalties, i.e. implementers with little or no expertise or resources find it impossible to assess the reasonableness of a SEP holder’s royalty demand, and

  • proceedings before national courts are time – and cost – intensive and are not adapted to FRAND determination.

The Commission believes that the above-mentioned problems have a strong impact on the market. First, existing SEPs holders face more price pressure and need to adapt their licencing model to the competition that new contributors (particularly Asian companies) bring to the standardisation process. Second, SEPs licencing in the IoT market may prove difficult and expensive, as IoT industries are not familiar with the principles of SEPs negotiations and FRAND determination.

In addition, the Commission points to different approaches taken by EU national courts (and UK courts) and concludes that it is difficult for them to handle SEPs-related cases and make detailed and consistent FRAND determinations, given the lack of transparency and the complexity of the issues at stake (for example, the essentiality checks).

As a result, both SEPs holders and implementers are likely to experience the following problem: loss of incentives to innovate; impaired sustainable competitiveness and impaired supply chain security.

4. What is the proposed SEP regulation from the European commission?

On 27 April 2023, the Commission published its proposal for a regulation on standard essential patents (the ‟Proposed regulation”).

The Proposed regulation aims to facilitate SEP licencing by increasing transparency about SEPs, reducing information asymmetries between SEPs holders and SEPs implementers and facilitating the agreement on FRAND licences. It would have a harmonising effect within the EU and consists of three main components:

  • setting up a competence centre at the EU Intellectual Property Office (‟EUIPO”), tasked with administering a SEPs’ registry and database, where SEPs holders would have to register their SEPs, on which the EUIPO would carry out essentiality checks and set FRAND criteria (the goal is that this will allow SEPs implementers to better understand the SEP ‟landscape”, possibly before putting relevant products on the market);

  • setting up a procedure to determine aggregate royalties for use of a given standard: SEPs holders would have an option to notify a proposed maximum total royalty (covering of SEPs holders) for a given standard, while SEP holders and implementers may request a third-party to make a non-binding recommendation as to the total royalty rate. It is hoped that this would create additional transparency and facilitate business planning, and

  • setting up a procedure to determine FRAND conditions: an expert-led out-of-court FRAND determination that would be mandatory (in the sense that one party can unilaterally impose it on the other) but non-binding in terms of its outcome. This process, which would be administered by a panel of third-party conciliators, would last for a maximum of nine months. During this procedure, but not thereafter, ASI injunctions are to be ‟off the table” in the EU, which, it is hoped, will facilitate FRAND negotiations. An important innovation of this process is that, unlike a typical court-based FRAND determination, it can be imposed by the implementer on the SEP holder.

Under the Proposed regulation, SMEs are exempt from essentiality checks. Whenever SMEs are SEPs holders, they may request a limit to the territorial scope of the FRAND determination of their SEPs. Furthermore, all other SEPs holders are encouraged to offer more favourable FRAND terms and conditions to SMEs, and to consider discounts or royalty-free licencing for low sales volumes (irrespective of the implementer’s size). Finally, the EUIPO’s competence centre would also provide training, support and general advice on SEPs to SMEs and raise awareness of SEPs licencing.

On 28 February 2024, the Proposed regulation was approved by a large majority at the European parliament.

While the Proposed regulation does not contain any potentially binding rules on the level of the value chain at which licencing should take place, the European parliament added, in what would be a non-binding interpretative recital, a statement that a FRAND licence should be available to any party seeking one, irrespective of the position of the potential licensee in the respective value chain.

For the Proposed regulation to become law, it still needs to be negotiated and approved by the 27 EU member-states, who will vote on a ‟qualified majority” basis, rather than on a ‟unanimity” basis. Therefore, potentially significant modifications to the Proposed regulation may still take place. As there is no fixed timetable for these discussions, the initiative may advance swiftly if there is broad consensus among EU member-states. But the Proposed regulation is controversial and will probably be subject to intense debate before EU member-states, which would delay the adoption process.

While SMEs and SEP implementers support the Proposed regulation, and its proposed measures to address the lack of transparency and fairness in SEP licencing, many SEPs holders are up in arms about such EU intervention in the SEPs/FRAND ecosystem by means of binding legislation which they find illegitimate. For example, Ericsson warns that the Proposed regulation departs from the inclusive consensus-driven approach by imposing different, new and untested procedures and could result in regional fragmentation as regards standards. Nokia believes that the Proposed regulation is flawed and would result in a lack of predictability and in reducing SEPs royalties, thus ultimately proving detrimental to EU leadership in 5G/6G. Even some academics have expressed criticism, with some of them calling the Proposed regulation unnecessary, disproportionate, likely to harm both EU innovators and the EU’s technology leadership on the global stage. Other experts welcome the Proposed regulation, which, in their view, will significantly increase transparency in licencing negotiations. They rebut the argument that it would reduce innovation and that the EUIPO is not up to the tasks for which it has been designated.

It seems to us, at Crefovi, that the Proposed regulation is a delicate balancing act, between the wants of the SEPs holders, and the needs of SEPs implementers – and in particular SMEs – with a view of boosting innovation and access to essential patented technologies without incurring draining litigation fees. Like the Digital Markets Act and the Digital Services Act, the EU Proposed regulation – if it is adopted – would have a significant ripple effect around the world (even in China, the UK and the USA), substantially impacting how FRAND terms are negotiated and agreed between stakeholders worldwide, even when such stakeholders are the ‟little guy”.
Crefovi’s live webinar: Standard Essential Patents (SEP) – is EU interventionism the solution? – 26 April 2024


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    Digital Services Act: the revolution will be televised

    Crefovi : 20/03/2024 4:09 pm : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Emerging companies, Entertainment & media, Fashion law, Gaming, Hospitality, Information technology - hardware, software & services, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Music law, News, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Sports & esports, Technology transactions, Webcasts & Podcasts

    The Digital Services Act is upon us and, with its bestie the Digital Markets Act, promises to force powerful changes in the digital ecosystem currently in place in the European Union and even globally. The power is shifting back to the people, with the Digital Services Act, and intermediary service providers better listen to its complaints about unclear and deceptive terms and conditions of service, its takedown notices for illegal content, products and services, as well as its concerns about bullying, breach of free speech, unfair targeting of minors, minorities, etc. Otherwise, the European Commission and national Digital Services Coordinators in the 27 European Union member-states, will take swift action to force online platforms, other types of intermediary service providers and search engines, to change their way and comply, with fines which can go up to 6 percent of worldwide annual turnover. Be warned, the Google, Apple, Microsoft and X/Twitter of this world: the revolution will be, is, televised.

    1. What is the Digital Services Act?

    Regulation (EU) 2022/2065 of the European Parliament and of the Council of 19 October 2022 on a Single Market for Digital Services and amending Directive 2000/31/EC (Digital Services Act) (‟DSA”) is a regulation from the European Union (‟EU”) that regulates online intermediaries and platforms such as marketplaces, social networks, content-sharing platforms, app stores and online travel and accommodation platforms.

    The DSA is part of a ‟package” of new EU rules focused on achieving Europe’s digital targets for 2030 and the digital ecosystem ‟Shaping Europe’s digital future”, along with the Digital Markets Act, the passed AI Act, as well as the Data Act and Data Governance Act, which form a single set of rules that apply across the EU, to implement the two following goals:

    • create a safer digital space in which the fundamental rights of all users of digital services are protected by setting clear and proportionate rules, and

    • establish a level playing field to foster innovation, growth and competitiveness, both in the European single market and globally.

    More specifically, the DSA creates an EU-wide uniform framework dealing with four issues as follows:

    • the handling of illegal or potentially harmful online content;

    • the liability of online intermediaries for third-party content;

    • the protection of users’ fundamental rights online, and

    • the bridging of information asymmetries between online intermediaries and their users.

    2. Who is affected and/or impacted by the Digital Services Act? Providers of online intermediary services

    2.1. Intermediary services

    The DSA applies to all intermediary services offered to EU users (natural persons and legal entities), irrespective of where the providers of these intermediary services have their place of establishment.

    ‟Intermediary services” are defined as:

    • a ‟mere conduit” service, consisting of the transmission in a communication network of information provided by a recipient of the service, or the provision of access to a communication network (for example, ‟mere conduit” services include generic categories of services, such as internet exchange points, wireless access points, virtual private networks, DNS services and resolvers, top-level domain name registries, registrars, certificate authorities that issue digital certificates, voice over IP and other interpersonal communication services);

    • a ‟caching” service, consisting of the transmission in a communication network of information provided by a recipient of the service, involving the automatic, intermediate and temporary storage of that information, performed for the sole purpose of making the information’s onward transmission to other recipients more efficient, upon their request (for example, ‟caching” services include the sole provision of content delivery networks, reverse proxies or content adaptation proxies), and

    • a ‟hosting” service, consisting of the storage of information provided by, and at the request of, a recipient of the service (for example, cloud computing, web hosting, paid referencing services or services enabling sharing information and content online, including file storage and sharing).

    Intermediary services may be provided in isolation, as part of another type of intermediary service, or simultaneously with other intermediary services. Whether a specific service constitutes a ‟mere conduit”, ‟caching” or ‟hosting” service depends solely on its technical functionalities, which might evolve in time, and should be assessed on a case-by-case basis.

    2.2. Providers of intermediary services

    Therefore, all companies providing online intermediary services on the EU single market, whether established in the EU or not, must comply with the DSA. These include:

    • intermediary service providers offering network infrastructure (internet access providers, caching operators);

    • hosting service providers;

    • online platforms (including social media platforms, social networks, app stores, online travel and accommodation websites, content-sharing websites, collaborative economy platforms and marketplaces), and

    • search engines.

    In the DSA, companies are subject to obligations which are proportionate to their size, role, impact and audiences in the online ecosystem, in particular:

    • micro-companies and small businesses (with less than 50 employees and annual sales of less than 10 million Euros) are exempt from some of the DSA’s obligations, and

    2.3. Very Large Online Platforms (VLOPs) and Very Large Online Search Engines (VLOSEs)

    The European Commission (the ‟Commission”) has begun to designate VLOPs and VLOSEs based on user numbers provided by platforms and search engines, which, regardless of size (except micro and small enterprises), they were required to publish by 17 February 2023. Platforms and search engines will need to update these figures at least every six months.

    Once the Commission designates a platform as a VLOP or search engine as a VLOSE, the designated online service has four months to comply with the DSA. The designation triggers specific rules that tackle the particular risks such large services pose to Europeans and society when it comes to illegal content, and their impact on fundamental rights, public security and wellbeing. For example, the VLOP or VLOSE needs to:

    • establish a point of contact for authorities and users;

    • report criminal offences;

    • have user-friendly terms and conditions, and

    • be transparent as regards advertising, recommender systems or content moderation.

    The Commission will revoke its decision if the platform or search engine does not reach the threshold of 45 million monthly users anymore, during one full year.

    So who are those VLOPs and VLOSEs, identified by the Commission as early as April 2023, so far? Some of the most notable are, inter alia:

    • Alibaba (Netherlands) B.V. is a VLOP under the DSA, for the designated service AliExpress;

    • Amazon Services Europe S.à.r.l. is a VLOP under the DSA, for the designated service Amazon Store;

    • Apple Distribution International Limited is a VLOP under the DSA, for the designated service App Store;

    • Aylo Freesites Ltd. is a VLOP under the DSA, for the designated service Pornhub;

    • B.V. is a VLOP under the DSA, for the designated service;

    • Google Ireland Ltd. is a VLOSE under the DSA, for the designated service Google Search, and a VLOP under the DSA, for the designated services Google Play, Google Maps, Google Shopping and YouTube;

    • LinkedIn Ireland Unlimited Company is a VLOP under the DSA, for the designated service LinkedIn;

    • Meta Platforms Ireland Limited (MPIL) is a VLOP under the DSA, for the designated services Facebook and Instagram;

    • Microsoft Ireland Operations Limited is a VLOSE under the DSA, for the designated service Bing;

    • Pinterest Europe Ltd. is a VLOP under the DSA, for the designated service Pinterest;

    • Snap B.V. is a VLOP under the DSA, for the designated service Snapchat;

    • TikTok Technology Limited is a VLOP under the DSA, for the designated service TikTok;

    • Twitter International Unlimited Company is a VLOP under the DSA, for the designated service X;

    • Wikimedia Foundation Inc 3*** is a VLOP under the DSA, for the designated service Wikipedia, and

    • Zalanda SE is a VLOP under the DSA, for the designated service Zalando.

    On 18 December 2023, the Commission opened formal proceedings to assess whether X may have breached the DSA in areas linked to risk management, content moderation, dark patterns, advertising transparency and data access for researchers. This decision to open proceedings was motivated by the analysis of the risk assessment report submitted by X in September 2023, X’s transparency report published on 3 November, and X’s replies to a formal request for information, which, among others, concerned the dissemination of illegal content in the context of Hamas’ terrorist attacks against Israel.

    3. What are the obligations that providers of online intermediary services have, under the DSA?

    The DSA establishes a new liability framework for companies in the digital sector, meaning they are now subject to a multitude of obligations.

    3.1. Key obligations for all intermediary service providers

    Here is a summary of the key obligations imposed on different levels of digital intermediary service providers by the DSA:

    • Governance: all providers at all levels must establish two single points of contact, one for direct communication with supervisory authorities, and the other for the recipients of the services. Providers not established in the EU, but offering services in the EU, will be required to designate a legal representative in the EU. Online platforms will need to have an out-of-court alternative dispute resolution mechanism, publish annual reports on content moderation, including the number of orders received from the authorities and the number of notices received from other parties, for removal and disabling of illegal content or content contrary to their terms and conditions, and the effect given to such orders and notices. VLOPs and VLOSEs must perform systematic risk assessments, share data with regulators and appoint a compliance officer;

    • Obligations for VLOPs and VLOSEs to prevent abuse of their systems, by taking risk-based action, including oversight through independent audits of their risk management measures. Platforms must mitigate against risks such as disinformation or election manipulation, cyber violence against women or harm to minors online. These measures must be carefully balanced against restrictions of freedom of expression and are subject to independent audits;

    • Responsible online marketplaces: online platforms and VLOPs will have to strengthen checks on the information provided by traders and make efforts to prevent illegal content so that consumers can purchase safe products and services;

    • Measures to counter illegal content online, including illegal goods and services: the DSA imposes new mechanisms allowing users to flag illegal content online, and for platforms to cooperate with specialised ‟trusted flaggers” to identify and remove illegal content;

    • New rules to trace sellers on online marketplaces, to help build trust and go after scammers more easily; a new obligation for online marketplaces to randomly check against existing databases whether products or services on their sites are compliant; sustained efforts to enhance the traceability of products through advanced technological solutions;

    • Ban on dark patterns on the interface of online platforms, referring to misleading tricks that manipulate users into choices they do not intend to make; providers must not manipulate users (commonly known as ‟nudging”) into using their service, for example, by making one choice more prominent than the other. Cancelling a subscription to a service should also be as easy as subscribing;

    • Wide-ranging transparency measures for online platforms, including better information on terms and conditions, as well as transparency on the algorithms used for recommending content or products to users; Also enhanced transparency for all advertising on online platforms and influencers’ commercial communications;

    • Bans on targeted advertising on online platforms: targeted advertising to minors or targeted advertising based on special categories of personal data, such as ethnicity, political views or sexual orientation, is prohibited for online platforms and VLOPs;

    • Protection of minors on any platform in the EU: for services aimed at minors, the providers of intermediary services must provide an explanation on the conditions and restrictions of use in a way that is understandable to minors;

    • Recommender systems: VLOPs will be required to offer users a system for recommending content not based on profiling. Transparency requirements for the parameters of recommender systems will be included;

    • ‟Notice and action” procedure: providers of intermediary services must explicitly describe, in their terms and conditions, any restrictions that they may impose on the use of their services, such as the content moderation policies, and to act responsibly in applying and enforcing those restrictions. Users will be empowered to give notice of illegal online content. Online platforms and VLOPs will have to be reactive through a clearer ‟notice and action” procedure. Victims of cyber crime will see the content that they report removed momentarily;

    • Protection of fundamental rights: stronger safeguards must be put in place to ensure user notices are processed in a non-arbitrary and non-discriminatory way, and safeguards must protect fundamental rights, such as data protection and freedom of expression;

    • Effective safeguards for users, including the possibility to challenge platforms’ content moderation decisions based on the obligatory information platforms must now provide to users when their content gets removed or restricted; users have new rights, including a right to complain to the platform, seek out-of-court settlements, complain to their national authority in their own language, or seek compensation for breaches of the rules. Now, representative organisations are able to defend user rights for large scale breaches of the law;

    • Accountability: EU member-states and the Commission will be able to access the algorithms of VLOPs and VLOSEs;

    • Allow access to data to researchers of key platforms in order to scrutinise how platforms work and how online risks evolve;

    • A new crisis response mechanism in cases a serious threat for public health and security crises, such as a pandemic or a war;

    • A unique oversight structure: the Commission is the primary regulator of VLOPs and VLOSEs, while other intermediary service providers are under the supervision of member-states where they are established. Indeed, national Digital Service Coordinators (‟DSCs”), designed by each one of the 27 EU member-states, are responsible for supervising, enforcing and monitoring the DSA in that country. In France, the ‟Autorité de régulation de la communication audiovisuelle et numérique” (‟Arcom”) is the DSC. The Commission has enforcement powers similar to those it has under antitrust proceedings. An EU-wide cooperation mechanism is currently being established between national regulators, the DSCs, and the Commission.

