Centre d études sur les médias and Journal of Media Economics. HEC Montréal, Montréal, Canada May 12-15, 2004

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1 6 th World Media Economics Conference Centre d études sur les médias and Journal of Media Economics HEC Montréal, Montréal, Canada May 12-15, 2004 Competition between Public Service and Commercial Television Broadcasting in the European Market Alfonso Sánchez-Tabernero, University of Navarra, Spain This article studies how competition between public service and commercial television broadcasters has evolved in the European Union. The last decade has seen the rise in commercial channels, audience fragmentation, with a huge array of special interest television channels, and an increase in concentration operations. An analysis of public service broadcasters possible responses allows us to evaluate what will be the profit outlooks and competitive mode l for the sector in the coming years. 1. Introduction Fundamentally, the economy in the West is regulated by laws of supply and demand. Public initiative has a subsidiary role; its chief purpose being the correction of market errors : for example, it tries to prevent monopoly abuses or to safeguard consumer rights (Just and Latzer, 2000). However, in Europe, television represents a massive exception to this general rule: the audiovisual sector, an attractive choice for private investors, has from the very outset been dominated by public initiative. Even today, the leading television stations in most European countries are state -owned and, despite the liberalisation process initiated in the mid seventies, state-owned companies still attract at least 40% of the audience (Pardo, 2002). In this article we will attempt to show a) why this exception to the subsidiary nature of state-intervention in the economy exists b) how the European television landscape has changed over the last decade and c) what are the mo st likely scenarios for public service broadcasters in the future. The interest of this research lies in the fact that the commercial companies strategies and the sector s profit outlooks as a whole will depend on how programming, market shares and the funding systems for public service broadcasting evolve. After a brief look at historical factors, we will analyse how the degree of concentration of national markets and the market shares of the public service and commercial channels with the highest audiences for each country have evolved. This data, together with other variables, - such as the size of each market, or the development of legal frameworks in the European Union and in each country will

2 2 give us some idea of the kind of television which will emerge in Europe over the next few years. The main quantitative data of the markets studied was gathered by national analysts, experts in the television industry in their respective countries. 2. The genesis and development of public service television When public service television appeared in Europe its aim was to provide the public with a new medium which informed and entertained (Paulu, 1974; Conseil Superieur de l Audiovisuel, 1992). From the very beginning, Europe distanced itself from the American model, which relied on private initiative to develop this service. In the United States, strict anti-monopoly regulation was established to prevent an excessive concentration of power and political influence in a small group of companies (Noam, 1991; Blumler, 1992; Machet and Robillard, 1998). However, European governments believed that state monopolies set up in each country were a better safeguard of the quality of the television service and pluralism of information. In part, this perception was based on a technological limitation: the only signal distribution system hertzian waves meant supply was scarce. In the European solution guarantees of plurality or information neutrality were written into the statutes regulating public service broadcasting activities. In practice, the countries from Northern Europe, with a long-established democratic tradition, were more respectful of this supposed neutrality than the countries of Southern Europe where dictatorships had been in place right up to the mid se venties (Shaugnessy and Fuente Cobo, 1990). For example, even today in Italy, Spain, Portugal and Greece, the elected political party has a decisive say in how information programmes are presented. Despite criticism from the majority of the public, historical precedent still count for more than viewers wishes. At the other extreme, the BBC represents the paradigm of public service broadcasting enjoying undisputed independence from the Government (Scriven and Lecomte, 1999); this has once again been demons trated recently by its coverage of the war in Iraq and its post-war coverage which has caused serious embarrassment to the British Government. This system of national state monopolies was maintained in Europe until In that year, only three European countries Great Britain, Finland and Luxembourg - had commercial channels. There were different reasons for these three exceptions: a) Great Britain s particular idiosyncrasy always with one eye on Europe and the other on the United States had encouraged the development of Independent Television which appeared in b) The small size of the Luxembourg market led its Government to grant a commercial monopoly to the company CLT, founded that same year. c) And, in Finland, in 1957, MTV Oy was set up, a commercial European channel, which operated without an exploitation licence until 1993 (Jyrkiäinen & Sauri, 2001) was the year when, in the whole of Europe, a deregulation process of the sector was initiated, paving the way for commercial channels. This process varied widely: in Italy, in this year, commercial channels of questionable legality sprang up. In the eighties, in numerous countries laws governing commercial television were passed. In France, in 1987, the most important public service channel TF1 which, at the time, held over 40% of the market share was privatised. Deregulation was the consequence of several factors (Gibbons, 1998; Croteau and Hoynes, 2001); in the first place, the development of cable and satellite had invalid ated the theoretical argument on which state monopolies had based their raison

