Opening Pandora’s Box: Why did the European Commission launch the Digital Single Market strategy?

Anna Karklina

Aalborg University

MSc European Studies Master’s Thesis

Supervisor: Dr. Wolfgang Zank

31/05/2016

The European Commission published the Digital Single Market strategy on May 6 2015. The

inclusion of the strategy in the top political priorities of the Commission President Jean-Claude

Juncker demonstrates the political will of the current Commission to deliver the digital single market,

where previous attempts have been fragmented and less successful. The strategy rests on 16 policy

initiatives across 3 policy areas – better access, encouraging businesses to grow and creating the right

conditions to ensure the growth of the digital economy in the EU. As its primary justification for the

strategy, the Commission has focused on the consumer and business benefits that will follow from the

creation of a digital single market. The ambitious scope of the strategy however, does threaten to open

Pandora’s Box, as the Commission risks not delivering on its initiatives in due time and introducing

legislative measures that will introduce new regulatory barriers in the digital market rather than

remove them.

This paper seeks to expand on the question “Why did the European Commission launch the

Digital Single Market?” and examine it from two other perspectives: the strategy as a means for the

Commission to expand its competences; and the strategy as a response to stakeholder dissatisfaction

with the existing fragmentation. Given its large scope, six elements were chosen from the strategy:

cross-border e-commerce and parcel delivery; value added tax; geo-blocking; personal data protection

and cross-border portability of online content.

The findings demonstrate two issues. Firstly, the strategy is an opportunity for the

Commission to expand its competences on a more general level, i.e. it enables the Commission to

become the leading European institution on digital issues. This is reflected in the creation of two

Commissioners for digital issues. The strategy also enables the Commission to enhance its authority

and oversight in certain areas (e.g. cross-border parcel deliveries and VAT regime), and also attempt

to create completely new competences. This is particularly demonstrated in the Commission’s stance

regarding geo-blocking, as the Commission has deemed the current regulatory framework to be

inefficient (contrary to the views of stakeholders, who have expressed that it merely requires

increased enforcement efforts) and therefore requires new legislative measures.

Secondly, the analysis shows that although stakeholder concerns were a driving force behind

all six of the issues examined here, only in two cases (personal data protection and cross-border parcel

delivery) were stakeholders given the opportunity to voice their concerns prior to the Commission’s

proposals of new policy measures. The Commission and stakeholders are able to act in a synergy:

even though it is the Commission who in most cases has set the agenda on digital development,

stakeholders are able to exert influence, and in many cases the Commission has been receptive to their

concerns. The analysis does not suggest the superiority of one reason over another; rather, they are all

interconnected and demonstrate that the Commission’s motives go beyond merely providing

consumer benefits.

Table of contentsIntroduction..............................................................................................................................................1

Methodology............................................................................................................................................2

Part 1: Theories of European integration and agenda-setting..................................................................3

Neo-functionalism...............................................................................................................................3

Theories of competence maximisation................................................................................................5

Policy entrepreneurship.......................................................................................................................7

Agenda-setting and issue framing............................................................................................................8

Part 2: Stakeholder dissatisfaction with fragmentation in the digital market........................................10

Cross-border e-commerce..................................................................................................................10

Cross-border parcel delivery..............................................................................................................14

Value Added Tax...............................................................................................................................17

Cross-border portability of online content.........................................................................................21

Personal data protection.....................................................................................................................28

Unjustified geo-blocking...................................................................................................................37

Analysis.................................................................................................................................................42

Conclusion.............................................................................................................................................49

Bibliography..........................................................................................................................................51

Introduction

The European Commission (‘the Commission’) launched the Digital Single Market strategy

(‘DSM strategy’) on May 6 2015. The creation of the digital single market was announced as one of

the top political priorities by the Commission President Jean-Claude Junker in 2014, and as such is

one of the most ambitious political projects the Commission has undertaken in the recent years. The

Commission estimates that the creation of a fully integrated digital single market will contribute

approximately 415 billion EUR to European economy as well as provide increasing opportunities for

innovation and jobs within the European economy. A fully integrated digital single market will ensure

that the free movement of goods, services, persons and capital which exists in the offline will also

exist online. The DSM strategy seeks to achieve this through 16 targeted initiatives to be fully

launched by the end of 2016. These initiatives are based on 3 key principles: firstly, ensuring that

European consumers and businesses have access to digital goods and services; secondly, creating the

right conditions to enable European businesses and other digital services to be able to innovate and

grow; and thirdly, maximising the potential of the digital economy.

Vice-President and Commissioner for the Digital Single Market, Andrus Ansip stated that “…

the strategy is our starting point, not the finishing line” (European Commission, 2015j). Whilst he

might be correct in stating that the DSM strategy in itself is not the creation of the digital single

market, it is not the first time the Commission has attempted to foster the growth of it. In 2010, the

Commission presented the Digital Agenda for Europe as one of the flagship initiatives under the

Europe 2020 strategy. The Digital Agenda also explicitly made reference to the creation of the digital

single market and even addressed some of the same issues, such as digital literacy, and data

protection.

The DSM strategy is the first time the Commission has comprehensively addressed the

creation of the digital single market. The aim of this paper is to asked the question “Why did the

Commission launch the Digital Single Market strategy?” and to approach it from two different

perspectives that go beyond the mere argument that it will bring increased consumer benefits. The

first part of the paper will examine theories of agenda-setting and competence-maximising and how

they relate to the Commission. The second part of the paper will examine several key elements of the

DSM strategy and the extent to which they have been placed in the strategy due to stakeholder

dissatisfaction with the current level of fragmentation in the digital single market. It will also examine

the extent to which the Commission has responded to, or is planning to respond, to stakeholder

demands.

1

Methodology

Given the large scope of the strategy, six elements of it have been chosen for analysis: cross-

border e-commerce and parcel delivery; Value Added Tax (VAT); unjustified geo-blocking; cross-

border portability of digital content; and personal data protection. These issues were chosen for

several reasons. Firstly, unjustified geo-blocking, VAT and issues within cross-border e-commerce

and parcel delivery represent some of the key challenges to delivering the digital single market.

Additionally, the modernisation of the personal data protection framework and the ability to travel

within the EU with legally acquired content are also some of the key consumer expectations which the

DSM seeks to address. As a result, whilst not being fully representative of the DSM strategy as a

whole, these six issues are representative to the extent that they depict some of the biggest challenges

the Commission seeks to address through the DSM strategy. Secondly, due to the fact that a majority

of these issues have been on the Commission policy-agenda prior to their inclusion in the DSM

strategy, the amount of information available was substantial.

The analysis is firstly based on several academic theories of European integration and

competence-maximisation, which were chosen for their relevance rather than so they could be

disproved. Secondly, the analysis is based on the examination of policy documents from the

Commission (e.g. Communications, Green Papers and reports conducted on behalf of the

Commission), as well the responses to the relevant public consultations from the Commission. Here it

is important to note that the Commission alongside publishing the responses to the consultations on its

website also has on many occasions published summary reports on the responses. Given the fact that

many of the Commission’s consultations receive several hundred responses, the summary reports

were used as the basis for analysis in order to save time and resources. Whilst these reports are

incredibly useful as they provide a comprehensive overview of the perspectives of the various

stakeholder groups, one obvious drawback is that they are generalised and do not provide specific

examples of stakeholder opinions. Additionally, in one particular case where there was no summary

report available for the results of the consultation but the responses themselves were published, a

small selection was chosen from the non-anonymised responses. The selection took into account the

variety of stakeholders who replied in order to be somewhat representative of the opinions expressed.

2

Part 1: Theories of European integration and agenda-setting

Neo-functionalism

Neo-functionalism emerged at the end of the 1950s following the publication of Ernst Haas’

major work, The Uniting of Europe which has since become one of the defining works of European

studies. Haas provided an account of the early stages of European integration following the Second

World War through examining the key actors both at the national and supranational level. Haas

attempted to formulate a grand theory: an objective examination of regional cooperation which could

be applied to other cases throughout the world (such as Latin America, which Haas himself

examined). His approach is rooted in the pluralist school of thought, which at the time was the

dominant political science theory in the United States (Lelieveldt & Princen, 2011). Pluralists

conceive politics to be a group-based process, in which the interests of the parties will eventually

organise to decisively impact decision-making. This approach can be seen in Haas’ definition of

integration, as he views political integration as the decision of national governments to shift a share of

their activities to a new political centre:

The process in whereby political actors in several distinct national settings are persuaded to

shift their loyalties, expectations and political activities toward a new centre, where

institutions possess and demand jurisdiction over the pre-existing national states. The end

result of a process of political integration is a new political community, superimposed on the

pre-existing ones. (Haas, 1958, p. 18)

The core neo-functionalist concept is spillover. It refers to the manner “in which the creation

and deepening of integration in one economic sector creates pressures for further economic

integration within and beyond that sector and greater authoritative capacity at the European level”

(Rosamond, 2000, p. 60). Lindberg’s (1963) “general formulation” (p.10) of spillover highlights that

the pressures of integration will themselves create conditions for further action and so on. Integration

via spillover is thus a self-perpetuating process, with the European institutions playing a core role in

order to facilitate integration which otherwise would not be possible with only inter-state cooperation.

Spillover exists in three varieties. Firstly, functional spillover is technical in nature and based

on the premise that the full benefits of integration can only be achieved if integration also takes place

in related sectors. Haas (1958) pointed out that the first steps towards integration (the creation of a

common market for coal and steel) had been completed and recognised that supranational authority in

one sector only could not be sustained. Hence the creation of the European Economic Community

(EEC) and European Atomic Energy Community (Euratom) was the functional spillover of the

European Coal and Steel Community (ECSC), as they took further integrative steps in neighbouring

sectors. The creation of the single market is an example of functional spillover: the abolition of tariffs

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between Member States led to the necessity of stabilising exchange rates which in turn led to demands

for a single monetary policy and a single currency and the eventual creation of new supranational

European authorities (Lelieveldt & Princen, 2011). Additionally the Schengen Agreement to abolish

passport and other border controls placed new items on the policy agenda such as crime prevention,

illegal immigration and police and judicial cooperation; issues which themselves necessitated further

cooperation between Member States in order for the agreement to be fully effective (Jensen, 2000).

Secondly, George (1991) identifies a second stream known as political spillover which

describes integration as driven by pressures exerted by national interest groups. Haas had already

acknowledged that interest groups operating at the European level would realise the benefits of

European integration, and shift their demands from the national level to the supranational, adding

pressure for further integration (Pollack, 2015). The European Round Table of Industrialists (ERT),

an influential lobby group consisting of around 50 of the major industrial corporations in Europe is a

well-known example of political spillover. ERT were especially active in promoting the creation of

the single market and the adoption of the Single European Act (SEA); they were also strong

supporters of EU enlargement towards Central and Eastern Europe (Lelieveldt & Princen, 2011).

Thirdly, cultivated spillover refers to the active role of supranational actors such as the

Commission, ECJ and the Parliament in promoting further integration. Supranational actors might do

so in the process of mediating between Member States (Tranholm-Mikkelsen, 1991; Niemann, 2006),

as well as through formal means such as ECJ court rulings. Thus landmark rulings such as van Gend

den Loos; Costa v ENEL; Cassis de Dijon; Dassonville, are examples of cultivated spillover as ECJ

actively fostered integration. Pollack (2015) also states that the Commission often encourages shifts

of loyalty of interest groups to the European level, in order to strengthen the argument of ‘common

European interest’. This presents the possibility of the Commission only becoming receptive to

arguments which promote further European integration, whilst ignoring arguments based on national

policy interests (Jensen, 2013).

Political elites (politicians, lobbyists, high-level civil servants) and interest groups play an

important role in the theory of neo-functionalism. Interest groups have already been mentioned as

being driven to engage in European integration to further their own interests, rather than any

particular ideology for a united Europe (Jensen, 2013). ERT for example, was motivated by the

opportunities the single marked offered for the ease of production and distribution of their products

throughout Europe, as well as the possibility of new markets in Central and Eastern Europe. Another

role played by interest groups is that of coalition building with the Commission. Through roundtables,

working groups and committees, interest groups become political allies and advocates of the

Commission’s stance vis-à-vis national governments and other policy actors (Mazey & Richardson,

2001; Sandholtz & Stone Sweet 2012). The elitist approach neo-functionalism assumes towards

4

political actors is best encapsulated through the concept of permissive consensus. It refers to the

implicit support assumed by top actors for further integration by the European people. Permissive

consensus largely applies to the first three decades of European integration, in which the demand for

integration was driven by economic interests of organisations, and the implications for the European

citizens were limited at best, as the agreements made at the European level were done so without

transparency (Stone Sweet & Brunell, 1998; Hooghe & Marks, 2009). As Hooghe and Marks (2009)

argue, permissive consensus amongst the European people has been replaced by constraining

dissensus, i.e. increasing Euroscepticism.

The elitist approach to policy-making is often levelled at the Commission, as its members are

neither directly nor indirectly elected to office, and therefore have come to represent the top-level of

EU elitism. However, an elitist approach can also be taken towards the Members of the European

Parliament (MEPs). Jensen (2013) applies the concept of ‘elite socialisation’ by claiming that MEPs

will over time become more European in their views because they work along political lines, rather

than national borders, which poses a challenge to fully focusing on national interests. Therefore the

strong European stance of the Parliament often makes it a natural ally for the Commission (Jensen,

2013).

The signing of the SEA in 1986 demonstrated a significant renewal of European integrative

efforts that had stagnated during the 1970s. It also caused a revival of interest in neo-functionalism.

An important spin-off from neo-functionalism was developed by Stone Sweet and Sandholtz (1998,

2012) known as supranational governance. Rather than attempting to formulate something general,

they have developed a transaction-based theory of integration stating that integration is more likely to

occur in sectors with considerable transnational trade between Member States. The high cost of

transnational trade associated with compliance with different national rules creates incentives for

national governments and interest groups to begin shifting their policy preferences towards an

expansion of competences at the supranational level. Once the first steps have been taken (e.g.

through ECJ case law or secondary legislation) the process of integration with the particular sector

becomes a self-sustaining dynamic that creates spillover into other sector and gradually reduces the

power of the Member States to influence policy outcomes (Sandholtz & Stone Sweet, 1998).

Theories of competence maximisation

The budget-maximising model was developed by William Niskanen in 1971. Niskanen

proposes that bureaucrats will seek to maximise the budget they receive for their department from

their ‘sponsor’, Niskanen’s term for the legislative and executive branches of government that require

services from the bureaucrats. His model rests on the assumption that bureaucrats are able to

transform the information they possess about the services they provide into successful bargaining

power over their government (McGuire, 1981). Most importantly, bureaucrats seek to increase the

5

size of their budget because it is directly related to important targets and tasks such as salaries, output

of the bureau, public perception and power (Niskanen, 1971). Majone (1996) also points out that the

theory assumes that the types of services provided by the bureau (e.g. administrative or regulatory) are

already pre-determined, and as a result the bureau is not seeking to expand its competences through an

expansion of the budget.