    While the DSA does not define what illegal content online is, it sets out EU-wide rules that cover detection, flagging and removal of illegal content, as well as a new risk assessment framework for VLOPs and VLOSEs on how illegal content spreads on their services.

    What constitutes illegal content, though, is defined in other laws, either at EU level or at national level – for example, terrorist content or child sexual abuse material or illegal hate speech is defined at EU level. Where a content is illegal only in a given EU member-state, as a general rule it should only be removed in the territory where it is illegal.

    The DSA stipulates that breaches must be subject to proportionate and dissuasive penalties, determined by each member-state. Intermediary service providers can be fined up to 6 percent of annual worldwide turnover for breaching the DSA and up to 1 percent of worldwide turnover for providing incorrect or misleading information.

    3.2. Key obligations specific to VLOPs and VLOSEs

    Once they are designated as such, VLOPs and VLOSEs must follow the rules that focus only on VLOPs and VLOSEs due to the potential impact they can have on society. This means that they must identify, analyse and assess systemic risks that are linked to their services. They should look, in particular, to risks related to:

    • illegal content;

    • fundamental rights, such as freedom of expression, media freedom and pluralism, discrimination, consumer protection and children’s rights;

    • public security and electoral processes, and

    • gender-based violence, public health, protection of minors and mental and physical wellbeing.

    Once the risks are identified and reported to the Commission for oversight, VLOPs and VLOSEs are obliged to put measures in place that mitigate these risks. This could mean adapting the design or functioning of their services or changing their recommender systems. This could also consist of reinforcing the platform internally with more resources to better identify systemic risks.

    Those designated as VLOPs and VLOSEs also have to:

    • establish an internal compliance function that ensures that the risks identified are mitigated;

    • be audited by an independent auditor at least once a year and adopt measures that respond to the auditors’ recommendations;

    • share their data with the Commission and national authorities so that they can monitor and assess compliance with the DSA;

    • allow vetted researchers to access platform data when the research contributes to the detection, identification and understanding of systemic risks in the EU;

    • provide an option in their recommender systems that is not based on user profiling, and

    • have a publicly available repository of advertisements.

    To conclude, the DSA is a first-of-a-kind regulatory toolbox globally, and sets an international benchmark or a regulatory approach to online intermediaries. Designed as a single, uniform set of rules for the EU, these rules will give users new protections and businesses legal certainty across the whole single market. Moreover, the DSA will complement the distance selling regulations and EU consumer contract legislation well, empowering consumers and businesses in doing more business and deals online. While we are super glad to be Europeans and therefore to benefit from these wonderful protections, we highly recommend that providers of intermediary services take the DSA very seriously, and work their socks off to become immediately compliant with it, even when online platforms, such as Easyjet, have not yet been designated as VLOPs by the Commission.
    Crefovi’s live webinar: Digital Services Act – the revolution will be televised – 29 March 2024

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      Digital Markets Act: forcing change in the digital services’ industry, to ensure more competition

      Crefovi : 19/02/2024 3:34 pm : Antitrust & competition, Articles, Consumer goods & retail, Emerging companies, Entertainment & media, Gaming, Information technology - hardware, software & services, Internet & digital media, Litigation & dispute resolution, Outsourcing, Technology transactions, Webcasts & Podcasts

      While the deadline for compliance with the Digital Markets Act is fast approaching, gatekeepers in the digital services’ market are (allegedly) frantically preparing themselves for compliance. But is this ever going to happen, by 5 March 2024, in light of the robust opposition and resistance to any change which may as much as weaken the monopolistic positions of the likes of Apple, Google, Microsoft, Meta, Amazon and Tiktok? Of course, none of these tech giants are European, and it is just not in the American, or Chinese, DNA, to have to suffer so much interference from a state-owned entity like the European commission, even for the sake of allowing a higher degree of competition and letting new players enter the market. So, what, exactly, is going on?

      1. What is the Digital Markets Act?

      Regulation (EU) 2022/1925 of the European Parliament and of the Council of 14 September 2022 on contestable and fair markets in the digital sector (Digital Markets Act) (‟DMA”) is a regulation from the European Union (‟EU”) that aims at ensuring a higher degree of competition in European digital markets by preventing larger companies from abusing their market power and by allowing new players to enter the market.

      Indeed, the DMA is designed to prevent the leveraging of market power across different digital services (including through a prohibition on self-preferencing), reduce barriers to entry or expansion across digital markets, facilitate switching and multi-homing between services (e.g. through data portability and interface interoperability requirements), and control how user data are processed and when such data must be made available to users as well as third party competitors.

      More specifically, the DMA applies to the markets where ‟core platform services” are provided to end users and business users, as follows:

      • online intermediation services;

      • online search engines;

      • online social networking services;

      • video-sharing platform services;

      • number-independent interpersonal communications services;

      • operating systems;

      • web browsers;

      • virtual assistants;

      • cloud computing services, and

      • online advertising services, including advertising networks, advertising exchanges and any other advertising intermediation services, provided by an undertaking that provides any of the core platform services listed above.

      2. Who is affected and/or impacted by the Digital Markets Act? Gatekeepers

      The DMA therefore targets the largest digital platforms operating in the EU, which are referred to as ‟gatekeepers”, in this EU regulation.

      The term ‟gatekeeper” refers to the ability of intermediary platforms to act as the main ‟bottleneck” to a large number of participants, that are not reachable elsewhere.

      Indeed, the DMA provides that an undertaking should be designated as a gatekeeper where it meets three qualitative criteria:

      • it has significant impact on the internal market;

      • it provides a core platform service which is an important gateway for business users to reach end users, and

      • it enjoys an entrenched and durable position, in its operations, or it is foreseeable that it will enjoy such a position in the near future.

      The DMA also requires undertakings to notify the European Commission (the ‟Commission”) where they meet three quantitative thresholds, which act as a presumption for gatekeeper status:

      • the undertaking generates EU revenues of at least 7.5bn Euros in each of the last three financial years, or had an average market capitalisation of at least 75bn Euros in the last financial year, and the undertaking provides the same core platform service in at last three EU member-states;

      • in each of the last three financial years, the undertaking provides a core platform service with at least 45m EU monthly active end users in the last financial year, and at least 10,000 yearly active EU business users, or

      • the undertaking met the second above-mentioned criteria in each of the last three financial years.

      Undertakings that meet these thresholds have the opportunity to argue why they should not be designated as a gatekeeper and thus to rebut the presumption.

      Conversely, the Commission can designate an undertaking as a gatekeeper where it does not meet the quantitative thresholds, but nevertheless satisfies the qualitative criteria.

      On 6 September 2023, the Commission designated for the first time six gatekeepers – Alphabet, Amazon, Apple, ByteDance, Meta and Microsoft – under the DMA. In total, 22 core platform services provided by those gatekeepers have been designated.

      The Commission’s designations confer gatekeeper status on 22 core platform services, as follows:

      • Alphabet: Google Maps, Google Play, Google Shopping, YouTube, Google Search, Google (ads), Google Chrome and Google Android;

      • Meta: Facebook, Instagram, WhatsApp, Messenger, Meta Marketplace and Meta;

      • Apple: App Store, Safari and iOS;

      • Amazon: Amazon Marketplace and Amazon (ads);

      More than one gatekeeper has therefore been designated for certain services.

      After the designation of TikTok as a gatekeeper, its parent company ByteDance launched itself into applying for the suspension of the Commission’s decision designating the former as a gatekeeper, as well as bringing an action for annulment of that decision, in November 2023. However, the EU general court dismissed this application for suspension on the grounds that ByteDance failed to demonstrate the urgency required for an interim order in order to avoid serious and irreparable damage, on 9 February 2024.

      Gmail, and Samsung Internet Browser also met the quantitative notification thresholds, but their owners (Alphabet, Microsoft and Samsung) were able to persuade the Commission that the relevant services should not be designated as they did not satisfy the qualitative criteria. Having examined the submissions that were made to it, the Commission has accepted that the presumption attached to the quantitative thresholds had been successfully rebutted for each of those services.

      Similar submissions were made to the Commission in relation to Bing, Edge, Microsoft Advertising and iMessage and, on 12 February 2024, the Commission adopted decisions closing four market investigations under the DMA, finding that Apple and Microsoft should not be designated as gatekeepers for the following core platform services: Apple’s messaging service, iMessage, Microsoft’s online search engine Bing, web browser Edge and online advertising service Microsoft Advertising.

      Also, the Commission has initiated a market investigation (which must be completed within the next twelve months) to determine if iPadOS should be added to the list of designated core platform services, notwithstanding the fact that the quantitative notification thresholds are not met.

      3. What are the obligations that gatekeepers have, under the Digital Markets Act?

      Alphabet, Amazon, Apple, ByteDance, Meta and Microsoft have six months from 6 September 2023 (i.e. the date on which some of their above-mentioned core platform services were listed in the Commission’s designation decisions) to comply with the obligations set out in the DMA that apply to designated gatekeepers.

      So, the deadline for compliance is 5 March 2024. And this is why we hear so much about the DMA at the moment, as the gatekeepers frantically prepare themselves for compliance with the following DMA obligations, inter alia:

      • the gatekeeper shall not prevent business users from offering the same products or services to end users through third-party online intermediation services or through their own direct online sales channel at prices or conditions that are different from those offered through the online intermediation services of the gatekeeper;

      • the gatekeeper shall allow business users, free of charge, to communicate and promote offers, including under different conditions, to end users acquired via its core platform service or through other channels, and to conclude contracts with those end users, regardless of whether, for that purpose, they use the core platform services of the gatekeeper;

      • the gatekeeper shall allow end users to access and use, through its core platform services, content, subscriptions, features or other items, by using the software application of a business user, including where those end users acquired such items from the relevant business user without using the core platform services of the gatekeeper;

      • the gatekeeper shall not directly or indirectly prevent or restrict business users or end users from raising any issue of non-compliance with the relevant EU or national law by the gatekeeper with any relevant public authority, including national courts, related to any practice of the gatekeeper;

      • the gatekeeper shall not require end users to use, or business users to use, to offer, or to interoperate with, an identification service, a web browser engine or a payment service, or technical services that support the provision of payment services, such as payment systems for in-app purchases, of that gatekeeper in the context of services provided by the business users using the gatekeeper’s core platform services;

      • the gatekeeper shall not require business users or end users to subscribe to, or register with, any further core platform services listed in the designation decision, or which meet the above-mentioned thresholds, as a condition for being able to use, access, sign up for or registering with any of that gatekeeper’s core platform services;

      • the gatekeeper shall provide each advertiser to which it supplies online advertising services, or third parties authorised by advertisers, upon the advertiser’s request, with information on a daily basis free of charge, concerning each advertisement placed by the advertiser, regarding th price and fees paid by the advertiser, the remuneration received by the publisher, the metrics on which each of the prices, fees and remunerations are calculated;

      • the gatekeeper will have to submit detailed compliance reports to the Commission, with the first reports due by 5 March 2024, where such reports explain the measures that have been adopted by the gatekeeper to comply with the DMA, including any action taken to inform end users and/or business users of these measures and the feedback received from these users, and

      • the gatekeeper will be under a duty to report planned acquisitions to assist the Commission in monitoring market developments and potentially problematic transactions which may fall below EU and national merger control thresholds.

      If a designated gatekeeper fails to comply with its obligations, the Commission, as sole enforcer of the DMA, has the power to impose fines up to 10 percent of the worldwide annual turnover, or up to 20 percent in the event of repeated infringements. The Commission also has the power to impose periodic penalty payments of up to 5 percent of average daily turnover and (in case of systematic infringements of DMA obligations) behavioural and structural remedies, including by ordering the divestiture of (parts of) a business.

      4. Why was the Digital Markets Act adopted by the EU?

      By way of background, Apple’s App Store and Google’s Play Store create local monopolies because consumers are locked-in by monetary costs and by convenience. Firstly, consumers are locked-in because they incur the monetary investment costs of having all choices. There cannot be competition between app stores when consumers can only choose the one app store that is tied to their phone. To have competition between app stores, consumers would need to purchase another phone, which is costly and inefficient. Secondly, consumers are locked-in because of their convenience or ‟laziness”. Apple exploits this convenience by allowing the one-click purchase option only for their own payment system. To use the external payment, consumers must click several links, which is costly in terms of time and effort.

      So, the DMA will spur competition by eliminating lock-in effects from both monetary investment and from convenience. For instance, phone makers will be forced to allow all app stores and give equal treatment to external payment systems.

      For the reasons mentioned above, the market power of big tech firms like Google, Apple, Facebook, Amazon and Microsoft has long been a thorn in the eyes of the Commission (and experts in the tech sector).

      Such concerns and frictions arose, in particular, with respect to several ongoing lawsuits and legal complaints, lodged by the likes of Epic Games and music streaming platform Spotify, against, in particular, software and hardware behemoth, Apple.

      4.1. The Epic-Apple case

      The Epic-Apple court decision in the USA illustrates why regulation in digital markets is complex and difficult.

      The situation escalated when Fortnite, a free-to-play cross-platform game, was banned from Apple’s AppStore in August 2020. Fortnite developer Epic Games was unwilling to pay the so-called ‟Apple Tax” of 30 percent, which grants automatically one third of all profits coming from apps and in-app transactions to Apple.

      Epic, eager to reclaim the total ownership over its profits, tried to circumvent this ‟tax” by integrating a link into the game. This URL link recommended users to buy directly from Epic at a 20 percent discount using virtual money ‟VBucks”, instead of Apple Play. Apple then banned Epic from the AppStore because the implementation of the link violated Apple’s anti-steering clause that forbid developers to offer alternative payment systems in their apps.

      Only a few hours after the ban, Epic Games filed a lawsuit against Apple’s abuse of market power. Google followed Apple in throwing out Fortnite from its own App store.

      Some of the claims raised by Epic Games against Apple revolved around the following key points: Do Apple and Google create illegal monopolies with their app stores? Are Apple and Google abusing their in-app market power? Are consumers and users paying too much for apps and for items in these apps? Should there be regulation of the App stores of, in particular, Apple and Google?

      The tepid court decision on this case, handed down on 10 September 2021 by the US district court for the Northern District of California, contains a mixed ruling which favours both parties but, in any case, fails to acknowledge Apple’s monopoly from lock-in effects.

      On the one hand, the judge Yvonne Rodgers sets out that ‟the court cannot ultimately conclude that Apple is a monopolist” and that its ‟App store is not in violation of antitrust law”. This part of the decision allowed Apple to continue its prohibition of third-party app stores and in-app payment systems. It further implied that consumers who buy from Apple’s app store still must pay the ‟Apple tax” price, containing its commission of 30 percent. Judge Rodgers consequently ruled against Epic Games, requiring them to pay Apple USD3.6 million, 30 percent of the revenue that was withheld to Apple related to their attempts to bypass the app store, and further stated that Epic Games violated its contractual terms as a developer.

      On the other hand, judge Rodgers decided that Apple partly engages in anticompetitive conduct, in breach of the California unfair competition law, by implementing its anti-steering clause that forces consumers to buy apps and in-app purchases directly from Apple’s app store. Trying to foster effective price competition, her judgment forces Apple to allow developers the integration of links into their apps that redirect users away from Apple’s in-app purchasing system towards alternative payment systems. Judge Rodgers issued a permanent injunction, that, in 90 days from the judgment, blocked Apple from preventing developers from linking app users to other storefronts from within apps to complete purchases or from collecting information within an app, such as an email, to notify users of these storefronts.

