EUROPEAN COMMISSION. Brussels, 21/12/2005 C(2005)5399 fin

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1 EUROPEAN COMMISSION Brussels, 21/12/2005 C(2005)5399 fin PUBLIC VERSION WORKING LANGUAGE This document is made available for information purposes only. Subject: State aid No. CP 101/2004 Italy Subsidy to digital decoders Sir, The Commission wishes to inform Italy that, having examined the information supplied by your authorities on the measures referred to above, it has decided to initiate the procedure laid down in Article 88(2) of the EC Treaty. I. Procedure (1) On May 11, 2004 Centro Europa 7 srl ( Europa 7 ) lodged a State aid complaint against Art. 4 (1) of Law 24 December 2003, n.350 (ref. A/34295). The complainant submitted further information and comments by letter of February 10, 2005 (ref. A/31242) in which it was stated that the Italian government had refinanced the measure in Comma 211 of the Finance Act for 2005 and urged the Commission to initiate the formal investigation procedure. On May 3, 2005 (ref. A/33724) Sky Italia srl ( Sky Italia ) also lodged a complaint against the two previous articles. On June 22, 2005 a meeting took place between the Commission services and Sky Italia. On August 31, 2005 (ref. A/36876), the latter complainant submitted further information concerning changes in the so-called Gasparri Law regulating the television sector in Italy. Finally, on October 31, 2005 Sky Italia requested to the Commission to adopt pending its decision an injunction to the Italian government to suspend the measure pursuant Article 11(1) of the Procedural regulation 1. (2) By letters of October 13, 2004 (ref. D/38544), April 21, 2005 (ref. D/53173) and July 15, 2005 (ref. D/55442) the Commission submitted requests for information to the 1 Regulation n.659/1999 laying down detailed rules for the application of article 88 of the EC Treaty. Official Journal L 83, , pages 1-9. S.E. On. Gianfranco FINI Ministro degli Affari esteri P.le della Farnesina 1 I Roma Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgio. Telefono: (32-2)

2 Italian Government. The information was provided on November 5, 2004, May 13, 2005 and September 12, 2005, following a short extension of the deadline. On June 6, 2005 a meeting took place between the Commission services and the Italian Authorities. (3) By letters of September 20, 2005 (ref. A/37498) and November 16, 2005 (ref. A/39413) the Italian Authorities informed the Commission of their intention not to prolong the scheme its present form. II. II.A. Detailed description of the aid Background II.A.1 The complainants (4) Europa 7 is an Italian company that holds a broadcasting concession since However, it has not been able to operate in the broadcasting market yet, allegedly due to the behaviour of the national authorities, which have not yet allocated the facilities and frequencies Europa 7 needs in order to broadcast. (5) Sky Italia is a pay TV which is owned by News Corporation and has a monopolistic position in the Italian market for satellite pay-tv broadcasting. It was formed as the result of News Corporation s acquisition of control of Telepiù S.p.A and Stream S.p.A in 2003, a merger which was approved subject to commitments (Case n. COMP/M.2876 Newscorp/Telepiù). As a result of the commitments Sky Italia was requested to dismiss its terrestrial business and cannot operate in Italy as terrestrial network operator or terrestrial pay-tv operator. II.A.2 The context (6) The present procedure is to be viewed against the background of the digitisation of broadcasting, which is affecting all the currently commonly available transmission platforms, i.e. cable, satellite and terrestrial 2. The prime benefit of digitisation is the increased transmission capacity on all platforms achieved by a more efficient use of the frequency spectrum. The Commission actively supports the digitisation of broadcasting 3. (7) There are in Italy 4 TV broadcasting platforms: (i) satellite, on which the main free to air channels are available plus the channels of Sky Italia one of the complainants whose programs can be accessed via subscription or pay per view agreements; (ii) 2 3 Therein DVB-T stands for digital video broadcasting over a terrestrial network. Other forms of digital video broadcasting are DVB-S (by satellite) and DVB-C (by cable). COM(2002)263 final, "eeurope 2005: An information society for all", COM(2003)541 final, "Communication from the Commission on the transition from analogue to digital broadcasting (from digital "switchover" to analogue "switch-off")" and COM(2005)241 final, "Communication from the Commission on interoperability of digital interactive television services", and COM(2005)204 final, "Communication from the Commission on accelerating the transition from analogue to digital broadcasting". 2

