The proposal responds to industry concerns that commercial piracy is undermining profitability and therefore further investments in online services, pay television and radio. The industry estimates that it is losing up to 5% per year in revenue due to pirated access to pay services. In the pay television sector alone, operators estimate that in 1996 they lost $281 million in revenue due to unauthorized access.

The directive makes it illegal to manufacture, sell, import, install and replace illicit devices such as pirated decoders and smart cards, which provide unauthorized access to encrypted services without payment. It also requires member states to ensure that injured parties can seek compensation and requires member states to introduce effective, proportionate and deterrent sanctions to punish violations.

The European Commission hopes the legislation will take effect by the end of next year. The legislation was designed to combat commercial activity and doesn't prohibit the use of an illegal decoder by an individual, according to the EC.

The legislation covers only services that use encryption to ensure payment of a fee and doesn't cover services such as financial services and telecommunications where encryption is used to ensure the integrity and confidentiality of a transmitted message. Services covered by the draft proposal include pay television channels, electronic publishing and video on demand.