      Epic Games immediately appealed the judgment from the US district court. Apple also appealed. In appeal, the three-judge panel found that the lower court judgment should be upheld. However, the Ninth circuit court of appeal agreed to stay the injunction requiring Apple to offer third-party payment options in July 2023, allowing time for Apple to submit its appeal to the US supreme court. Both Apple and Epic Games have escalated this appeal decision to the supreme court in July 2023. And Epic Games’ emergency request to lift the Ninth circuit’s stay was denied in August 2023. So, under the US justice system, Apple can, in all impunity, still refuse to let Fortnite back onto its app store, until the completion of all litigation related to the dispute, which might have taken a minimum of five years, if not more, thereby prolonging the resolution of the dispute until 2026.

      However, on 16 January 2024, the US supreme court declined to hear the appeals from Apple and Epic in this case, with all charges dismissed except for the anti-steering charge. To implement this, Apple allowed developers to include ‟metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms”, but required that developers give Apple 27 percent of all sales made within seven days of being directed to these external sites, which Apple described as a ‟reasonable means to account for the substantial value Apple provides developers, including in facilitating linkedin transactions”. In addition, the Apple’s app store posts a warning screen stating that Apple is not responsible for any security or privacy issues related to third-party payment systems when clicking through to one of these systems. Epic Games stated that these changes are in bad faith compliance with the court orders, maintaining a 27 percent anti-competitive tax and a ‟scare screen” that are intended to dissuade developers from using third-party payment systems, and planned to challenge these changes in court. Apple requested the lower court to order Epic Games to pay 90 percent of Apple’s legal fees estimated at USD73 million, based on the fact that nine of the ten claims Epic Games filed were dismissed by the court.

      This legal saga shows how, pre DMA, the lock-in effects play an important role and shift market power to gatekeepers like Apple, in the digital economy.

      Apple announced, in January 2024, that, to comply with the DMA, it will now allow third party storefronts to be loaded onto iOS devices in March 2024. In response, Epic Games stated that they plan to bring the Epic Games Store as well as Fortnite to iOS in Europe. However, Epic Games still argued that the new terms for use in the EU, of Apple’s app store, were a ‟new instance of malicious compliance” and would continue to challenge those through legal routes.

      4.2. The Spotify v Apple beef

      Many companies, such as AirnBnB and even Facebook, publicly sided with Epic Games.

      The top music streaming platform, Spotify, had even filed an EU antitrust complaint against Apple on 13 March 2019, with the Commission, alleging that the ‟Apple tax” harms consumer choice and stifles innovation.

      EU competition regulators initially sent a statement of objections to Apple in 2021, raising their own concerns that Apple’s in app payment rules were anticompetitive.

      Two years later, an updated statement of objection was sent by the Commission to Apple, announcing that the investigation had been narrowed to specifically focus on the anti-steering provision (i.e. the fact that app developers cannot sign-post users to other payment options outside of their apps). The Commission took the preliminary view that Apple’s anti-steering obligations are unfair trading conditions in breach of article 102 of the Treaty on the functioning of the EU.

      On 19 February 2024, the press unanimously reported that, nearly five years after Spotify first submitted its formal complaint, EU regulators are about to fine the tech giant 500 million Euros for breach of competition law.

      The EU regulators have reportedly concluded that Apple’s app store rules regarding the highlighting of payment options outside the Apple ecosystem are prejudicial against streaming services that compete with the tech giant’s own Apple Music. These rules are unfair trading conditions, according to the EU regulators, reportedly.

      Spotify – and many other app developers – have long criticised Apple’s app store rules in relation to in-app payments. Those rules state that, with certain apps, all in-app payments must be taken using Apple’s own commission-charging transaction platform. Not only that, but app developers cannot sign-post users to other payment options outside of their apps – the rule referred to as the anti-steering provision.

      Apple’s commission on in-app payments is up to 30 percent. As Spotify’s profit margin is also in the region of 30 percent, it would need to pass on the Apple charge to the customer, which makes a Spotify subscription look more expensive than an Apple Music subscription.

      The other option, which is the one Spotify took, is not to take in-app payments at all. But that makes up-selling premium subscriptions to free tier users much harder, and the introduction of pay-to-access tools within the Spotify app – to monetise podcasts and audiobooks – basically impossible.

      While Apple says that it has already made some changes to its app store rules in Europe, in order to comply with the DMA, Spotify argues those changes do not deal with the issues it has raised about Apple’s in-app payment rules. Spotify’s summary of Apple’s plans is that app developers will have other options for taking payments, but will still have to share any income from in-app transactions with the tech giant. ‟Apple is still charging a 17 percent rent on developers for existing in the app store if they offer alternative payment methods or link out to their own website”, Spotify explains. Plus there is a ‟completely new 0.50 Euros fee per download, every year, in perpetuity, to Apple for just allowing developers to exist on iOS”. ‟The ball is in your court, European Commissioners”, Spotify says in its blog, ‟and once and for all you must reject this blatant disregard of the very principles you worked so hard to establish”.

      To conclude, the DMA is going to create tectonic shifts in the digital services’ industry, what with the deadline of 5 March 2024 fast approaching. Gatekeepers must change their ways, in the EU first, but, gradually around the world, otherwise they will be handed down hammering fines and penalties from the Commission (and other competition authorities in the world), which will just make it unsustainable for them to keep on offering services in the EU. Let’s hope that the likes of Apple and Google get the message quickly, because neither natural persons customers, nor business users, stand to gain anything, if Apple, Microsoft and Google desert our European shores.
      Crefovi’s live webinar: Digital Markets Act – forcing change in the digital services’ industry – 23 February 2024

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        Farfetch: anatomy of a fall

        Crefovi : 20/12/2023 1:57 pm : Antitrust & competition, Articles, Banking & finance, Capital markets, Consumer goods & retail, Emerging companies, Fashion law, Hostile takeovers, Information technology - hardware, software & services, Insolvency & workouts, Internet & digital media, Law of luxury goods, Mergers & acquisitions, Private equity & private equity finance, Restructuring, Technology transactions, Unsolicited bids, Webcasts & Podcasts

        Farfetch was a lovely entrepreneurial adventure launched 16 years’ ago by thirty-something Jose Neves, but will probably not stand the test of time, in its current iteration. Let’s analyse what and who drove Farfetch, and how Farfetch was driven, into the ground, in less than 5 years. We all need to hear cautionary tales, and the Farfetch story definitely fits into this category. Future fashion entrepreneurs, saddle up!

        1. What is Farfetch?

        Farfetch was incorporated at Companies House in October 2007 as the private company limited by shares ‟ Limited”, by Jose Neves, a Portuguese national, in London, United Kingdom (‟UK”).

        The company name was changed twice, in May 2010 and then June 2013, with the name ‟Farfetch UK Limited” still in existence, today.

        In 2007, Jose Neves’ vision was to create a business that would use the same technologies that were transforming other consumer sectors, such as the music and film sectors, for shopping fashion products. His plan was to ‟create a world-class infrastructure supported by a top-notch team, and then put all that to the service of the world’s most interesting retailers and their websites”.

        Since some of the best brick-and-mortar fashion boutiques around the world, despite having a powerful eye for curation, were not able to fund, set up and manage their own e-commerce operations to scale their businesses beyond their local markets, Farfetch seemed to bring them an appropriate solution.

        This, combined with the fact that Farfetch did not take on the risk of owning inventory made it a compelling business model that attracted the interest of venture capitalists, such as Advent Ventures (now Felix Capital) and its founder Frederic Court.

        Mr Neves and its venture capital investors pushed, over the years, Farfetch to expand and grow to realise the vision of becoming the Amazon of the fashion industry, a platform upon which the whole industry could operate its e-commerce businesses.

        Today, Farfetch, one of the few global online retailers for high-end merchandise from a range of labels, works with more than 1,400 fashion boutiques and sellers, in 190 countries.

        In 2015, Farfetch bought Browns, the London fashion boutique, which had a flagship store on Brook Street. Now, the brick-and-mortar location of this flagship store is disused and vacant, in Brook Street, London.

        As consumer appetite for buying luxury goods online began to grow, Farfetch also started working directly with fashion brands to build their websites and back-end operations. Through Farfetch Platform Solutions, the company also offers a host of e-commerce services to brands, like Burberry and Ferragamo, and department stores, like Harrods and Bergdorf Goodman.

        In 2017, Farfetch bought the intellectual property from Condé Nast’s failed e-commerce venture, a brand that the company has never used.

        In 2018, Farfetch became a public company listed on the New York Stock Exchange (‟NYSE”), via Farfetch Holdings plc, a public limited company organised under the laws of England and Wales and a wholly-owned direct subsidiary of Cayman Islands-based Farfetch Limited. At the USD20 Initial Public Offering (‟IPO”) price, Farfetch debuted its IPO with an approximate market capitalisation of USD5.8 billion.

        The same year, Farfetch acquired New-York based sneaker and streetwear reseller Stadium Goods, opting to pay USD250 million for the sneaker startup in a combination of cash and Farfetch stock.

        In 2019, Farfetch ramped up its shopping spree, with a USD675 million takeover of the Italian holding company New Guards Group, which manages the design, production and distribution, for a range of global brands, including Off White, Reebok and Palm Angels. This acquisitive move, doubled by a report of larger than expected losses, wiped out more than USD2 billion off Farfetch’s market value in a single day, in 2019.

        Unfettered, Jose Neves bought a USD200 million stake in American department store Neiman Marcus for Farfetch, and, in 2022, struck a deal to buy 47.50 percent of the shareholding of Yoox Net-a-Porter (‟YNAP”) – the underperforming e-commerce platform from the Richemont group – in exchange for the issuance of a 12 percent shareholding in Farfetch to Richemont. That partnership was cleared by the European Commission in October 2023.

        Meanwhile, Farfetch acquired Los Angeles-based luxury beauty retailer Violet Grey, at the beginning of 2022, only to put it up for sale barely a year and a half later, in October 2023, further to shuttering its beauty division in August 2023.

        And then, in November 2023, when Farfetch issued a press release backtracking on its initial intention to announce third quarter 2023 results, its shares started tumbling, losing more than 50 percent of their value. Mid-December 2023, two years after Farfetch’s peak valuation at a pandemic high of USD26 billion in February 2021, its market value shrunk to less than USD238 million, with its shares losing more than 97 percent of their market value since its IPO.

        In Mid-November 2023, British investment firm Baillie Gifford, formerly Farfetch’s largest investor, sold nearly half of its shares in the platform, keeping a 7.53 percent stake only.

        On 18 December 2023, Farfetch provided a business update, confirming that it had entered into an emergency and lifeline USD500 million bridge loan facility with Athena Topco LP, a Delaware limited partnership owned by South Korean e-commerce group Coupang, Inc (also listed on the NYSE and backed by SoftBank Group Corp). In exchange, Farfetch will delist from the NYSE and a partnership between Coupang and the investment firm Greenoaks Capital Partners will acquire Farfetch through a pre-pack administration in the UK, which is a quick process used to facilitate selling all or parts of the assets of an insolvent company.

        Via the same business update, Farfetch also informed the public that its partnership with Richemont, to purchase 47.50 percent of YNAP, the adoption of Farfetch Platform Solutions by YNAP and the Richemont Maison, as well as the launch of Richemont Maison e-concessions on the French marketplace, had terminated with immediate effect.

        Farfetch’s shares on the NYSE were suspended after slumping 35 percent in premarket US trading before the public announcement on 18 December 2023.

        2. How, and why, is Farfetch in such dire straits?

        A combination of factors have brought Farfetch to the brink of extinction, many of those self-inflicted.

        Firstly, Farfetch veered too far away from its cautious approach to fashion e-commerce, jumping with both feet, from 2015 to 2023, in overpriced, underprepared and badly-executed multiple acquisitions of brick-and-mortar fashion brands and retailers and etailers, as well as their inventories.

        Not only did this scattered M&A strategy massively increase the financial risks underpinning Farfetch’s business, but it also seriously emptied the coffers of this startup (whose current cash flow resources stand at USD630 million), and saddled it with debt (in particular, USD600 million of convertible notes, shared equitably between Richemont and Alibaba Group Holding Limited, to be converted into cash or shares in 2026).

        Also, Farfetch’s erratic growth approach, without a well-thought business plan, caused both the fashion industry and unforgiving financial markets such as the NYSE, to no longer understand the company’s increasingly complex vision.

        And, Farfetch never consistently made a profit, since its IPO. So, investors, stakeholders in the fashion industry and financial markets doubt that it may be able to get back on track.

        Moreover, clearly, the leadership at Farfetch, and in particular Jose Neves, is incompetent. Although Mr Neves currently owns only 15 percent of the company’s shareholding he founded in 2007, he still has 77 percent of the vote on Farfetch’s executive committee. While he sacked all independent members of Farfetch’s board and all committees of Farfetch, as confirmed in the business update dated 18 December 2023, the board still consists of … Jose Neves. It is probably the insistence, by Jose Neves, to keep on staying at the helm of Farfetch, despite his proven track record of incompetence and poor management, that has ultimately deterred the likes of Amazon, Alibaba, LVMH, Richemont and Kering, from rescuing Farfetch out of its misery: they know that, while Mr Neves is in charge at Farfetch, nothing good can come out of it.

        Finally, the economic conditions for etailers are tough, post-pandemic, as luxury e-commerce players such as Farfetch, Mytheresa and Matchesfashion currently experience. MyTheresa’s shares have lost 90 percent of their value since the pandemic boom of 2021, and Matchesfashion has just been acquired by the Frasers Group, for just GBP52 million, in a deal that signals heavy losses for its private equity backer Apax Partners. The longer-term challenge of luxury e-commerce platforms is a drive among fashion labels to seek greater control of their products, usually at their own retail boutiques – a strategy aimed at avoiding discounts that third party retailers like Farfetch and Mytheresa rely on to attract shoppers. Now that consumers are back to shopping in person, it is a trend that luxury brands prefer to control their own distribution.

        3. What’s next for Farfetch?

        The deal between Coupang and Farfetch, announced in December 2023, will be a catastrophe for Farfetch in the medium to long term. Indeed, while such a transaction gives Farfetch a bit of a breather in terms of keeping its network of brands, boutiques and consumers depending on the Farfetch marketplace up and running, for now, there are very few synergies (if any) between a basic, cheap, retail e-commerce platform like, and a luxury e-commerce marketplace such as

        There is no chance that the Korean management of Coupang will ‟get” the exclusive and elitist distribution strategy of its asset, with the risk of diluting the brand Farfetch by lowering the standards of selection of the boutiques selling on the Farfetch marketplace. When that happens, no fashionista or luxury shopper will ever buy anything on Farfetch again.

        Also, Farfetch can kiss goodbye to its glitzy deals with luxury partners such as Richemont, Ferragamo, Burberry, etc. The positioning of Farfetch, now that it is becoming an asset of Coupang, is veering from being ‟luxury”, to ‟mainstream retail”. Also, the top brass at Farfetch will be replaced by a team of South Koreans who not only understand very little about what constitutes the makeup of a luxury brand, but also do not have the appropriate connections and pazzaz, in the luxury spheres.

        While Jose Neves must go, since he continuously mismanaged and negligently drove Farfetch into the ground, the South Korean ‟new guard” who will eventually replace him will fail, if they do not quickly and efficiently buy extremely expensive knowhow and strategic advice about, and connections within, the luxury sectors in Europe and the USA, to turn Farfetch around and to keep it as a thriving going concern for the luxury fashion industry.
        Crefovi’s live webinar: Farfetch – anatomy of a fall – 22 December 2023

        Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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          AI & copyright protection: lawmakers must swiftly adapt to save their creative industries

          Crefovi : 21/03/2023 10:41 am : Antitrust & competition, Art law, Articles, Copyright litigation, Entertainment & media, Gaming, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Life sciences, Litigation & dispute resolution, Music law, Sports & esports, Webcasts & Podcasts

          Artificial intelligence (‟AI”) technologies, which developed exponentially in the last 5 years, are here to stay and thrive. Most legal frameworks, in particular the French and US ones, are not ready for these technological advances. Indeed, most courts still refuse to grant copyright protection and ownership, to AI-generated works, worldwide. This situation is not sustainable, as AI-generating tools and platforms will replace traditional methods of generating content, in a very short timeframe. Legal frameworks must therefore adapt and yield, in order to ensure that their national creative industries remain competitive and at the top of the class. How can this be achieved?

          1. The AI revolution: making AI the new normal

          1.1. AI technological advances

          AI technologies have exponentially developed, in 2022, making it possible to generate various creative outputs, in the literary field, music sector, art and illustration sectors, the film industry, the graphic novels’ sphere and the video gaming industry.