The budget-maximising theory is a variation on the principal-agent approach. Elgie (2002)

states that the underlying notion of the approach is that one actor (the principal) will have the impetus

to delegate power or competences to another entity (the agent), with the expectation that the agent will

act in a way that is consistent with the wishes of the principal. At the EU-level, a straightforward

application of the theory is challenging because the institutional design of the EU has purposefully

avoided any real concentration of power (Dehousse, 2008). As a result, the European institutions have

the ability to each accountable for their actions. For example, the College of Commissioners could be

described as the principal as it provides the political leadership and the Directorates-General (‘DGs’)

as the agents who carry out the work, but the College is held accountable by the Member States and

the Parliament. Even the Parliament, which by all accounts is the agent to the European electorate, can

find itself unable to align its position to that of the European people due to political pressures within

the EU system.

Similarly, Niskanen’s budget-maximising theory is not fully applicable to the EU. Although

the EU institutions do have regulatory and administrative powers, they do not themselves implement

their decisions and consequently the actors within the institutions lack the incentive to systematically

attempt to expand their budget (Horl, Warntjen & Wonka, 2005). Additionally, the Commission’s

annual EU budget proposal is subject to close scrutiny by the Council and the Parliament which

significantly reduces any attempts for budget maximisation. Majone (1996) has therefore modified the

theory by stating that the Commission, instead of acting as a budget-maximiser, acts as an influence-

maximiser. Its influence is thus measured by the scope of its regulatory competences, rather than the

size of its budget (Majone, 1996).

The expansion of competences at the EU-level, in particular of the Commission, has been

subject to academic scrutiny. In 1994, Pollack characterised the expansion of European Community

regulation into various policy areas such as technology, environment and education as ‘creeping

competences’, and concluded that the timing and content of the new policies was most often linked to

their relevance to the expansion of the internal market. Aspinwall and Schneider (2000) argue that the

Commission seeks to legitimise itself as a regulatory body through identifying new issues and

proposing solutions. Consequently, it attempts to create a demand for European-level goods and

services that could not otherwise have been possible through Member State cooperation only. Schmidt

and Wonka (2012) also claim that the Commission’s expansion into new issues is particularly

6

supported by large businesses and organisations that have a strong preference for harmonised policies

across the EU. Cram (1994) characterises the Commission’s expansion into new policy areas as

“purposeful opportunism” (p.197). The Commission (both as a whole and its individual DGs) have

employed a strategy in which it has been flexible and prepared to provide input in a new policy area

when the correct moment was presented for it to do so.

Policy entrepreneurship

The notion of purposeful opportunism is similar to Kingdon’s (1984) theory of policy-makers

as policy entrepreneurs: actors who are willing to invest significant resources in return for ensuring

that their preferred policies are accepted in the future. He provides several key characteristics of

policy entrepreneurs. They promote one specific problem definition and solution (which have been

developed in advance) over another, often making use of focusing events and opportunity windows to

push through their ideas. Policy entrepreneurs also employ a continuous feedback loop on their

proposals, through holding press events and meeting with relevant stakeholders, with the aim of

ensuring that the public and political communities are receptive to their proposals. In general, policy

entrepreneurs have three basic qualities: they are regarded seriously as experts or as authoritative

decision-makers; they are well known for their negotiation skills; and they are persistent in having

their policy proposals accepted (Kingdon, 1984).

Sandholtz (1992) demonstrates that the Commission acted as a policy entrepreneur in

fostering cooperation in the IT field, which resulted in the creation of the European Strategic Program

on Research in Information Technology (ESPRIT) in 1982. The window of opportunity was the lack

of growth in national European IT schemes during the 1970s, especially vis-à-vis the highly

competitive American and Japanese industries. Protecting the European IT industry became the EU

equivalent of national protectionism at the nation-state level (Cram, 1994). The Commission pushed

through its interest in the IT field through the appointment of Étienne Davignon as the Commissioner

for Industry in 1979. Dauvignon created the Information Technologies Task Force (ITTF), an

independent research body which reported to the Commission but was not covered by any of the

existing DGs. ITIF produced studies on the IT industry and research and development (R&D),

providing the Commission with the necessary knowledge to be able to effectively participate in IT

industry discussions (Sandholtz, 1992). Dauvignon also fostered crucial relationships with the IT

industry. In 1981 he hosted Roundtable discussions with the 12 biggest European IT companies,

promising that if they wished to cooperate amongst themselves, Dauvignon would ensure

Commission funding for a major IT programme, which became the basis for ESPRIT (Sandholtz,

1992). The Commission not only acted as a policy entrepreneur for identifying the need for European

action in the IT field, but its efforts had bypassed the national governments until the first formal

submission of the ESPRIT programme to the Council on 25 May 1982 (Sandholtz, 1992).

7

Agenda-setting and issue framing

Related to policy entrepreneurship are the concepts of agenda-setting and issue framing.

According to Lelieveldt and Princen (2011), three types of agendas exist. Firstly, the political agenda

refers to the issues that have high political priority and that policy-makers pay the most attention to.

Secondly, the media agenda refers to issues that receive a high amount of coverage on the television

and newspapers, and increasingly on the Internet. Thirdly, the public agenda refers to the issues that

the European citizens find important. Cobb, Ross and Ross (1976) have formulated three models of

how the agendas interact with each other: the outside initiative model; mobilisation model; and the

inside-access model. The outside initiative concerns issues which have been identified by certain

groups in society, and must first reach the public agenda before they are put on the political agenda.

The European Citizens’ Initiative (ECI) is one of the most well-known examples, as it enables at least

one million EU citizens to directly call upon the Commission to propose legislation. The Right2Water

campaign collected almost two million signatures in 2013; although the Commission published a

Communication and Roadmap on improving access and quality of drinking water throughout the EU,

no legislative action has yet been taken.

The mobilisation model is characterised by policy-makers first placing an issue on the

political agenda and then on the public one in order to gain support of the citizens. Princen (2011) has

formulated to ways in which the European decision-makers mobilise supporters: big words and small

steps. By using ‘big words’, the European institutions highlight fundamental values or overarching

policy priorities. For example, this is the manner through which Commission is continuing to present

the on-going negotiations on the Transatlantic Trade and Investment Partnership (TTIP) with the

United States. Commissioner for Trade, Cecilia Malmström, has continuously made reference to the

importance of the agreement for economic benefits and the protection of shared values such as human

rights, and transparency and accountability. The use of ‘small steps’ refers to the application of

technical or more detailed aspects of an issue, and their use to gradually build support for an issue.

Princen (2011) provides the issue of alcohol consumption as an example: given the variety of

(cultural) differences across the EU regarding alcohol consumption, it would be impossible to

introduce restrictive measures on the availability of alcoholic beverages. As a result, actors involved

in EU alcohol policy have focused on issues that have resonance across all the Member States, e.g.

drink-driving and excessive consumption among young people. The focus on ‘smaller issues’ forms

an important stepping stone for potentially focusing on other far-reaching issues relating to alcohol

and alcoholism (Princen, 2011).

Finally, the inside-access model is characterised by issues arising within the decision-making

body or institution, and staying there without any attempt to place them on the media or public

agenda. An example of this is at the EU-level is the Commission’s involvement in tackling obesity,

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which began in 2005 with the establishment on the European Platform for Action on Diet, Physical

Activity and Health, as well as the publication of a Green Paper, outlining the main issues. Although

the European Platform involved representatives from consumer organisations and health NGOs, the

Green Paper highlights that EU-level involvement in the issue came at the request of the Council,

rather than through consultation with the public.

9

Part 2: Stakeholder dissatisfaction with fragmentation in the digital

market

Cross-border e-commerce

Since its emergence in the mid-1990s, e-commerce has expanded rapidly. Consumers

worldwide are increasingly turning to online markets to purchase goods; in 2014 online retail sales

were worth approximately 756 million EUR and these figures are expected to rise as more businesses

begin to offer their good online (AT Kearney, 2015). Ecommerce Europe (2015) also further

estimates that the share of the e-commerce sector in the European GDP was 2.45% and that this figure

will double by 2016, and triple by 2020. It is an opportunity not fully exploited however, as Eurostat

(2015) notes that only 8% of EU businesses make sales to other Member States.

Cross-border e-commerce refers to online transactions which take place over several Member

States. For example, a consumer in the Netherlands will purchase goods online from a company based

in the United Kingdom (‘the UK’) and the goods will be shipped from the UK to the Netherlands;

larger online businesses will have warehouses in multiple countries in order to save on transportation

costs. There are currently no official statistics available on bilateral cross-border e-commerce in the

EU; data from companies only offers a partial understanding as it is biased towards the company’s

market position in the EU (Gomez-Herrera, Martens & Turlea, 2013; Duch-Brown & Martens, 2015).

Using EU consumer surveys and Eurostat data, Gomez-Herrera, Martens and Turlea (2013) calculated

the online business-to-consumer (B2C) trade in goods in 2011, both at the domestic and the cross-

border level. Their findings show that the total value of goods traded online in the EU was

approximately 241 billion EUR, of which 197 billion EUR (approximately 80%) was traded

domestically. Only 44 billion EUR (18%) was cross-border trade (Gomez-Herrera, Martens & Turlea,

2013). According to data received from national e-commerce authorities, E-commerce Europe (2015)

estimates that the trade in online goods reached a turnover of 367.7 billion EUR in 2014, ranking

second on the global scale behind Asia-Pacific.

In 2001, Cairncross speculated that increased use of the Internet and online services would

result in the ‘death of distance’, i.e. geographical location and national boundaries would not be

significant in online transactions. The death of distance has not yet fully occurred in the EU as

consumers remain sceptical. In 2015, 61% felt confident in purchasing goods online domestically,

compared to 38% who felt confident in making cross-border purchases (European Commission,

2015l). These figures are a minor improvement from 2013, when 59.2% and 35.4% of consumers

were confident about domestic and cross-border purchases, respectively (Flash Eurobarometer 358,

2013). Reasons for lack of consumer confidence in cross-border e-commerce relate to risks of

becoming a victim of fraud and abuse of personal information; high delivery and return costs; long

10

delivery times and concerns relating to consumer redress in case of receiving a faulty product (Special

Eurobarometer 359, 2011; European Commission, 2015l). Almost a third of EU consumers have

experienced at least one problem when purchasing online; a majority of those problems were related

to cross-border purchases (European Commission, 2015l). Cardona, Duch-Brown, Francois, Martens

and Yang (2015) also note that consumers who have expressed concern about the security of their

payments online are still more likely to purchase from international sellers who deliver cross-border,

suggesting that the reputation of a foreign seller is more significant than that of an unknown domestic

seller.

Despite concerns, consumers also have a variety of reasons for purchasing online. The four

main factors identified by the Commission are the convenience of time (i.e. saving time by buying

online and being able to order at any time of day); ability to compare prices and to find cheaper

products; having a variety of products to choose from and the ability to find reviews and other

information related to the product (European Commission, 2015i; 2015l). Cardona, Duch-Brown,

Francois, Martens and Yang (2015) also find that price, choice and convenience are the principal

reasons for the purchase of tangible goods; the quality of digital content is the most significant factor

determining purchase.

Blum and Goldfarb (2006) suggest that even if trade barriers associated with distance are

removed, a homogenisation of cultures needs to occur. Significant academic research has not yet

occurred into whether cultural differences across the Member States impact consumer decisions on

whether to purchase cross-border or not. While it is undeniable that cultural differences exist across

the EU, it is far more likely that generational differences present far more difficulties to cross-border

e-commerce than cultural ones. The consumer survey by the Commission into the obstacles in the

digital single market found that younger and more highly educated citizens are much more likely to

participate in online activities, including online shopping, whereas the frequency of online use among

older age groups is far less (European Commission, 2015l). Consequently cross-border e-commerce is

likely to increase as older age groups across the EU gradually adopt and use the Internet; likewise, e-

commerce from the more rural areas is also likely to increase as these areas gain access to faster and

more reliable broadband and Internet.

In order to boost consumer confidence in purchasing online, the Commission has decided to

improve and simplify EU contract law as a part of the DSM strategy. This is related to the Common

European Sales Law (CESL). CESL was proposed by the Commission in 2011, with the purpose of

introducing a new legal framework covering the sale of digital goods and services which would

decrease transaction costs for both sellers and buyers. The proposal was approved by the European

Parliament (‘the Parliament’) in February, but progress was stalled by differing national opinions in

the Council of Ministers. As a part of the DSM strategy, the new legislative proposals presented by

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the Commission on December 9 2015 address contract laws on the supply of digital content and the

online sale of goods.

The first proposal is for a Directive on the supply of digital content. In order to create a level-

playing field, for the purposes of the Directive ‘digital content’ will include films, games, music, and

software and cloud storage. Additionally, the Directive will cover digital content which is supplied in

exchange for data provided by the consumer. The Directive consists of four main components: no

time limit on demanding a remedy for defective digital content; the supplier will have the burden of

proof (i.e. the supplier will have to prove that the content was not defective at the time of purchase);

consumer right to terminate a long-term contract; and in case of a contract which has been established

for the exchange of data, the supplier will be required to cease using the personal data of the consumer

once the contract has been terminated.

The second proposal for a Directive covers tangible goods purchased online. The aim of the

Directive will be to further harmonise the existing contract law framework throughout the EU. The

Consumer Rights Directive1 has already fully harmonised some aspects relating to online sales, such

as pre-contractual information the consumer should be able to receive and the right to withdraw from

a contract. Member States however are permitted to go beyond the minimum level of harmonisation

provided by the Consumer Sales and Guarantees Directive with regard to the remedies available to the

consumer when the tangible goods received are not in conformity with the contract of sale. For

example, the current Directive states that in case of non-conformity, the consumer is first permitted to

request a repair or a replacement, and only in case of continued non-conformity can ask for a contract

termination or price reduction. This is known as the hierarchy of remedies. Whilst a majority of the

Member States have opted for this approach, a number of Member States2 offer repair, replacement or

termination at the first instance of non-conformity.

According to the Commission (2015f), online sellers face costs up to 9000 EUR in order to be

able to adapt to the contract law of each Member State they wish to conduct business in. The

Commission is seeking to implement a number of measures to reduce costs and uncertainty, both for

consumers and sellers: the seller will have burden of proof will be set to two years throughout the

whole of the EU; consumers will not lose their rights if they do not inform the seller of a defect within

a certain period of time; the consumer will be reimbursed if the seller does not repair a minor defect;

and consumers will be able to exercise their rights within a two year period when selling second-hand

goods online.

The proposals are the result of extensive stakeholder consultations, which were both targeted

and general. Specific consultations took place through the Stakeholder Consultation Group, composed

1 2011/83/EC2 Croatia, Cyprus, Greece, Lithuania, Portugal and Slovenia.

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of 22 organisations representing a wide range of interests, including manufacturers, consumers, e-

commerce and online platforms and content developers and providers. The group met 7 times

throughout 2015 and sought to assist the Commission in identifying the main problem areas which

would have to be resolved through the DSM strategy. Minutes of the meetings show that the

discussions centred on a number of core elements: scope; conformity; burden of proof; remedies;

commercial guarantees; time limits and unfair terms.