3 terrestrial, on which operate 78 local and 4 national broadcasters i.e. RAI (free to air), Mediaset 4 (free to air and pay per view), La 7 (free to air and pay per view) and Prima TV (free to air); (iii) cable, on which operates Fastweb (free to air and payment services); and (iv) X-DSL, on which operate Fastweb and Telecom Italia s Rosso Alice (free to air and payment services). (8) Terrestrial remains the major means of television viewing in Italy, with a penetration of roughly 19 millions households over a total of 22 millions. The main players in terrestrial TV are the public service broadcaster (RAI) with three channels and commercial broadcaster Mediaset also offering three channels. The two organisations account for approximately 90% of the TV audience in Italy. (9) Penetration of satellite TV is limited around 16% of households have a parabolic antenna. Most of these households subscribe to the DTH platform (satellite) Sky Italia which reported about 3 million customers in June (10) Cable hardly exists in Italy, although Fastweb the only triple play operator in Italy had acquired around 140,000 TV customers by March 2004 using a fibre and DSL infrastructure. (11) In June 2005 digital TV penetration rate was 26.5%, with around 6 millions of subscribers in total. At the end of 2005 the two pay TV offers terrestrial and satellite are expected to have more or less the same number of subscribers. (12) The aid in question is for terrestrial transmission, which in Italy is the only platform to still use analogue mode. Digital mode can normally accommodate more television channels than analogue mode. As from the end of 2003 digital mode transmissions (T- DVB) were broadcast along with those in analogue mode (so called simulcast phase ). As from the 1 January 2007 the switch over to the digital mode should be completed and the transmission in analogue mode should be switched off. (13) In the meantime, according to the Gasparri Law, regulating the sector in Italy, only broadcasters already transmitting with the analogue technology are permitted to apply for experimental digital authorisations and/or digital licences. There is no formal obligation for analogue operators to give back the frequencies used for transmissions in analogue format after the switch-off. According to the Italian authorities 5 multiplexes (frequencies blocks including one or more programmes) for digital terrestrial have been licensed in Italy. RAI has two multiplexes, Mediaset has one multiplex, Telecom Italia/TV International and D-Free (TF1 and HCS) have one multiplex each. Under the Italian regulatory regime, network operators holding more than one digital licence must give access to 40% of their bandwidth for unrelated content providers. (14) As regards coverage of T-DVB according to the national telecommunication regulator 5 in 2004 more than 50% of the population was effectively covered by at 4 5 RTI manages the infrastructures. But RTI is owned by Mediaset.. See the Relazione of the Autorità per le garanzie nelle comunicazioni ai sensi della legge 24 febbraio 2004, N. 43 di conversione del decreto legge 24 dicembre 2004, n. 352, recante Disposizioni urgenti 3

4 least 2 multiplexes and 60% is potentially covered by 3 multiplexes. The market trend suggests that coverage should increase considerably. According to the Italian authorities, 85% of existing households could potentially be covered by at least 2 multiplexes after the switch over to digital terrestrial. On the other hand, satellite broadcast could cover virtually 100% of the population. (15) Concerning programs, according to the Italian authorities, 23 national programs and roughly 70 local programs were broadcast on digital terrestrial frequencies, 10 of which in simulcast (program already broadcast in analogue). 4 channels have been created on purpose for the digital broadcasting. (16) The TV market was once characterised by mass viewing of free-to-air TV in terrestrial mode and by pay-tv offer on satellite. The introduction of digital terrestrial TV and the development of cable and Internet are modifying this pattern. Indeed, as from January 2005 Mediaset and Telecom Italia (through LA7) have launched on T-DVB a pay TV service for premier league soccer matches based on prepaid cards. At the same time, TF1 49% partner in the D-Free broadcaster has indicated that it may be interested in launching pay channels on its T-DVB multiplex. The pay TV services are allowed, in the prepaid card form, by the digital interactive technology embodied in the decoders which are subsidised with the measure. (17) Finally there are currently 4 network operators in the digital terrestrial. One of them is owned by RAI, one by Mediaset, one by La7/Telecom and the latter by Prima Italia. The distinction between broadcasters and network operators is not so relevant for the major Italian broadcasters because RAI, Mediaset, La7 and D-Free all have their own subsidiary for terrestrial transmission. II.B. Description of the aid (18) The subject-matter of the formal investigation procedure are article 4(1) of Law N. 350 of 24 December 2003 (the Finance Act for 2004), the implementing Decree ( Decreto interministeriale ) of 30 December 2003 and comma 211 of Law N. 311 of 2004 (the Finance Act for 2005). (19) Article 4(1) of the Finance Act for 2004 provides for a public grant of 150 to be awarded to users who purchase or rent a set up box (hereafter decoder ) capable of receiving programmes broadcast using digital terrestrial technology and correlative interactive services, and earmarks a total budget of 110 million for the purpose. It has to be remarked that the subsidy is not available for decoders not receiving digital terrestrial signals even if they allow the reception and utilization of the interactive services. The text of the article in dispute is as follows: For 2004, each user of the broadcasting service who has fulfilled his obligations regarding payment of the relevant subscription fee for the year in progress and who purchases or rents a set top box allowing the reception, free-to-air and without any concernenti modalità e tempi di definitiva cessazione del regime transitorio della legge 31 luglio 1997, n.249 4