3 3 d être: the shortage of available frequencies; secondly, the eighties and nineties were marked by the rise of more market oriented ideas, globalisation and the opening up of markets to foreign investors; the public, too, were dissatisfied with what the public service broadcasters had to offer which usually consisted of two or three channels which did not compete with each other, and they were demanding more choice. Finally, owners of media companies took up this demand for more channels to press governments for the liberalisation of the television market. In the nineties, new channels were launched at a breakneck pace. According to a report by Screen Digest (2000), in this decade Europe saw national or regional channels jump from 100 to This means that every year 100 new commercial channels were created. All of the large commercial media companies invested heavily in the audiovisual industry with the aim of diversifying the ir assets and taking up positions in a sector with clear potential for future development. 3. Public service channels and free competition The variety on offer in the broadcasting market of each country in Europe today is huge: two or three national public service channels; between two and four commercial channels fighting it out for the top slot; and a host of regional, local and specialised content channels targeted at geographical, demographic and common interest niches. In this new competitive arena, European public service channels find themselves facing three challenges: a) political control, b) funding and c) contents. As we shall see, these three aspects are intimately linked. From the political point of view, the problem of dependence and editorial control is an important issue (Woldt et al., 1998). This has been a recurring dilemma for European public service television stemming from the difficulty in clarifying who should make the key decisions in these companies. There is always the risk that governments or parliamentary majorities in each country will seek to use public service channels for their own party ends to the detriment of the public. But, if the running of these companies is not subject to Parliamentary control, then whom should they be accountable to? The second challenge is economic and is linked to funding. Traditionally, public service television has been funded by direct taxes (the licence fee in Great Britain, redevance in France, etc.) or by state grants. However, the proliferation of channels in each market has meant that the prices of the most popular programmes have become inflated (Hoskins et al., 1997). To meet rising costs through increased public funding was not an easy option when many countries in Europe were facing strict budgetary controls to fulfil the conditions for convergence set down by the Treaty of Maastricht; a necessary condition for those countries adopting the euro as the common currency. A second option lay in drawing up cheaper programming. In this sense, it is significant that, in the last ten years, in most of Europe the re-broadcasting rights for the UEFA Champions League and the national football leagues (the most popular sports competitions in Europe) have been transferred from the public service channels to the commercial channels, whether they are pay per view or free to air. Other public service broadcasters have sought alternative funding sources with the launching of channels which operate in a similar way to commercial companies. In this area, the BBC again leads the field (Graham et al., 1999).

4 4 Finally, other countries have decided to take a more relaxed attitude towards regulation which bans or sets strict limits on advertising on public service channels. Italy, France and Spain have followed this option: in 2002, national public service channels in these counties obtained 37%, 52% and 64% respectively of their total revenue through advertising (European Audiovisual Observatory, 2003). This decision to favour the progressive commercialisation of public service channels has given rise to legal problems (European Parliament, 2000). On several occasions, commercial television channels have complained to the European Commission that public service channels have shown disloyal competition: according to the plaintiffs twin funding (public funds and advertising) gives public service channels an unfair advantage over commercial channels. The European Commission s (2001) response to these complaints has been an ambiguous one which means that this controversy is far from over. The third problem facing public service broadcasters is contents. Two extreme options in this area could be the following: a) To continue offering a broad range of mixed genre which will necessarily be similar to what commercial cha nnels offer. The drawback to this is that public funds are used to finance contents already available to viewers on commercial channels. b) To develop a type of programming which complements what commercial channels offer, along the lines of the American PBS. However, this decision would, in some way, render public service channels irrelevant (Blake et al., 1999) because they would lose what they have today, which is their ability to draw large audiences whilst offering more news programmes and cultural and educational programmes than their commercial rivals (Day, 1995). Between the two extremes can be found halfway options which seek to benefit from the advantages and neutralise the disadvantages of the two programming models. In the following epigraph we will examine the evolution of the television markets in Europe to discover what route public service broadcasting has taken in each country. 4. The leading channels In 1990, the public service broadcasters dominated the European broadcasting scene. In those markets where liberalisation was late in coming, such as Austria, Sweden and Portugal, their market quotas were over 80%. In contrast, in Italy, Great Britain, Germany, Belgium, Denmark, Finland and France, the market quotas of the leading public service broadcasters had dropped from 50%. In that year, in France a commercial company TF 1 was the market leader. In 2000, three commercial companies dominated their respective national markets. Tables 1 and 2 show the evolution of market quotas of the leading public service and commercial broadcasting companies for each country. In all countries, from 1990, public service broadcasters have seen a drop in their market share. In the private sector the trend has been more ambiguous: between 2000 and 2003 the leading companies RTL (Germany), Antenna TV (Greece), Mediaset (Italy) and TV3 (Ireland) strengthened their positions but the leading commercial companies in other market saw their relative positions weakened.