          For example, ChatGPT is a language model developed by OpenAI, a research organisation that specialises in developing cutting-edge AI technologies, founded in 2015. ChatGPT is based on the Generative Pre-trained Transformer (‟GPT”) architecture. Its self-described purpose is to ‟provide conversational assistance and answer a wide range of questions on various topics, from factual information to subjective opinions and advice”. It can be used as a powerful research tool, writing extremely coherent and detailed research reports, which may then be inserted verbatim in any article, research paper or blog.

          AI writing tools have become commonplace, and now assist humans in a variety of ways, in order to write better emails, blogs, articles and novels, to curate email newsletter content, to generate ready-to-write SEO outlines, to generate articles that are SEO friendly, etc.

          In the graphic design sphere, AI tools can produce outstanding illustrations and drawings just by merely giving written instructions to AI tools such as Dall-E 2 (also created by OpenAI), Midjourney, and The results are outstanding, as Midjourney’s community showcase demonstrates.

          These illustrations and drawings can, in turn, be used to create graphic novels, such as ‟Zarya of the Dawn” by Kristina Kashtanova (generated with Midjourney), video games, magazines’ covers, such as The Economist’s cover and Cosmopolitan’s cover for its AI issue, or films, such as ‟The Crow”, a short film generated with OpenAI’s CLIP, and which won the 2022 Jury Award at the Cannes Short Film Festival!

          In the music field, AI-generated music is become more prevalent, with AI music composition tools such as MusicLM, a model generating high-fidelity music from text descriptions from Google Research lab, Riffusion, an AI that composes music by visualizing it, Dance Diffusion, Google’s previous project AudioLM and OpenAI’s Jukebox. Soundful, a human aided AI music platform, aims at fulfilling the demand for music within the creator community and content-creator economy. At the click of a few buttons, you can have the tune you need for your project.

          1.2. Who are the main players in the AI field?

          As mentioned above, OpenAI, is at the forefront of AI innovation, with multiple AI tools created to be exploited on various creative medium such as:

          • the spoken word, via ChatGPT;

          • films, with CLIP;

          • illustrations, via Dall-E 2, and

          • music with Jukebox.

          OpenAI was founded in 2015 by a group of prominent tech industry figures, including Elon Musk, Sam Altman, Reid Hoffman, Ilya Sutskever, Peter Thiel, John Schulman, and Wojciech Zaremba. It is an American AI research laboratory consisting of the non-profit OpenAI Incorporated (OpenAI Inc.) and its for-profit subsidiary corporation OpenAI Limited Partnership (OpenAI LP). The goal of OpenAI is to create safe and beneficial AI ‟that can help to address some of the world’s most pressing challenges” (sic). OpenAI is an independent organization, and its research is funded by a mix of philanthropic contributions, corporate partnerships, and government grants. The organization is ‟dedicated to advancing AI technology while also promoting transparency, collaboration, and ethical considerations in the development and deployment of AI”.

          In 2023, OpenAI announced a partnership with Microsoft. On 23 January 2023, Microsoft announced a new multi-year, multi-billion dollar (reported to be USD10 billion) investment in OpenAI. Then, on 7 February 2023, Microsoft announced that it is building AI technology based on the same foundation as ChatGPT into its web search engine Bing, its web browser Edge, its productivity software Microsoft 365 and other products.

          Google is also prominent in the AI-tools’ manufacturing sector, in particular with its above-mentioned music-generating AI tools, MusicLM and AudioLM. On 6 February 2023, Google announced an AI application similar to ChatGPT (Bard, a conversational AI chatbot powered by Google’s Language Model for Dialogue Applications), after ChatGPT was launched, fearing that ChatGPT could threaten Google’s place as a go-to source for information. Google also launched Imagen, a ‟text-to-image diffusion model with an unprecedented degree of photorealism and a deep level of language understanding” (sic), to compete with Dall-E.

          For now, the media’s general impression is that Google fell behind in AI, in particular compared to Microsoft and OpenAI.

          2. AI’s legal challenges

          2.1. Do AI users have rights to the outputs?

          The question of AI authorship is particular important, especially if actors from the content-creator economy embrace it.

          The first port of call is to review the terms and conditions of the AI-generating tool, in order to clarify who owns what, as far as the AI-generated output is concerned.

          For example, in order to use OpenAI’s platforms, such as Dall-E 2, Jukebox or ChatGPT, the user must first agree to OpenAI’s terms of use. In the version dated 14 March 2023 of these T&Cs, it is set out that OpenAI assigns to the user all its right, title and interest in and to the output generated and returned by the OpenAI services based on the user’s input. This means the user can use the Content (defined as the input and the output together) for any purpose, including commercial purposes such as sale or publication, if the user complies with OpenAI’s terms. OpenAI may use the Content to provide and maintain its services, comply with applicable law, and enforce its policies. The user is responsible for the Content, including for ensuring that it does not violate any applicable law or OpenAI’s terms of use.

          This is an improvement on the OpenAI’s terms of use which were in force before 14 March 2023. These terms used to state that users assigned any ownership they had in any output created by the OpenAI’s system and services, and, in turn, the users had an exclusive licence to use the generated output for any purpose. Other AI platforms which can generate output, such as Soundful, still have similar contractual copyright and licensing arrangements.

          2.2. Who is the author of the AI-generated output?

          Was it the person who input the text prompt? Was it the AI? Was it the developer of the AI or the company that owns the AI?

          Most jurisdictions require a human to be the author, and a work is only capable of being protected by copyright if it shows intellectual effort, creativity, and reflects the author’s personality.

          As AI creative systems become more widespread, can we consider that a text prompt, such as ‟a cat wearing a turban gazing at the city landscape at night, from a window, in the style of Van Gogh”, constitutes enough human input and individuality, and is sufficiently creative and reflective of the human author’s personality to allow the resulting image to be protected by copyright?

          For example, UK law permits copyright protection of computer-generated works, with the author being the person who made the ‟necessary arrangements” for the creation of the work pursuant to section 9(3) of the Copyright, designs and patents act 1988. Other rare jurisdictions expressly provide for copyright in computer-generated works, such as Hong Kong, India, Ireland, New Zealand and South Africa.

          However, most countries, such as France, refuse to acknowledge copyright protection if the work is generated by anyone other than a human. Indeed, pursuant to article L. 112-1 of the French intellectual property code, ‟any work of the mind, regardless of its kind, form of expression, merit or purpose”, is eligible for copyright protection. French courts acknowledge the originality of a creation as soon as the said creation is endowed by the personality of their author. While the threshold of the originality requirement is low, the author of a work must be a natural person according to a well-established case-law. It cannot be a legal person, an animal or a software. The rationale behind this position is that French law only protects works of the mind and the creations at issue must bear the imprint of the personality of their author(s); legal persons, animals and AIs neither have a conscience nor have a personality that may come out of the works created by them.

          Time and time again, the United States Copyright Office (”USCO”) which is in charge of registering works for copyright protection in the USA, refused to grant copyright protection to AI-generated content, such as:

          • the above-mentioned graphic novel ‟Zarya of the Dawn”, because the images generated by Midjourney, contained within the work, are ‟not original works of authorship protected by copyright” (sic) and since ‟text prompts” are insufficient to qualify as ‟human authorship”.

          Since copyright protection is automatically granted in France, unlike in the USA where copyright protection is granted solely upon the USCO’s registration, no such case law exists in France or other European countries. We will have to wait a few more years, before copyright infringement litigation, relating to AI-generated content, lands in the European courts’ dockets (with the notable exception of the claim filed by stock image supplier Getty Images, against, for copyright infringement, with the High Court in London, UK).

          Considering the absence of a work of the mind and the lack of originality of an output resulting exclusively from an AI, such creations are thus today in the public domain and not intellectual property right is attached to them (with the notable exception, above-mentioned, of the regime applicable in the UK, Hong Kong, Ireland, India, New Zealand and South Africa, which permits copyright protection of computer-generated works, with the author being the person who made the ‟necessary arrangements” for the creation of the work).

          2.3. How can the law adequately address AI, in order to make it beneficial for the creative industries?

          In France, the ‟Conseil Supérieur de la Propriété Littéraire et Artistique”, an independent advisory body advising the French ministry of culture and communication in the field of literary and artistic property, provided recommendations in a report dated 27 january 2020. It suggests that a ‟sui generis” right could be created to the benefit of the one bearing the risks of the investment, like the specific regime benefiting to database producers.

          The European Parliament, from the European Union (‟EU”) also suggested that a legal personality be acknowledged to IA, so that copyright protection be granted to AI-generated works.

          For the time being, none of the above recommendations have been taken up by the French and/or European legislators.

          The European Commission (‟EC”) has proposed a four-step test in order to assess whether AI-generated output can qualify as protected work under the current EU copyright framework, as follows:

          • step one: the AI-generated output must be a production in the literary, scientific or artistic domain (article 2(1) of the Berne Convention for the Protection of Literary and Artistic Works);

          • step two: the AI-generated output must be the result of human intellectual effort (i.e. some sort of human intervention such as, for example, development of software, editing or gathering or choice of training data);

          • step three: the AI-generated output must be original, and

          • step four: the work needs to be identifiable with sufficient precision and objectivity (i.e. the generated output will fall within the creator’s general authorial intent).

          It is blatant that the current disparities in the various legal systems and frameworks, where one set of national legal frameworks strongly pushes back against granting copyright protection to AI-generated content, while the other set of national legal frameworks fully embraces AI-generated content and grants it full copyright protection, will create substantial inequalities of treatment for content creators worldwide.

          Indeed, content creators based in the UK or Ireland or India are incentivised to speed up their work flow, by fully embracing time-saving AI-generator tools and programmes, the output of which these creators will be able to claim copyright ownership and protection on. Meanwhile, creatives based in France or the USA will seriously struggle to enforce any type of copyright protection and rights over AI-generated content. Therefore, French and US content creators will prefer to stick to the ‟old methods” of work creation, refusing to use AI platforms which output will automatically fall into the public domain.

          This situation cannot perdure, and since AI is here to stay – big time – stubborn law makers and enforcers, such as the USCO which recently issued some narrow-minded guidance on copyright registrations involving AI, will inevitably have to yield and reform, in order to grant copyright protection to AI-generated works.

          Of course, lobbies and organisations representing music and other creative disciplines will try to delay the inevitable, by setting up mindless campaigns and lobbying plots, such as the ‟Human Artistry Campaign”, to prevent copyright offices and courts from finding that AI-generated works are protected by copyright.

          But the floodgates are now open. And there is no way back: the technological advances and jumps that AI-generating tools and platforms provide are so important and ground-breaking, that the creative content economy and stakeholders at large will fully embrace them in the next few months, never looking back.

          Lawmakers must adapt fast, in order to keep their creative economies and actors at the forefront of competition.

          Crefovi’s live webinar: AI & copyright protection – lawmakers to adapt to save creative industries – 24 March 2023

          Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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            CMA merger enquiry into Sony acquisition of Kobalt’s AWAL & KNR

            Crefovi : 07/03/2023 1:52 pm : Antitrust & competition, Articles, Entertainment & media, Hostile takeovers, Information technology - hardware, software & services, Internet & digital media, Mergers & acquisitions, Music law, Private equity & private equity finance, Restructuring, Unsolicited bids, Webcasts & Podcasts

            The Competition and Markets Authority (‟CMA”) did a stellar job, with the information and data it was provided with, during the phase 1 and phase 2 investigations of Sony’s acquisition of Kobalt’s assets, AWAL and Kobalt Neighbouring Rights. Why is this merger enquiry important, for the music industry? How did it come about? Was the merger enquiry’s outcome fair and appropriate, to preserve healthy competition in the music distribution and rights management sectors?

            1. What happened?

            Kobalt Music Group Limited (‟Kobalt”) is an independent rights management and music publishing company founded in 2000, in New York, USA.

            Kobalt has several subsidiaries, all providing services relating to rights management and music publishing, such as, in particular:

            • AWAL, a music platform providing marketing, distribution and other services to independent recording music artists and independent labels, and

            • Kobalt Neighbouring Rights (‟KNR”) which collects neighbouring rights royalties arising from the public use of music recordings on behalf of artists.

            On 18 May 2021, Sony Music Entertainment (‟SME”), one of the three major labels in the music industry and a wholly-owned subsidiary of Sony Group Corporation (‟Sony”), acquired AWAL and KNR from Kobalt, for around USD430 million in cash (the ‟Acquisition”).

            In other words, SME acquired all the issued shares of AWAL and KNR, from Kobalt, for USD430 million in cash, on 18 May 2021.

            2. Why the Acquisition?

            2.1. Kobalt’s rationale

            Kobalt’s rationale for the Acquisition was twofold: a sale would allow the company to reduce its debt and return capital to long-term shareholders. Kobalt considered SME’s offer to be the best means of achieving both of these aims.

            Kobalt also justified its decision to sell to SME by saying that AWAL and KNR would benefit from the Acquisition for a number of reasons, as follows:

            • being part of Sony’s global network would able AWAL and KNR to grow internationally, supporting the global aspirations of their artists;

            • AWAL artists would gain access to the expertise of The Orchard (one of Sony’s subsidiaries), including tools to manage digital advertising campaigns, optimise YouTube channels, and pay out royalties to collaborators;

            • AWAL would benefit from exposure to Sony’s frontline labels and AWAL artists would have easier access to Sony’s resources, including the potential to achieve increased exposure and investment, and

            • being part of Sony would open up more opportunities for AWAL and KNR in the form of financial support.

            2.2. Sony’s rationale

            Although Sony would never say so openly, buying competing companies, such as AWAL – which provides services quite similar to those offered by Sony’s subsidiary, The Orchard -, is an astute way to beat the competition and force consolidation in the music industry and, in particular, in the music rights management and distribution sectors, to its advantage.

            3. Why and how did the CMA review and control the Acquisition?

            On 16 September 2021, the CMA, in exercise of its merger control duty under section 22(1) of the Enterprise Act 2002 (the ‟Act”), referred the Acquisition for further (i.e. phase 2) investigation and report, by a group of CMA panel members.

            This was after a lengthy investigation process into the Acquisition:

            During the phase 2 investigation, the CMA gathered further evidence, in particular by requesting third parties to make submissions on the issues statement and provide evidence, and then:

            4. What was the outcome of the CMA review of the Acquisition?

            As mentioned already, the CMA cleared the Acquisition, at the end of its phase 2 investigation.

            The 158 pages’ long Report provides not only a detailed analysis of the phase 2 investigation process performed by the CMA on the Acquisition, but also a detailed snapshot of the UK streaming industry for recorded music.

            It is therefore an excellent educational document, for anyone who wants to learn about the current UK streaming market for recorded music.

            4.1. The industry

            In the Report, the CMA makes it clear that the Parties (i.e. Sony, SME and AWAL) overlap in:

            • the wholesale digital distribution of recorded music and related artist and repertoire (‟A&R”) services, including artist and label (‟A&L”) services, and

            • the supply of neighbouring rights administration services.

            The wholesale distribution of recorded music is a two-sided market. One side is artist-facing where providers of recorded music distribution (the ‟Providers”) compete to provide services to artists (for example, music distribution, supporting A&R, marketing and promotion). The other side is where Providers compete to distribute their content, in particular to Digital Service Providers (‟DSPs”), such as Spotify, Apple Music, Amazon Music and YouTube/Google for their streaming services, which account for the majority of consumer spending on music.

            Providers offer the following recorded music distribution services:

            • A&R services, which relate to the discovery, signing and development of artists, as well as the recording of their music (for example, talent scouting, signing and negotiating artist contracts, payment of any capital advances, funding and provision of artistic and creative support and direction, organising tour support and other supporting services);

            • marketing and promotion, for example, advertising, publicity, radio promotion and playlist promotion, and

            • wholesale distribution of recorded music, which refers to music companies bringing their artists’ music to market, primarily through DSPs. It is also common for Providers to offer physical distribution and digital distribution to download formats although these are of declining importance.

            A recording artist typically has five possible Providers’ options when releasing music, depending on their circumstances, as follows:

            • sign with one of the three large companies that account for the majority of recorded music revenues, i.e. Sony, Universal Music Group and Warner Music Group (the ‟Majors”);

            • sign with a smaller, independent label (such as Beggars group, BMG Rights Management or Domino Recording Company);

            • use an ‟artist services” provider (such as AWAL, Believe, PIAS, Empire and Virgin);

            • choose to distribute their music as a self-releasing artist using an established platform (known as ‟DIY” platforms, for example DistroKid, CDBaby, OneRPM, DITTO, United Masters and Amuse), or

            • some artists secure the services of a manager and team for various levels of promotion and other support, and arrange distribution via a ‟label services” provider.

