European regulators may decide as soon as this week to require video streaming services like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) Prime to feature 20% European content and to ensure their "prominence," Reuters reported.
Current European Union broadcast rules require television networks to make 50% of their content European. Many countries in the EU already have laws setting quotas for streaming networks, according to Variety, but the numbers vary greatly from 10-60%. The proposed new quotas would set a level playing field for streaming services across the continent.
The goal of the new rules would not be to force Netflix and Amazon to pack their services with old content that meets the standard, but rather to encourage new investment in European film and television.The current rules only require services that are physically based in a country to meet such quotas, but the proposed rules would require any company that does business in a certain country to hit the 20% minimum.
These new rules would also force Netflix and Amazon to promote local content, presumably on their service's homepages. Judging by the Netflix-provided screenshot of its app's home page in Spain, this would require changes as well:
How expensive will this be for Netflix and Amazon?
The bottom-line cost of the EU proposal for Netflix and Amazon depends upon the final wording of the proposal. It's a question of whether the rules count partially European products against the quota or whether a show or film must be entirely European. It's also possible that the EU makes the 20% number an investment quota, which is a doomsday scenario for the streaming leaders.
Under the first scenario, in which partial productions count, Amazon and Netflix would already be in compliance, according to research from Ampere Analysis. Even under a more strict standard, the new rules would not present a major obstacle in most European countries, according to Ampere Analysis:
If the European Commission was to apply more stringent rules, and specify that the main country of origin had to be in Europe, Amazon Instant Video would still be unaffected in its two core European markets of the UK and Germany. Netflix, however, would have to adjust its catalogue composition in the UK, Germany, Portugal, Netherlands, Poland and the Czech Republic -- although not necessarily by much. In this instance, Germany would have to replace a total of three non-European titles in order to meet with the regulation.
Of course, the goal of the rules would not be to have Amazon and Netflix juggle their content lineup by cutting some non-European shows to get into compliance. The point would be to encourage investment in European productions, and that's where this could get expensive.
Canal Plus, a premium cable TV channel based in France, is "currently obliged to invest a sum equivalent to 12% of its annual revenue pre-buying French films," according to Variety. That's well more than most companies are currently spending: According to an EU study cited by Variety, streaming services operating in Europe invest just over 1% in new productions.
These rules could kill momentum
While a looser standard could have little to no impact, an investment requirement could be difficult for Netflix and Amazon. Under strict 20% investment requirements, both services would have to either spend a lot more money on purely European content across a number of countries or vastly limit their catalogues in the various European markets.
Netflix, as you might imagine, has objected to this type of quota system in the past, telling the European Commission (the legislative arm of the EU):
Rigid numerical quotas risk suffocating the market for on-demand audiovisual media services. An obligation to carry content to meet a numerical quota may cause new players to struggle to achieve a sustainable business model. ... The focus of European audiovisual media policy should be on incentivizing the production of European content and not imposing quotas.
Why not let the market decide?
While the potential EU rules would be bad for the streaming companies, they could also limit choice in European nations or even cause some streaming companies to avoid certain markets. Daniel Dalton, a member of the European Parliament from England's Conservative party, condemned "digital protectionism" and told Reuters it would not lead to quality film-making: "The European Commission has yet again failed to understand how the digital world works. Subscription services like Netflix and Amazon should consider only one thing when placing content on their platforms: what their viewers want to watch."
It's easy to see why the EU wants to protect local cultures and support creative voices in its countries. But it's also easy to see how content quotas or minimum investment laws could backfire, leading citizens of these nations to get a watered-down version of Netflix, Amazon Prime, and other services.
Encouraging the top streaming companies to invest in local productions make sense. Forcing them to do so won't have the desired effect, and it will be bad for the companies and European viewers.
Daniel Kline has no position in any stocks mentioned. He is in the middle of season two of Daredevil, but can only watch when his wife goes to sleep as she is not a fan (but she loved Jessica Jones). The Motley Fool owns shares of and recommends Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.