5 5 Table 1 Market shares of public service broadcasters COUNTRY NAME % NAME % NAME % AUSTRIA ORF 94 ORF 56,5 ORF 53,3 BELGIUM VTM 27 VRT 31 VRT 36 DENMARK TV2 47 TV Danmark 36 TV Danmark 38 FINLAND YLE 47 YLE 42,3 YLE 43,5 FRANCE FT 33 FT 40,7 FT 39,6 GERMANY ARD/ZDF 69,6 ARD/ZDF 1 43,6 ARD/ZDF 43 GREAT BRITAIN BBC 49,5 BBC 38 BBC 37,3 GREECE ERT 61 ERT 12 ERT 14 IRELAND RTÉ 68 RTÉ 36 RTÉ 34,3 ITALY RAI 45,7 RAI 47,6 RAI 46,4 NETHERLANDS NOS 58 NOS 39,5 NOS 37,6 PORTUGAL RTP 86,5 RTP 28,5 RTP 23,6 SPAIN RTVE 56 RTVE 32,4 RTVE 32 SWEDEN SVT 82 STV 47 STV 43 Source: author s own research. Table 2 Market shares for commercial broadcasters COUNTRY NAME % NAME % AUSTRIA Pro7Sat1 13,9 Pro7Sat1 13,1 BELGIUM VMM 33,4 VMM 32 DENMARK MTG 13 MTG 11 FINLAND MTV Oy 40,9 MTV Oy 40,7 FRANCE TF1 33,4 TF1 32,7 GERMANY Kirch Group 25,1 RTL Group 26,9 GREAT BRITAIN ITV One 30 ITV One 22,7 GREECE Antenna TV 27,04 Antenna TV 31,94 IRELAND TV3 8 TV3 10,7 ITALY Mediaset 42,6 Mediaset 42,9 NETHERLANDS HMG 27,4 HM G 27,4 PORTUGAL SIC 48,1 SIC 35,3 SPAIN Tele5 22,3 Tele5 20,2 SWEDEN TV4 27 TV4 25 Source: author s own research. If we analyse the data of the last three years referring to channels rather than companies (tables 3 and 4), it can be seen that audience levels for almost all the channels have fallen as a consequence of the appearance of new competitors. In all countries, niche channels a) geographical (local offer), b) themed (sports, music, educational, youth, movie channels etc.) or c) demographic (children, youth) have made their appearance; also, in some markets where immigration has been high, channels catering for ethnic or linguistic minorities have sprung up. However, in all 1 ARD is a working group of 10 independent regional public bodies organising several nationwide tvchannels beside their regional tv and radio programes; ZDF is a nationwide public body; ARD and ZDF are treated as one public broadcasting group by KEK, which is the regulation authority for private television providers.