5 cost for the user or for the content provider, of television signals transmitted using digital terrestrial technology (T-DVB/C-DVB) and the resulting interactivity shall be entitled to a public grant of 150. Award of the grant shall be made within the spending limit of 110 million. (20) Article 4(4) specifies that the grant for the rent or purchase of set top boxes for the C- DVB technology is conditional on the fact that the commercial offer clearly indicates to the consumer which content providers had agreed with the cable managers the terms for the provision of the T-DVB signal via cable. (21) Comma 211 of the Finance Act for 2005 refinances for the same spending limit of 110 million, but the grant per decoder is now 70. The scheme in its present form ceases to apply on 1 December (22) The measure has been successful; apparently more than citizens have bought a subsidized decoder. Moreover, thanks to this success the consumer price of interactive decoders has decreased from 300/350 Euro to around 150 Euro. II.C. Comments from the parties (23) According to the Italian Authorities, the reasons behind the Italian measures are the following: Improve the use of frequencies to expand pluralism and TV offering; Promote economic development based on information and communication technologies; Promote e-society services among as many citizens as possible thanks to the interactive operability of the decoders given that TV sets are spread all over the population; Minimise the reception obstacle by creating a market for interactive decoders at accessible prices for consumers; The measure accords with the European Community policy in the sector of supporting open standards. (24) According to the complainant, by paying a non refundable grant to anyone buying or renting a decoder for digital terrestrial television, the Italian legislature has provided state aid to producers of decoders for digital terrestrial television broadcasts vis-à-vis those producing other types of decoders for digital TV, and to television broadcasters operating in the sector, thereby discriminating against competing firms, particularly from other EU Member States, operating on another digital platform (satellite) or in analogue. (25) Following a preliminary request for information which the Commission addressed to the Italian Authorities, the Italian Authorities clarified that the subsidy is granted to consumers for purchasing or leasing a decoder that allows the reception of a non- 5

6 encrypted digital signal with no additional cost for the consumers and the content provider. According to the Italian authorities, reception of non-encrypted digital signal has to be interpreted as the decoder s capacity of executing any interactive service provided by any broadcaster. This would therefore be a synthetic expression to indicate that the decoder must permit non-encrypted interactive functions (i.e. it must be not only interactive but it also must allow for interoperability ). These are decoders with an open standard for the programming interface (API) of which the MHP is the almost unique example. III. III.A. Legal Assessment State aid assessment pursuant to Article 87(1) EC (26) At this stage the Commission considers that the measure at hand may constitute state aid. Article 87(1) of the Treaty lays down the following conditions for presence of state aid. First, there must be an intervention by the State or through State resources. Second, it must confer an advantage on the recipient. Third, it must distort or threaten to distort competition. Fourth, the intervention must be liable to affect trade between Member States. III.A.1 State resources and imputability (27) The measure is clearly imputable to the State and involves the use of State resources. Indeed, it is contained in the financial Act for 2004 and 2005 approved by the Parliament. III.A.2 Economic advantage (28) First, the Commission considers that the direct beneficiaries of the grant are final consumers, thus not undertakings falling in the scope of Article 87(1). However, the measure aims at promoting sales of decoders for the reception of digital terrestrial television and thus may benefit indirectly (i) the producers of decoders; (ii) the television broadcasters operating on digital terrestrial platforms; and (iii) the operators of the networks that carry the signal. The first question to be analysed is therefore whether an eventual indirect advantage may fall within article 87(1). III.A.2.1 Indirect advantage: can it constitute aid (29) First, it must be noted that Article 87 does not require the advantage to be direct. In particular, measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without therefore being subsidies in the strict meaning of the word, are similar in character and have the same effect are considered to constitute aid according to established jurisprudence 6. Second, the Court jurisprudence and the Commission practice leave little doubt that an indirect advantage may constitute a State aid. 6 See for example case C-387/92 Banco Exterior de España [1994] ECR I-877, paragraph 13, and case C- 75/97 Belgium v Commission [1999] ECR I-3671, paragraph 23. 6

7 (30) In its judgment of 13 June 2002 on case C 382/99 7 the Court made it clear that advantages granted indirectly to undertakings constitute state aid within the meaning of Article 87 of the EC Treaty. Similarly, in its judgement of 19 September 2000 on case C 156/98 8 the Court held that a tax relief granted to individuals who invested in companies situated in Berlin or in the new German Lander constituted aid in favour of the companies. (31) Having established that an indirect advantage may fall within article 87 (1) below we examine if the three categories of potential beneficiaries of the aid receive an indirect advantage that can be qualified as State aid. III.A.2.2 Indirect advantage: beneficiaries Producers of decoders (32) The measure has the effect of making the decoders targeted by the subsidy cheaper for consumers given the State shouldering of the expense. This may allow the producers to increase their sales without lowering the price at which they sell their products. The grant to the consumers seems to create additional gains for the producer than those it would normally have had obtained from its normal activities (i.e. he can sell more products without having to lower the price so he does not have to bear the loss of gain linked to a lower price per unit). Broadcasters using digital terrestrial and cable platforms (33) As for the broadcasters using T-DVB/C-DVB, it could be said that by favouring the diffusion of the technologies necessary for the reception of their signal, the measure helps those broadcasters in creating and developing their audience at a faster pace than without the measure. (34) In the absence of the measure, any broadcaster wanting to develop his digital audience at the same pace would have been compelled to finance the reception costs of its potential viewers. For example the complainant Sky Italia a satellite operator claims that it provided free to its subscribers a decoder and an antenna. Accordingly, the measure allows the T-DVB/ C-DVB broadcasters to avoid a cost that they would have normally borne had they wanted to develop their digital audience. (35) Moreover, by accelerating the switchover from analogue to digital TV the measures reduces the length of the simulcast phase. Were the switchover simply dictated by the market, the period over which some broadcasters would have to finance a double broadcasting technology would be longer. The effect of the measure is therefore also to reduce the cost that the broadcasters emitting in simulcast would normally have to bear. 7 8 Case C 382/99 Netherlands v Commission [2002] ECR I-5163 Case C-156/98 Germany v Commission, [2000 ] ECR I-6857, paragraphs Tax provision favouring investment in the new German Länder. 7