The importance of having a harmonised set of rules for both online and offline sales contracts

was pointed out by a number of stakeholders: Eurocommerce3; European eCommerce and Omni-

channel Trade Association (EMOTA)4; Independent Retail Europe (IRE)5, E-commerce Europe6, the

European Consumer Organisation (BEUC)7; and the Federation of Direct Marketing Associations

(FEDMA)8. Eurocommerce in particular noted that if offline sales of goods were to be excluded from

the upcoming proposals, their implementation should be delayed in order to ensure that the two sets of

legislation deliver the same protection (European Commission, 2015d). There was also a particular

lack of consensus amongst the stakeholders on the time period for the burden of proof: business

stakeholders (such as BusinessEurope9, EMOTA, Eurocommerce, E-Commerce Europe) were in

favour of a period of 6 months, whereas BEUC preferred an extension of 2 years, arguing that 6

months would not be fully sufficient for consumers to fully utilise it, and would decrease the level of

consumer protection in some Member States (European Commission 2015b, 2015c). Stakeholders

were also in disagreement over whether a harmonised hierarchy of remedies requirements should be

introduced, and whether the choice of remedy should be with the consumer (European Commission,

2015a).

The discussions that took place within the Stakeholder Consultation Group echo the responses

to the public consultation on the contract rules for online purchases of digital content and tangible

goods that took place from June to September 2015. The consultation received 189 responses from

stakeholders throughout the EU; 52% of the responses were from businesses, 15% from consumer

organisations and 17% from Member States and public authorities; the remainder 16% were from

academics legal professionals (European Commission, 2015m). Regarding the sale of online goods,

all stakeholders were in agreement that harmonised EU rules should be introduced for B2C

transactions as long as the existing high level of consumer protection is not compromised. Businesses

3 Organisation representing national federations and companies in retail, wholesale and international trade industries from 31 European countries. 4 An umbrella trade federation representing national associations and companies operating in the e-commerce sector. 5 An umbrella European association representing independent retailers in food and non-food sectors. 6 An association representing European companies which sell goods and services online to consumers. 7 An umbrella consumers association based in Brussels representing the interests of consumers. 8 An umbrella association representing the direct marketing industry (i.e. online advertising and television advertisements) in Europe. 9 A confederation representing business federations from 33 European countries.

13

supported the hierarchy of remedies already existing in the Consumer Sales Directive, whereas

consumer organisations favoured a free choice of remedies, with Member States being divided

between the two choices. A similar situation also emerged regarding burden of proof: whereas

businesses preferred to maintain the 6 month long period of burden of proof, consumer organisations

preferred an extension to 2 years and Member States were divided between the two options (European

Commission, 2015m).

With regards to digital content, the summary report of the responses to the consultation shows

that there was wide support from consumer organisations, Member States and businesses on the

necessity for harmonisation of rules at the EU-level; a majority of respondents also supported the

inclusion of B2C contracts only under the scope of new legislation (European Commission, 2015m).

All three types of stakeholders supported the necessity of any future legislation applying a broad

definition of digital content, in order to be able to establish an effective framework that could take

into account any future technological developments. Representatives of digital content development

organisations however highlighted the importance of differentiating between different types of digital

services, e.g. storage and sharing services (European Commission, 2015m). Regarding the time limits

for demanding a remedy and the burden of proof, Member State respondents agreed on the principle

of offering the same remedies for digital content as for tangible goods, such as price reduction, repair

and replacement, and termination of the contract. Nonetheless, there was no consensus among the

Member State respondents whether the burden of proof should be with the seller or with the supplier;

similarly, some Member States preferred a single time limit and others preferred two time limits

(European Commission, 2015m).

Cross-border parcel delivery

The Commission launched a public consultation on cross-border parcel delivery on May 6

2015. It sought the views of stakeholders on the challenges and areas for improvement in EU parcel

delivery. The responses showed that the problems consumers are most often faced with are high costs

of delivery and uncertainty over the date and time of delivery; whereas businesses are unsatisfied with

track and trace capabilities and high prices. Both consumer and business respondents highlighted the

reduction in delivery prices as the main factor that would improve buying and selling online

(European Commission, 2015n). Businesses in particular noted the necessity of improving price

transparency and regulatory oversight (also supported by consumers), however through industry-led

initiatives rather than EU-legislation. Postal delivery operators also suggested increasing regulatory

oversight in order to ensure that national postal operators do not take advantage of their dominant

position in their Member State; national postal operators considered system interoperability between

national operators as the most significant feature that would improve cross-border delivery (European

Commission, 2015n).

14

The public consultation reiterated that high-quality and affordable parcel delivery is an

essential element of a well-functioning e-commerce market, and both European consumers and

businesses are demanding those expectations to become reality in the EU. European consumers

routinely take into consideration low delivery costs and convenient delivery options when choosing to

purchase goods online (European Commission, 2015l). Despite the advantages that cross-border e-

commerce offers, consumers are often wary of purchasing online due a variety of delivery related

concerns: 27% of consumers are concerned about delivery prices; 24% about high return costs; 23%

about long delivery times, and 15% about the non-delivery of goods (European Commission, 2015l).

Moreover, businesses are held back from engaging in cross-border e-commerce due to high prices for

the delivery of small parcels and a lack of interoperability and information between the different

postal operators involved; approximately 60% of European retailers are consider cross-border parcel

delivery to a barrier to trade (Flash Eurobarometer 413, 2015).

The EU currently has a highly fragmented delivery service market, consisting of national and

alternative postal and parcel delivery operators, global/multinational operators (DHL, TNT Express,

UPS, Fedex) and third party logistics providers. Global operators such as DHL, although more

traditionally focused on business-to-business (B2B) deliveries have begun to expand into B2C

deliveries, and often provide cross-border deliveries for larger online businesses. However in most

other cases, cross-border deliveries are reliant on the cooperation of domestic postal operators and

services. National postal services have developed their own communication and logistics systems

independently of each other (e.g. different labelling requirements and differing track-and-trace

systems), resulting in a lack of interoperability between postal services which often results in delayed

or low quality parcel delivery. There is also a lack of transparency for consumer between postal

services, meaning that if the consumer received a damaged parcel that was handled by various

operators, it is often difficult to seek a remedy.

Price discrepancies occur between Member State tariffs for cross-border parcel deliveries.

Meschi, Irving and Gillespie (2011) state that the prices charged for cross border deliveries by

national postal services are often up to five times higher than the prices charged for domestic

deliveries. For example, the cost of a domestic parcel delivery is between 3 and 12 EUR, depending

on the weight of the parcel; the starting cost of a parcel delivery from the Netherlands to Denmark is

between 9 and 13 EUR, and can increase up to 45 EUR depending on the weight of the parcel. High

costs may be attributed to several factors. They might be generated by a set of rules on tariffs on

interconnection, which national postal operators have to comply with and that do not reflect the actual

costs of delivery (Campbell, Dieke & Zauner, 2010). Bilateral or multilateral agreements between

national postal services, some of which do not follow the Postal Service Directive also drive up costs

(Campbell, Dieke & Zauner, 2010). Furthermore, although bigger businesses might be able to carry

15

the high costs of cross-border delivery, the costs are particularly detrimental to SMEs who are limited

from engaging competitively and growing their businesses (Meschi, Irving & Gillespie, 2011).

The 2015 public consultation was a means for the Commission to confirm what it already has

known about the problems relating to cross-border parcel delivery. In 2012, the Commission

published a Green Paper on an integrated parcel delivery market for the growth of e-commerce in the

EU, in which it identified consumer dissatisfaction with delivery details (e.g. delays or damages) and

a lack of price transparency as some of the key concerns. It also noted that delivery operators are

unable to meet the demands of businesses (e.g. regarding faster or delivery times or increased

information exchange) due to the difficulty of quickly altering logistics operations and a lack of

interoperability between communications systems (European Commission, 2012c). The Green Paper

was also accompanied by a consultation; the results indicated that a majority of stakeholders believed

that the existing framework (i.e. the Postal Services Directive) was sufficient but additional measures

such as common standards could be introduced to facilitate cross-border e-commerce. The results of

the consultation were used as the basis for the Commission’s Roadmap for completing the single

market for parcel delivery, which began in 2013.

The roadmap set out an 18 month period for the completion of industry-led initiatives to

address three key issues: “increased transparency and information for all actors along the e-

commerce chain; improved availability, quality and affordability of delivery solutions; enhanced

complaint handling and redress mechanisms for consumers” (European Commission, 2013a, p. 3).

For example, regarding increasing transparency, the roadmap stated that delivery operators and

businesses would develop enhanced information tools to provide businesses with information

regarding their parcel deliveries. The roadmap also stated that they would develop solutions for

increased interoperability, e.g. through new cross-border information systems and enhanced

standardisation. The role of the Commission throughout the process was to monitor and facilitate

discussions between the stakeholders. Following the completion of the roadmap in June 2015, the

Commission also held a workshop consisting of e-retailers, postal regulators, Member States,

consumer organisations and delivery operators to discuss the developments made. Particular

developments included the creation of pan-European trustmarks by both E-Commerce Europe and

EMOTA10 and creation of an information portal on cross-border deliveries, to be funded by the

Commission through the COSME 11programme. National postal operators have also made proposals

to enhance interoperability between their services, especially regarding track-and-trace, returns and

labelling issues. The Commission has noted that although these developments have been welcomed

by the stakeholders, issues of price transparency and regulatory oversight still persist.

10 The E-commerce Europe trustmark is carried by approximately 25 000 online businesses and aims for an easy dispute resolution in case a consumer complaint arises; the EMOTA trustmark is aimed at ensuring a high quality delivery. 11 Competitiveness of Enterprises and Small and Medium-sized Enterprises Work Programme.

16

The approach of the DSM strategy towards the issue of cross-border parcel deliveries is

somewhat vague. The Commission acknowledges the problems of high prices, lack of transparency

and interoperability, but does not provide any substantial information on the measures it will be taking

beyond stating that it will “launch measures in…2016 to improve price transparency and enhance

regulatory oversight of parcel delivery” (European Commission, 2015e). It is likely that the

Commission did not perceive itself to be in a position to fully comment on the regulatory measures it

would be taking due to the fact that the roadmap was still underway when the strategy was published,

and as a result the Commission did not have a full understanding of the issues which would require

further action and which would not. The Commission’s focus on price transparency and regulatory

oversight as the two areas requiring intervention is interesting as it suggests that purely industry-led

initiatives would be unfeasible. However, the Commission has not indicated if the measures it will

propose will be legislative, or merely facilitative and similar to the roadmap.

Value Added Tax

VAT is a tax on consumption, applying to the value that is added to a product at each stage of

production or distribution. The VAT Directive12sets out the legal framework for applying VAT

throughout the EU. The Directive grants national governments some flexibility in setting their own

VAT rates, subject to two rules. Firstly, Member States must comply with the standard rate for all

non-exempt goods and services. Article 97 of the VAT Directive amended by Directive 2010/88/EU

and in force until 31 December 2015, states that the standard rate must be no less than 15%, although

it does not prescribe a maximum rate. As of January 1 2016, the average standard rate in the EU is

22%, with Luxembourg and Hungary having the lowest and highest rates (17% and 27%,

respectively). Secondly, Article 98 of the Directive states that Member States have the ability to apply

reduced VAT rates on a number of goods and services such as foodstuffs and the supply of water;

pharmaceutical products and medical equipment and admission to cultural events and facilities;

Article 99 further states that the VAT rate applied must not be less than 5%. As a result, although the

Directive provides a general framework for the administrative provisions of VAT (e.g. a common

invoicing and legal accounting framework), the actual application of VAT rates throughout the EU

remains fragmented.

VAT in the EU has a complex history. In 1967 a commitment was made to establish a single

VAT rate that would operate in the same manner throughout the EU as it would within a single

country. A common system was established through the First Council Directive 67/227/EC on the

harmonisation of legislation concerning turnover taxes and the Second Council Directive 67/228/EC

on the structure and application of VAT throughout Europe. The changes in physical borders that

were necessary for the completion of the internal market by 1993 led the Commission to make new

12 2006/112/EC.

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proposals for a common VAT system in 1987. The proposals were based on the ‘country of origin’

principle, i.e. taxation takes place in the country where the goods reside when the sale occurs. Other

key features of the proposals were a harmonised tax structure and a single mechanism for distributing

VAT to the Member States in which the consumption took place. However, Member State resistance

to these proposals led to the introduction of transitional arrangements in 1989 which allowed VAT to

be collected at the Member State of destination under a national rate.

A second attempt at harmonising VAT was made in 1996. The Commission proposed a

programme in which taxation would be based in one single Member State, and redistribution of tax

would take place based on official macroeconomic statistics. It also envisioned an eventual definite

VAT system. The lack of progress on the programme in the Council led the Commission to present a

new Communication on VAT in 2000, which led to the adoption of the 2006 Directive. The 2008

‘VAT package’ also introduced significant changes. As of 2010, B2B supply of services is taxed

based on the location of the consumer and as of January 2015 taxation of telecoms, broadcasting and

electronic services takes place in the Member State of consumption (i.e. ‘the destination principle’).

This is done through a mini one-stop-shop (MOSS) scheme, in which businesses fulfil the VAT

obligations (registration, declaration and payment) through a web portal in their Member State of

establishment and the VAT revenue is then transferred to the Member State of the consumer. Thus a

seller of electronic services is required to charge VAT in the country of consumption, but will only

register and account for VAT in their Member State of establishment.

The overarching VAT framework is nevertheless in the transitional phase that was established

almost 30 years ago. The review process of the VAT system began in 2010, with the Commission’s

Green Paper on the future of VAT – towards a simpler, more robust and efficient VAT system. It

acknowledged that the existing system had not proven to be successful mainly due to the

administrative burdens created by compliance to varying VAT rules across the EU, stating that

reduced burdens would enable businesses to become more competitive (European Commission,

2010c). The attached public consultation focused on key issues such as cross-border transactions and

increasing harmonisation. It received a total of 1776 responses; the summary report of the responses

notes that 1115 of those responses were from non-profit associations in Sweden and Finland, due to a

misunderstanding regarding the interpretation of the VAT Directive that is not linked to the Green

Paper (European Commission, 2011c).Of the 611 other responses, national associations accounted of

the biggest share of replies (35%) followed by individual businesses (31.9%). Replies from European

associations of businesses, non-profit organisations and national associations accounted for 12.3%.

A majority of the respondents stated that the existing VAT system was not efficient within the

single market, with the key issue being the fragmented application of the VAT rules across the EU

which creates complex administrative burdens. Respondents also highlighted the fact that a lack of

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harmonisation between the Member States has resulted in the weakening of economic neutrality in the

EU, as businesses have to make economic decisions (i.e. transport routes) based on tax. Additionally,

businesses mentioned the necessity of seeking specialised legal advice concerning cross-border

activities, noting that this is a financial burden SMEs often cannot afford (European Commission,

2011c).

Regarding the country of origin principle, respondents acknowledged that although they

would prefer such a solution, they believed that it was unlikely that the political will among Member

States could be found to implement such a set of harmonised rules. Nevertheless, a majority of the

respondents were in favour of the use of Regulations if it was deemed necessary to introduce new

legislation, as it would ensure the maximum amount of harmonisation and implementation across the

EU (European Commission, 2011c).. Another issue addressed in the consultation relating to VAT in

the digital single market was whether respondents considered the MOSS as a relevant simplification

measure. Those in favour stated that it would be a significant reduction of burden. Those opposed to

the mechanism noted that the extension of the mechanism should only take place following its

implementation in the telecoms sector in 2015, as to give valuable experience for its construction and

efficiently address any challenges that might arise, e.g. Member State incapacity to implement

sufficient IT systems (European Commission, 2011c).