6 6 countries general viewing programming continues to be an option with audience quotas of leading channels coming close to or exceeding 25% of the market. In the private sector, audience fragmentation has led to concentration operations, as far as legislation has permitted. One of the peculiarities of the European market is its heterogeneous legal framework; two extreme cases will suffice to illustrate this point: in Italy, one company (Mediaset) can own 100% of the three main commercial channels whilst in France and Spain, until 2003, no company could own more than 50% of any one channel. Table 3 Evolution of audiences for public service broadcasting channels COUNTRY NAME % NAME % AUSTRIA ORF2 32,9 ORF2 30 BELGIUM TV1 23,3 TV1 27,2 DENMARK TV2 36 TV2 36 FINLAND YLE1 22,6 YLE1 23 FRANCE FT2 22 FT2 20,8 GER MANY ARD1 13,7 ARD1 14 GREAT BRITAIN BBC One 30 BBC One 26 GREECE ET1 6,4 ET1 6,1 IRELAND RTÉ1 25,4 RTÉ1 24,1 ITALY RAI1 22,8 RAI1 23,7 NETHERLANDS Nederland2 17,4 Nederland2 17 PORTUGAL RTP1 28,5 RTP1 23,6 SPAIN TVE1 24,4 TVE1 24,7 SWEDEN STV2 25 STV2 27 Source: author s own research. Table 4 Evolution of audiences for commercial broadcasting channels COUNTRY NAME % NAME % AUSTRIA RTL 6,2 RTL 5,9 BELGIUM VTM 28,1 VTM 26,4 DENMARK TV3 13 TV3 11 FINLAND MTV3 40,4 MTV3 39,1 FRANCE TF1 33,4 TF1 32,7 GERMANY RTL 14,2 RTL 15,4 GREAT BRITAIN ITV One 30 ITV One 22,7 GREECE ANT1 21,8 ANT1 23,1 IRELAND TV3 8 TV3 10,7 ITALY Canale5 21,2 Canale5 22,6 NETHERLANDS RTL4 14,9 RTL4 17,1 PORTUGAL SIC 48,1 SIC 35,3 SPAIN Tele5 22,3 Tele5 20,2 SWEDEN TV4 23 TV4 25 Source: author s own research. The greater number and growing diversity of what is on offer and the acquisition and launching of new channels by leading broadcasting companies in each country has modified the type of competition in the sector. We have gone from audience wars

7 7 between mixed genre public service and commercial channels in the nineties to the accumulation of rating points (GRP s) through several channels generalist and niche owned by the same company (Dimmick, 2003). In the next epigraph we will evaluate how this phenomenon has affected the degree of concentration of the European markets. 5. Degree of market concentration How the sources of the television industry s revenues have changed is a clear reflection of the massive transformation of the European market and the public service channels loss of influence. At the start of the eighties, most of the funding for the EU television broadcasting sector was obtained through fees. Ten years later, advertising revenues had overtaken taxation as a revenue source for the sector (Foster, 1992). At the close of 2002, advertising made up 42% of the total revenue, taxation 30% and subscription fees for pay channels 28% (Commission of the Telecommunications Market, VI. 2003). The increase in revenue from subscription fees is the result of more subscribed households in the EU (from 45 million in 1996 to 70.7 million in 2003) and, to a lesser extent, of a slight growth in the ARPU (Average Rate Per User) in the same period (Ibid.). From the funding perspective, a certain balance in strengths has been reached between public service channels, commercial channels and pay channels. However, if we take a closer look at audiences, the general viewing programming channels, both comercial and public services, dominate the market. The effects some of these trends have on the degree of market concentration are ambivalent. Basically, two contrasting phenomena have occurred: deregulation in the eighties put an end to state monopolies, but the fragmentation of the market and the liberalisation of the legal framework encouraged concentration operations in the private sector (Wieten et al., 2000). The chronological evolution of the degree of concentration can be summed by the following stages: a) Up to the close of the seventies: state monopolies. b) Up to 1985: monopolies slightly eroded by commercial channels. c) Until 1995: battle for leadership between the mixed genre channels. d) Up to the present: audience fragmentation and, simultaneously, concentration operations in the private sectors meaning that a group of commercial companies owns several television channels in one or more European country. To measure the present degree of concentration in the sector and the relative weight of the main public service and commercial broadcasters in each country we have used the Herfindahl Hirschman Index (HHI). This system of measurement calculates the degree of concentration by adding up the squared market percentages of all the operators of the sector in each market: this evaluation method is rigorous in its approach and means that comparisons can be carried out on a country by country basis. To determine which channels belong to a company, a certain percentage of share in the capital was not established. Instead, we have followed the concept of effective control used by the European Union (Council of the European Commission, 21.XII. 1989). This means that with a very small share in the capital for example with 5% of the shares of a television company a company can exercise effective control normally this occurs when the rest of the capital is in the hands of many owners so that the company owning 5% of the share has decisive control over appointing managers and other strategic decisions. In accordance with these criteria, table 5 shows the evolution of the degree of concentration of European television markets in the last three years. As we have indicated, the basis for the analysis is audience ratings and not revenue. With some