8 Operators of terrestrial networks (36) Since the diffusion of their transmitting technology is shouldered by the State, the activity of those digital terrestrial and cable network operators for which subsidized decoders are available (regardless of whether or not they are integrated into a larger undertaking that is also a content provider) is advantaged vis-à-vis that of network operators by other digital technologies. Had they wanted to obtain the same result, these operators would have contributed together with broadcasters to finance the reception cost of the potential viewers. In this respect, the measure allows them to avoid a cost that they would have borne in normal market conditions had they wanted to develop their activity in the same way. III.A.3 Measurement of the aid (37) The measure in question seemingly provides a selective advantage to the above quoted beneficiaries. However the selective advantage, if any, is only indirect and does not seem easily measured. The size of the advantage could become relevant, should the Commission, as an outcome of the procedure, find that the measure at hand constitutes incompatible aid and ask recovery. Therefore, the Commission invites all parties to provide comments on the possible quantification of or methodology for estimating the advantage accrued to the various indirect beneficiaries of the measure. III.A.4 Distortion of competition Producers of decoders (38) According to the complainant the Italian legislature has provided state aid to producers of decoders for digital terrestrial television broadcasts vis-à-vis those producing other type of decoders for digital TV. The Commission doubts that it is possible to draw a distinction between different categories of producers of various types of decoders because it would seem that any producer is able to produce any type of decoder. Moreover, in the present case the subsidy is granted to decoders that incorporate the MHP standard, i.e. an open API that is freely available to any manufacturer. Therefore, it is unclear whether the measure favours certain undertakings in comparison with other undertakings which operate in the production of decoders. (39) However it has to be also assessed whether the measure selectively favours producers of decoders as a sector of the manufacturing industry with respect to competitors that do not benefit from the measure because, for example, they do not operate in the same sector or because they are located elsewhere in the EU. (40) Considering that a sectoral measure provides a selective advantage is in line with the practice of the Commission. For example in paragraph 16 of its decision on case N 622/2003 Digitalisierungsfonds Austria 9, the Commission affirmed that The notified scheme is selective since it is partially targeted towards undertakings active in the sectors related to the digitisation of television, for instance broadcasters and 9 Decision C(2005) 586 of March 17, 2005 not yet published. 8

9 partially, directly or indirectly, towards undertakings active in the market for digital transmission services. The Austrian authorities actually had put forward that the measure was of a general character since it does not grant an advantage to specific undertakings. However, when the Commission posed questions regarding the selectivity of the scheme, the authorities did not deny that the measure as such has a selective character. As the Court held in Adria Wien 10, the measure grants an advantage to a specific sector and is thus to be considered as a specific measure. (41) In this particular case, however, the aid is directed at consumers which have the choice among decoders of all manufacturers. It seems that the aid does not selectively advantage any type of producer of decoders on the basis of place of production. Nor does it seem that there are manufacturers which are specialised in the production of the subsidised decoders and that could be favoured over producers of other models. Finally, it does not seem that manufacturers of decoders compete with operators in other sectors that cannot benefit indirectly from the measure. (42) Moreover, it is possible that the measure in question does not seek, through its object or general structure, to create an advantage for decoders manufacturers. The consequences arising from this, insofar as they relate to an increase in sale of decoders, are inherent in the system so that it may be possible that they are not a means of granting a particular advantage to decoders producers. Indeed, any public policy in favour of digitisation (even the most technologically neutral) would favour producers of decoders. The advantage they derive is neither the object nor does it flow from the general structure of the measure, but it is the inherent effect of any such policy. (43) Accordingly, the Commission doubts that manufacturers of decoders are selectively favoured by the measure. However, the Commission invites comments on whether the system has worked in practice so as to distort competition in favour of particular producers of decoders. Broadcasters (44) The advantage granted to broadcasters is selective and goes to the detriment of broadcasters using different technological platforms or to the detriment of companies which cannot broadcast despite having a concession like one of the complainants, Europa7. For example, The Italian Autorità per le garanzie nelle comunicazioni in its Relazione concludes that the public contribution to the purchase of decoders is playing a decisive role in developing the audience of broadcasters using T-DVB 11. (45) Moreover, Digital Terrestrial broadcasting does not only compete with other free to air analogue offers but also with pay-tv. Indeed examples from commercial practice confirm the link between platform and programming as it seems that some decoders Case 143/99 Adria-Wien Pipeline GmbH Wietersdorfer & Peggauer Zementwerke GmbH v Finanzlandesdirektion für Kärnten [2001] ECR I See paragraph 88 (d) of Relazione ai sensi della legge 24 febbraio 2004, N

