Internet sale is mass media

When used to sell products and services to the public, the Internet is considered an instrument of mass media that is subject to the nationality rules on ownership.

This, in a nutshell, was the opinion rendered by the Securities and Exchange Commission (Opinion No. 14-06) on the issue on whether a foreign-owned company can provide a digital platform for advertisements and sales.

Komil Network Phils. Inc., a domestic corporation whose voting shares are wholly owned by a foreign corporation, asked if it can engage in, among others, the following activities:

Wholesale marketing and sale of digital publications;

Provide a platform to clients to reach out to their target audience and advise them on online outlets that would best meet their promotional campaigns;

Provide a platform to third party websites to sell and monetize their online inventory.

The company intends to use the Internet or mobile technology as primary medium to accomplish these objectives.

In fine, the offered services are in the nature of advertisement and mass media, both of which are covered by restrictions on foreign ownership by our Constitution.

Promotion

To gain a clear understanding of the issues involved, the SEC cited the definition of “advertising” and “mass media” in existing laws.

Advertising is “the business of conceptualizing, presenting or making available to the public, through any form of mass media, fact, data or information about the attributes, features, quality or availability of consumer products, services or credit.”

Thus, advertising agencies “serve as agents or counsellors … by writing, preparing or producing the commercial messages or materials used by advertisers in selling their goods and services …”

Mass media, on the other hand, refers to “any means or methods used to convey advertising messages to the public such as television, radio, magazines, cinema, billboards, posters, streamers, hand bills, leaflets, mails and the like.”

Only corporations wholly owned and managed by Filipino citizens can validly engage in mass media activities. The citizenship requirement is “intended to prevent the use of such facility by aliens to influence public opinion to the detriment of the best interest of the nation.”

The SEC said the Internet and mobile technology have become recognized platforms for mass media. It cited the Tobacco Regulation Act of 2003 which specifically includes the Internet in the definition of mass media.

Based on these definitions, the SEC stated out that by providing advice to clients, after studying their target audience’s online habits, on what online outlets to use to connect to them, Komil is considered engaged in advertising.

This activity would bring it within the purview of the constitutional provision limiting foreign equity in advertising agencies to a maximum of 30 percent.

Restrictions

Aside from the issue of foreign ownership in advertising agencies, the SEC also pointed out that Komil’s sale of digital publications in retail (or direct to the consumers) would trigger the application of the foreign equity restrictions under the Retail Trade Liberalization Act of 2000.

The law states that “retail trade enterprises with a paid-up capital less than the Philippine Peso equivalent of Two Million Five Hundred Thousand US dollars (US$2,500,000) shall be exclusively owned by Filipino citizens and corporations wholly-owned by Filipino citizens.”

Komil’s plan to provide a digital platform to third party websites to sell and monetize online inventory proved to be the clincher in its legal woes.

The SEC said that “although the company will not own or operate any media outlet nor will affiliate with any Internet service provider, online retailer or social networking site and will merely act as a middleman by bringing together the product manufacturers and third-party websites, it will provide an online platform intended to increase the same of a particular product.”

With this as premise, the SEC stated, citing an earlier opinion, that “if the corporation is engaged in the operation of a voucher platform on the Internet with the purpose of increasing the sales of a particular product or service, it, in effect, disseminates information to the general public through the Internet and is thus considered a mass media entity.”

Bottom line, since Komil is wholly owned by a foreign corporation it cannot lawfully engage in the activities earlier mentioned.

Observations

Although this opinion applies only to Komil, the SEC’s treatment of the Internet as a mass media entity would have serious implications on corporations that provide portals or digital platforms for the promotion, distribution and sale of products and services.

It is common knowledge in the industry that many of the existing service providers or website administrators, including search engines, have cross-ownership or joint management arrangements with foreign entities.

If the rules on mass media ownership are to be strictly applied, the border less or seamless nature of the Internet, which accounts for its efficiency and usefulness, would be adversely affected.

So who and how will this nationality requirement be enforced, if at all? Or is it even worth the time and effort of the government to enforce it.

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