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EU Rulings on Geo-Blocking in Digital Storefronts Will Increase Piracy Rates in the Developing World

For the longest time, it was an insurmountable challenge for those in the developing world to be able to afford to legally consume multimedia products. Prices originally set in Dollars, Euros or Yen often received insufficient adjustments to compensate for lower incomes, something that was compounded by local import or manufacture taxes that did little to alleviate matters. Markets starving to consume modern-day products were faced with an unrealistic pricing structure that was a bad fit for most citizens, especially for young people growing up without access to much capital in an increasingly digital world.

In the 1990s and 2000s, piracy thrived in regions such as LAC, CIS, Eastern Europe, Southeast Asia, among several others. In countries such as Brazil, it was often more usual to pirate than to purchase official goods when it came to products such as music, films, software, and video games. City centers were (and to a smaller extent still are) overtaken by street vendors selling piles of CDs and DVDs with photocopied covers housed in plastic envelopes and sold at a fraction of the cost found in legitimate stores.

The industry was, by and large, occupied waging intellectual property battles against developed world university students and upholding advantageous sales models such as that of the music CD, never quite looking into the issues of the developing world with a special lens. Solutions in developing countries were mostly focused on extensive police action against those selling the pirated goods, which amounted to little in the way of results, seeing as the demand side of the equation remained unaffected.

In the 2010s, developing markets observed a significant shift towards the consumption of legal goods as the young people grew into productive adults with access to more capital, and two factors can be seen as decisive in this shift: first, digital storefronts with price differentiation for countries with lesser purchasing power were established; second, streaming platforms offering flat fees for a relatively extensive catalogue of multimedia became available. This provided the correct incentives for many consumers not to want to be bothered by the hurdles of consuming pirated content.

In early 2021, the European Commission made a decision that is a subversion of proven best practices that convert informal consumers into legitimate purchasers, and if this act is a sign of their broader intentions, the only possible result is the increase in piracy rates in the developing world. Steam (the largest digital storefront for video games globally) and five major game publishers were fined to the tune of 7.8 million Euros for alleged “geo-blocking” practices. According to the official press release: “The Commission has concluded that the illegal practices of Valve [Steam’s parent company] and the five publishers partitioned the EEA market in violation of EU antitrust rules.”

In the same press release, the complaint is said to be rooted in: “bilateral agreements and/or concerted practices between Valve and each of the five PC video game publisher implemented by means of geo-blocked Steam activation keys which prevented the activation of certain of these publishers’ PC video games outside Czechia, Poland, Hungary, Romania, Slovakia, Estonia, Latvia and Lithuania.”

In other words, price differentiation meant to account for different market realities has been equated to geo-blocking, and thus deemed illegal within the EU. There are several reasons why this argument is inconsistent, but foremost is the stretching of the meaning of geo-blocking, which is normally understood to be the practice of stopping a user from being able to view specific content if they are accessing a certain service from a given region or their account is tied to a given region.

In this case, users from different regions are able to see the same products in the storefront, but if the user is purchasing the game from Poland, they will be offered a significantly reduced price in relation to a purchase originating from Germany. Since Steam’s activation keys can be gifted and traded between users, this system ensures that a key bought within a lower priced region cannot be activated in one where the product costs more. While this method is not fool-proof, it works well enough for publishers to adjust prices in a way that makes sense for their audience. This is a widespread tactic adopted on the Steam storefront by almost all publishers, being not limited to the 5 that were cherry-picked by the EC to serve as examples.

There is clear correlation between the region cited as having lower prices and reduced local purchasing power. According to the World Bank, the GDP per capita/PPP Int$ in Hungary, Poland, Romania, Slovakia, and Latvia is within the 32-35.000 range, in comparison to Germany’s 56.000 or Ireland’s 88.000. Forcing the games to be sold at a flat price across the EU fails to acknowledge these disparities. It does not promote fairness, as the bloc does not have a homogenous economic reality.

On the aftermath of the ruling, a statement from the EC’s Executive Vice-President Margrethe Vestager, in charge of competition policy, is of particular note: “The videogame industry in Europe is thriving, and it is now worth over € 17 billion. Today’s sanctions against the ‘geo-blocking’ practices of Valve and five PC video game publishers serve as a reminder that under EU competition law, companies are prohibited from contractually restricting cross-border sales. Such practices deprive European consumers of the benefits of the EU Digital Single Market and of the opportunity to shop around for the most suitable offer in the EU.”

The question that follows from Vestager’s statement is: shop around how? Users can go to a different storefront altogether if they so desire, but how is this supposed to take place within the system of a single storefront in a manner that, as described by Vestager, would create more consumer choice? That proposition does not add up. What is being forced into practice is that users in the developing world will need to pay the same price for digital goods as those in the developed world, without sensitivity to their local reality. This is a significant step back from decades of progress in terms of creating a fair market where users can make legitimate purchases.

With the EU’s growing appetite for the regulation of digital goods and several new regulations in the horizon, it is important to observe this event as an example of what is to come. Under the name of standardization of laws within the bloc, regions where there is less purchasing power will be more often forced into making choices between not having access to unreasonably priced goods or pirating that content. Many will choose the piracy route, and no amount of digital rights management will be able to stop it. Hopefully, other nations and blocs will not follow the EU’s example, or we might be headed yet again for very difficult times in the commerce of digital goods.

By Mark Datysgeld, GNSO Councilor at ICANN

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