8 8 exceptions, it can be observed that there is a generalised fall in the index of market concentration. Table 5 Evolution of the HHI by countries COUNTRY NUMBER OF TV HHI, 2000 HHI, 2003 HOUSEHOLDS (thousands) AUSTRIA BELGIUM (fl) BELGIUM (fr) DENMARK FINLAND FRANCE GERMANY GREAT BRITAIN GREECE IRELAND ITALY NETHERLANDS PORTUGAL SPAIN SWEDEN Sources: author s own research. Data about TV households: The Media Map The countries with the highest concentration index adhere to two possible models: a) late liberalisation of the legal framework so that one or two public service television networks have held on to a hegemonic position in their markets (Austria, Finland and Sweden); b) countries which have undergone a relatively early liberalisation but whose legal framework does not put excessive restraints on concentration operations in the private sector (Italy, Portugal and Germany). In less concentrated markets (Spain, Great Britain, Greece, Ireland and France) public service broadcasters have seen a progressive fall in their market share whilst the private sector is highly fragmented. For any channel public service or commercial the ideal scenario is to have a high share in an unconcentrated market (and, therefore, with relatively weak rivals), such as the case of TF1 in France: this guarantees dominance of the advertising market. In contrast, if the leader has a low market share for example, lower than 25%, then fragmentation will be greater, the leader s position will be less secure and negotiating powers will be transferred to the advertising agencies and the media buying companies. The increase in the number of channels has not only brought benefits to the advertising sector, it has also given greater negotiating power to the providers of popular products and those with ownership rights. When a television broadcasting monopoly has existed, film and television producers and owners of football competition broadcasting rights have sold at extremely low prices (Salokannel, 1997). Competition has hugely inflated the prices of these contents. However, too much fragmentation of the market means fewer advantages for content providers and those with ownership rights, because, in this scenario, no television company could afford to pay current prices. For this reason, it is in the content providers interest to encourage open competition, but with a group of strong

9 9 companies in each market. To ensure this is what actually happens, sales strategies must be aimed at not only se lling at the highest prices but also at promoting healthy, without being over- fierce, competition. 6. Future scenarios We have analysed the type of competition which has emerged in the European broadcasting sector in the last decades looking at the change in the role and influence of the public service channels and the development of the private sector. With their sights set on future competition, companies need to determine what the likely scenarios will be in the coming years. A key issue is to foresee if there will be a growth in the index of concentration of markets with a lower HHI which would mean the consolidation of the German and Italian models: one or two large public service operators and other commercial ones. In this scenario there would be room for numerous niche channels but all of them would have small audiences meaning they could not compete either with general viewing programming channels or for audience market quotas or in attracting major advertising campaigns. How the legal framework evolves will provide an answer to this question: economic logic favours concentration operations, the limits of which must be established by legislators. Restrictive laws are justified if they protect variety in independent information channels; on the other hand, greater permissiveness regarding concentrations gives companies greater competitive advantages (Sánchez-Tabernero and Carvajal, 2002). Although predicting how legislation will evolve is not an easy task there is one factor which pushes the scales in favour of allowing for greater permissiveness: the Commission of the European Union is seriously concerned about the export import imbalance of audiovisual products between Europe and the United States which has reached a proportion of 1 to 10 (European Audiovisual Observatory, 2003); the Commission is aware that the most effective way to correct this imbalance is to help European companies grow in size. So, in spite of the greater number of television channels, probably over the next few years we will not see a significant deconcentration of the European market: in fact, we are likely to see more concentration operations going ahead in the private sector. The European Union s legislation sets down general rules of play, but each country establishes its own particular regulations. In the audiovisual field, the trend will be for the less densely populated countries to permit higher HHI because the smaller the market the bigger the quota needed to reach the profitability threshold and promote the development of highly competitive companies. The second key issue for how the audiovisual market will develop in the next decade concerns the statutes governing the public service broadcasters. These determine the content offered, the funding model and how these companies will compete. In this field, it is harder to predict what will happen: there are no homogenous lines of strength and decisions made by national governments largely depend on electoral considerations. In any case, there are two funding sources which, in all likelihood, will not see a significant increase: licence fees paid by television set owners (owing to the trend towards fewer taxes) and state grants (because of governments increasing concern with balancing the budget). Public service broadcasters will be left with no choice other than becoming more commercial (and following a business model along the lines of commercial television companies) or employing strategies of retreat which will mean