Based on the results of the consultation, the Commission published a Communication on the

future of VAT on December 6 2011. It acknowledged two fundamental issues regarding VAT: the

publication of the Green Paper and the subsequent public consultation created expectations for change

but that reconstruction of the VAT regime would be a long-term project (European Commission,

2011a). The Communication also set out the principles on which the reform of the VAT regime would

be based on: simple; efficient and neutral; and robust and fraud proof (European Commission, 2011a,

p. 5 – 6). These principles aim for a creation of a VAT regime throughout the EU based on a

standardised set of rules, ensuring that tax is paid to only one Member State administration, with a

particular focus on enabling European tax administrations to work together effectively. Additionally,

the Commission described the implementation of MOSS as a “high priority” (European Commission,

2011a, p.7) and further stated its vision to broaden the scope of the mechanism beyond the telecoms

sector. Although it did not provide examples of the sectors into which it would extend the mechanism,

it is likely the Commission would have been considering expanding it into e-commerce VAT. It

should also be noted that the Communication does not contain any references to the role of VAT in

the development of the digital single market, indicating that the priorities at the time lay in resolving

VAT issues in the offline single market.

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In 2014, the Commission High Level Expert Group on Taxation of the Digital Economy13

published a report detailing its recommendations for taxation in the digital economy, including VAT.

Firstly, the Group stated that although it supported the creation of a VAT system fully based on the

destination principle, such an achievement needs to be underpinned by “trust between Member States,

trust of parliaments and citizens, and the trust of the business community to be acceptable” (European

Commission, 2014a, p.37). Consequently, it suggested that the Commission should take cumulative

and well implemented measures in order to gain trust. Secondly, the Group recommended the broader

extension of the MOSS scheme to all B2C supplies of goods throughout the EU, stating that it would

be a clear simplification in cross-border trade (European Commission, 2014a). However the Group

suggested reconsidering the requirement for auditing to be carried out the Member State of

consumption, as it as it could potentially result in 28 separate audits for the same business without any

coordination between the auditors. The potential for multiple information requests in multiple

languages would create significant administrative burdens, as well as decrease the level of efficiency

of the audits themselves. Therefore, the Group recommended the principle of the ‘home country

audit’ i.e. businesses are audited by the authorities of their Member State of establishment (European

Commission, 2014a).

A second public consultation was held in 2015, which sought the views of stakeholders on

issues relating to the modernisation of VAT: the implementation of the 2015 VAT rules;

implementation of the MOSS mechanism; simplification of procedures for small businesses and the

removal of the VAT exemption for non-EU suppliers. The VAT exemption refers to small

consignments (worth up to 22 EUR) from non-EU suppliers which enables the supplier to ship the

goods to European customers without paying VAT. The number of consignments benefitting from the

exemption has risen from approximately 30 million in 1999 to 115 million in 2013, and could rise up

to 300 million by 2020 (Ernst & Young, 2015). The Commission has estimated that the amount of lost

VAT which could have been paid on small consignments ranged between 550 million EUR and 850

million EUR in 2013, a figure which could increase up to 2.2 billion EUR in 2020. The exemption

creates market distortions in the EU, as non-EU suppliers (especially those which are geographically

close to the EU) of low value goods are at an advantage to EU suppliers (European Commission,

2015f).

13 The group was established by the Commission Decision C(2013)7082 final of October 2013. It consisted of a chair and 6 members from a number of institutions across the EU. It held 4 meetings in Brussels throughout 2013 and 2014; the aim of the group was to identify digital taxation issues in the EU and to present possible solutions.

20

A selection of non-anonymised responses14 was chosen from the contributions the

Commission published on its website. Despite the small size of the sample, the contributions were

chosen with consideration to include businesses of varying sizes, as well as national representatives

and consumer organisations. The findings show that the most common problems still encountered by

stakeholders when accounting for VAT across the EU are: registering and declaring for VAT;

understanding rules (e.g. regarding invoicing) in different Member States, and problems that arise

when dealing with different languages. However, although there is agreement that the MOSS

mechanism is a significant simplification that should be extended into the online sale of tangible

goods, stakeholders in the telecoms sector who have had experience with the MOSS mechanism state

that there are a number of problems, including no minimum threshold for MOSS registration; difficult

design and operation of national portals; lack of access to information in other Member States; no

common rules on invoicing and a lack of auditing by the Member State of identification. The

respondents also agreed that the VAT rules (e.g. regarding invoicing) applicable to businesses should

be of the Member State in which the business is established in; additionally, the respondents also

agreed that VAT exemptions should be removed for non-EU suppliers and agreed that cross-border

transactions should also have a threshold (i.e. no VAT to be paid up to a certain amount) although

there were differences between the amounts suggested.

As a part of the DSM strategy, the Commission committed itself to presenting new legislative

proposals in 2016 to simply VAT for cross-border e-commerce. The Action Plan on VAT which was

published on April 7 2016 presents a number of actions which have clearly been signalled by

stakeholders throughout the review process: extending the MOSS scheme to all cross-border e-

commerce; introducing simplification measures to enable SMEs to participate in e-commerce;

introducing home country audits and removing the VAT exemption for non-EU suppliers.

Cross-border portability of online content

Intellectual property-rights intensive/copyright-intensive industries are an important driver of

growth in the EU; the EU is a world leader in certain industries such as publishing, music and audio-

visual material. Over the 2008 – 2010 period, copyright related industries generated approximately 56

million direct jobs (26%) in the EU15 and contributed 4.7 trillion EUR to EU GDP (European Patent

Office & Office for Harmonisation in the Internal Market, 2013). Increasing online consumption and

digitisation can also be observed. In 2014, 75% of European citizens between the ages of 16 and 74

used the internet daily (Eurostat, 2016). Mobile devices such as smartphones and tables further

14 Etsy Ireland; Kingfisher; European and International Booksellers Federation; Tesco; Meridian Global Services; Planet Mu Records; Stoneham Press; Wizard Tower Press; European Games Developer Federation; Confederation of Danish Industry; Eurocommerce; BusinessEurope; Federation of European Enterprises; Bol.com; Confederation of British Industries; International Federation of the Phonographic Industry; Zomex; Ideacluster. 15An additional 20 million jobs were created indirectly by copyright-intensive industries, raising the share of employment by copyright-intensive industries throughout the EU to 35%.

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facilitate use, with 51% of citizens using a mobile device to connect to the internet; the use of tablets

especially has risen, from 18% in 2012 to almost 50% of European households using them in 2014

(Eurostat, 2016). Consumption of digital material has also increased: consumers spending on digital

video content increased by 400% between 2010 and 2013 (International Video Federation &

European Video Yearbook, 2014). Furthermore, more than 3000 on-demand audio-visual services

were available in 2014 (including catch-up TV and VOD services providing a catalogue of

programmes), with 25 million users in 14 Member States (European Commission, 2015f). These

services rely almost exclusively on content that is copyright-protected. The revenues from online on-

demand TV services reached 938 million EUR and online on-demand film revenues reached 588

million EUR in 2013 (European Commission, 2015f).

These figures show that there is a huge demand for access to content in the EU; these

demands also extend to the cross-border portability of content within the EU. Cross-border portability

refers specifically to two types of digital services currently available in the EU: transactional and

subscription services. Transactional services refer to content providers such as Amazon or iTunes,

which enable consumers to purchase or rent content on a one-off basis. Subscription services such as

Netflix establish a long-term contract between the consumer and the provider, i.e. the consumer pays

a monthly fee to be able to access the content. Both transaction and subscription services offer content

through a particular service provider, which means that the consumer is not fully in control of their

access to the content which they have purchased or subscribed to (European Commission, 2015f).

In 2011, 27% of European consumers indicated their interest in accessing audio-visual

content transmitted from their home country when temporarily residing abroad, e.g. while on holiday

or on business (Special Eurobarometer 366, 2011). The Body of European Regulators for Electronic

Communications (BEREC) has estimated that Europeans who travel at least once a year spend

approximately 11.6 days abroad (BEREC, 2014), which coupled with the increasing use of mobile

devices and online content services suggests that there is an interest among European consumers for

cross-border content portability. A Eurobarometer survey on the cross-border access to online content

shows that 33% of the respondents who did not have a paying subscription to an online content

service would consider it important to have access to it when in another Member State (Flash

Eurobarometer 411, 2015). The study also shows that age is an important factor: 65% of the

respondents aged 15 to 24 and 50% of those aged 25 to 39 stated that they would consider it important

to be able to travel with the service they are paying for, if they decided to subscribe to one (Flash

Eurobarometer 411, 2015).

Consumers who have attempted to access content they have paid for when in a different

Member State, however, do encounter problems. The Commission’s survey on the obstacles in the

digital single market shows that of the 31% respondents who have attempted to access content from a

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national service provider, 43% were denied from doing so (European Commission, 2015l). The

respondents’ most cited reasons for the denial of access are: refusal by the content provider (48%);

refusal by the internet service provider (28%); and ‘other reasons’, cited by 24% of the respondents

(European Commission, 2015l). Refusal to access to content across borders is a result of the partial

portability of digital content providers, which occurs in three different ways: the consumer has the

content downloaded directly onto their device but cannot fully access it in a different Member State;

the consumer’s access is limited to a selection; or the consumer’s access is limited to the catalogue

available in the Member State, i.e. the content offered on Netflix varies between countries (European

Commission, 2015f). Partial portability is predominantly present in the audiovisual content sector

(e.g. through standalone VOD services and TV operator catch-up services) since the content they

provide is subject to copyright. The availability of content is thus determined by the licensing

practices of right-holders and the commercial practices of service providers, both of which are often

driven by high investments in return for territorial exclusivity. As a result, the cross-border

accessibility in the EU ranges from 0.4% to 3.8% (Alaveras, Gomex-Herrerra & Martens, 2015).

Increasing cross-border availability of copyright-protected content has been on the EU agenda

since 2011, when the Commission first published the Green Paper on the online distribution of

audiovisual content and launched the debate on the opportunities and challenges it presented. In the

Green Paper, the Commission already expressed an interest in the extension of the country of origin

principle present in the Satellite and Cable Directive16, as the application of the principle would not

affect the contractual agreements made between licensees and rights holders. The extension of the

principle was also supported by most stakeholders in the responses to the Green Paper. Furthermore,

the Green Paper further reiterated the commitment the Commission had already made to increase the

availability of online services through the creation of a single and comprehensive framework for

copyright in 2011.

In December 2012, a stakeholder initiative was announced in the Communication on Content

in the Digital Single Market. Called Licenses for Europe, the aim of the initiative was to bring

together stakeholders in structured working groups to discuss the potential of industry-led action in

bringing online content to European consumers; one working group was dedicated specifically to

cross-border portability. Following the completion of the initiative in 2013, stakeholders in the

audiovisual industry released a joint statement, in which they stated their willingness to work towards

the cross-border portability of audiovisual content. The signatories17 affirmed their interest in the

16 The country of origin principle in refers to Article 12 of the Directive (93/83/EEC) which states that that the broadcast of a satellite transmission takes place in the Member Sate from where the signal is sent to satellite, and therefore not in all of the other Member States in which the broadcast can be received. 17 Association of Commercial Television in Europe (ACT), European Coordination of Independent Producers (CEPI), Europa Distribution, EuroVoD, Federation of European Film Directors (FERA), International Federation of Film Distributors Associations (FIAD), International Federation of Film Producers Associations (FIPAF), Independent Film & Television Alliance (IFTA), International Video Federation (IVF), Motion

23

development of cross-border portability of legally acquired audiovisual material, but stressed that

potential solutions would have to be industry-led and based on clear consumer demand. Additionally,

the joint statement also calls for sustainability in two different ways: firstly, through maximising

distribution revenues in order to be able to maintain the sustainability of the sector in Europe; and

secondly through allowing operators to experiment with different business models. The second point

is related to sustainability because in order for cross-border portability to be viable and address

consumer demand, operators offering portability will need to take into consideration the rapid pace of

technological and digital innovation. Therefore, prescriptive measures run the risk of becoming

outdated and unsustainable because consumers would shift to different services that meet their

demands.

Following the completion of the initiative, the then-Commission for Internal Market and

Services Michel Barnier stated that “[w]e want to monitor the implementation of these pledges to

ensure that they are kept and truly make a difference in real life”(European Commission, 2013b).

However, in the two years following the completion of Licenses for Europe, stakeholders have failed

to adopt any concrete measures to achieve the goals set out in the statement, effectively rendering the

initiative (or at least, a significant aspect of it) a failure18. Lack of progress in a market that is

otherwise very dynamic could be explained by the reluctance of both right-holders and industry

service providers to negotiate cross-border portability into new licenses when standards or best

practices have not yet been identified. A lack of clear guiding principles risks leading to diversified

and fragmented practices throughout the EU, e.g. service providers might have varying

understandings of the conditions necessary for portability, such as the length of stay in another

Member State. Secondly, both service providers and right-holders might be reluctant to re-negotiate

the terms of existing licenses to take into consideration portability, especially when many licenses

warrant territorial exclusivity. A Commission monitoring exercise on the access restrictions of 17

audiovisual content providers19 based on their terms of use found that only one service provider

(Filmotech) did not have any explicit territorial restrictions, and the remainder of service providers

limited access through an IP check, e.g. Sky Now is only available to UK residents accessing the

service within the UK (European Commission, 2015g). Furthermore, amending existing licensing

agreements might incur significant administrative costs, which are particularly burdensome for

smaller service providers.

Picture Association (MPA), Society of Audiovisual Authors (SAA) and Sports Rights Owners Coalition (SROC)18 European Digital Rights (EDRi) already proclaimed Licenses for Europe to be a failure following its completion in 2013 because of the lack of consensus among stakeholders on how EU copyright law reform should best proceed 19 iTunes, Sky Now, MyTF1, CanalPlay, Maxdome, RTL Now TV, Magine TV Germany, Universcine, Proximus TV Partout, Filmin, Filmotech, Mediaset Infinity, ChiliTV, Onet VoD, Voyo Bulgaria, Nova Play.

24

The Communication on Online Content in the Digital Single Market itself was not a major

step. Aside from launching the Licenses for Europe dialogue, it merely reaffirmed the Commission’s

commitment to reviewing the EU copyright framework, with – at the time – potential to introduce

legislative reform proposals in 2014. Following the completion of the Licenses for Europe initiative,

and building on previous consultations, the Commission launched its most comprehensive review

attempt in December 2013: a public consultation on the review of the EU copyright rules. The

consultation covered a broad range of topics which were identified in the Communication as the

priority areas in the copyright review: “territoriality in the Internal Market, harmonisation,

limitations and exceptions to copyright in the digital age, fragmentation…and improve[ing] the

effectiveness and efficiency of enforcement” (European Commission, 2012d, p.5). As a result, the

Commission received more than 9500 replies and approximately 11000 messages with questions and

comments relating to the consultation.