10 are already sold in a bundle with pre-paid pay-tv cards of certain broadcasters. In this respect, the complainant stresses that the aid allows the T-DVB broadcaster to enter the markets related to the pay-tv transmission of football games. This advantage is relevant in distorting competition. Operators of terrestrial networks (46) While not mentioned in the complainants, the distortion of competition might concern also the operators of terrestrial networks using the favoured technologies. In general a distinction can be done between the activity of the content provider and the activity of the signal carrier. The distinction however is not so relevant for the major Italian broadcasters because RAI, Mediaset, La7 and D-Free all have their own subsidiary for terrestrial transmission and therefore an aid to the network operator is de-facto an aid to the group. On the other hand, in the case of satellite, the activity of carrying the signal is provided by a separate undertaking. The same goes for cable. (47) The measures excludes the competing satellite platform from indirectly benefiting from the aid, while for the cable specific conditions apply according to the Decree adopted by the Minister for Communications on 30 December Also the Italian competition authority has stressed the relevance of the principle of technological neutrality. Indeed the authority considers it useful to put in place incentives to disseminate decoders to Italian households. However, with the aim of securing the objective of competition between platforms these incentives should safeguard the principle of technological neutrality, and should not, therefore, be restricted to only a few transmission platforms but be extended with the same modalities to all digital television platforms: digital terrestrial, satellite, cable and X-DSL technologies 13. III.A.5 Effect on trade (48) The distortion of competition between television broadcasters is capable of affecting trade between member States since the broadcasting market is open to international competition. Likewise network operators are active in an international market, the example of satellite operators being very clear in this respect. III.A.6 Conclusion (49) In summary, although the main beneficiaries receive an advantage which is only indirect, at this stage of the analysis the Commission cannot exclude that the measure As mentioned above, the cable operator must indicate to the user the content providers with whom it has agreed the cable retransmission of the signal transmitted using digital terrestrial technology. However, it appears from the mentioned complaint that (because of the allegedly excessive pricing policy of Mediaset and RAI) cable operators may encounter serious problems in inserting in their offer programs of Mediaset and RAI and thus it is not clear to what extent they can really profit from the measure in question. All the rest being equal, consumers would buy T-DVB decoders rather than C-DVB decoders if the cable operator offer does not include RAI and Meadiaset channels. Italian Competition Authority: Conclusion of fact-finding investigation into sale of television commercials (English version). Rome, 6 December

11 constitutes a State aid in favour of broadcasting operators using T-DVB/C-DVB and terrestrial network operators. Since most content providers and network operators in Italy are vertically integrated and each broadcaster is strongly characterised by its presence on a particular platform, the main concern is the distortion on the markets for TV audience, the advertising market for free to air TV and the subscriptions market for pay TV. Finally, the Commission doubts that the measure constitutes aid for producers of decoders. (50) In any event, the presence of state aid in the present case is not called into question by the possible application of the Altmark ruling in relation to a possible compensation for public service costs. 14 None of the four criteria (definition and assignment of the service of general economic interest, ex ante determination of parameters for compensation, no overcompensation and choice of efficient provider via tender or estimate of the net additional costs of the average well run company) is met. III.B Compatibility assessment (51) The Commission has doubts as to whether the measure at hand, if it constitutes state aid, is compatible with the single market. On the basis of the characteristic of the measure and the communication, it seems that the possible grounds for compatibility of this measure would be: Article 87(2)(a), aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; Article 86(2), providing a derogation for services of general economic interest; Article 87(3)(c) aid for the development of a certain economic activity. (52) Indeed it is clear that the exception provided for in Articles 87, paragraph (3)(a) of the EC Treaty does not apply in the present case, because the measure does not concern only regions which would be eligible to aid under such derogation. In the same way, it seems that the measure cannot be considered to be a project of common European interest or to remedy a serious disturbance in the economy of Italy, as provided for by Article 87, paragraph (3)(b) of the EC Treaty. Nor does it have as its object the promotion of culture and heritage conservation as provided for by Article 87, paragraph (3)(d) of the EC Treaty. III.B.1 Article 87 (2) (a) (53) An argument could be made to the effect that the measure is an aid to consumers having a social character and does not discriminate as to the origin of the product. It could be affirmed that the aid responds to some social interest i.e. facilitating the access to digital TV by the population which is a recognised public interest. Since the subscribers to satellite can afford the high fees, the subsidy can moreover be restricted to users of the terrestrial technology. 14 Judgement of 24 July 2003 in Case C-280/00 Altmark Trans GmbH, ECR [2003] Page I-7747, paras