            Providers offer three broad deal structures to artists:

            • traditional recording agreements with the Majors or independent labels offering high-touch (i.e. with significant artist support) A&R, marketing and promotion, and distribution services, where the artist agrees to long-term commitments, and sometimes assigns their copyright for an extended period or in perpetuity;

            • services deals with A&L service providers where an artist retains their copyright and receives marketing and A&R services, and

            • distribution-only agreements with DIY providers.

            AWAL is an example of an A&L provider with a tiered offering: AWAL Core, where artists join AWAL Core either by direct referral or, more commonly, following submission of their music to AWAL’s online DIY platform; AWAL+, in which select AWAL Core members are ‟upstreamed” based on the number of their played streams, other factors and the judgment of AWAL’s expert team; and AWAL Recordings, which is a service designed to support a select group of established and developing artists and provides a customised high-touch service (i.e. with significant artist support) via elevated funding, digital marketing support, press and radio promotion, sync licensing, physical distribution and local marketing plans in international territories.

            The Parties also overlap in the provision of neighbouring rights administration services. Neighbouring rights entitle performing artist and those who own copyright in the related sound recording to compensation for the public use of the recording. Artists and copyright owners collect royalties from Collective Management Organisations (‟CMOs”) directly, or use the services of neighbouring rights collection suppliers such as KNR, which collect neighbouring rights royalties from CMOs on their behalf.

            The Parties submitted that Sony’s publishing arm, Sony Music Publishing, has no material market presence in supplying neighbouring rights administrative services. Also, the CMA’s phase 1 decision noted that there were a number of other close competitors to KNR operating in the UK. For these two reasons, the CMA found, at phase 1, that the Acquisition did not give rise to a realist prospect of a SLC. The CMA confirmed, in the Report, that it did not investigate the supply of neighbouring rights administration services as part of its phase 2 investigation.

            4.2. Relevant merger situation

            The CMA decided that the Acquisition had created a relevant merger situation, within the meaning of the Act, because (i) as a result of the Acquisition, the enterprises of Sony (including SME), AWAL and KNR had ceased to be distinct, and (ii) the Parties overlapped in the wholesale distribution of recorded music in the UK, with an estimated (by the Parties) combined share of supply of 20 to 30 percent, and therefore the share of supply test was met.

            Then, the CMA applied the SLC test, which involves the comparison of the prospects for competition with the merger, against the competitive situation without the merger. The latter is called the counterfactual. In the Report, the CMA sets out that the counterfactual is that AWAL would most likely have continued to supply services to both artists and labels and to compete in a similar way as prior to the Acquisition, with a focus on improving the profitability of the business but would not have been likely to materially expand its label business within the next two to three years. In the counterfactual, the CMA adds, Sony would be most likely to have continued to compete in a similar way as prior to the Acquisition, and would most likely provide high-touch services to artists as it did, prior to the Acquisition; and would make ongoing efforts to expand its artist services offering in addition to continuing its label services through the Orchard.

            In the Report, the CMA explains that it assessed two theories of harm:

            • the first concerns a loss of current and potential (future) competition in the supply of A&L services. This is a theory of harm arising from horizontal unilateral effects concerning in particular the loss of potential (future) competition from the future growth of AWAL and The Orchard in A&L services, including the possible further diversification of The Orchard and AWAL within artist services and label services respectively, and

            • the second concerns a loss of current competition and potential (future and dynamic) competition in the supply of high-touch services to artists. This theory of harm considers the impact of the loss of competition between AWAL Recordings and SME on competition in the supply of services to artists. The CMA considered the extent of current and potential (future and dynamic) competition between AWAL Recordings and SME and, in particular, the impact on SME or AWAL’s high-service tier offering which combines non-traditional contracts and high-touch services to artists. The CMA’s assessment considered the extent to which this offering had been, and was likely to continue to be, an important competitive constraint on SME, as well as the extent of the remaining current and future constraint from other A&L providers, independent labels and other types of Providers.

            In relation to the first theory of harm, based on the loss of current and potential (future) competition in the provision of A&L services, the CMA concluded that The Orchard and AWAL did not currently compete closely in the provision of A&L services, due to their different areas of focus on label and artist services respectively, and due to the constraints from other competitors (such as ADA, Virgin, Ingrooves, Believe, PIAS, Empire and FUGA). Accordingly, the CMA decided that the Acquisition had not resulted, and may not be expected to result, in a SLC due to a loss of current and/or future competition in the supply of A&L services in the UK.

            With respect to the second theory of harm, relating to the loss of current and potential (future and dynamic) competition in the supply of high-touch services to artists, the CMA considered that AWAL Recordings’ business model faced some challenges regarding its sustainability. As such, AWAL Recordings would not have materially improved its competitive offering absent the Acquisition. Also, several other A&L providers offer non-traditional contracts and high-touch services to artist and some of these have growing market shares. A number of A&L service providers have credible expansion plans. In addition, the largest independent labels in the UK exert some current and ongoing constraints on the Parties. Considering the extent of the constraint from AWAL, which will be lost, and looking at the constraint from third parties in the round, the CMA concluded that the constraint from AWAL which will be lost is not significant because these third-party constraints are, in aggregate, sufficient to ensure that rivalry will continue to discipline the commercial behaviour of the Parties, post-Acquisition, in the supply of high-touch services to artists. Therefore, the CMA decided that the Acquisition had not resulted, and may not be expected to result, in a SLC as a result of a loss of current and/or potential (future and dynamic) competition in the supply of high-touch services to artists.

            To conclude its Report, the CMA set out that, while the Acquisition by Sony, through SME, of AWAL and KNR, had resulted in the creation of a relevant merger situation, the creation of that situation had not resulted, and may not be expected to result, in a SLC within any market or markets in the UK as a result of (i) a loss of current and/or potential (future) competition in the supply of A&L services, and (ii) a loss of current and/or potential (future and dynamic) competition in the supply of high-touch services to artists.

            5. Was such merger enquiry, and its outcome, fair, accurate and meaningful?

            In this post-covid economy, it is important that companies be able to restructure, divest and invest, in a fast, smooth and efficient manner, in particular to raise cash (and therefore avoid liquidation or winding up), and/or to refocus their businesses on ever-evolving key services and/or products. It’s a matter of survival.

            Therefore, it is commendable that the CMA struck the right balance, between:

            • interfering with the Acquisition, by taking seriously its concerns of a SLC which arose at phase 1 of the merger enquiry, and

            • letting Sony and Kobalt go through with the Acquisition, once suspicions of such SLC were cleared upon completion of phase 2 of the merger enquiry.

            Having reviewed the Report, and the 22 other documents relating to the merger enquiry published by the CMA on its site, I am convinced that the CMA performed an exhaustive, systematic, thorough and very well organised merger inquiry of the Acquisition.

            As mentioned above, I even think that the CMA’s final Report is so analytical and exhaustive, that it gives an excellent view and analysis of the current UK/global music streaming market, on a par, in quality, with the yearly IFPI’s global music report (which sells at a five-figure price now). The Report is educational.

            My concern, however, is that the outcome of the CMA’s merger enquiry reinforces the worrying trend of massive consolidation in the music industry, with the Majors making the bulk of the acquisitions of cash-strapped and intellectual property-rich music companies. This, in turn, means that end-customers of the Providers, i.e. the artists and labels, have fewer choices, in the market, for the distribution and monetisation of their songs.

            This point was made abundantly by Impala, the independent music companies association, in its response to the CMA’s issues statement, during the merger enquiry.

            Also, the Report needs to be read with a pinch of salt because the CMA received a low response rate to their questionnaires sent to customers, with nearly half of artists and labels contacted by the CMA not having any views about the Acquisition. Moreover, the CMA noted in its Report, with respect to the Providers contacted for input as part of this merger enquiry, that there was a lack of consistency across Providers as to whether different elements of their business are accounted for separately or combined. For example, AWAL’s figures included its DIY platforms, where other Providers did not (for example, Believe reported separately from its subsidiary TuneCore).

            To conclude, I think that the merger enquiry was fair, thoroughly performed, but not entirely accurate due to lack of factual and exact data. In terms of whether such merger enquiry is meaningful, it will definitely remain a landmark case for merger enquiries in the music industry for years to come, reviewed and studied by legal practitioners and law students around the world. However, I think that the outcome of this merger enquiry could have been more ‟pro-competition” in the music industry, by, for example, requesting from Sony a long-term commitment not to buy any other competitors of AWAL and The Orchard, in the future.

            Since the Acquisition, Kobalt, as it stands today (Kobalt Music Publishing and AMRA), was sold to US-based private equity firm Francisco partners, riding the wave of lush equity financing on the lookout for smart investments in the entertainment sector.

            Crefovi’s live webinar: CMA merger inquiry into Sony acquisition of Kobalt’s AWAL & KNR – 13 March 2023

            Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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              Freedom of speech in the creative industries: how did it all go so wrong?

              Crefovi : 09/02/2023 11:34 am : Art law, Articles, Copyright litigation, Employment, compensation & benefits, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Music law, Webcasts & Podcasts

              While cancel culture and culture wars are attacks on freedom of speech and freedom of press coming from the bottom, the virulence of the latest onslaught on freedom of the press and creative expression now comes from the top. States, government structures, public and private companies, oligarchs as well as other plutocrats are using all the legal tools in the box, and more, to silence, intimidate and neuter anyone who may as much as mouth a criticism about them, their behaviours, their actions and their track records. The creative industries are particularly targeted by these authoritarian top-down approaches and legal tactics to bland their creative outputs and works, despite the legal protections offered by copyright.

              1. A global context of seriously curbed free expression and free press

              In the aftermath of the COVID-19 pandemic, and in the midst of the thralls caused by the inflation crisis and recession, the population around the world, but the creative industries in particular, have seen many of their liberties curtailed, if not obliterated, in the last five years.

              In particular, the freedom of speech and the freedom of the press have all been extremely impacted, by the bullying, scaring and repressive tactics implemented by old – and dying – plutocratic, corrupted and totalitarian powers, economic entities, structures, regimes and governments.

              Indeed, the Index Index, a new pilot project and global index that uses innovative machine learning techniques to map the free expression landscape across the globe to gain a clearer country-by-country view of the state of free expression across academic, digital and media/press freedoms, has placed:

              • France in the second tier of its new global index of freedom of expression (2: ‟significantly open”);

              • the United States of America (‟USA”) in the third tier too, of its new global index of freedom of expression,

              with most countries in the world being in the 4: ‟partially narrowed” to 10: ‟closed” categories.

              China, Burma, Laos, Turkmenistan, South Sudan, Syria, Belarus, Cuba and Nicaragua are all ranked in this worst category 10.

              These very concerning rankings were confirmed by other indexes, such as:

              • the Economist’s Democracy Index 2022 (which ranked France and the UK as – just about – ‟full democracies” at ranks 22 and 18, respectively, and placed the USA as a ‟flawed democracy” at rank 30).

              2. How legal systems and tactics are used to silence the creative industries, via attacks on the freedoms of expression and the press

              2.1. Very wide – and widening – exceptions to freedom of speech in the French and UK statutory legal frameworks

              As explained in our 2020 article on cancel culture, while freedom of speech is enshrined in the French declaration of rights of the human being and citizen, dated 1789, in its article 11 (‟free communication of thoughts and opinions is one of the most precious rights of the human being: any Citizen may therefore speak, write, print freely, except where he or she has to answer for the abuse of such freedom in specific cases provided by law”), many specific cases where freedom of speech is curtailed, are also enshrined, under French law.

              These statutory limits and exceptions to freedom of expression include:

              • Law dated 1881 on the freedom of the press which, while recognising freedom of speech in all publication formats, provides for four criminally-reprehensible exceptions, which are insults, defamation and slander, incentivising the perpetration of criminal offences, if it is followed by acts, as well as gross indecency;

              • Law dated 1972 against opinions provoking racial hatred, which – like the four above-mentioned exceptions, is a criminal offence provided for in the French criminal code;

              • Law dated 1990 against revisionist opinions, which is also a criminal offence in order to penalise those who contest the materiality and factuality of the atrocities committed by the Nazis on minorities, such as Jews, homosexuals and gypsies before and during world war two, and

              • Law dated July 2019 against hateful content on internet, which provisions (requiring to remove all terrorist, pedopornographic, hateful and pornographic content from any website within 24 hours) were almost completely censored by the French constitutional council as a disproportionate infringement to freedom of speech, before entering into force in its expurgated finalised version later on in 2019.

              Since 2020, many more laws have been promulgated, in France, in order to kill freedom of speech and freedom of the press, by legitimating the use of artificial intelligence algorithms to collect, gather and process algorithmically personal data and content, to police speech and the media. This ‟total information awareness” (‟TIA”) empowers governments, tech companies and private surveillance companies into implementing surveillance capitalism, enshrined in new laws, such as, for example, the law relating to global security adopted in France on 25 May 2021. Because of this new law, it has now become a crime punishable by five years of prison and a Euros 300,000′ fine, to broadcast, by any means, the face or any other identification element of a member of the French police forces acting within the scope of a police operation. This new law is extremely detrimental to people who live in/go to France, since taking smartphone pictures and videos of French assaulting police officers (an occurrence which is extremely common, in France), while these assaults are occurring, was the only way to gather evidence of French police violences and acts of harassment. Indeed, nobody in their right mind wants to testify in court and/or at a police station that they witnessed someone beaten up by French police forces, in the middle of the street and/or in the privacy of their own homes, for fear of personal security jeopardy and ongoing acts of vendetta and reprimand by French policemen and their top brass.

              On the other side of the Channel, the legal framework around freedom of speech is no panacea either. Freedom of expression is usually ruled through common law, in the UK. However, in 1998, the UK transposed the provisions of the European Convention on human rights – which article 10 provides for the guarantee of freedom of expression – into domestic law, by way of its Human rights act 1998.

              Not only is freedom of expression tightly delineated in article 12 (Freedom of expression) of the Human rights act 1998, but there is a broad sweep of exceptions to it, under UK common and statutory law. In particular, the following common law and statutory offences, narrowly limit freedom of speech in the UK:

              • threatening, abusive or insulting words or behaviour intending or likely to cause harassment, alarm or distress, or cause a breach of the peace (which has been used to prohibit racist speech targeted at individuals);

              • sending any letter or article which is indecent or grossly offensive with an intent to cause distress or anxiety (which has been used to prohibit speech of a racist or anti-religious nature, as well as some posts on social networks), governed by the Malicious communications act 1988 and the Communications act 2003;

              • incitement (i.e. the encouragement to another person to commit a crime);

              • incitement to racial hatred;

              • incitement to religious hatred;

              • incitement to terrorism, including encouragement of terrorism and dissemination of terrorist publications;

              • glorifying terrorism;

              • collection or possession of a document or record containing information likely to be of use to a terrorist;

              • treason including advocating for the abolition of the monarchy or compassing or imagining the death of the monarch;

              • obscenity;

              • indecency including corruption of public morals and outraging public decency;

              • defamation and loss of reputation, which legal framework is set out in the Defamation act 2013;

              • restrictions on court reporting including names of victims and evidence and prejudicing or interfering with court proceedings;

              • prohibition of post-trial interviews with jurors, and

              • harassment.

              Lately, the UK government has also introduced in parliament the ‟Online safety bill” which proposes to hand to the UK’s communication regulator, Ofcom, the power to identify ‟lawful but harmful” (sic) content and punish social networks that fail to remove it. While these proposals to regulate social media are deemed to be a ‟recipe for censorship” by campaigners, the Bill passage is following its course in parliament, and is currently at the ‟Committee stage” in the House of Lords, with a view of obtaining royal assent this year, in 2023.

              2.2. The use of rap lyrics as legal confessions and evidence in court to ‟put away” and silence artists

              Always imaginative and tactically astute, criminal prosecutors and criminal attorneys around the world are using the lyrics and other creative output of artists and musicians as evidence in criminal cases, to put them in jail and stop them from expressing any of their ideas and views.

              Rappers in particular, whose lyrics are usually punchy, on point political commentaries and frank assessments of where respect of civil liberties is at in any society (remember ‟Fuck da police” from NWA released in 1988?), are viciously targeted by these legal proceedings’ tactics.

              For example, in the USA, this distorted and twisted use of rap lyrics as legal confessions in court is so widespread that:

              • another similar bill is under consideration in the state of New Jersey, and

              • the ‟Restoring Artistic Protection Act” (‟RAP”) was introduced in the US congress in 2022, in order to achieve something similar on a US-wide basis.

              In Europe, rappers are also being systematically neutered by using criminal proceedings against them.

