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Brexit and the Digital Media Industry

by User Not Found | Jun 30, 2016

As disappointed as I may be with the UK’s EU referendum result, I have to put my analyst’s hat back on and ask: what next?  Immediately after the Leave victory was confirmed, my colleague already outlined the possible scenarios lying ahead. I’m also asking myself: what impact Brexit may have on the digital media industry?

We have already seen the immediate impact: the pound plunged to its lowest value in more than 30 years against the dollar on the Monday after the voting although there appears to be some recovery as I write this blog. Stock markets around the world tumbled but again a modest recovery is underway.  Services like Spotify, Amazon, Netflix and iTunes are making less money in dollars or Euros than they did before Thursday last week. If the currency does not recover reasonable ground and recover quickly, would it be a surprise if these services should readjust their prices in the UK in the coming months? Or a sizeable number of users should decide to cancel their subscriptions?

If the UK should pull out of the European Union but retain its position inside the single market (officially the European Economic Area, or EEA), that is, it continues to recognise the free movement of goods, capital, service and labour, the long term impact of Brexit on the digital media industry would be limited. The most meaningful difference would be the termination of the EU’s financial support to art creation work, making the creation of content, especially by the unestablished talents, harder.

However, if the UK should fail to negotiate a deal to keep its position inside the single market, if it insists on restricting the free movement of labour, for example, we see three key challenges to the digital media industry:

1. Higher prices and taxes on content,

2. Negative impact of mobile roaming charges on consumption, and

3. Rising content creation costs.

The biggest impact on the media industry will come in the shape of the digital single market (DSM) the EU has been working on and is now under consultation.

As an extension of the single market for goods, DSM will eliminate internal customs for digital content traded across borders, while the content from outside of DSM will be subjected to import tax. As they are all part and parcel of the overall European Single Market, failure to keep the UK in the single market for goods will also bar the country from accessing the DSM. This will have the biggest impact on the UK’s music industry, which is the world’s single largest exporter. According to IFPI, the global music trade organisation, 5 out of the world’s top 10 bestselling artists in 2015 were British, while the British Phonographic Industry (BPI), UK’s recorded music industry organisation, claimed that more than 17% of the world’s album sales in 2015 were by British artists. All the “big 5” have signed with global labels, so Brexit will not make their music for costly when sold to the EU markets. But Adele and One Direction also have a large portion of their business handled by UK-based independent labels. It’s this part of their catalogues, and other artists whose business is handled by the local labels that will feel the pinch of the new trade barrier making British music more expensive to other European consumers. Meanwhile, the UK market, one of the world’s biggest music consuming markets according to Strategy Analytics’ forecast, will become harder to crack for other European artists as a result of the new trade barriers.

The second relevant policy is the planned elimination of roaming charge within the EU, currently planned to implement from July 2017.

Prohibitive roaming charges will seriously dampen consumers’ enthusiasm in using mobile data when travelling and will heighten their caution when consuming mobile media on the go, for example streaming music or video outside of Wi-Fi environment. The mid-2017 timeline will arrive long before the UK will be able to extract itself from the EU, so it will be a reality here. Then, on EU exit, UK operators may be legally released from the obligation to match EU pricing, but may find it commercially beneficial to do so. For example, Three, having already offered free roaming to many EU markets, may stick with that longer term rather than antagonising its customers by taking away what they will have already enjoyed for more than a year and reintroducing roaming premiums.

Other indirect impacts from Brexit and exit from the single market could include the cost of producing content going up, especially if the project involves collaboration with partners in the EU.

This is partly due to the depreciation of the pound, and partly due to the procedural cost related to work permit applications.

In the current version of DSM directive, EU “TV broadcasters will continue to be obliged to broadcast at least 50% share of European works (including national content) in viewing time”, while on-demand video services “need to ensure at least 20% share of European content in their catalogues” with “good visibility (prominence) to European content in their offers”. In this sense, the UK’s departure from EU should be good news for the Hollywood studios while putting the independent European or even UK video content producers at even less advantaged position.

Any silver lining for the UK’s digital media industry? Well, not much, except that sitting outside of the EU jurisdiction, the UK would be a “safer” location to base European headquarters for companies like Google which has been under antitrust investigations by the European Commission, or Google and Apple that have been investigated for receiving favourable tax treatments. Whether the post-EU UK is prepared to become a de facto tax haven is another matter.

Overall, uncertainty fuels financial market volatility which in turn are elevated and emotionalized by the flames of hungry print, TV, and online media which in turn can have a significant impact on consumer sentiment. The bottom line takeaway is the Brexit will likely have some modest downside pressure on mobile media consumption in the short term. We will monitor the development closely and adjust our market outlook accordingly when the signals become clearer.

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