12 (54) To assess this argument the definition of social character must be analysed. The Commission considers that the term social character should be interpreted narrowly because this provision derogates to the general ban on State aid and as a rule should be interpreted strictly. According to Commission s practice the term social character refers to an aid addressing the need of underprivileged part of the population. For example, in the transport sector the Commission has recognised that aid falling within art. 87(2)(a) must have a social character, i.e. it must in principle only cover specific categories of passengers travelling on a route, such as children, handicapped persons or low income people. However, where the route concerned links an underprivileged region, mainly island, and the aid could exceptionally cover the entire population of the region 15. (55) In the case of the present measure, the law does not contain any reference to the social or economic status of the beneficiary. Therefore, even if the aid is granted regardless of the origin of the decoder, the measure is not reserved to that part of the population that may appear not to be in a position to cope with the cost of buying a digital decoder. In this respect it may be interesting to remember that the Autorità per le garanzie nelle comunicazioni has made a survey on the availability on the market of decoders at an accessible price. It has concluded that the effect of the aid in question is that to bring the net price of interactive decoders substantially in line with that of more simple models (zappers) i.e. around 150. The impact of the purchase of the decoder on the average household income with or without public contribution is small. The market tendency is that even without the aid more than 50% of the households will have a decoder by 2006 in the best scenario and by beginning 2008 in the worst. The Authority, moreover underlines that it is only for lower income portion of the population that the purchase of the decoder may constitute an important purchase decision 16. The analysis of the Autorità suggests that not the whole population is in need of the aid in order to switch to digital TV. (56) In summary, at this stage it seems that the measure does not have a social character and, would it be aid, Article 87(2)(a) would not applicable. III.B.2 Article 86(2) (57) It could be argued that access to digital TV represents a service of general economic interest and thus switch-over from analogue to digital is a public service task. However, it seems that the Article 86(2) derogation does not apply to the present case. Indeed, the aid is granted to consumers and it is not intended as compensation for the net additional cost of providing a public service that had previously been clearly defined and formally entrusted. Accordingly, the Commission s preliminary view is that Article 86(2) does not provide a basis for the compatibility of the measure should it constitute aid Guidelines on State aid in the aviation sector, section III.3, OJ C /5. See Relazione ai sensi della legge 24 febbraio 2004, n.43 dei conversione del decreto legge 24 dicembre 2004, n. 352, recante Disposizioni urgenti concernenti modalità e tempi di definitiva cessazione del regime transitorio della legge 31 luglio 1997, n.249 paragraphs 50 to

13 III.B.3 Article 87(3)(c) (58) It might be argued that the possible aid is compatible under article 87(3)(c) EC since it develops an economic activity consisting in the digital transmission of terrestrial television signals without affecting trading conditions to an extent contrary to the common interest. (59) In order to be compatible under article 87(3)(c) an aid must pursue an objective of common interest in a necessary and proportionate way. In particular, the measure should be assessed with respect to the following questions: (1) Is the aid measure aimed at a well-defined objective of common interest? (2) Is the aid well designed to deliver the objective of common interest i.e. does the proposed aid address a market failure or other objective? In particular: (a) (b) (c) is the aid measure an appropriate instrument, i.e. are there other, better placed instruments? is there an incentive effect, i.e. does the aid change the behaviour of firms? is the aid measure proportional, i.e. could the same change in behaviour be obtained with less aid? (3) Are the distortions of competition and effect on trade limited, so that the overall balance is positive? Objective of common interest (60) With respect to the first question, it can be observed that the transition from analogue to digital broadcasting ( digital switchover ) has great advantages in terms of more efficient spectrum usage and increased transmission possibilities. These will lead to new and better quality services and to wider consumer choice. (61) The Commission actively supports digital switchover and it has underlined these advantages in the Action Plan eeurope 2005 and in the two Communications relating to the digital switchover quoted above. 17 In its Communication i2010 A European Information Society for growth and employment 18 the Commission has pointed out that the planned switching off of analogue terrestrial television by 2012 will improve access to spectrum in Europe. Regulation should neither impose nor discriminate in favour of the use of a particular digital platform such as cable, satellite, terrestrial or DSL TV thus adhering to the principle of technological neutrality. As stated in the Framework Directive, this does not preclude a Member State from taking COM(2002)263 final, eeurope 2005: An information society for all, COM(2003)541 final, "Communication from the Commission on the transition from analogue to digital broadcasting (from digital "switchover" to analogue "switch-off")", and COM(2005)204 final, "Communication from the Commission on accelerating the transition from analogue to digital broadcasting". COM(2005)229 final, 1 June