              In the UK, Music Week reported that the UK rap star Digga D, who achieved a N. 1 album in April 2022, faced legal challenges to his career including a Criminal Behaviour Order, following criminal convictions and spells in prison. In recent years, UK drill music, a growing sub-genre of UK rap, has increasingly used in the courtroom as evidence of bad character, with the prosecution engaging police officers – who are notably not drill ‟experts” to decode slang-heavy lyrics for the court. In some cases, the videos presented as evidence of gang involvement and violent disposition pre-date the alleged offence by several years.

              France and its police forces, who have always had a difficult relationship with the rap genre and their authors, i.e. minorities from ethnic backgrounds (check ‟La Haine” to get a feel), have, also, clamped down on rap lyrics which may in any way challenge the French establishment and status quo.

              In particular, in relation to Franco-Italo-Senegalese rapper, Freeze Corleone, who was not only criminally indicted by the very controversial French minister of the interior, Gerald Darmanin – who was himself under criminal investigation for sexual coercion, harassment and misconduct in 2009, and then again between 2014 and 2017 – for provoking racial hatred and racial slander, upon the release of his first album ‟La Menace Fantôme” (‟LMF”), but whose songs were (unsuccessfully) requested to be pulled off from all streaming platforms such as YouTube, Spotify, Deezer, by the French government. As a result, Freeze Corleone – who, surprisingly, is still not in prison, probably because he resides in Senegal, rather than France – was dropped by his original label, Universal, and, more recently, by BMG, which forced him to self-release his third album ‟Riyad Sadio”.

              27-year-old stalwart French rapper, Moha La Squale, is currently rotting in prison, for breaching his ‟judicial control” (‟contrôle judiciaire”, i.e. the right to stay outside jail, pending the occurrence of a criminal court case) in June 2022. While Mohamed Bellahmed is certainly no angel, as he was indicted for alleged violences and sexual assault on several of his ex-girlfriends, it is quite obvious that the French government and judiciary are mostly concerned about his rap lyrics and videos, which one can only describe as eulogies to recreational drug use (‟Amsterdam”) and drug dealing (‟Ca débite”).

              2.3. SLAPP lawsuits to censor, intimidate and silence investigative journalists and authors

              Another institutionalised legal tactic to kill freedom of speech and freedom of the press are Strategic Lawsuits Against Public Participation (‟SLAPP”), especially popular – and effective – in the UK.

              Very prized by Russian oligarchs and other plutocrats, SLAPPs have – and still are – routinely lodged by mercenary law firms, such as Osborne Clarke, Mishcon de Reya, Schillings, Harbottle & Lewis, CMS, Carter Ruck and Boies Schiller Flexner, to censor, intimidate and silence critics by burdening them with the cost of a legal defence, until they abandon their criticism or opposition.

              In a typical SLAPP, the claimant does not normally expect to win the lawsuit. Their goals are accomplished if the defendant succumbs to fear, intimidation, mounting legal costs, or simple exhaustion and abandons the criticism. In some cases, repeated frivolous litigation against a defendant (usually an investigative journalist) may raise the cost of directors’ and officers’ liability insurance for that party, interfering with an organisation (i.e. the publisher or journal)’s ability to operate. A SLAPP may also intimidate others from participating in the debate.

              A common feature of SLAPPs is forum shopping, wherein claimants find courts that are more favourable towards the claims to be brought than the court in which the defendant (or sometimes claimants) live.

              The UK is just such a jurisdiction.

              For example, a 2021 libel action brought against Big 5 publisher, HarperCollins, and the author and journalist Catherine Belton, over the latter’s book, ‟Putin’s people”, was a SLAPP. Despite good prospects of winning the legal case brought by several Russian oligarchs, including Roman Abramovich, Ms Belton was left facing legal costs of GBP1.5 million. She settled the claims against her. Her publisher agreed to make edits to the book and a charitable donation, after agreeing that some of the information about one of the oligarchs was, allegedly, ‟incorrect” (sic).

              The rise of SLAPPs got so bad and stifling on civil liberties, in the UK, that the Solicitors Regulation Authority (‟SRA”) launched a crackdown on SLAPPs, saying it believed that some British lawyers were pursuing ‟abusive litigation” designed to ‟harass or intimidate” their opponents into silence. It set out a list of behaviour that could result in disciplinary measures. The SRA said it would take action if it found lawyers sending threatening letters advancing meritless claims or pursuing litigation that was ‟bound to fail”. The SRA has 29 probes underway based on complaints and tip-offs, and warned lawyers that ‟representing your client’s interests does not override wider public interest obligations and duties to the courts”. A model anti-SLAPP law was drafted by the UK anti-SLAPP Coalition but not much has come of it, yet.

              Of course, as one would expect, the USA has had a flurry of cases which are notable SLAPPs.

              Even French courts are routinely seeing SLAPPs in their dockets. For example, in 2010 and 2011, Mathias Poujol-Rost, a French blogger, was summoned twice by the communication company Cometik (NOVA-SEO) over exposing their quick-selling method and suggesting a financial compensation for his first trial. The company’s case was dismissed twice, but appealed both times. On 31 March 2011, the company won in court:

              • the censorship of any reference (of its name) on Mathias Poujol-Rost’s online blog;

              • Euros 2,000 in damages;

              • the obligation to publish the judicial decision for 3 months on Mr Poujol-Rost’s blog;

              • Euros 2,000 as procedural allowance, and

              • all legal fees for both first and appeal instances.

              SLAPPs are becoming so concerning that the European Commission has drafted a proposed directive to tackle abusive lawsuits against journalists and human rights defenders. It enables judges to swiftly dismiss manifestly unfounded lawsuits against journalists and human rights defenders, as well as establishing several procedural safeguards and remedies, such as compensation for damages and dissuasive penalties for launching abusive lawsuits.

              The short-term outlook is really troubling, as far as protecting freedom of speech and creative expression are concerned. Only decisive technological, legal, enforcement and political action from the people, and their future representatives, may reverse the course of these extremely worrying trends of annihilating freedoms of expression and of the press, coming from both the top, and the bottom. Let’s watch the space and see. I suspect, though, that the next few years will see violent riots, guerrillas and civil wars erupt, as the people grabs back power, and reclaims agency – as well as its civil liberties -, the hard way because obsolete structures, corrupt governments, the patriarchy and rotten individuals and companies refuse to relinquish their autocratic power and plutocratic control.

              Crefovi’s live webinar: Freedom of speech in the creative industries – 15 February 2023

              Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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                Private equity goes to Hollywood: when investing in media content production became hype

                Crefovi : 28/12/2022 8:00 am : Articles, Banking & finance, Capital markets, Emerging companies, Entertainment & media, Information technology - hardware, software & services, Internet & digital media, Mergers & acquisitions, Private equity & private equity finance, Real estate, Sports & esports, Webcasts & Podcasts

                Even in a downturn, private equity money picks Hollywood as a smart bet. Investment firms now view star-driven production banners (and major soundstages) as a long-term play in a crowded content marketplace. How did this happen? Why the sudden change of heart, since finance people had previously always viewed investing in media content production a very risky bet, at best? Is this ‟all in” investment strategy in media content production, implemented by private equity funds, financially sound?

                1. Private equity buys stakes in media content production entities

                Private equity (‟PE”) is doubling down on Hollywood.

                After dipping their toes in the water through the talent agencies (TPG owns a majority stake in CAA, while Silver Lake is the largest external shareholder in Endeavor), investment firms are on a spending spree, snapping up stakes in production entities, or financing new vehicles like former Disney execs Kevin Mayer’s and Tom Stagg’s Candle Media to do the buying for them. Candle Media, which is backed by billions of dollars from Blackstone, has already purchased stakes in Reese Witherspoon’s Hello Sunshine (for a reported USD900 million) and Will and Jada Pinkett-Smith’s Westbrook Media, and has bought outright ‟Cocomelon” owner Moonbug and ‟Fauda” producer Faraway Road.

                In June 2022, Shamrock Capital invested USD50 million into Religion of Sports, the studio co-founded by Gotham Chopra, Tom Brady and Michael Strahan.

                On 13 December 2022, The Hollywood Reporter reported that Redbird Capital Partners formed a joint-venture with Abu Dhabi-based private investment fund, International Media Investments, pouring an initial committed capital of USD1 billion into the new venture, called RedBird IMI, which will see former CNN and NBCUniversal CEO Jeff Zucker acquiring and building companies in the sports, media and entertainment sectors. Both companies are already heavily invested in the media content production sector, with RedBird owning stakes in entertainment ventures like diversified content-production studio Skydance Media, LeBron James’ SpringHill as well as Ben Affleck’s and Matt Damon’s Artists Equity. IMI, meanwhile, owns a stake in Euronews and Sky News Arabia (a joint venture with Sky News).

                Village Roadshow and Chernin Entertainment, sensing opportunity, have also begun to explore their options. The North Road Co., Peter Chernin’s production roll-up, is being financed by USD500 million from Providence Equity Partners and USD300 million in debt from Apollo through its managed affiliates. Chernin said, in July 2022, that he is now in the market for further acquisitions, leveraging the private equity cash to buy ‟pure-play” companies that focus solely on creating content.

                What is causing the gold rush? Look no further than the annual ‟Peak TV” data released by FX Networks in January 2022. The data showed that in 2021, broadcast and cable channels, as well as streaming services, presented 559 English-language scripted series, a new record, and a 13 percent jump from pandemic-impacted 2020.

                There is a high demand for supply of unique high-quality content to drive new eyeballs and subscriptions, and, at the same time, a lot of companies still need to program linear TV channels.

                Therefore, the bet from private equity is that original programming, especially programming from blue-chip talent or independent studios, will not abate anytime soon, and may even continue to increase as streaming services seek to stand out, and compete with each other, in this era of streaming consolidation. In other words, ‟Peak TV” has not peaked yet.

                2. Infrastructure purchases: soundstages and physical studios are feeling the love too!

                The thesis that demand for content will continue to surge has also led to investment firms buying up soundstages and physical studios. Los Angeles-based real estate investment and operating company Hackman Capital has purchased Kaufman-Astoria Studios and Silvercup Studios in New York, as well as Los Angeles’ CBS Studio City lot, and has purchased, or is developing, studio space in Scotland and Toronto, among other places.

                Meanwhile, TPG purchased Studio Babelsberg in Germany and Domain Capital Group is developing a new studio in Georgia.

                The private equity firms’ logic, with the studio and soundstage buys, is that the real estate will appreciate in value, while the non-stop demand in film and TV productions provide steady and stable cashflows.

                3. Private equity on the Croisette: investors are bullish on indie films, particularly in Europe

                Within this broader trend of so-called ‟smart money” placing its bets on content, the 2022 Cannes film market was the stage set for some of the biggest players packaging projects and inking deals, backed by private equity groups, last May.

                Indeed, very prominent on the Croisette were European mini-majors Leonine and Mediawan – both bankrolled by KKR – and Anton, the Anglo-French producer/financier/sales outfit run by Sebastien Raybaud, which has tapped private equity to fund productions such as Gerard Butler’s actioner ‟Greenland” and Cannes market projects ‟Canary Black” (a spy thriller from ‟Taken” director Pierre Morel starring Kate Beckinsale) and ‟Femme” (a LGBTQ+ revenge thriller featuring George MacKay and Nathan Stewart-Jarrett).

                Meanwhile, the teams from Vine Alternative Investments portfolio companies Village Roadshow, EuropaCorp and Lakeshore Entertainment were all sharing a tent in Cannes, last May 2022.

                Private equity investments are coming to Europe, riding the wave of European content consumption growth, driven by the explosion in streaming services and platforms offered to European customers, as well as the mandatory European Union (‟EU”) content quotas for SVOD platforms (imposing that 30 percent of all content on streaming services must be European-made) which guarantee demand for original, home-grown films and series which most streamers will be unable to fill on their own.

                So the opportunities for independent studios, based in Europe, with access to original intellectual property and private equity capital, have never been greater.

                Instead of inking an exclusive output deal with a single streamer – as Steven Spielberg’s Amblin Partners, Spike Lee’s 40 Acres and a Mule Filmworks, and Vanessa Kirby’s Aluna Entertainment have all done with Netflix – many creatives are now using private equity’s backing to stay independent and sell their wares to the highest bidder, in particular at film markets like Cannes.

                It is telling that the new Cannes Film Festival president, from 2023 onwards, will be Iris Knobloch, the head of I2PO, a private equity-backed Special Purpose Acquisition Company (‟SPAC”) set up in 2021 by François Pinault (of Kering fame), Iris Knobloch and Matthieu Pigasse (who owns many media outlets in France, such as Le Monde, Les Inrockuptibles, Radio Nova and Mediawan) for the purpose of acquiring entertainment companies across Europe.

                4. The distribution and downturn risks: heavy reliance on streamers and low valuations

                However, even flush with all their new PE cash, the indies – and other media content producers – remain dependent on the global streamers for distribution.

                Also, it is a known fact, in the movie business, that it is never been possible to scale a content business if you do not own your distribution. If streamers move away from licensing films and shows from third parties, in favor of producing the bulk of their content in-house, or if the influx of new private equity capital inflates the cost of production beyond profitability (due to fast-rising interest rates and heavy reliance on debt financing), the current growth market for indies and other media content producers, and their appeal as PE investments, may vanish.

                Talent like Witherspoon, Smith and James are on board with the private equity cash, knowing that their financial backers have deep pockets and are willing to sell to the TV channel or streaming service willing to cut the best deal.

                By contrast, every entertainment conglomerate is increasingly creating films and TV shows first and foremost for their owned services. Not only that but, with fears of a recession mounting, companies like Netflix, Warner Bros. Discovery and Disney have indicated that they will be more prudent with their content investments.

                However, their desire to work with name-brand talent or producers remains, ensuring that firms like SpringHill and Hello Sunshine stay in demand.

                Meanwhile, a potential economic downturn could force media firms to take a close look at their valuations. For companies that do not necessarily need the capital and are selling minority stakes, the lower valuations justified by the current market may not meet expectations, leading some founders to wait things out until conditions improve.

                But a downturn also could bring opportunities of its own: even if private entertainment and production companies get spooked by low valuations, the public markets could provide them with new opportunities. Could, for example, Lionsgate be in play once it completes its spinoff of Starz?

                This is the first time in at least five years where there are real opportunities in the public markets. For firms spending big to gobble up content and production companies, it could lead to bargains that are hard to pass up.

                Crefovi’s live webinar: Private equity goes to Hollywood – 4 January 2023

                Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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                  Loot boxes in video games: self-regulation or legislation, that is the question

                  Crefovi : 30/11/2022 2:25 pm : Antitrust & competition, Articles, Entertainment & media, Gaming, Information technology - hardware, software & services, Internet & digital media, Sports & esports, Webcasts & Podcasts

                  On the back of the Star Wars Battlefront 2 debacle in 2017, many European regulators, including the UK and French ones, have started to take an increasingly scrutinising and judging stance, on loot boxes offered for purchase to children and young persons who play video games. Why are loot boxes potentially dangerous? What are the UK and French regulators – and other governments in the world – doing, to protect vulnerable players from these random reward mechanisms?

                  1. What are loot boxes?

                  1.1. Definition

                  Loot boxes are a relatively recent phenomenon, entering discourse around 2006. There is evidence that the use of the term ‟loot box” developed from the more general phenomenon of ‟Random Reward Mechanisms” (‟RRMs”) that have been used in games since the early 1990s. RRMs operate similarly to other forms of chance, such as collectible cards and Kinder eggs, and can be traced back to 19th-century cigarette cards.

                  RRMs are based on the principle of desirable ‟free” products contained within another product which is sold and the nature of ‟the game” relies on blind purchases of random items. Using collectible cards as an example, buyers continue to pay for cards in the hope of finding the particular cards they want. The market for these goods operates with information asymmetry: sellers control availability, do not publish probability statistics and capitalise on buyers’ desires.

                  While these antecedents of loot boxes are established and accept randomness as an element of play in physical and virtual games of chance, research indicates that ‟video games have been putting random items in treasure chests for decades”.

                  Therefore, the randomness of reward is the key distinguishing feature of loot boxes around which all definitions agree.

                  In terms of distinguishing and classifying loot boxes, the division centres on the mechanism of reward. Key distinguishing factors in definitions are:

                  • type: cosmetic (customisation, eg. looks of the player’s character or avatar) versus integral/game improvement (eg. tools, weapons, maps, ‟super powers”);

                  • currencies used: virtual versus real-world money (with the cost of loot boxes varying from a few Euros (1 to 2 Euros) to up to 100 Euros or more);

                  • ubiquity: popular versus niche;

                  • access: reward for playing the game well or a reward for sustained gameplaying (with the cost of loot boxes ranging from some gameplay – such as finishing a level, for example – to heavy – several hours – and often repetitive gameplay – so-called grinding), and

                  • exclusiveness: the player has no other way of acquiring items other than spending money.