A number of questions in the consultation specifically pertained to cross-border portability of

digital content. Citizens (referred to as end users/consumers) were asked to identify the problems

faced when attempting to access online content and services in other Member States. The problems

identified echoed the issues already mentioned: consumers are regularly faced with restrictions based

on their geographic location, determined by their IP address. Examples provided included BBC

iPlayer, which is only available with a UK IP address and the iTunes store and Netflix only providing

limited catalogues depending on the location of the consumer20. Respondents also noted that being

directed to a national website or national versions of a content provider limits freedom of choice,

especially when different content is available residents in other countries, and therefore called for

access to all online content, regardless of whether they are directed to a national website (European

Commission, 2014b). While these points are certainly valid from the consumer perspective, it is

doubtful that the average European consumer is aware of the complex licensing agreements and the

variety of factors that have to be taken into consideration, which often result in territorial restrictions.

Service providers were asked to highlight the problems they encounter when seeking to

provide cross-border services in the EU, and whether they are required to impose territorial

restrictions when they have multi-territorial rights. Service providers of digital content reported that

there is a lack of crucial information on the clearance and distribution of content, e.g. it is often

unclear who the responsible authorities are for copyright issues in certain territories(European

Commission, 2014b). Other commonly mentioned issues which have to be taken into consideration

when seeking to provide content cross-border are: cost of compliance with divergent consumer

protection laws (especially with regard to the protection of minors); costs of subtitling and dubbing, as

20 Each iTunes store is localised, meaning that customers are not able to access the iTunes stores of different countries, e.g. the Danish iTunes store is not available outside of Denmark, and a Danish customer residing in a different Member State will have access to that particular iTunes store only. There may also be differences in the content offered, i.e. special offers in different Member States.

25

well as customer care in different languages; national rating systems, and a lack of common technical

standards across the EU. Furthermore, they also pointed out that there are economic factors (such as

income levels and consumption trends) across the EU which make achieving a single price for some

forms of digital content (e.g. video games) impossible (European Commission, 2014b).

Audiovisual services note that even if they wished to offer cross-border portability, they

found that there was a lack of demand which would make it a worthwhile investment: demand for

portability is often limited to areas with a common language and to large migrant populations

(European Commission, 2014b). VOD platforms in particular stated that they were contractually

obliged to impose territorial restrictions, and therefore have to employ practices such as geo-blocking

to prevent consumers from accessing content. Collective management organisations (organisations

with aggregate the rights of copyright holders and grant licenses to commercial users on the behalf of

the copyright holders) in the audiovisual sector stated that although they do grant multi-territorial

licenses, they were often limited by territorially limited mandates given to them by the copyright

holders(European Commission, 2014b). Broadcasters also stated similar reasons for not providing

cross-border services, as considerations such as consumer demand, cost of marketing and the ability

to provide customer care in different languages do not provide enough incentives(European

Commission, 2014b). Additionally, broadcasters and distributors who are financing productions are

often bound by licensing agreements which demand territorial exclusivity in order to enable them to

make a return on their investments.

The public consultation does however reveal a lack of consensus among stakeholders on the

necessity of further legislative changes at the EU-level. Commercial broadcasters (private

broadcasters owned by corporate media, often serving commercial interest) stated that they do not

find any new legislation necessary; public service broadcasters (those offering programmes for public

benefit, rather than purely commercial gain) believed that the country of origin principle which is

currently applicable to the Satellite and Cable Directive should extend to the (re)transmission of

programmes via online services (which had already been proposed by the Commission in 2011 as a

possible policy option). Service providers supported the extension of the country of origin principle,

stating that licenses should allow consumers to travel within the EU with the content they have

purchased (European Commission, 2014b). Service providers also called for simplification of the

licensing process and increasing information and transparency, recalling the Global Repertoire

Database initiative as an example21.

21The Global Repertoire Database project began in 2008, following the Online Commerce Roundtable initiated by Neelie Kroes, the then-Commissioner for Competition. The roundtable consisted of a selection of music rights holders, music service providers and consumer representatives (including iTunes, Amazon, and Universal Music Publishing Group). Following its completion, the Commission invited the participants to form the Global Repertoire Database Working Group. The aim of the project was to create a central database that lists the owners, administrators and beneficiaries of musical copyright in order to allow licensees to easily identify who owns the copyright, and facilitating more efficient distribution of royalties. It was declared a failure in 2014

26

The Member States who responded to the consultation stated that they did not view cross-

border portability as a major problem, but rather as an issue that requires discussion (European

Commission, 2014b) . They also believed that the existing frameworks are already sufficient,

mentioning the Licenses for Europe initiative and the importance of enabling industry-led solutions;

ensuring the proper implementation of the Collective Rights Management Directive22, and using the

case law of the ECJ as the means for fostering further cross-border portability of content without

resorting to the introduction of new legislation.

Final rounds of stakeholder discussions were held throughout 2015 by the Commissioner for

Digital Economy and Society, Gunther Oettinger and the Directorate General for Communications

Networks, Content and Technology (DG CONNECT). The discussions were centred on possible EU

intervention on content portability and what the realistic policy options are; however the Commission

has not released any information on which stakeholders were present, beyond stating that they were

representatives of consumer organisations, rights holders, online service providers and broadcasters

(European Commission, 2015g). The Commission also states that several stakeholders signalled a

willingness to work towards solutions enabling portability, although there appeared to be

disagreement between stakeholders on whether EU intervention should be legislative (supported by

consumer representatives and the ICT sector), or merely facilitative, which was supported by the film

sector and broadcasters (European Commission, 2015g).

The discussion surrounding online content and its portability reached the final stage through

its inclusion in the DSM strategy and the subsequent proposal for a Regulation on cross-border

portability, which was presented on December 9 2015. The proposal was accompanied by an Impact

Assessment, which examined potential policy options and their outcomes. In the first option, the

Commission would act as a facilitator because it would provide guidelines to service providers on

how to achieve portability. Without those guidelines being binding, this option would most likely lead

to differentiated licensing practices throughout the EU. The second option presented is a “legal

mechanism to facilitate the cross-border portability of online content services” (European

Commission, 2015g, p. 23). The legal mechanism (a binding instrument such as a Regulation or a

Directive) would require a service provider to enable portability to a consumer who has legally

acquired the content in their Member State of residence and is temporarily residing in another

Member State. The third option contained the same legal mechanism as in the second option but with

two added elements: an obligation to provide the same content and functionalities when temporarily

abroad as when in the Member State of residence; and a prohibition on portability restrictions in

contracts between right holders and service providers. The Impact Assessment found that the third

when several collective management organisations began pulling out, and the project lost funding. 22 The Directive (2014/26/EU) establishes EU-wide standards on collective management organisations and will ease multi-territorial licensing of musical works for online use.

27

option would be the most effective one, as it would ensure full portability regardless of licensing

practices; under the first two options, service providers would be able to continue to restrict

portability through licensing agreements with rights holders.

The third option therefore takes shape in the proposed legislation. A Regulation was chosen

as the legal instrument as it would ensure systematic application of the rules throughout the EU, as

well as offering full legal certainty. There are a number of key elements in the Regulation. Firstly,

although it does provide a definition of temporary presence as “[the] presence of a subscriber in a

Member State other than the Member State of residence” (European Commission, 2015k, p. 16) it

does not otherwise provide a time cap or limit. Therefore a subscriber could be temporarily present in

another Member State for a week-long holiday or a business trip of several months, and the portability

would not be affected, so long as they are upholding the terms of their contract, i.e., through monthly

payments. It is likely that this was done in order to create a level-playing field and prevent service

providers from imposing their own time limits.

Another notable element of the Regulation is Article 3, which states that the obligation to

cross-border portability will not “extend to any quality requirements applicable to the delivery of

online content…the provider is subject to when providing this service in the Member State of

residence, unless otherwise expressly agreed by the provider” (European Commission, 2015k, p. 17).

Consequently, service providers will not be held liable for the quality of the content they provide

when it is accessed in another Member State (unless they have explicitly contractually agreed to do

so), as service providers themselves are not responsible for the content delivery networks. For

example, a consumer accessing high definition content in Germany might find that the quality is

decreased when temporarily present in Italy due to a longer path of delivery or insufficient bandwidth.

The explanatory memorandum to the Regulation notes that the quality delivery was a concern

signalled by stakeholders. This was presumably during the discussions between stakeholders that took

place during 2015, as stakeholders were made aware of the fact that legislation would be proposed

and therefore voiced concrete concerns, rather than general ones. Other concerns which were voiced

by stakeholders and taken into consideration in the Regulation are: not imposing the portability duty

on service providers which are free of charge and do not require residence authentication (the

Regulation applies both to paid services and those which are free but require residence authentication)

and enabling service providers to establish the conditions in accordance with the requirements in the

Regulation.

Personal data protection

Trust is an essential element to fostering a strong digital environment. A fundamental aspect

of trust is the protection of personal data which is shared online through various outlets such as social

media, search engines, online platforms and e-mail. The most common worries concern the lack of

28

transparency and information about the ways in which personal data is collected, what it is being used

for and whether the original collector of personal data is passing it on for use to potential third parties.

In the EU, Eurobarometer surveys on data protection show that European citizens are becoming

accepting of the fact that disclosure of personal data online is part and parcel of life in the digital age,

they do not feel fully in control of the data they share. In 2011, 78% of the respondents felt that they

had some control over the data they share, with 20% feeling no control at all (Special Eurobarometer

359, 2011). These figures decreased to 50% of the respondents feeling that they have some control

over their personal data online, and 31% stating they have no control in 2015 (Special Eurobarometer

431, 2015). Other significant concerns include: citizens feeling that they have no choice but to provide

personal data to obtain products and services (58%); having the same rights over their personal data

regardless of the country in which the authority or private company is located (89%); and 69% of the

respondents stated that they would prefer to give their explicit approval before the collection of

personal data (Special Eurobarometer 431, 2015).

One of the most common reasons why people provide personal data online is to make a

payment or have a purchase delivered (Special Eurobarometer 431, 2015), and as a result, a lack of

trust also extends in the protection of data in the e-commerce sector. 30% of consumers have

expressed concerns about the potential misuse of their personal data when purchasing goods online

domestically; 26% of consumers report that they are worried about their payment card details being

stolen when purchasing online goods domestically (European Commission, 2015l). Interestingly,

concerns about misuse of personal data (18%) and payment card details (17%) are less dominant

when consumers are purchasing online cross-border, as issues linked to delivery (e.g. high delivery

costs and times, concerns about consumer rights) are more dominant (European Commission, 2015l).

Nevertheless, Cardona, Duch-Brown and Martens (2015) find that consumers are 8.5% less likely to

have purchased online goods cross-border if they had concerns about the potential for personal data

misuse.

The data protection framework in place prior to the 2015 data protection reform was the Data

Protection Directive23 which was adopted in 1995. It had followed the adoption of specific regulations

during the 1970s and 1980s on personal data processing, such as the 1980 OECD Privacy Guidelines

and the 1981 Council of Europe Convention No.108; as well as the 1978 French Act regarding

informatics, files and liberties and the UK Data Protection Act of 1984. At the EU level, little

harmonisation had occurred and the lack of an adequate personal data protection framework was

perceived as a barrier to the internal market. Therefore, the 1995 Directive was seen as a crucial

instrument to improve cross-border trade. A core tenant of the Directive is that it concerns personal

data as opposed to privacy, as a number of provisions apply to acts of data processing which are not

related to privacy or sensitive personal data. The key principle of the Directive is that data processing 23 95/46/EC.

29

is lawful through certain conditions, e.g. through the consent of the individual; it is necessary for the

performance of a contract; compliance with legal obligations; and for the purposes of legitimate

interests. Article 27 of the Directive also encouraged self- and co-regulatory approaches to data

protection through codes of conduct.

Rapid digital innovation developments led the Commission to begin reviewing the data

protection framework in the 2009, with a public consultation as the first step. The consultation was

focused on two issues: whether the existing framework was sufficient to deal with the challenges in

data protection which had emerged since the adoption of the Directive in 1995, and whether new

action should be taken to strengthen the Directive. The consultation received 168 responses; a

summary report was also published by the Commission.

29 EU citizens responded to the consultation; the Commission notes that the individuals who

responded “seem[ed] very much aware of the importance of the current review of the European legal

framework and their contribution” (European Commission, 2010d, p.2). This implies that the

Commission might have received a particularly biased citizen response, as only those with a strong

interest in the subject or specific issues that they wish to raise would respond to the consultation. The

challenges identified by the individual respondents are largely concerned with digital innovations

which complicate the application of the Directive, as well general implementation concerns.

Examples of new digital innovations provided by the respondents include behavioural advertising

(collection of online browsing behaviour by online companies in order to create more relevant and

targeted ads) and privacy enhancing techniques (applications or mechanisms which used in

conjunction with online services or applications allows the user to protect personally sensitive

information). More broadly speaking, the issue that the individual respondents identified is that of

increased self-determination within the online world, i.e. through use of social networks and media.

The challenge therefore is whether the Directive is capable of providing a sufficient framework vis-à-

vis increased independence online (European Commission, 2010d). The challenges described by

organisations which replied to the consultation echo those of citizens in some respects. Although it

was noted that the core technology-neutral principle of the Directive is sufficiently flexible to address

the issue of new technologies, the interpretation of the Directive should be carefully considered. For

example, in the case of cloud computing – the use of a remote network of services hosted online to

manage, store and process data – the concept of ‘data controller’ would have to be considered. The

report also notes that several stakeholders also had doubts over the legality of behavioural advertising

(European Commission, 2010d).

Organisations also drew attention to the necessity of updating definitions within the Directive,

especially of ‘data controller’ and ‘data subject’. It was noted that the distinction between data

controller and subject often becomes unclear when users generate their own information and data,

30

therefore becoming both data controllers and data subjects (European Commission, 2010d).

Organisations also called for a consistent approach regarding ‘consent’, especially when consumers

need to rely on the opt-out consent approach. The opt-out approach relies on the consumer giving

consent by not declining to give consent, e.g. when purchasing goods online, consumers are often

presented with a checkbox and given the option to uncheck it (therefore, opting out) from sharing

their information with affiliate websites, often for marketing purposes. Clarification was also called

for with regards to the definition of ‘personal data’ in order to include several issues which had

emerged since the adoption of the Directive: behavioural profiling; whether the use of an IP address

could be considered as personal data; and the inclusion of traffic data (European Commission, 2010d).

Related to the topics of personal data and consent is the principle of Privacy by Design;

several organisations signalled that they wished to see the principle enshrined in the data protection

framework (European Commission, 2010d). The Privacy by Design principle was first established

during the 1990s by Dr. Ann Cavoukian, the Information and Privacy Commissioner of Ontario, and

is based on 7 foundational principles24 which together state that user privacy should not be guaranteed

only via compliance with legal frameworks, but rather, that maximum user privacy protection should

be the modus operandi of all organisations. The principle has been adopted globally: firstly in 2010, at

the annual assembly of International Data Protection and Privacy Commissioners, where it was

recognised as a fundamental element of privacy protection; secondly, the U.S. Federal Trade

Commission recognised it in 2012 as one of its three recommended practices for protecting personal

privacy.