14 proportionate steps to promote certain specific services where this is justified, for example digital television as a means for increasing spectrum efficiency. 19 This means that each platform should in principle compete on its own strengths, but that intervention targeting in correcting market failures that are specific to one platform can be envisaged. In the end, the platforms should prevail which offer the greatest benefit to consumers. (62) In the communication on interoperability of digital interactive television services quoted above 20 the Commission also stresses the relevance of interactivity and interoperability. It is there stated that the Commission seeks to ensure that European citizens benefit from a growing range of interactive DTV services, available on an increasing number of transmission platforms. Indeed, interactive TV adds another layer of functionality to digital television (DTV) beyond video which could be exploited in the future not only for commercial purposes but also to implement T- government functions also for the share of the population with most difficulties in relationship with informatics. (63) Moreover, the lack of interoperability (covering both technical interoperability and access issues) and possible constraints on consumer choice, could affect the free flow of information, media pluralism, and cultural diversity. These concerns could be summarised as follows. Consumers would be unable to buy a standardised, universal receiver able to receive all free-to-air and pay television interactive services and could be locked into using more costly receivers containing proprietary APIs. Broadcasters would face obstacles in developing and delivering interactive services because they would have to negotiate with vertically-integrated network operators, in control of proprietary API technologies. Open APIs facilitate interoperability, i.e portability of interactive content between delivery mechanisms with full functionality of the content intact. MHP standard is currently the most advanced open API standard in Europe and the Commission takes measures to promote the voluntary adoption of this standard. One way of reducing the additional costs to consumers of equipment incorporating standard execution engines such as MHP is to subsidise purchases at the level of the consumer. Member States may therefore offer consumer subsidies. (64) Accordingly, the transition from analogue to digital broadcasting and the diffusion of open standards for interactivity are to be considered objectives of common interest. Well designed aid (65) The Commission recognises that the digital switchover may be delayed if the process is left entirely to market forces. It is generally recognised that the switch to digital television may be hindered by certain market failures and that, in principle, consumer subsidies are an acceptable way of promoting the switchover as far as they are provided respecting the principle of technological neutrality. Moreover, there is a risk that not all parts of the population can benefit from the advantages of digital television (problem of social cohesion). Several types of market failure or social problems seem 19 See Recital 18 of the Framework Directive 2002/21/EC. 20 See footnote 3. 14

15 possible 21 concerning in particular the markets related to broadcasters. The various possible arguments some of which advanced by Italy are: a) The development of digital terrestrial broadcasting may be hampered by a coordination problem between market players. b) The measure is a compensation for consumers that need to update their analogue equipment. c) The presence of market power may prevent the market from achieving the full benefits of competition between operators. d) The switchover may have positive externalities due to the better use of frequency spectrum. e) The measure promotes innovation and development of new services, a particular kind of externalities. (66) In relation to these points it should be first assessed whether these are true market failures which prevent the market from achieving economic efficiency; secondly, whether State aid is the appropriate remedy to correct them and, thirdly, if the granted aid is the minimum necessary to reach the objective. a) The coordination problem (67) Regarding the co-ordination problem between market players, the Commission recognises that this may in principle represent a market failure. This problem arises because broadcasters need to agree on common dates for switching off analogue transmission and for switching on digital transmission to overcome the lack of frequency spectrum and to minimise the costs of parallel transmission, particularly in view of the fact that frequency spectrum is insufficient to transmit analogue and digital TV signals in parallel (the so-called simulcast phase). Consumers might not be willing to shift to the digital platform until it carries a large number of broadcasters. Accordingly, broadcasters might want to wait other operators before moving to the digital platform. In the absence of coordination, this approach might delay the switchover. There is therefore an interest in limiting in time the simulcast phase and in achieving simultaneous switchover of broadcasters. (68) However, aid to consumers does not seem the appropriate instrument to target such a coordination problem. Indeed, the existence of a mandatory date for switchover 31 December 2006 seems already sufficient to help broadcasters to plan a coordinated move into the new platform and consumers to adapt to the new transmission technology. (69) A particular type of coordination problems hampering investment in digital terrestrial is the risk run by network operators and broadcasters that a critical mass of consumers using digital terrestrial is not reached so that their investment is lost. However, at the present stage it does not seem to the Commission that this can be considered a risk 21 See also the final Commission decision C(2005) 3903 on case C 25/2004 Introduction of digital terrestrial television (DVB-T) in Berlin-Brandenburg, Germany. 15

16 reasonably faced by market operators in the present case. Indeed in Italy the market for terrestrial TV is very large (as it was said before cable operators serve a small minority of households and satellite operators do not reach more than 20% of households). b) Compensation for consumers (70) The measure, by compensating consumers that need to update their analogue equipment, is necessary step for a smooth switchover process. This argument appears to be confirmed by the example of the satellite operator who provided at his own costs new digital equipment to its clients at the moment of the switchover to digital in the satellite platform. (71) However, as it was argued in the previous paragraph, this argument might justify aid to consumers, but not the discrimination between the terrestrial and the satellite platforms: the aim is to encourage consumers to abandon the analogue platform, but should not address them preferentially towards either of the digital platforms, which seems to be the case with the present measure. (72) The Italian authorities have argued that the measure contains the requirement that decoders must allow the reception of free to air television without any cost for the user, which would already exclude the satellite platform from the benefits of the measure because the only satellite operator, Sky Italia, requires a fee to access its programs. (73) However the full interpretation of the words without any cost for the consumer and the rationale of such a requirement remain unclear to the Commission. Indeed, if this requirement has to be interpreted as additional cost necessary to receive the free-toair channels compared to the costs already paid by the consumer to receive other services provided by the broadcaster then also subscribers to satellite TV do not suffer additional costs in order to watch free-to-air TV. On the other hand, if the norm has to be interpreted that no cost at all must be borne by the consumer in order to receive free-to-air channels, it remains unclear why the subsidy is given to decoders of other platforms which require payment of a subscription fee to certain telecom and internet services. In general, consumers may decide to avail themselves of free to air TV together with pay-tv or other services; it should be clarified whether there are reasons to discourage this choice. c) Strengthening of competition between the different distribution platforms (74) It can be argued that Sky Italia, one of the complainants, enjoys a monopolistic position in the market for broadcast on satellite so that the effect of the restriction of the measure to the terrestrial technology increases competition in favour of the consumer. However, aid is normally not considered the appropriate instrument to target lack of competition. It is reminded that commitments were required in the context of News Corporation s acquisition of control of Telepiù and Stream, which should already address competition concerns. 16