                  RRMs have been conceptualised in four types, depending on the Resources players tender versus the potential Reward. These may be either (I) Isolated from, or (E) Embedded in the real-world economy. This leads to four types of loot boxes:

                  • I-I non-purchasable and non-sellable, RRMs in single-player games (eg. Diablo I);

                  • I-E non-purchasable but sellable, RRMs that can be traded (e.g. Diablo III);

                  • E-I purchasable but non-sellable, RRMs that can be bought but not traded (eg. Overwatch);

                  While some researchers consider that only E-E type loot boxes can be considered gambling, others, like Leon Xiao, have argued against that position, pointing towards the case. In this case, a third-party website meant that game currencies and rewards that were Isolated by design, could in fact be traded (making them effectively Embedded in this case).

                  So loot boxes are a form of microtransactions where they are available as an in-game purchase. However, loot boxes are only one part of the in-game purchase market. Their unique element is the change mechanism. For other forms of in-game purchases, players will know what item they will receive in advance of purchase.

                  1.2. Scale and scope of the market for loot boxes and microtransactions

                  In 2021, there were 2.96 billion gamers globally, generating 2020 revenues of USD189.3 billion from the top five companies (Tencent, Sony, Microsoft, Apple and Activision Blizzard), accounting for 43 percent of global games revenues. Video games is one of the fastest-growing entertainment sectors, with predictions of a compound annual growth rate of around 10 percent, over 2022-2030.

                  In this context, loot boxes and microtransactions are highly lucrative. Revenues generated from loot boxes used in video games will exceed USD20 billion in 2025, up from an estimated USD15 billion in 2020.

                  No wonder large studios (eg. Activision Blizzard and Electronic Arts) have patented their loot box mechanisms to combat imitation!

                  As explained in our article on Microsoft’s acquisition of Activision Blizzard, gamers access video games three ways:

                  • they can purchase the game for a set price (that premium purchase price model is the most traditional business model, still used for the Grand Theft Auto V and Assassin’s Creed franchises);

                  • they can subscribe, on a monthly (sometimes yearly) basis for access to a game (Blizzard Entertainment’s World of Warcraft is perhaps the most successful game that utilises this subscription model); or

                  • they download games which are free to play, but may have to execute microtransactions in order to obtain discrete pieces of content (for example, a player may spend a dollar on a new sword for a character, or on a vanity item such as changing the color of their character’s hair, like in the most popular PC game in the world – Riot Games’ League of Legends – which sells a variety of items that can customise the base game, which, itself, is given away for free).

                  It is in the third and last scenario, the freemium model of distribution, built round microtransactions as a revenue stream, that loot boxes thrive. The game is downloaded from digital platforms such as the App Store, Google Play or Steam, with most players spending no money at all to play the game. Loot boxes are inserted into freemium games as a mechanism for in-app purchases. Even if players do not wish to access loot boxes, they cannot avoid exposure to these features of the game: they will constantly be reminded of the opportunity to avail themselves of the random rewards contained in loot boxes.

                  1.3. Are loot boxes included in the definition of ‟gambling‟ under the UK gambling act 2015 and French law dated 12 May 2010?

                  No, loot boxes are not legally considered gambling in the United Kingdom (‟UK”) and France.

                  Concerns have been raised about whether the purchase of loot boxes is like a ‟game of chance” and therefore a form of gambling. Particular concerns have been raised about loot boxes within video games targeted at children or young people.

                  In 2016, the UK Gambling Commission identified loot boxes as a potential risk to children, as part of a wider review of gaming and gambling. The Gambling Commission subsequently stated that whether it has powers to intervene in the loot box market is based on a judgment of whether a particular activity is considered a game of chance played for ‟money or money’s worth” under relevant provisions of the UK gambling act 2005. The commission said that ‟where in-game items obtained via loot boxes are confined for use within the game, and cannot be cashed out, it is unlikely to be caught as a licensable gambling activity. In those cases, our legal powers would not allow us to step in”.

                  The same conclusion was reached by French Autorité de régulation des jeux en ligne” (‟ARJEL”), in its 2017-2018 activity report, concluding that loot boxes (except E-E type loot boxes, such as in games PlayerUnknown’s Battlegrounds, Team Fortress 2 and Counter-Strike: Global Offensive, which had been investigated already, and largely resolved by ARJEL, other regulators and the game industry) were outside the scope of French law of 12 May 2010 relating to the opening of competition and regulation in the sector of online money and chance games.

                  So, for French and UK gambling regulators, the games that are most commonly mentioned in the debate on loot boxes (Overwatch, Star Wars Battlefront 2 and FIFA Ultimate Team) belong to the E-I type (purchasable but non-sellable RRMs) and thus do not meet the legal definition of gambling.

                  Not every European country has taken this route, though, with Belgium and the Netherlands ruling that the sale of loot boxes in certain circumstances is a form of gambling under their national gambling legislation. Slovakia also considers loot boxes to be gambling under its national legal definition but has yet to take regulatory action. More recently, Spain has committed to introduce new legislation to restrict the sale of loot boxes.

                  Interestingly, the European Union (‟EU”) institutions, and, in particular, the European Commission, declined to take any significant targeted action to address the topic of loot boxes because the EU has little competence in the area of gambling, as this competence mainly lies with EU member-states.

                  So, in France, the UK, but also Denmark, Finland, Sweden, and the other EU member-states (except Belgium, The Netherlands, Slovakia and Spain) loot boxes are regulated by general national legislation on contracts and consumer protection.

                  2. Why are loot boxes an issue, as it stands?

                  A scandal erupted in November 2017, when game studio EA suspended microtransactions in Star Wars Battlefront 2 following a furore over loot boxes, hours before the game’s launch. While other game developers and publishers had been embroiled in the controversy over loot boxes, EA took the brunt due to the imbalance potentially caused by randomised loot, in this competitive multiplayer shooter game.

                  This is when more and more national gambling authorities and governments started to take the issues potentially caused by loot boxes really seriously, and launched investigations.

                  Moreover, a study published in 2020 surveyed the 100 top-grossing games on the Google Play store and App Store. It found that 58 percent of the Google games, and 59 percent of the iPhone games, contained loot boxes. Of those that contained loot boxes, 93 percent of the Google games, and 95 percent of the iPhone games were available to children aged 12 and over. So, loot boxes are an extremely common occurrence, in freemium games.

                  Also, loot boxes are becoming even more appealing to players because premium fashion brands and luxury labels, such as Gucci, Burberry and Nike – are partnering up with video games publishers to provide even more attractive and hype cosmetic and avatar-customisation options to players. So this makes it even more difficult to resist, for fashion conscious youth, opportunities to purchase loot boxes containing fashion designers’ items, on their favourite game.

                  In September 2019, the UK House of Commons Digital, Culture, Media and Sport Committee (‟DCMS”) published its report ‟Immersive and addictive technologies”. The report detailed financial harms associated with online gaming, including gambling-like behaviours which can affect some users, especially those in vulnerable age groups like children and young people. DCMS heard evidence that there were ‟structural and psychological similarities between loot boxes and gambling”. The report recommended that loot boxes that contain the element of chance should not be sold to children playing games, and instead in-game credits should be earned through rewards won through playing the games.

                  3. What are the UK and France doing to limit the damage caused by loot boxes?

                  This prompted the UK government to launch a call for evidence in September 2020, and the wider review of the gambling act 2005 in December 2020. The consultation outcome of the call for evidence was released in July 2022 with the main message conveyed by the UK government to the games industry being that it must self-regulate and take action on loot boxes, or risk future legislation. In a typical Tories’ move, the conclusion of the consultation was that improved industry-led protections were the best approach, over regulation under an amended version of the gambling act 2005 (which would classify loot boxes as gambling) and other statutory consumer protections. Under these improved industry-led protections, industry trade body Ukie and its members must go further, and more should be done across game platforms and publishers to mitigate the risk of harm from loot boxes, while purchases of loot boxes should be unavailable to all children and young people unless and until they are enabled by a parent or guardian.

                  So the view of the DCMS, set out in its July 2022 conclusion to the call for evidence, is that it would be premature to pursue legislation with regards to loot boxes without first pursuing enhanced industry-led protections. And convene a technical working group to pursue these enhanced industry-led measures to mitigate the risk of harms from loot boxes in video games. The technical working group would include representatives of games companies and platforms, government departments and regulatory bodies.

                  Among the members of this technical working group is above-mentioned Leon Xiao, a PhD fellow focusing on loot boxes and video game law.

                  In a seminal piece, L. Xiao criticises Belgium’s loot box ban as ineffective, because, even though Belgium technically ‟banned‟ loot boxes using its gambling law in 2018, 82 percent of the highest-grossing iPhone games on the Belgian App Store continued to monetise using loot boxes in 2022. This is because the Belgium regulator has not actively enforced the law due to a lack of resources and enforcement power. Therefore, any self-regulatory framework should be supported by effective enforcement mechanisms, with an independent body set up to review compliance actions by game publishers and hand down penalties (such as fines and financial penalties) in case of non-compliance. Funding for this enforcement task could be obtained through a mandatory levy on the gaming industry.

                  L. Xiao also suggests that the UK loot box self-regulation involve the creation of a ”code of conduct” within the meaning of Regulation 2(1) of the Consumer Protection from Unfair Trading Regulations 2008. This would imply that any failure to comply with verifiable self-regulatory commitments, explicitly set out in such code of conduct, by a signatory company, may be subject to legal proceedings. This combination of flexibility, industry commitment to self-regulation, and enforcement powers thanks to UK statutory regulations, would be ideal, according to L. Xiao.

                  Another tool to enhance self-regulation would be to require mandatory loot box probability disclosures, such as the ones required in China. Indeed, China has required video games platforms to disclose the probabilities of obtaining randomised items from loot boxes since 2017. Only 64 percent of games containing loot boxes disclose probabilities on the UK App Store, compared to 95.6 percent on the Chinese store. While Apple has some App Store Review Guidelines which set out that loot box probability disclosures must be made, it has not actively enforced this self-regulatory probability disclosure requirement. This should change according to L. Xiao and failing to disclose probabilities should cause the games to be removed from the store. Also, these probability disclosures should be sufficiently prominent and easily accessible to players, and the UK self-regulation measures should encompass industry-wide minimal standards that all companies must meet in this respect.

                  One self-regulatory measure that has been uniformly applied is PEGI’s ‟Includes paid random items” label. European video game content rating system provider PEGI would attach this to any games containing loot boxes to ‟provide additional information” to players and parents. But PEGI label seems ineffective because it does not inform players and parents as to exactly how the loot box mechanic can be identified so as to allow players and parents to avoid engaging with it. Therefore, an improvement would be to specifically describe the loot box mechanic in the game, and provide a choice in the options’ menu to turn the ability to purchase loot boxes on or off (potentially even with the default option set to off).

                  While the UK is attempting to find the best way to force the video games’ industry to self-regulate on loot boxes and microtransactions, and France has lost the plot on the subject entirely, Australia has filed a loot box bill on 28 November 2022, with its proposed legislation requiring games with loot boxes to be rated R18+ and carry warnings for parents, in order to keep children from purchasing and playing games with loot boxes.

                  This is a stark warning to video game companies that they must change their ways, quickly, in order to work with governments and, in particular, the UK government, to implement effective and strictly enforced self-regulating measures to avoid any further children’s and young persons’ psychological and financial exploitation via loot boxes. I am hopeful that game publishers have got the message since many large studios, such as Activision Blizzard, Electronic Arts, Ubisoft and First Touch Games, as well as trade association representing the UK’s game industry TIGA, submitted evidence to the above-mentioned 2020 call for evidence. Let’s watch the space and see whether video game companies are up to the challenge, and can come up with decisive self-regulatory measures, which will be enforced industry-wide, in the UK and beyond.


                  Crefovi’s live webinar: Loot boxes in video games – self-regulation or legislation? – 2 December 2022

                  Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!


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                    Film distribution media: what’s next to retain customers?

                    Crefovi : 13/10/2022 11:55 am : Antitrust & competition, Articles, Copyright litigation, Entertainment & media, Hostile takeovers, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Mergers & acquisitions, Technology transactions, Trademark litigation, Unsolicited bids, Webcasts & Podcasts

                    Film distribution remains inefficient and not user-friendly enough, despite the many disruptions caused by online piracy and the advent of film streaming. Is the outcome of the streaming wars going to bring more consolidation in film distribution? What about aggregating film streaming services together, to make them more affordable to end-users? Let’s explore.

                    1. Which distribution media exist for films?

                    Film distribution (also known as ‟film exhibition” and ‟film distribution and exhibition”) is the process of making a movie available for viewing by an audience.

                    This is usually the task of a professional film distributor, who would determine the marketing and release strategy for a movie, the media by which a film is to be exhibited or made available for viewing.

                    The film may be exhibited directly to the public through movie theatres, television or personal home viewing (including physical media, video-on-demande, download, television programs through broadcast syndication).

                    1.1. Movie theatres

                    The film industry was invented, at the end of the 19th century, when the Lumière brothers organised the first ever commercial and public screening of their ten short films in Paris, on 28 December 1895, which took place in the basement of the ‟salon indien du grand café” with Louis and Auguste Lumière’s ‟cinématographe”.

                    After that, and during the first decade of motion pictures, the demand for movies, as well as the amount of new productions and the average runtime of movies, became such, that it became viable to have theatres that would no longer program live acts, but only films.

                    Claimants for the title of the earliest movie theatre include the Eden Theatre in La Ciotat, France, where ‟L’arrivée d’un train en gare de la Ciotat” was screened on 21 March 1899.

                    In the United States of America (‟USA”), many small and simple theatres were set up, usually in converted storefronts. They typically charged five cents for admission, and thus became known as nickelodeons. They flourished between 1905 and 1915.

                    The design and technical sophistication of picture theatres developed and expanded, offering consumers more and more different types of venues in which to watch films, such as multiplexes and megaplexes, drive-ins, outdoor movie theatres, 3D movie cinemas, IMAX and Premium Large Format cinemas. Moreover, a new classification by the type of movies these theatres show was set up, as follows:

                    • first-run theatre: a cinema that runs primarily mainstream film fare from the major film companies and distributors, during the initial new release period of each film;

                    • second-run or discount theatre: a movie house that runs films that have already shown in the first-run theatres and are presented at a lower ticket price (also known as ‟dollar theatres” or ‟cheap seats”);

                    • repertoire/repertory theatre or arthouse: a theatre that presents more alternative and art films as well as second-run and classic films (often known as an ‟independent cinema” in the United Kingdom (‟UK”));

                    • IMAX theatre: this theatre can show conventional movies, but the major benefits of the IMAX system are only available when showing movies filmed using it (IMAX movies are often documentaries featuring natural scenery, and may be limited to a 45-minute length of a single reel of IMAX film).

                    1.2. Television

                    The second film distribution channel to have seen the light of day, was television (from the Greek word ‟tele” (far) and the Latin word ‟visio” (sight)) in the late 1920s. After several years of further development, the new technology started becoming marketed to consumers. After World War II, an improved form of black-and-white television broadcasting became popular in the UK and the USA, and television sets became commonplace in homes, businesses and institutions during the 1950s.

                    While television, or ‟TV” as it is also known, evolved from black-and-white, to color in the mid-60s, to digital in the late 2000s, to 3D from 2010 onwards and to smart television from 2015 onwards, various broadcast systems were used, and experimented with, as listed below:

                    • terrestrial television: programming is broadcast by television stations (channels), as stations are licensed by the governments of the countries they are located in, to broadcast only over assigned channels in the television band;

                    • cable television: a system of broadcasting television programming to paying subscribers via radio frequency signals transmitted through coaxial cables or light pulses through fiber-optic cables;

                    • satellite television: a system of supplying television programming using broadcast signals relayed from communication satellites, in which the signals are received via an outdoor parabolic reflector antenna usually referred to as a satellite dish and a low-noise block downconverter, and

                    • internet television (or online television): the digital distribution of television content via the internet as opposed to traditional systems such as terrestrial, cable or satellite, which covers the delivery of television series, and other video content, over the internet by video streaming technology, typically by major traditional television broadcasters.

                    1.3. Personal home viewing

                    Home video is pre-recorded media content sold, or rented, for home viewing.

                    The term originates from the Video Home System (‟VHS”) and Betamax era (mid 1970s), when the predominant medium was videotapes, but has carried over to optical disc formats such as DVD, Blu-ray and streaming media.

                    The home-video business distributes films, television series, telefilms and other audiovisual media in the form of videos, in various formats, to the public. These are either bought, or rented, and then watched privately in consumers’ homes.