Organisations also had several concerns regarding the implementation of the Directive. They

noted that there is a lack of harmonisation across the Member States, especially with regards to

interpretation of the articles (European Commission, 2010d). For example, Data Protection

Authorities (DPAs) across the EU have issued their own interpretation of Article 4 of the Directive,

resulting in fragmented national laws which create additional burdens for organisations and

businesses. Furthermore, they also raised concerns regarding the applicability of the Directive (or

more generally, about the applicable national data protection regime) when data is processed in one

Member State but the data controller is a non-EU company, or in cases where the data processing

occurs in one Member State but the data processed is that of residents of another Member State. The

report notes that some organisations were in favour of establishing a mutual recognition regime in

which one DPA takes the role of the lead regulator, and data controllers are subject to the national

laws of only one Member State, therefore reducing administrative burdens for organisations, and

encouraging cooperation between different Member State lead DPAs (European Commission, 2010d).

24 “Proactive not reactive and preventative not remedial; privacy as the default setting; privacy embodied into design; full functionality – positive-sum, not zero-sum; end-to-end security – full lifecycle protection; visibility and transparency; respect for user privacy”

31

In general, organisations were in favour of avoiding potentially prescriptive legislation, instead

allowing organisations to self-regulate and establish their own chains of accountability. Public

authorities (data protection authorities and Member State governments) who responded to the

consultation shared the same concerns as organisations, especially regarding a lack of harmonisation

and reduction of administrative burdens (European Commission, 2010d). Other issues they

highlighted were the necessity of data protection accountability regarding new technologies such as

cloud computing; a general data breach notification system; awareness-raising among citizens and

strengthening the resources and tools available to DPAs.

The 2009 public consultation confirmed that although the core principles of the Directive: the

protection of fundamental rights (freedom of individuals and the right to the protection of personal

data) and the further achievement of the internal market – remained sound, the application of the

Directive to new technologies and increased demands for online privacy posed significant challenges.

The results of the consultation were directly used by the Commission its 2010 Communication on a

comprehensive approach on personal data protection in the European Union25. The Commission set

out the areas of concern, i.e. “strengthening individuals’ rights” and “enhancing the internal market

dimension” (European Commission, 2010a, p. 5, 10) but it did not announce any substantial policy

plans. Instead the Commission stated that it would explore, examine or consider the ways in which it

could take concrete steps to address the issues identified, e.g. “The Commission will examine the

means to achieve further harmonisation of data protection rules at EU level” (European Commission,

2010a, p.10). It is likely that the Commission did not feel adequately informed on certain issues (such

as new technologies) in order to be able to address them concretely. However, with regards to issues

such as non-compliance and a lack of harmonisation between Member States, the Commission had

already been aware of them as early as 2003 when it carried out the first implementation report26.

Interestingly, in the follow-up Communication to the Work Programme the Commission stated that it

“[did] not envisage submitting any legislative proposal to amend the Directive” (European

Commission, 2007) due to finding the existing framework sufficient.

Therefore, together with the Communication, the Commission launched a second public

consultation in 2010. Unlike the 2009 consultation, the second one focused on the issues identified in

the Communication and the stakeholder attitudes towards potential further legislative action. The

consultation received a total of 305 responses, of which 288 have been published online due to some

25 The Communication also focused on data protection rules in the area of police and judicial cooperation in criminal matters, which is beyond the scope of this research. 26 The implementation report found that the three main issues regarding the Directive were a lack enforcement across the Member States; uneven compliance among data controllers and a low knowledge among European citizens on their data protection rights. The Work Programme consisted of 10 action points, which largely consisted of structured dialogues with Member States and supervisory authorities.

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respondents requesting anonymity. The issues covered in the consultation can be grouped under four

headings.

1. Coherent application of data protection rules

The report notes that a majority of the respondents referred to the challenges posed by

technological developments, e.g. the previously noted cloud computing and social networks. A

coherent sectoral approach was referred to by some stakeholders as one way to address the issue of

technological developments. Stakeholders also identified the need to update the definitions of the

provisions such as ‘data controller’ and ‘personal data’ as another manner in which to ensure coherent

application of the data protection rules (European Commission, 2012b). Stakeholders had differing

views on how coherent application could be further achieved. DPAs and other public authorities

argued that there is a need for coherent enforcement mechanisms, stating that self-regulation could be

an effective means of ensuring full application of the rules (European Commission, 2012b). Business

associations stated that coherence could be achieved by introducing an obligation to mutually

recognise the data protection regimes between Member States (European Commission, 2012b).

2. Data breach notifications, right to be forgotten and Privacy by Design

There was general agreement across the stakeholders that data breach notifications should be

extended beyond the telecoms sector and the e-Privacy Directive, as it is considered an essential

aspect of accountability on the part of the service provider. It was, however, noted that in the interests

of both businesses and DPAs that over-notification should be avoided as it would create significant

administrative burdens. The industry sector in particular highlighted the fact that administrative

burdens of notification should not be created in case of insignificant breaches which could be resolved

without notifying those involved (European Commission, 2012b).

Data minimisation refers to the principle that the data collected by a data controller should not

be excessive and limited to what is directly necessary to accomplish a specific task. Public institutions

and DPAs in particular have expressed that they agree with the importance of data minimisation;

service providers and the business sector (especially in finance and insure) however note that the

principle of data minimisation is already present in Article 6.1 (b) and (c) of the Directive, which

states that data collection must not be excessive with regards to the purpose for which it is collected.

Furthermore, some stakeholders also highlighted the fact that data minimisation could potentially

create a conflict with industry requirements which necessitate the retention of data for legally

sanctioned purposes (European Commission, 2012b).

Citizens claimed that the practice of excessive collection of personal data – contrary to the

principle of data minimisation – is widespread, and that they have an expectation for more options to

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remain anonymous online. This has been countered by claims by business stakeholders, which state

that additional anonymisation options would often lead to costly administrative burdens (European

Commission, 2012b). Consumer organisations stated that the data minimisation principle should

become one of the leading principles in any modern approach to data processing; this is closely

related to the principle of Privacy by Design, which received support from citizens and DPAs, who

further claimed that the principle could strengthen accountability and individual rights. However,

stakeholders in the private sector pointed out that the concept is too vague and difficult to measure

adequately if it needs to remain technologically-neutral, in line with the rest of the data protection

framework (European Commission, 2012b).

The principle of the right to be forgotten – the right of individuals to have their data deleted

when it is no longer necessary to do so for legitimate purposes, for example, when the individual has

withdrawn their consent or the data storage period has expired – received diverse responses.

Stakeholders from technology companies, the trade industry and service and content providers pointed

out that if the right to be forgotten would be included in the framework, a distinction should be made

between it and the right to delete one’s own personal data (which has already been included) should

be made. Technology companies also suggested that after a period of time, anonymisation could

replace deletion as deletion could cause businesses significant additional costs (European

Commission, 2012b).

Public authorities, DPAs, privacy organisations and civil society organisations insisted on the

necessity of providing clear information, if the right to be forgotten was to be introduced. Civil

society and privacy organisations in particularly noted that awareness efforts would have to be

mounted in order to educate the European citizens that they have such a right (European Commission,

2012b). The citizen responses stressed the need for the right as an absolute necessity, especially with

regards to children and under-age users. Stakeholders, in particular DPAs and civil society

organisations stressed the need to develop legal provisions related to children’s protection from

advertising, requirements for information, parental consent and certain types of data which could not

be collected from children (European Commission, 2012b). However, other stakeholders did not

support the possible introduction of new provisions for children by stating that there are diverse rules

and understandings of what constitutes a child across the EU, as well as by pointing out the

difficulties in establishing a practical and fool proof mechanism for obtaining consent from children.

3. Reducing administrative burden and increasing accountability

The possibility of reducing administrative burdens was welcomed by most stakeholders,

especially businesses. DPAs also noted that the existing resources allocated to authorities were

insufficient for effective monitoring and notification of data breaches. Additionally, a majority of

34

public authorities supported the potential simplification of the existing notification procedure, e.g. to

reduce the obligation to notify when the data breach does not pose risks to the data subject. Some

stakeholders also argued for the mandatory appointment of a data protection authority in order to

increase efficiency among the data protection authorities (European Commission, 2012b).

Stakeholders also highlighted the necessity for clarifying the rules on the applicability of the

framework, especially regarding the territoriality of the Directive. Stakeholders suggested that

multinational companies carrying out personal data processing across several Member States, and

companies established outside of the EU but collecting data from EU citizens should also fall under

the scope of the legal framework (European Commission, 2012b).

The two public consultations were not the only forms of stakeholder interaction on the review

of the data protection framework. In July 2010, a series of meetings took place between the

Commission and non-public sector stakeholders on a variety of issues and challenges pertaining to

data protection and possible solutions. The background paper published by the Commission lists 60

questions, including whether data minimisation should be introduced into the legal framework;

simplifying the responsibilities of the data controllers; and increasing citizen awareness of their rights.

The issues discussed are thus very similar to the issues raised in the public consultations, but it would

appear that the Commission was seeking more specific information that could not otherwise be

provided within the context of a public consultation.

The reform of the data protection rules was presented by the Commission in January 2012. It

consisted of a General Data Protection Regulation and a Data Protection Directive for the police and

criminal justice sector. The final legislative steps took place in 2015: on December 2015, the

Parliament, the Commission and the Council reached an agreement on the new framework; the

agreements were also welcomed by the European Council of 17 – 18 December. The Council adopted

the Regulation and the Directive on April 8 2016; they were adopted by the Parliament on April 14.

The full official text of the Regulation was published in the Official Journal on May 4 2016.

The new Regulation includes a number of key changes which clearly reflect the views

expressed by stakeholders during the consultations. Article 2 of the Directive contained 8 definitions;

Article 4 of the Regulation now contains 26 definitions. The definition of ‘personal data’27 has been

expanded to include location data and online identifiers as information which could be used to

identify a person. The definition of ‘consent’28 has also been updated in order to include the provision

of requiring an “unambiguous indication…by a statement or by a clear affirmative action” (OJEU,

27 Defined in the 1995 Directive as “ any information relating to an identified or identifiable natural person (‘data subject’); an identifiable person is one who can be identified, directly or indirectly, in particular by reference to an identification number or to one or more factors specific to his physical, physiological, mental, economic, cultural or social identity”28 Defined in 1995 Directive as “any freely given specific and informed indication of his wishes by which the data subject signifies his agreement to personal data relating to him being processed”

35

2016, p.34). Article 7 of the Regulation (‘Conditions for consent’) further states that the data subject

has the right to withdraw their consent at any time. Consent with regards to children – which was also

an issue raised among stakeholders – has been explicitly addressed in Article 8. The Article states that

the processing of personal data for children below of the age of 16 will only be awful if consent has

been authorised by the holder of parental responsibility; the data controller will also be responsible for

verifying that the consent has been given. Taking into consideration the views of some stakeholders

that understandings of what constitutes a child and how consent should be addressed vary across the

EU, the Article states that the requirements will not “affect the general contract law of Member States

such as the rules on the validity, formation or effect of a contract in relation to a child” (OJEU, 2016,

p.38). Another notable addition to the list of definitions is ‘cross-border processing’ which

specifically refers to data processing activities across several Member States. Contrary to the views

expressed by stakeholders during both consultations, the definitions of ‘data controller’ and ‘data

processor’ remain unchanged, aside from the technical details, i.e. change from ‘national and

Community law’ into ‘Union or Member State law’.

Article 3 of the Regulation takes into account the concerns raised by some stakeholders on the

territorial scope of data protection. It explicitly states that the Regulation will be applicable to all data

processing activities when they are related to EU citizens, even when the data controller or processor

is established outside of the EU or the data processing takes outside of the EU.

Article 17 establishes the grounds on which individuals will have the right to be forgotten,

under certain grounds which include the removal of consent; unlawful processing or lack of legitimate

reasons for continued processing, e.g. no legal basis, processing is no longer necessary in relation to

the purpose for which the data was collected or processed, and erasure in order to comply with EU or

Member State law. As pointed out by several stakeholders during the second public consultation, a

right to be forgotten should not be applicable on certain grounds, which are recognised in the third

paragraph of Article 17. These include reasons of public interest (such as public health and scientific

and historical research) and compliance with legal obligations which require processing to be carried

out for the exercise of legal claims or in the interest of official authority granted in the data controller.

The Regulation introduces a number of measures designed to improve accountability and

efficiency. Article 56 establishes a ‘lead supervisory authority’ which will be responsible for data

controllers and processors who are established in several Member States or whose processing

activities have an effect on data subjects in different Member States. The lead supervisory authority

will also be responsible for monitoring and coordinating the activities of the other supervisory

authorities; the Regulation also refers to a ‘one-stop-shop mechanism’, in which the lead authority and

other supervisory authorities cooperate on specific cases (OJEU, 2016, p.23). Articles 60 to 62 also

36

set out the conditions for improved mutual assistance and joint cooperation between Member State

supervisory authorities.

Furthermore, Articles 33 and 34 on the notification of personal data breaches state that

notifications to supervisory authorities and the data subject concerned should only take place if they

are likely to present a “high risk to the rights and freedoms of natural persons” (OJEU, 2016, p.53).

Article 35 states that the data controller will be required to present a data protection impact

assessment if the controller is carrying out processing with the use of new technologies which might

present serious risks to the rights and freedoms of the data subjects, e.g. the large scale monitoring of

publicly available data. Thus, the impact assessment will require the controller to prove that they have

taken the necessary measures to mitigate or prevent high-level risks. Additionally, Article 37

establishes a data protection officer, which will be appointed by the controller or processor in cases

where data processing is carried out by a public authority or in which regular monitoring is necessary

by the virtue of the large scope of processing.

Unjustified geo-blocking

Geo-blocking has been subject to intense debate in the Commission, with Commissioner

Andrus Ansip, responsible for the Digital Single Market, even stating that “[he] hates geo-blocking”

(Teffer, 2015). The other EU institutions have also taken a similarly tough stance: the European

Parliament’s recommendations to boost the digital single market, including ending unjustified geo-

blocking, were approved with 551 votes to 88 and geo-blocking was one of the main priorities of the

2016 Dutch Presidency of the Council. There is clearly a strong will across the institutions to tackle

geo-blocking, and the Commission proposed two initiatives in the DSM strategy to address it: firstly,

to launch legislative proposals in 2016, which could potentially include changes to the e-Commerce

framework and Article 20 of the Services Directive; secondly, launching a Competition Sector Inquiry

focusing on the application of geo-blocking among e-commerce businesses.

Generally, geo-blocking refers to technical measures which prevent or disable access to

online content/services based on a pre-determined territorial area or a Member State. Within the EU

digital market, consumers may find that online shops based in a different Member State will not sell

goods and services, or will only sell them through a website that specifically targets their Member

State. If a consumer in Denmark wishes to access a certain website in France, their access could be

directly blocked due to their Danish IP address, or they could be re-routed to a Danish version of the

website without the possibility to revert to the original French website. Geo-filtering is another form

of territorial discrimination, referring to the cross-border online sale of goods/services but offer

different terms and conditions for the sale based on the location of the consumer. Examples of geo-

filtering (or diversified sales conditions) include charging cross-border consumers an additional

amount for their chosen payment option which a domestic consumer would not have to pay; or

37

offering the domestic consumer a variety of delivery options, such as express or next-day delivery, but

offering only the standard delivery option to the cross-border consumer (European Parliament, 2013).