17 d) Existence of externalities (75) The switchover entails externalities due to the better use of frequency spectrum that broadcasters do not necessarily take into account in their investment decisions, i.e. the social benefit of more channels and services may exceed the private benefit of the incumbent broadcasters to switch since they risk, for example, being exposed to more competition for audience and advertising. This is in principle a possibility present in Italy where the incumbent broadcasters using T-DVB, vertically integrated with network operators will be forced to leave the 40% of their transmission capacities to other broadcasters. In this situation, broadcasters may be reluctant to take part in the switchover. Therefore it could justify regulatory intervention in the field and, possibly, incentives to consumers. This, however, does not necessarily justify an indirect compensation to broadcasters. (76) It should be noticed first that digital licences mostly remain with the incumbent analogue broadcasters (which de facto are guaranteed 60% of the transmission capacities); second, the incumbents already receive compensation for the switchover, as digital technology seems to allow greater transmission capacity at lower transmission costs. Indeed some digital TV broadcasters are already using the increased technical capabilities to enter the pay-tv market. (77) Accordingly, while it might be appropriate to stimulate demand for digital TV in order to accelerate the passage to digital TV, it is questionable whether the aid should be selectively aimed at terrestrial TV. e) Promotion of innovation (78) The Italian Authorities suggest that the digital technology will serve to promote innovation by offering interactivity (the possibility for the user to dialogue with the system) and interoperability (the possibility for the user to access all broadcasters via one decoder). It is true that without the subsidy consumers would have been oriented more likely towards cheaper decoders non supporting interactive services (zappers) something the measure has prevented by bringing the price of interactive decoders substantially in line with that of these more simple models. (79) However in the present context the Italian authorities should also provide valid reasons for excluding the satellite from the benefit. According to the Italian authorities, the satellite is excluded because at the moment only the digital terrestrial and the cable platforms provide digital interactive non-encrypted programs. Accordingly, the subsidy is granted only for decoders for T-DVB and C-DVB. (80) Such arguments must be further verified and assessed. One of the complainants, Sky Italia, argues that: (i) digital interactive programs or services are or can easily be provided also on satellite and (ii) the same benefits to consumer deriving from interoperability could be offered by satellite. Indeed, while article 4(1) at stake explicitly contains the requirement that a decoder is interactive in order for the benefit to be provided, the same article does not explicitly require that the decoder is interoperable. The exclusion a priori of the satellite platform, based on the argument that at the moment the first measure was adopted the satellite used only non interoperable decoders, does not seem to take into account that satellite operators 17

18 could be able and willing to provide interoperability in order to benefit from the measure. At this stage, therefore, it seems to the Commission that the advantage, even if it is apt at promoting innovation, is not proportional to the aim desired. Avoid unnecessary distortions (81) While public intervention might be justified in view of the existence of certain market failures and possible cohesion problems, the way the measure is designed appears to introduce unnecessary distortions of competition. (82) The circumstance that satellite operators are explicitly excluded has the effect of strongly distorting competition in the pay-tv market in a situation where incumbent operators in the terrestrial TV act in a very concentrated market and are equal strength competitors with the satellite operator. Indeed, it seems that the pay-tv market, especially linked to large sport events, cannot be segmented by platforms, which the consumers see as substitutes in this context. In these circumstances, a subsidy which directs consumers towards one of the platforms can be highly distortive. As a further argument supporting the link between the introduction of the subsidies and the entering in the pay TV business by terrestrial television operators, the complainant stresses that as of February 2005, the Italian Ministry of Communications and the state-owned undertaking Poste Italiane have started advertising the subsidies during football events normally broadcast with a pay TV service by Sky Italia rather than on free to air television. Conclusion on Article 87(3)(c) (83) Article 87(3)(c) requires that there is a balancing between positive developments allowed by a given measure and its negative effects on competition. In the present context, it seems that digital switchover and interoperability are objectives of common interest. However, while the measure addresses the problem of switchover it does not address the issue of interoperability, but merely excludes the satellite platform from the benefit. (84) In the same way, the presence of externalities from the switchover and cohesion problems related to the obligation imposed on consumer to switch to digital television can in principle justify aid to broadcasters in the form of consumer subsidy. (85) The measure however has certain characteristics which are neither necessary nor proportional and create unnecessary distortion in favour of the incumbent terrestrial television broadcasters, in a market seemingly characterised by a strict oligopoly where these distortions can have a very large impact on competition. (86) Accordingly, at the present stage of the analysis, the Commission is not convinced that the measure, if it is aid, can be deemed compatible under article 87(3)(c) EC. III.B.4 Conclusion on the compatibility assessment (87) Since the measure, as aid, does not appear, at this step of the procedure, to qualify for any of the exceptions provided for in the Treaty, in the context of its preliminary assessment as provided by article 6 of Council Regulation (EC) N 659/1999 laying 18