                    Most theatrically released films are now released on digital media, both optical and download-based, replacing the largely obsolete videotape medium.

                    While DVDs remain popular in Asia, the Video CD format has gradually lost popularity since the late 2010s and early 2020s, when streaming media became mainstream.

                    The transition from disk-based viewing to a streaming culture is best illustrated by Netflix’s business case: Netflix used to have a DVD-by-mail service (which, in 2015, still served 5.3 million subscribers), before, and then while, expanding its streaming services (which, in 2015, had 65 million members).

                    Alongside early-entrant Netflix, the film streaming business counts the following streaming services as Netflix’s competitors:

                    • Streaming Video On-Demand service providers (‟SVoD providers”): subscription-based, or ad-based, online platforms which provide streaming video on-demand services to users, by allowing them to access, via streaming, videos without a traditional video playback device (such as a desktop client application) and the constraints of a typical static broadcasting schedule, such as Netflix, Amazon Prime, Hulu, Disney+, Peacock, HBO Max and Paramount+.

                    1.4. In-flight entertainment

                    In-flight entertainment refers to entertainment available to aircraft passengers during a flight, and is a popular way to watch films and other video entertainment, either via a large video screen at the front of a cabin section, or (more commonly) via personal television sets located in front of each passengers’ seat.

                    Other types of journey film watching facilities can exist on trains, cars, ferries, boats, hotels, space crafts, etc.

                    2. Which contractual models are used to distribute films?

                    First and foremost, let’s have a look at the various stakeholders involved in entering into distribution agreements:

                    • the owner, which is the person who, or legal entity that, owns the distribution rights (i.e. theatrical rights – referring to film screenings in cinemas -, TV rights and Video-on-Demand rights) to a film title, and

                    • the distributor which is the legal entity which will distribute the film title, in a defined territory, for a defined term, via a license, or an assignment, of the above-mentioned distribution rights, granted by the owner.

                    While the categorisation of contractual parties seems plain and simple, it is less often so, in practice. Many distributors find themselves dealing with a ‟producer” who neither owns, nor controls, the distribution rights.

                    Therefore, to identify the owner, a review of the chain of title (i.e. the process whereby the documentation that establishes proprietary rights in a film is reviewed in detail, in order to clarify who, exactly, owns such rights) must be performed.

                    Also, like producers, there are many different kinds of entities that go by the name of ‟distributors”, while they do not all have the same function or structure. That function or structure is critical for the owner to understand, as it will determine, among other things, the resources of the distributor, their business practices, and how many different parties are taking a piece of the revenues generated by the owner’s motion picture before any of it will come back to him/her.

                    As set out on the professional version of IMDB, when one opens the ‟Companies” dropdown menu to click on ‟Distributors”, one will find what appears to be an almost infinite number of companies, literally thousands of entities, that define themselves as ‟distributors”. This list of ‟distributors” can be sub-categorised as follows:

                    • major studios (or ‟majors” or ‟studios”), such as Warner Bros, Paramount, Universal, Disney, Fox and Sony Pictures, which, due to their size, can distribute directly (including via subsidiaries and affiliates) throughout (most of) the world – Their size typically makes the majors less flexible in their agreements, more likely to rely on precedent, and more concerned with their liability as the deep-pocketed party in any transaction, as well as with the release of ‟major” films (i.e. movies in the highest budget range, i.e. USD100 million and above) which they tend to be the exclusive distributors of;

                    • independent distributors (or ‟mini-majors”), such as Lionsgate, (now defunct) The Weinstein Company, STX, (now defunct) Broad Green, which, in the USA, maintain their own theatrical distribution (i.e. license their pictures to movie theatres and collect their share of box office receipts from cinemas), home video distribution (although physical distribution of DVDs may be serviced by a major) and license directly to VOD and television and, outside the USA, license their motion pictures territory by territory to local distributors, although some, like Lionsgate, may also have ownership interests in one or more of those foreign distributors as well;

                    • divisions of the majors, with their own personalities and histories, such as Universal-owned Focus, Sony-owned Screen Gems, Disney-owned Searchlight Pictures, Warner-owned New Line, which, in the USA, have access to their parent companies’ distribution operations, but typically administer their own marketing and, outside the USA, may be able to use the parent company output deals and other distribution advantages, and/or act as a foreign sales agent, licensing territory by territory;

                    • sales agents, such as FilmNation and XYZ Films, which, although technically not distributors (since they do not generally own the copyrights/distribution rights in the pictures that they license), are mandated by the producer/copyright owner to market their picture to foreign distributors, to negotiate territorial agreements with those distributors, often on a ‟pre-buy” basis before the picture is even produced, and to deliver the picture to the distributors when it is completed, all on behalf of the owner as his/her exclusive agent;

                    • financiers and productions companies, such as Participant, RatPac and Legendary, which, although being listed as ‟distributors” on IMDB, are not – with the clarification that many significant production companies maintain the in-house capability to also directly license the pictures they produce to (foreign) territorial distributors, such as a foreign sales agent, and

                    • SVoD providers, such as Netflix, Amazon Studios and Disney+, although they are better characterised as end users rather than distributors in the various territories in which they operate – their distribution agreements, more properly characterised as ‟digital licenses”, are distinguished primarily by the fact that there is no division of revenues involved – Netflix, for example, is not sharing the subscription fees it receives with any owner; Thus, even when Netflix acquires all worldwide rights in perpetuity to a motion picture prior to production, and bills it as a ‟Netflix Original”, they agree to make a fixed ‟buyout” payment with no additional net profits, royalties or other accountings.

                    Now that the various parties to a distribution agreement have been identified, let’s delve into the main types of film distribution agreements available on the market:

                    • the acquisition agreement, which is an agreement that may be used by a US-based distributor to acquire rights in all (or many) media in the USA and, often, Canada, the so-called ‟domestic” territory. Many of the provisions in this agreement reflect the leverage that US distributors have by virtue of the importance of their domestic territory, both because of its size and the usual leading role US release takes in marketing English-language movies worldwide;

                    • the IFTA distribution agreement, which is a template form provided by the Independent Film & Television Alliance (‟IFTA”), the self-described ‟global trade association for the independent motion picture and television industry” – the distribution agreement is used, in many variations, primarily by foreign sales agents when licensing motion picture rights to foreign territorial distributors. Many of the differences between this template form and the acquisition agreement serve to illustrate the relatively weaker leverage of typical foreign distributors, excluding those in major foreign territories such as China, the UK, France and Japan;

                    • the negative pickup agreement, which, while there is no ‟negative” to ‟pick up”, these days, still survives in its title and concept – the distributor, primarily US-based and probably a major studio, agrees before a picture is produced to pay the entire cost of production of the picture upon delivery, in return for the copyright and all other rights to the picture worldwide and in perpetuity. This agreement is in many ways an extreme version of the acquisition agreement, and

                    • the sales agency agreement, in which no distribution rights are granted to the sales agent, so this is not really a distribution agreement at all – yet, the agent is engaged by the copyright owner/filmmaker to find, negotiate and enter into distribution agreements on behalf of the filmmaker as its exclusive agent. In this agreement, the approvals and controls shift to the filmmaker, and the sales agent typically provides no advance or minimum guarantee (more on this below) to the filmmaker. Sales agents, however, often play a significant role in assisting filmmakers finance their pictures through pre-sales.

                    Some of the crucial provisions set out in a film distribution agreement are:

                    • picture specifications, to identify the commodity that the distributor is purchasing or licensing, such as its title, the date it was screened by the distributor, the promised rating (usually formulated with reference to the Motion Picture Association of America categories, but sometimes including local rating designations as well), the length and technical specifications (relating to whether the picture is being shot on film or, more commonly, in digital HD) and, if the distributor is acquiring distribution rights earlier in the production process, screenplay, genre, production budget, cast, director;

                    • essential elements, since the value of pictures sold on a pre-buy basis is determined by the attachment of star actors or, less frequently, a star director (i.e. essential elements);

                    • advertising rights, which are the right to advertise the picture using the name and likeness of the above-mentioned essential elements, granted to the distributor;

                    • approvals of the respective distributor or agent, which may range from almost none in the sales agency agreement, to virtually total control of every production element and the respective agreements relating to those elements in the negative pickup agreement;

                    • the term, which, in large territories such as the USA, may extend for 15, 25 or more years, or even perpetuity, while is usually 7 years from delivery of the picture to the distributor, in smaller foreign territories;

                    • the territory, which is defined on a granular level, still, in most distribution agreements, given the vested commercial interests of distributors and rights owners in the territorial system of distribution, but which is becoming increasingly irrelevant and out-of-touch with reality, in the SVoD and streaming era where the expectation of consumers is that all content will be immediately available everywhere (more on this below);

                    • the rights, i.e. exploitation rights (on which media the film can be exploited), advertising rights (to advertise and promote the motion picture to the public), ancillary rights (such as, for example, the right to exhibit the picture on airlines, ships and in hotels, but also the right to create action figures and T shirts via merchandising) and derivative rights (right to create sequels, prequels, remakes and television series);

                    • holdbacks and windows, since the theatrical exhibition business still relies commercially on being the first medium of exploitation of motion pictures, with theatre owners – and particularly large chains – pushing back against screening films in any significant numbers that are available in any other medium at the same time;

                    • the minimum guarantee, which is the amount payable by the distributor to the owner as an advance against the owner’s share of distribution revenues, and which is the basis for much of independent motion picture financing as lenders will loan a discounted amount against the aggregate minimum guarantees already secured by the owner or its agent;

                    • gross receipts and their application: gross receipts mean the revenues actually received by the distributor less ‟off the top” deduction of certain limited expenses such as collection costs and bank fees, but also less distribution fees (formulated as a percentage of gross receipts) and less distribution expenses (in particular advertising, attending film markets such as Cannes, Toronto, IFTA’s AFM and Berlin), and less the recoupment of the minimum guarantee, and

                    • theatrical release commitments, which, despite the ongoing disruption of the traditional motion picture theatrical release model, by SVoD providers and UGCs sites, remain the Holy Grail of many filmmakers, sought after for the prestige, exposure and potential financial bonanza that they believe their picture and career deserve.

                    3. How streaming changed the game in film distribution

                    While the music industry was plagued by the likes of Napster in the early noughties, the film sector has also been seriously disrupted by consumers’ ability to download peer-to-peer files, in particular video format files such as .mp4 or .mov, illegally, on the internet. Illegal peer-to-peer websites, such as eMule, qBittorent, uTorrent and Seedr, still exist today, but consumers may prefer to use illegal SVoD providers such as PopcornTime, which are much easier to use.

                    This acceleration into the digitalisation of film distribution, thanks to better internet connections and speeds, as well as the above-mentioned peer-to-peer technology, has permanently, negatively and irremediably affected the scale of film distribution in all other non-digital media (movie theatres, of course, but also TV networks, DVDs, Blue Ray, etc.).

                    The music industry, which swiftly understood that CDs, cassettes, vinyls and mini-discs were things of the past, decided to take back control of the narrative, by making music streaming legal, via subscription-based or ad-based, digital service providers (i.e. tech companies providing music streaming services, such as Apple Music, Spotify, Deezer, Tidal and Amazon Music) (‟DSPs”). These easily-affordable monthly subscription plans, offered by DSPs, gave a fatal blow to peer-to-peer music sites, in the mid-noughties, since consumers would rather pay between GBP5 to GBP20 per month, to access catalogues of millions of songs, rather than spend time, energy and efforts – not to mention, risking having their internet connection terminated by their internet service provider for acts of piracy – downloading files.

                    However, the film industry was, and still is, much less nimble, realistic and flexible in adapting to the new realities of this digital era. The distribution side of the business, in particular, has resisted, and still does resist, any cost-effective, customer-friendly and affordable digital solution to its film distribution model. As a result, piracy has, and still is, thriving in the motion picture sector, with customers routinely using peer-to-peer platforms and illegal SVoD providers to find movies they want to watch for free. Even people who use music streaming services via DSPs, and/or who use SVoD services via SVoD providers (but cannot find the film they want to watch on that streaming platform), still download movies and TV series illegally.

                    And that is the crux of the matter, in film distribution today: customers want to have access to all the video content, all at once, anywhere, anytime, while film distributors and owners, as well as states and governments, are only prepared to drip-feed movies, on a limited number of SVoD platforms, usually after the theatrical window has elapsed (which, for example, in France, is between 22 and 36 months following theatrical release, to allow for pay-TV release, and then free-TV window, before streaming!).

                    Not only that, but the number of streaming platforms has shot up through the roof, with every major studio now having its own SVoD provider, and therefore pulling off its own catalogue from competing SVoD providers owned by pure tech companies, such as Netflix, Apple TV and Amazon Prime, or owned by rival studios such as HBO Max, Paramount+, Disney+ and Hulu, or owned by media conglomerates such as Peacock.

                    There are now streaming platforms for each genre and sub-genre, for documentaries-enthusiasts (such as History Vault, MagellanTV, PBS Documentaries, GuideDoc), horror fans (such as Shudder and Tubi), etc.

                    Therefore, customers who want to ‟play by the rules” have to subscribe, and pay monthly subscription fees, to 4 to 10 SVoD providers at once, in order to “cover the market”, in terms of accessing large libraries and catalogues of movies (ancient and new). This is all the more perplexing since a Spotify premium plan user will have access to more than 80 million music tracks (i.e. around 80 percent of the total number of songs in the world), on that DSP, for the modest sum of GBP9.99 per month.

                    No wonder that piracy is still very much an issue in the movie business, with only few (and, to be frank, quite stupid) customers ready to fork hundreds of USD, GBP or euros per month, in order to have lawful access to vast catalogues of films and video content online.

                    4. A need for consolidation and aggregation in the film distribution business model

                    It is clear that film owners and distributors need to become more self-aware, by taking a long and hard look at the licensing value of their content, in this new market paradigm in which no consumer in their right mind will spend more than between 25 to 50 GBP/USD/euros per month, in order to have access to large catalogues of newly-released movies as well as catalogues of old films, via SVoD platforms.

                    Also, film distribution via traditional media, such as movie theatres, is bound to decrease over time, due to changing consumer habits (who prefer to cocoon at home) and in the wake of the covid pandemic. In 2021, US adults saw on average 1.4 movies in a cinema in the past 12 months. Cable TV and pay TV are on the path of extinction too, with the numbers of US pay-TV subscribers forecasted to fall by 28 per cent, each year, between 2013 and 2023.

                    The only diversification that we foresee, for film distribution media, is in the in-flight entertainment segment, with the increase and development of space tourism, space’s commercial exploitation by behemoths such as SpaceX-Tesla and BlueOrigin-Amazon, as well as space stations set up by governments, space agencies and private companies.

                    What does this all mean for stakeholders in the film industry?

                    Since the development of the above-mentioned in-flight entertainment segment is a very-long-term game, stakeholders in the movie industry need to focus on making the digital film distribution channels more efficient, streamlined and consumer-friendly.

                    First, there will be some consolidation in the film streaming sector, with many existing SVoD providers either going extinct, or being the targets of acquisitions, in the next five years. Additional consolidation will be largely driven by SVoD providers’ need for larger content catalogues, to satisfy consumers’ insatiable demand for hit content. Also, pure digital players like Netflix, Amazon Prime and Apple TV, managed by high tech executives – steeped with the cost-cutting, data-driven decisions and lean management methods professed by Silicon Valley – will force, via competition, SVoD providers owned by media & entertainment conglomerates, major studios and film distributors to shed dead weight and increase efficiencies and profitability.

                    Second, there will be an even more aggressive push towards aggregation of SVoD services, via super-aggregators which bundle non-competing tech services together (for example, the purchase of an iPad from Apple Store gives you access to a free one-year license to Apple TV) and via ‟ad hoc” subscription-based apps bundling several SVoD services all in one app, to combine the content libraries from different SVoD providers, such as Struum.

                    Eventually, when the current streaming wars will have dried out, only a few winners will remain. These lucky winners will shop around ferociously, either by way of mergers & acquisitions, and/or assignments or licensing of catalogues, in order to grab the largest possible content libraries.

                    It is at this cost, and after weeding all these weaker competitors out, that this handful of appropriate film streaming services will finally be on offer, in the video content industry, for consumers. Piracy will subside, because consumers will no longer need it to have access to very large content libraries, while only paying reasonably-priced monthly subscription fees to the lucky few streamers still standing.

                    What an inordinate and wasteful amount of money and time, to reach more or less exactly the exact same status quo than in the music streaming industry, but with a 10 to 15 years’ delay, in the movie streaming sector.


                    Crefovi’s live webinar: Film distribution media – what’s next to retain customers? – 19 October 2022

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