Surveys have shown that European consumers are affected by territorial restrictions. A

Eurobarometer survey indicates that 10% of consumers who have engaged in cross-border online

shopping have been refused delivery from a foreign seller; 8% of consumers have been redirected to a

domestic website with differing prices and 5% of consumers have reported that the seller did not

accept payment from their country (Flash Eurobarometer 397, 2015). The relatively low percentages

of consumers who have reported a problem relating to geo-blocking would suggest that the issue is

not as major as the Commission has made it seem to be. This could be attributed for two reasons.

Firstly – as it has been previously discussed – the cross-border e-commerce market is still developing

in the EU, with a majority of who shop online doing so domestically and thus unlikely to encounter

geo-blocking. In this case, it is logical for the Commission to seek to remove barriers to cross-border

online trade as early as possible, in order to ensure that consumers do not encounter problems as the

market increases in size. Secondly, it could point to the general acceptance by European consumers of

territorial restrictions as the prevalent market reality, i.e. although consumers might be temporarily

inconvenienced, they will ultimately seek out options from domestic websites or those which ship to

their Member State.

Geo-blocking is a term which has assumed many definitions for the Commission. The Staff

Working Document accompanying the DSM strategy makes a distinction between geo-blocking and

geo-filtering, whereas the main strategy document does and therefore it is assumed that any legislative

proposals will address both. The results report of the sector inquiry also makes a distinction between

geo-filtering and geo-blocking but states that for the purposes of the report, geo-filtering is not

included (European Commission, 2016b). The 2015 public consultation on geo-blocking does not

make a distinction between geo-blocking and geo-filtering but introduces the concept of ‘other

geographically based restrictions’. On the one hand, the lack of a consistent definition may prove to

be counter-productive because it allows stakeholders to project their own assumptions and add further

complexity to the issue. On the other hand, the inconsistent definitions may be explained by the

Commission still being in the preparatory phase. Therefore it is likely that the Commission will have

a concrete definition that is applicable to geo-blocking at the European level when it presents its

legislative proposals. This approach risks the Commission proposing a definition which is either too

broad or too narrow, leading to further stakeholder dissatisfaction.

The current legislative framework relating to geo-blocking is based on two pieces of

legislation. Firstly, the e-Commerce Directive29 establishes the country of origin principle, which

states that if an action or a service is performed in one Member State, but it is received in another, the

292000/31/EC.

38

applicable Member State law is that of which the service or action is originally performed in. The aim

of the principle is twofold: to prohibit Member States from creating barriers that would restrict

services being provided by another Member State and to allow businesses to investigate foreign

markets without having to establish themselves permanently in that market.

Secondly, Article 20(2) of the Services Directive30 states that national authorities must ensure

that consumers are not discriminated based on their nationality or place of residence. Yet it also states

that differential treatment may be allowed if “…[the] differences are directly justified by objective

criteria”(OJEU, 2006, p.25); however, the notion of objective criteria is somewhat problematic

because there are no shared understandings of what such a criteria entails, nor how to assess or

enforce it. Complementary to the Services Directive is Article 8(3) of the Consumer Rights

Directive31 which imposes transparency obligations on online traders, i.e. if there are any delivery

restrictions, they must be clearly present. Furthermore, on a more general level, EU competition law

can address anti-competitive agreements made between businesses operating on the same, or

different, levels in the production and distribution chain; despite prohibiting businesses with dominant

positions from abusing their positions, competition law does not address barriers or restrictions which

arise as a result of business decisions made by non-dominant companies.

The results of the Competition Sector Inquiry reveal the justifications businesses have for

geo-blocking. The aim of the inquiry was to gather data and information on the current functioning of

the European e-commerce market, and to identify existing barriers. The Commission published a Staff

Working Document on the initial findings relating to the use of geo-blocking in e-commerce on

March 18 2016. The findings were based on more than 1400 replies, and they found that geo-blocking

is a widely used practice across the EU. Relating to the sale of consumer goods, it found that more

than a third of online sellers collect information on the location of the customer, with a view to geo-

block (European Commission, 2016b). The main forms of geo-blocking reported are the refusal to

deliver abroad; refusal to accept certain types of payment; and re-routing/blocking website access.

The two major reasons provided for geo-blocking are unilateral business decisions made by retailers

and contractual restrictions that are a part of agreements between retailers and suppliers. The product

categories most affected are clothing, shoes and accessories, followed by electronics, sports and

outdoor equipment (European Commission, 2016b). Regarding digital content, a majority of

respondents stated that they are contractually obliged by right-holders to geo-block consumers based

on their IP addresses (European Commission, 2016b).

The public consultation on geo-blocking was held from June to September 2015. The

consultation received 433 replies, approximately half of which were from consumers (251 replies). A

30 2006/123/EC31 2011/83/EC

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further 33 replies were from consumer organisations and consumer authorities. 136 replies were

received from companies and business associations; 13 from Member State authorities. The results

largely confirm the already known trends regarding geo-blocking. A majority of consumers and

consumer organisations (89.4%) reported that they have experienced some form of geo-blocking

when shopping online, with the most common types of geo-blocking being refusal to sell and deliver;

refusal of discount and price differences when shopping cross-border. Consumers also reported that

the sectors in which they are most frequently geo-blocked are the retail sector (e.g. when attempting

to purchase clothing and footwear, electronics and physical media); purchasing digital content; and

the leisure/accommodation sector as consumers reported having experienced geo-blocking when

attempting to purchase airplane tickets or rent a car (European Commission, 2016b).

Companies and business associations agreed that geo-blocking on grounds of delivery was

not justifiable, but still highlighted the fact that companies and businesses should be able to decide the

geographical scope of their activities. They also listed numerous other justifications for geo-blocking

in response to the following question, which they considered to be legitimate, including: national

VAT differences; health and safety rules; shipping costs; and cybersecurity concerns. Some

respondents also stated that they should be able to ‘geo-tailor’, i.e. set different prices in each market

according to the needs of that market (European Commission, 2016a). Public authorities also

expressed similar views, stating that legitimate reasons for geo-blocking in cross-border transactions

include cost of delivery; fraud related reasons; vary tax rates; different safety standards; and varying

levels of purchasing power across the EU; however, consumers and consumer organisations took a

general position against all forms of territorial restrictions (European Commission, 2016a).

Regarding possible policy responses, consumers were in favour of measures to increase

transparency and prohibit certain business practices. A majority of the consumer respondents (94%)

were in favour of a ban on discriminatory measures that ban access to websites; 87% also favoured

the creation of a set of rules that would prohibit certain discriminatory measures (European

Commission, 2016a).. Between 71% and 87% of the respondents also supported the creation of a list

of rules that would specify measures which either cannot or can justify differential treatment of

customers. A large majority of consumers also were in favour of a business obligation to provide

reasons during the transaction process of differential treatment based on the residence of the

consumer. The responses from companies and business authorities were less enthusiastic to such

suggestions however. Only 35% of the respondents agreed to the obligation to provide reasons for

differential treatment; and only 30% agreed to the creation of a list of reasons which could not justify

geo-blocking practices (European Commission, 2016a). Whilst business associations were supportive

of the aim to ban unjustified geo-blocking, they also highlighted the necessity to respect contractual

freedoms.

40

The Commission’s stance on the issue of geo-blocking is largely consumer driven, which is

understandable given its aim of the establishment of a single market. Nevertheless, it is also

problematic because the Commission seems to be pre-disposed towards legislative measures which

could seriously negatively impact European businesses and thus create the opposite effect from what

the Commission intended. The Commission announced that it would be introducing legislative

measures in the DSM strategy even prior to the launching of the public consultation and the

Competition Sector Inquiry; furthermore, the questions in the public consultation did not contain any

reference to the possibility of altering the Service and e-Commerce Directives, and those two

frameworks were mentioned only by the respondents. These two factors suggest that the Commission

had already decided that legislative measures would be the most effective, regardless of whether

stakeholders agreed or not. The Commission’s pre-disposition towards legislative action is also

demonstrated in the Inception Impact Assessment related to geo-blocking, in which it explicitly states

that “[b]etter enforcement in itself would fail to address the shortcomings of the current framework”

(European Commission, 2015c, p.8) and presents possible policy options, which include the creation

of lists of justified or unjustified geo-blocking; increasing enforcement via widening the scope of the

Consumer Protection Cooperation Regulation; improved transparency measures; and a ban on the

denial of access to a website and rerouting. However, besides stating that the existing legislative

framework is ineffective, the Inception Impact Assessment does not provide any suggestions on how

it would include targeted changes to the e-Commerce Directive and Article 20 of the Services

Directive.

Additionally, the Commission’s pre-disposal towards legislative measures runs contrary to its

overarching principle of reducing regulatory barriers in the digital single market, as it could

potentially limit the ability of businesses to offer their goods to European consumers. It also

backtracks on a Commission Staff Working Document from 2012 on establishing guidance on the

application of Article 20(2) of the Services Directive, which states that “…some instances justify

different treatment given the current degree of completion of the internal market” (European

Commission, 2012a, p.23). The Commission has already acknowledged that the issue of geo-blocking

is not as black and white as it would initially appear. In fact the same document already suggested a

suitable approach: “...a case-by-case analysis is required in all circumstances to determine whether

different treatment is being applied to recipients and whether or not that treatment is justified for

objective reasons” (European Commission, 2012a, p.13). A case-by-case approach would still allow

the Commission to address unjustified geo-blocking, without the potential of becoming too

burdensome for businesses and risking reducing consumer choice in the market.

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Analysis

The fragmented nature of the digital market in the EU is self-evident: it is the reason why the

Commission launched in the DSM strategy in the first place. Despite the highly publicised and

politicised nature of the strategy, it is not the first time the Commission has attempted to

comprehensively address issues relating the digital market. The Digital Agenda for Europe launched

in 2010 as a part of the Europe 2020 strategy addressed many of the issues raised in the DSM

strategy, including increasing digital literacy skills, improving Internet access throughout the EU and

reviewing the telecoms sector. The overarching aim was of the Digital Agenda was to create a form of

a digital single market that would deliver economic and social benefits to European citizens

(European Commission, 2010b). Prior to the Digital Agenda, the Commission published the

Communication on cross-border business to consumer e-commerce in the EU in 2009. What is

remarkable about the Communication is that in some respects it appears to be an early draft of the

DSM strategy because it already identified a number of similar barriers to cross-border trade,

including VAT; cross-border postal logistics; efficiency of consumer protection authorities;

improving enforcement of Article 20 of the Services Directive; and addressing “illegal conduct…such

as automatic re-routing of customers…or terminating a consumer’s transaction process over the

internet once their credit card data reveal an address not within the targeted exclusive territory”, i.e.

geo-blocking (European Commission, 2009, p.11). In that regard, the DSM strategy can be regarded

as a third attempt by the Commission to effectively attempt to address (and define its role within) the

digital market and the wider digital environment.

The neo-functionalists would argue that the creation of the digital single market is merely

functional spillover from the establishment of the internal market. The benefits of the offline single

market have created the expectation that the same benefits will be available online as well, thus

putting pressure on the European institutions to deliver. For example, the free movement of goods

within the digital market has not yet been attained, due to regulatory barriers such as VAT rates and

unreliable postal delivery services for cross-border purchases; issues which the DSM strategy aims to

address. The simple fact that goods can be purchased online from a different Member State is no

longer enough because there are expectations attached to the purchase. It can – to an extent – also be

applied to the cross-border portability of purchased content vis-à-vis freedom of movement.

Customers have the expectation that the content they have legally acquired should be available to

travel with them throughout the EU.

The digital single market is also a product of cultivated spillover, with the Commission

having taken the role as the main driver behind further digital integration. Even though it did not

suggest any legislative measures in the 2009 e-commerce Communication, it still made its intentions

clear through references to monitoring developments and engaging in discussions with stakeholders.

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Its role increased when it began to launch official reviews of existing frameworks (i.e. data

protection) and new issues such as geo-blocking and online platforms. Inherent to the digital

developments in these issues is the threat of fragmentation and divergent national practices, which the

Commission will seek to avoid and instead introduce EU-wide measures. The Commission’s

particular process of cultivated spillover – identifying new areas necessitating EU-level action,

consulting with the relevant stakeholders on policy options and then proposing legislation – has also

enabled a form of political spillover to emerge. Interest groups and other stakeholders are routinely

encouraged to share their opinions through both public and targeted consultations, allowing them to

advocate for certain policy options. Jensen’s (2013) observation that the Commission is particularly

receptive to suggestions that concern further integrative measures can be seen in the development of

the digital single market. Regarding VAT, although it had been the Commission who suggested the

extension of the MOSS scheme (and had advocated for its wide application in 2011) and the removal

of the tax exemption for non-EU consignments in the 2015 public consultation, the support from

stakeholders to both suggestions led to the Commission officially stating that both would form a part

of the legislative VAT proposals it will present in 2016. Similarly, throughout the data protection

reform process stakeholders continuously raised the issues of updating the framework to take into

consideration online data protection as well as increasing the power of national authorities –

suggestions which were included in the new data protection framework. These developments show

that cultivated and political spillover do not exist separately from each other, but are strongly

interconnected in a manner that is crucial for policy-making.

The development of the digital single market also calls into question the extent to which it

allows the Commission to act as a policy entrepreneur. It does certainly fulfil Kingdon’s (1984) three

basic qualities: the Commission is arguably the authoritative decision-maker in the EU due to its

monopoly over legislative initiative; strong negotiation skills are crucial to be able to mediate between

the interests of the European institutions and stakeholders; and although the Commission will

withdraw a proposal if it does not progress, a large majority of the Commission’s legislative proposals

do pass at first reading. Consequently, the DSM strategy is the Commission’s ‘specific problem

solution’ and its publication itself was the focusing event. This is due to the fact that the Commission

signalled that it is making a credible commitment to the creation of the digital single market by the

end of its mandate in 2019. Whereas the digital single market had previously only been acknowledged

as a futuristic concept that may one day be achieve, or invoked as a means to an end to an individual

policy (e.g. modernising VAT to remove it as a barrier to cross-border e-commerce), it has now

become a political commitment with 2 Commissioners directly responsible for it, and another 13

Commissioners also involved in its implementation. The highly politicised nature of the strategy can

be seen both as a blessing and a curse. If the digital market is successfully established, it will seriously

43

boost the legitimacy and credibility of the Commission (by extension, the EU) at a time of increasing

Euroscepticism; but if it fails, the Commission will be heavily criticised for being too ambitious.

Therefore, the DSM strategy as a whole can be viewed as an act of policy entrepreneurship

from the Commission because it has been presented as the definite manner with which the digital

single market will be achieved. The other key characteristic – creating a constant feedback loop to

ensure a positive reception to the proposed policies – can also be easily observed in the Commission’s

actions. Creating a feedback loop via public consultations has been one of the key characteristics of

not only the DSM strategy, but of Commission policy-making as a whole as public consultations are

the cornerstone of the Commission’s legislative process. A majority of the policy areas under the

DSM strategy have received their own targeted consultations, and as has been shown here, they also

received public consultations prior to becoming a part of the strategy thus providing ample

opportunity for those interested to voice their opinions. A targeted feedback loop can also be

observed, e.g. through the meetings that took place between stakeholders and Commission Oettinger

in 2015 regarding the cross-border portability of online content. The relative lack of transparency

from the Commission regarding these meetings is indicative of their political sensitivity i.e.

stakeholders were probably made aware of the fact that the Commission would be making legislative

proposals and therefore were able to prepare concrete suggestions and criticisms.