10 10 more niche programming, cutting down on jobs and giving up their position as market leaders which, until now, they have managed to retain. We find ourselves, then, at a moment of great change, perhaps with more uncertainties than certainties. In this new competitive context, getting strategic decisions right will be just as crucial for public service and commercial broadcasting companies as their ability to detect errors and imbalances so as to swiftly rectify their course. References Blake, A. D. et al. (1999). Keeping Baywatch at Bay. Mckinsey Quarterly, 4, Blumler, J. (ed.) (1992). Television and the Public Interest: Vulnerable Values in Western European Broadcasting. London: Sage. Comisión del Mercado de las Telecomunicaciones (2003, June). El audiovisual crece a pesar de la caída de la invers ión publicitaria. Noticias CMT, 15, 6. Conseil Superieur de l Audiovisuel (1992). Le positionnement des chaines publiques et privées en Europe. París: CSA. Council of the European Commission (1989, December, 21). Regulation 4064/89 on the control of concentrations operations between companies, art. 3,3 y 3,4. Croteau, D. & Hoynes, W. (2001). The Business of Media: Corporate Media and the Public Interest. Thousand Oaks: Pine Forge Press. Day, J. (1995). The Vanishing Vision: the Inside Story of Public Television. Berkeley: University of California Press. Dimmick, J. (2003). Media Competition and Coexistence. The Theory of Niche. Mahwah, N.J.: Erlbaum Associates. European Audiovisual Observatory (2003). Statistical Yearbook: Cinema, Television, Video and New M edia in Europe. Strasbourg: EAO. European Commission (2001). Communication from the Commission on the application of State aid rules to public service broadcasting, 2001/C 320/04 European Parliament (2000). Resolution on Community Policy in the Audiovisual Sector in the Digital Era. DOCE C 14, 16.XI.2000, 114. Foster, R. (1992). Public Broadcasters, Accountability and Efficiency. Edinburgh: Edinburgh University Press. Gibbons, T. (1998). Regulating the Media. 2 nd. ed., London: Sweet & Maxwell. Graham, A. et al. (1999). Public Purposes in Broadcasting: Funding the BBC. Lutton: University of Lutton Press. Hoskins, C., Mc Fadyen, S & Finn, A. (1997). Global Television and Film; An Introduction to the Economics of the Business. Oxford: Clarendon Press. Just, N. & Latzer, M. (2000). EU Competition Policy and Market Power Control in the Mediamatics Era. Telecommunications Policy, 24, Jyrkiäinen, J & Sauri, T. (2001). The Finnish Media Landscape. Structure, Economy and Consumption, Nordicom Review, 10, Machet, E. & Robillard, S. (1998). Television and Culture. Policies and Regulations in Europe. Dusseldorf: The European Institute for the Media. Noam, E. (1991). Television in Europe. New York: Oxford University Press. Pardo, A. (ed.) (2002). The Audiovisual Management Handbook. Madrid: Media Business School. Paulu, B. (1974). Radio and Television Broadcasting in Eastern Europe. Minneapolis: University of Minnesota Press.

11 11 Salokannel, M. (1997). Ownership of rights in Audiovisual Productions: a Comparative Study. The Hague: Kluwer Law International. Sánchez-Tabernero, A. & Carvajal, M. (2002). Media Concentration in the European Market. New Trends and Challenges. Media Market Monographs, Pamplona: EUNSA. Scriven, M. & Lecomte, M. (eds.) (1999). Television Broadcasting in Contemporary France and Britain. New York: Berghahn Books. Shaughnessy, H. & Fuente Cobo, C. (1990). The Cultural Obligations of Broadcasting. Manchester: The European Institute for the Media. Wieten, J. et al. (2000). Television across Europe. London: Sage. Woldt, R. & Dries, J. (1998). Perspectives of Public Service Television in Europe. Düsseldorf: Europäisches Medieninstitut.