The European Union recently filed antitrust charges against six major U.S. film studios and pay-TV broadcaster Sky U.K. over allegations of illegal licensing agreements.
The European Commission alleges that Disney (NYSE:DIS), Time Warner's (NYSE:TWX.DL) Warner Bros., Sony (NYSE:SNE) Pictures Entertainment, Comcast's (NASDAQ:CMCSA) NBCUniversal, Viacom's (NASDAQ:VIA) Paramount Pictures, and 21st Century Fox (NASDAQ:FOX) prevented Sky U.K. (which is partly owned by Fox) from offering its U.K. and Irish pay-TV services across other EU nations.
These charges are related to the EU's Digital Single Market Strategy, which will allow customers who buy digital media in one country to access that content across all other EU nations. The EU believes that Sky U.K.'s lack of satellite or online support for its pay-TV services outside of the U.K. and Ireland violates that principle.
What happens if pay-TV barriers fall?
On the surface, the EU's digital plan would seemingly simplify digital purchases for EU residents and travelers. However, executing it could significantly alter the existing relationships between studios and distributors.
Studios have traditionally sold distribution rights for films and TV shows in individual countries, with the distribution rights going to the highest bidder. But if the EU eliminates pay-TV barriers between countries, major studios can no longer sell the same content repeatedly to multiple broadcasters
As a result, competition between pay-TV providers would intensify -- and likely reduce the market to a mere handful of big pay-TV providers. Those providers would then only have to license the content once from studios for broadcast rights across the entire EU.
This would adversely impact studios in two ways. First, studios would generate less revenue from selling distribution rights for each country or region. Second, it could give pay-TV providers more leverage against studios when negotiating rights fees. A Disney spokesman told The Wall Street Journal that it would "vigorously" oppose the EU's demands, calling them "destructive of consumer value." NBCUniversal and Warner Bros. issued less aggressive statements, stating they would cooperate with EU regulators.
It's unclear how much the EU's plan will reduce studio revenues from distribution rights. However, if the six studios are found guilty, they could be fined up to 10% of their global annual revenue for violating antitrust laws and be required to change their business practices. Actual fines in previous cases, however, have been significantly lower.
U.S. companies under fire
This isn't the first time the EU has taken a swing at American companies. Facebook, Google, Amazon, Apple, and other U.S. tech giants have all recently been investigated for concerns about privacy and anti-competitive practices.
Back in February, President Obama complained that the EU investigations were a form of protectionism fueled by "commercial interests". The European Commission hasn't directly denied those allegations. Instead, EU policy makers believe that unifying the continent's fragmented digital market will foster the creation of European tech giants that can compete against companies like Google and Facebook. The recent pay-TV move against American film studios follows a similar protectionist philosophy -- that reducing the number of EU distributors would give them an edge over overseas studios.
In my opinion, accusing U.S. companies of anti-competitive practices is clearly hypocritical. The EU is basically hoping its largest tech and pay-TV companies wipe out smaller players and consolidate the market so the biggest players can gain a competitive advantage against their American rivals. That strategy is both anti-competitive and protectionist, and it could hurt smaller EU businesses more than it hampers U.S. rivals.
Should investors be worried?
Investors in these American studios shouldn't fret over the EU's antitrust charges. Even if the studios are found guilty, the fines will be written off as one-time charges. Over the long term, distribution revenue from pay-TV providers in Europe might decline, but the overall impact on the studios' top and bottom lines should be minimal.
The key takeaway, here, is that as U.S. media and tech companies expand overseas, they will run into resistance from protectionist economies like the EU and China. The roadblocks these governments set up could drain overseas revenue, so investors should keep an eye on these ongoing developments.