It is interesting to note that the other key characteristic of policy entrepreneurship –

employing policies which have been prepared for in advance – has been only partially fulfilled by the

Commission under the DSM strategy, because the Commission has been dependant on receiving

feedback from stakeholders. Only the General Data Protection Regulation was ‘ready in advance’ at

the time of the DSM publication because it had been proposed several years earlier. It is highly likely

that early drafts of all of the initiatives the Commission has planned to propose under the DSM

strategy have already been prepared but their substance, to an extent, is dependent on the outcomes of

stakeholder consultations. For example, the Commission is planning to propose measures to increase

transparency and regulatory oversight of cross-border parcel delivery. While the Commission is

probably well aware to some extent of the types of measures it wants to propose, it also has to take

into consideration the results of the public consultation and of the roadmap to deliver measures that

will reflect the actual needs of the sector. In other words, while the Commission has prepared ‘in

advance’ the 16 initiatives it will launch to create the digital single market, the actual content of the

majority of them still remains to be seen.

The strategy calls into question the Commission’s intentions vis-à-vis expanding

competences. The highly politicised nature of the strategy implies that the Commission is not driven

by a purely pragmatic desire to deliver the four freedoms that exist in the offline market to the online

market. Rather, it suggests that the Commission is seeking to expand its competences on a more

44

general level. As it has been previously mentioned, the successful completion of the strategy would be

a legitimacy boost for the Commission, and it would enable the Commission to become the leading

EU authority on digital developments as it was at the initiative of the Commission that the digital

single market was created in the first place. This recalls Aspinwall and Schneider’s (2000) argument

that the Commission is seeking to legitimise itself as a regulatory body through identifying new

issues; the DSM strategy is therefore the Commission’s attempt at self-legitimisation in the digital

field. This self-legitimisation is reflected by the fact that the Commission has created two

Commissioners for digital issues: one specifically for the digital single market and one for issues

relating to the digital society and digital economy.

There is a link between competence expansion, and agenda-setting and issue framing because

the Commission has to frame digital issues in such a way that justifies its intervention. The DSM

strategy is somewhat unique in this regard because even though it concretely placed the creation of

the digital single market on the EU-agenda, a large number of issues within the strategy have been on

the policy-making agenda for years. Of the six issues discussed here, only geo-blocking is ‘new’ in

the sense that it had not received the same rigorous consultation and review process the other issues

had received. Furthermore, the Commission has attempted to frame a majority of these issues in terms

of consumer benefits: new contract laws to foster consumer trust in e-commerce; measures to increase

the quality of cross-border parcel delivery which is essential for consumers; updated data protection

rules to increase consumer trust; and cross-border portability of content to fulfil consumer

expectations. The Commission’s overarching ‘ensuring maximum consumer benefits in the digital

single market’ frame has been broadly welcomed by most stakeholders because in one way or

another, they will also benefit from the measures the Commission is seeking to implement. Regarding

VAT, the Commission’s framing was somewhat different due to the technical nature of the issue; the

Commission framed VAT in terms of reducing significant administrative burdens which in turn, have

become barriers to trade. Stakeholders, again, broadly welcomed the Commission’s framing of the

issue.

Geo-blocking however, is interesting because its placement on the digital agenda has revealed

a clash of frames. Whereas the Commission has framed geo-blocking in terms it being an obstacle that

prevents consumers from “enjoying the benefits of e-commerce, by comparing and taking advantage

of wider choice and better prices” (European Commission, 2015f, p.21) that has to be removed fully

for the benefits to be available, stakeholders have consistently framed geo-blocking as a kind of

‘necessary evil’ that has to imposed in order to fulfil contractual obligations or to take into

consideration market realities across the Member States. Furthermore, the Commission is attempting

to frame the existing legislative framework regarding geo-blocking as wholly inadequate, and thus

requiring new policy intervention; a viewpoint contested by many stakeholders who have stated that

the existing framework requires updating and better enforcement.

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It is clear that in some respects (e.g. data protection and VAT) the existing digital market had

become too fragmented across national lines and legislative action from the Commission is the only

way in which harmonisation will be able to occur. Regarding cross-border portability of online

content, the Commission also clearly has the necessary authority to increase its competences through

new legislation because it would provide a harmonised set of rules across the EU and discourage

service providers from imposing their rules. Increasing Commission competences via new legislation

is therefore justifiable in these cases because the issue frame is self-evident. The geo-blocking

example illustrates how the Commission perceives – and to an extent, mistakes – legislative authority

as competence. Whilst the Commission is not wrong for identifying geo-blocking as a barrier in the

digital single market, its insistence on introducing new legislation to address it may prove to be

misguided. This is because if the Commission decides to stake a stand and introduce a blanket-ban on

all forms of geo-blocking, it could potentially result in less consumer choice as businesses

(particularly SMEs) will not be able to cope with the demands of providing goods and services

throughout the whole of the EU. Additionally, such a stance would most likely to prove to be

symbolic, rather than functional: the Commission would be able to portray itself as finally having

taken a stand against geo-blocking, but businesses and organisations would fight it (and even

potentially take the Commission to the ECJ) and argue that geo-blocking is justifiable and necessary

in some cases. If the Commission was truly committed to tackling geo-blocking in an efficient

manner, the DSM strategy would have suggested cooperative measures with business and industry

stakeholders, as well as better enforcement of the existing legislative framework.

The other academic conceptualisations most applicable to the Commission and the DSM

strategy are the mobilisation model, and the use of ‘big words’ and ‘small steps’. The strategy was

first clearly on the political agenda when it formed a part of President Juncker’s political guidelines; it

became a part of the public agenda with its publication in 2015. Attempting to build public support for

the strategy can most clearly be seen through the Commission’s use of ‘big words’, i.e. constant

referencing to the overarching principles of the single market and the benefits that it will bring. The

Commission has also employed a modified version of the ‘small steps’ concept. The first policy areas

to be addressed by the Commission under the DSM strategy were contract law, data protection and

cross-border portability of online content; they correspond to some key consumer concerns and

expectations. It is likely that the Commission is hoping that through addressing these issues first,

European citizens will begin to support the DSM strategy as a whole because it has already delivered

substantive consumer benefits.

The digital single market, however, cannot be driven solely by consumer demand. The views

of the stakeholders involved (e.g. businesses, industries, national authorities) are equally as important,

because ultimately, it will be the stakeholders themselves who will deliver the digital single market

through compliance with the Commission’s policy proposals. Therefore, stakeholder involvement in

46

the policy-making process is crucial. The second part of this paper examined the extent to which

stakeholder dissatisfaction with the fragmentation in the digital single market has been a driving force

behind the DSM strategy, as well as whether the Commission has taken into consideration their

concerns when proposing policies. This was done through examining six policy areas: cross-border e-

commerce; cross-border parcel delivery; VAT; geo-blocking; personal data protection and the cross-

border portability of digital content.

What becomes clear is that for the majority of these issues, the DSM strategy acts as the

culmination of several years of review and continuous stakeholder consultation. This is particularly

the case with VAT and personal data protection. An important point to take into consideration is that

it was the Commission who in both cases recognised the necessity for improvement and began

considerable review processes. Regarding VAT, it was also the Commission who made the crucial

suggestions (a single MOSS scheme based on the country of origin principle) that became one of the

defining aspects of VAT reform. The Commission also recognised the necessity of addressing other

issues such as the tax exemption for non-EU countries and the potentially problematic nature of the

home audit requirement – issues on which the Commission sought stakeholder input in during the

2015 public consultation, and appeared to have taken into consideration in the 2016 VAT Action Plan.

Consequently, although stakeholders had been vocal about the administrative burdens created by the

fragmented VAT regimes across the EU, it was the Commission who took the initiative to propose

solutions, rather than the stakeholders advocating for a certain course of action. Rather, it was the

Commission who continuously advocated for the full adoption of the MOSS scheme and had to

persuade stakeholders that it was the best solution for VAT fragmentation.

The data protection review process also demonstrated the Commission’s capabilities of

responding to the concerns raised by stakeholders. The 2009 public consultation was specifically

designed as a means for stakeholders to voice their issues; the 2010 consultation was focused on

potential policy responses. Targeted changes to the new Regulation – such as the expansion of

definitions, reduction of administrative burdens and the inclusion of a provision concerning the

protection of children – clearly demonstrate that the Commission took into account the concerns

raised by stakeholders during the review process. Crucially, they are concerns that emerged as a result

of the fragmented application of the data protection Directive, as well as the general fragmentation

that occurs in the digital environment due to different Member State approaches to certain issues (e.g.

the online protection of children).

Cross-border e-commerce and parcel delivery are somewhat different because they did not

have the same extensive review process. Firstly, despite the importance attached to cross-border e-

commerce as a significant part of the digital single market, there was no review process which

required stakeholders to identify the biggest challenges and what the best policy solutions would be. It

47

appears that the Commission had decided prior to the publication of the DSM strategy that it would

address contract law as a means of boosting e-commerce, and only following the publication of the

strategy did it consult with stakeholders. Consequently, whilst stakeholders agreed on the necessity

for harmonised EU-level action, there was little consensus among business and consumer

representatives on what the content of new contract law rules should be. Therefore, the two proposed

Directives address what the Commission – rather than the stakeholders themselves – perceive to be

fragmentation in the digital market. Secondly, the topic of cross-border parcel delivery underwent two

public consultations, and the response was clear that in order to address national fragmentation in

postal deliveries, the two main challenges to address are transparency and regulatory oversight. The

Commission also states that it will address these two issues via the DSM strategy. However, due to

the relative lack of information on the outcomes of the roadmap exercise, it is difficult to anticipate

the manner in which the Commission will be responding to the fragmentation in the postal delivery

sector.

Cross-border portability of online content and geo-blocking are significant because their

placement on the policy agenda was dependent on the dissatisfaction of a single set of stakeholders:

the European consumers and the Commission itself. Stakeholders in the cross-border portability

discussions (e.g. service providers) have continuously reiterated the fact that they have to territorially

discriminate consumers based on their location due to contractual agreements made with rights-

holders. Furthermore, some stakeholders have even stated that the actual demand for cross-border

portability is limited to certain groups only. The failure of the Licenses for Europe initiative

demonstrates that stakeholders are not unwilling to let the European digital content market continue to

be fragmented because it serves their interests and that they – to an extent – know better than the

Commission. Similarly, stakeholders in the geo-blocking discussions have stated that they have a

variety of justified reasons for geo-blocking, implying that they are likely to continue to geo-block

even if the Commission takes legislative measures. In these two cases it appears that vis-à-vis the

digital single market, the stakeholder dissatisfaction stems not from the fragmentation in the market

(as industry stakeholders in both cases are the ones perpetuating the fragmentation for their own

interests) but because of the Commission’s insistence on viewing these as barriers that it needs to

remove. Whereas the Commission and stakeholders were able to reach a compromise on cross-border

portability of online content, it remains to be seen if this will be possible with regards to geo-blocking

given the Commission’s strong stance on it.

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Conclusion

The DSM strategy represents the Commission’s most ambitious effort yet to create a truly

digital single market. Its ambition is reflected in the strategy’s 50 billion EUR budget and a set of 16

targeted initiatives to be delivered by the end of 2016 by a team of 15 Commissioners. The

Commission estimates that the completion of the digital single market will contribute approximately

415 billion EUR per year to the EU’s economy. Such a comprehensive overhaul of the existing status

quo in the European digital market calls into question whose interests are being served by the strategy.

President Juncker summarised the Commission’s position most succinctly by stating that “I want to

see every consumer getting the best deals and every business accessing the widest market” (European

Commission, 2015j). The Commission’s baseline position is therefore wider access to goods and

services for both consumers and businesses across the EU.

This paper sought to go beyond the obvious and examine the extent to which the Commission

seeking to expand its competences and actual stakeholder dissatisfaction in the fragmentation of the

digital single market as the two reasons why the Commission launched the DSM strategy. Given the

large scope of the strategy, six elements were chosen: cross-border e-commerce and parcel delivery;

VAT; personal data protection; cross-border portability of online content and geo-blocking. These

were chosen due to the availability of information and due to the fact that they represent some of the

‘core’ issues in the digital single market. For example, geo-blocking is construed to be a key barrier to

trade in both e-commerce and access to online content; VAT related-burdens are also an obstacle for

many European businesses. Personal data protection is also a key concern for many consumers

purchasing cross-border goods online.

The findings suggest that firstly, the DSM strategy is a means for the Commission to expand

its competences. Expanding competences in this context refers to the ability of the Commission to

influence digital development in the EU, and become the leading European institution on digital

matters. Although the Commission does already have some level of authority in almost all of the areas

discussed, introducing new legislative measures or policies ensures that its level of involvement is not

outdated. Furthermore, the Commission’s pursuit of new competences is particularly clear in its

stance towards geo-blocking, as its eagerness to introduce measures against geo-blocking is not

shared by many stakeholders.

Secondly, while the DSM strategy might be new, the issues of VAT, personal data protection,

cross-border parcel delivery and portability of online content are not and have been on the

Commission agenda for years. Therefore it appears that the Commission has employed the DSM

strategy both as a means of putting new issues on the agenda and gaining closure on others. With

regards to stakeholder dissatisfaction with fragmentation in the market, this was only truly the case

with personal data protection and cross-border parcel delivery, as stakeholders were first explicitly

49

given the opportunity to voice their concerns which the Commission then took on in its policy

suggestions. Although stakeholders were able to voice their dissatisfaction in the digital market with

regards to the remainder of the issues as well, they were offered the opportunity to do so only after the

Commission had begun to formulate policy options.

Whilst it is still too early to conclude with certainty whether the Commission has opened

Pandora’s Box with the launching of the DSM strategy, there are some early warning signs that it

might have done so. The ambitious scope of the strategy combined with the fact that less than half of

the 16 initiatives have been unveiled by mid-2016 suggests that the Commission might have been

overly-ambitious and is already struggling to fulfil its commitments. Additionally, the Commission’s

inclination towards introducing legislation might prove to be problematic as it might introduce new

barriers to trade rather than remove them.

It is worth noting that these conclusions are drawn from only a small selection of issues

presented in the DSM strategy, and therefore are not wholly representative of the strategy. They have

however provided an interesting insight into the process and motivations behind the Commission’s

actions. Given the fact that the DSM strategy is still being implemented, other interesting areas of

research would include examining the extent to which the other issues in the strategy have been

subject to prior review and how that has impacted the proposals under the DSM strategy. The

Commission has identified the role of online platforms and the liability of online intermediaries as an

issue to be addressed under the DSM strategy, with the potential view to introducing policies to

regulate platforms. This has been seen by many as a controversial decision, and clearly points to the

Commission wishing to expand its competences in a sector in which it has no previous authority in.

The Commission’s – and that of the other European institutions – stance towards online platforms,

and the benefits they offer to the digital single market, is another interesting subject for further

research.

50

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