30/06/2023 - The researcher talked us through the findings of a recent study on the so-called “Netflix taxes”

Cineuropa spoke to Ivana Kostovska, a researcher at Brussels’ imec-SMIT-VUB and co-author of a recent study on “Netflix taxes” as tools for supporting European audiovisual ecosystems. The research was published in Routledge’s European Audiovisual Policy in Transition (read more about the book here).

Cineuropa: Could you please introduce the focus of your study?
Ivana Kostovska: This research follows up on the implementation of the 2018 revision of the EU’s AVMSD, which granted member states the option to introduce what has come to be known as “Netflix taxes”. […] The main objective of the research is to explore how the investment obligations are taking shape based on an analysis of the national legislation transposing the AVMSD. The findings suggest that investment obligations open up opportunities for policy intervention to reduce tensions in contractual relationships between producers and streamers, and to promote diversity.

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One of the findings indicates that investment obligations are being hindered by a “policy lag”. Could you please explain what this is and how it is affecting investment obligations?
Policy lag is essentially the stretch of time that began when market conditions in Europe shifted because of the rise of global streaming services, running up until a policy response in the form of investment obligations took effect. [...] The challenge here is that the audiovisual landscape had evolved quite rapidly during this lag period. So, by the time the policies take effect in some European countries, the market conditions have changed, rendering the policy interventions less impactful. If investment obligations for streamers had been put in place earlier, some countries’ independent production companies might have bounced back from the pandemic more swiftly.

What are the main strategies being implemented by investment obligation policy within Europe? Which ones are proving the most successful and why?
Investment obligation models vary between member states. Many European producers are likely to agree that the French model, combining a levy and a direct contribution, is among the most successful. [...] Spain, on the other hand, has favoured a more market-friendly strategy, setting an investment obligation rate four times lower than the one in France, in an effort to establish itself as the “Hollywood of Europe”. In Flanders, the investment obligation model offers a choice between direct investment or levy, a strategy that seems to be inspiring policymakers in some smaller markets. […] Despite the variations in national approaches, there are recognisable common ingredients for success.

The critical factor lies in designing investment obligations as part of a strategic roadmap aimed at sustaining local audiovisual industries and their international competitiveness in the digital distribution era. This suggests that achieving the desired effect with policy intervention is dependent not only upon how an investment obligation intervention is set up, but also on how well it aligns with production incentives, public support measures and so on.

What problems and opportunities may arise after a revision of the AVSMD? What types of changes may be implemented?
Up until now, only France and Italy have mandated global streamers to invest more than 5% of their revenue in local content. Proposals recently developed in the Netherlands and Denmark, as well as the updated rules proposed in Flanders, haven’t pushed past this 5% threshold. The big-picture issue is that smaller EU markets are competitively disadvantaged. [...] The production of audiovisual works in smaller markets plays a critical role in safeguarding the cultural and linguistic diversity of the European audiovisual sector. The question then is: how can these smaller markets lure investments at times when technology pushes towards globalisation and scale? I think it could prove challenging to find a way to improve the position of smaller EU markets in a possible next revision of the AVMSD. There is a potential risk that independent production in smaller countries could be eclipsed by a sector primarily geared towards servicing inward investment businesses.

Another important question to consider is the flexibility of the current definition of European works, which could lead to varying interpretations. The rationale behind investment obligations should be financing European audiovisual works with cultural and societal significance that challenge audiences, rather than funding low-budget, unscripted content, such as reality shows. Additionally, there are certain challenges related to the lack of meaningful data when it comes to understanding the impact of investment obligations.

How are VoD giants reacting to the implementation of the AVSMD?
Global streamers, so far, are complying with investment obligations, and I expect this to continue. In my view, streamers should be regarded as an integral part of European production ecologies, rather than being cast as outsiders. [...] While streamers provide commercial financing, enhance the transnational circulation of European works and support talent development, they also disrupt local European ecosystems, as broadcasters and local streaming services struggle to compete on the same scale.

The intensity of the disruption by the global streamers varies from one market to another, influenced by different factors, including working capital and the strength of other financiers. For example, in a recent empirical study conducted in Denmark, I found that some small production companies are tailoring their business models to primarily pitch to streamers. In other markets, producers continue to rely heavily on traditional financiers.

As growth in content investment is expected to slow in the coming years, the market conditions are likely to become more challenging. Streamers may be put on a trajectory where they have to make a compromise between affordability and quality of European content. [...] Streamers will probably intensify their lobbying efforts against the introduction of new investment obligations, and advocate for policy designs and rates that better align with their business interests. In this context, producer associations and screen agencies will need to intensify their efforts to foster collaboration and lobby for investment obligation types that contribute to the financial stability and diversity of local ecosystems.