Sky vs Mediaset : the battle comes to Europe

There have been recent developments in the legal skirmish currently taking place between two television broadcasters in Italy, namely Sky Italia, Rupert Murdoch’s Italian subsidiary, and Mediaset, which is owned by Prime Minister Silvio Berlusconi. The two companies have now been battling for years to win over every last Italian TV viewer, who is often oblivious to the inconceivably huge commercial interests that are at stake when he chooses whether or not to watch television, or watches one programme over another.


You could say that everything began with the famous, or perhaps it would be better to say infamous, switchover to “digital terrestrial” television, which has been taking place on a staggered basis in recent months and years in the various Italian regions and cities. This has forced viewers to either buy a new digital television, or to install a decoder on their old set. In fact, the Italian government budget in 2004 and in 2005 made available a cash sum of €150, later reduced to €70, for every viewer that had bought a device to allow their TV to receive a digital terrestrial signal, that is to say, a decoder. The budget set aside a maximum amount of 110 million Euros a year to pay these grants.

Afterwards, the European Commission intervened, after a complaint from the Europa 7 group (another Italian broadcaster) and Sky Italia about the above mentioned state grants, and found the necessary conditions for opening a formal enquiry relating to the State Aid Law (ex Article 87, Paragraph 1, TEC). It should be remembered that in order for a measure to qualify as “State Aid” four conditions must be fulfilled. Above all, it must involved aid directly given by the state or via state resources. Secondly, the aid must give so called “selective” economic advantage to the beneficiary ; it must distort or threaten to distort the competition and finally, it must be likely to have an effect on trade between EU Member States.

State Aid

In reaching its verdict on 24th January 2007, the Commission dealt with each of these conditions one by one. Firstly, the measure that was included in the budgets of 2004 and 2005, and this having subsequently been financed by the state, meant that the first condition was satisfied, which the Italian government did not even attempt to challenge. As far as “selectivity” was concerned, and the measure being targeted to favour certain undertakings, the Commission decided that, even if the ultimate beneficiaries were the viewers, advantage was also gained indirectly by those TV broadcasters that operated on the digital terrestrial and cable platforms, by the operators of the networks that transmit the signal and finally by the decoder manufacturers. In particular, the measure can be seen as being selective in that it permitted terrestrial and cable broadcasters to “develop an audience, particularly with regard to increasing pay TV subscriptions.” In the absence of such a measure, the broadcasters would have had to bear the cost of this themselves, exactly as Sky have done. Sky operates on the satellite rather than the terrestrial platform and provided a decoder and a satellite aerial for free to its subscribers. In other words, this state grant has allowed some television broadcasters to avoid a commercial expense, by subsidizing decoders, which are popular on the market and useful for creating an audience. What’s more, the operators already present in the market could easily convert their analogue licences to digital, whereas new competitors had to first acquire licences to broadcast on the market before even being able to broadcast analogue. The advantage therefore helped to consolidate the position of the terrestrial operators, being a sort of chance for them to ensure the loyalty of their own clientele as far as the new pay per view television is concerned.

In conclusion, the selectivity resulted from the fact that not all television broadcasters could gain an advantage from the measure put in place by the Italian government. For example, all broadcasters that operate exclusively on the satellite platform were excluded, and they have not seen an increase in viewers since the introduction of digital terrestrial television. As far as the third condition is concerned, the Commission decided that the measure in question distorted the competition. As supported by the Guarantor Authority for Competition and Market in its “Conclusions of the survey carried out into the television sector” in December 2004, terrestrial and satellite operators are in competition in the pay TV market, and the cost of the decoder has in fact been a factor in the choice for consumers between the two different types of service, because the grant from the state arrived at rather a delicate moment. That being the moment in which many analogue terrestrial TV viewers were having to face the switchover to digital television, and choosing whether to invest in a device that would allow them to receive terrestrial transmissions or one that would give them access to satellite broadcasts. Finally, in terms of affecting trade between Member States, regarding the broadcasting market and network services open to international competition, to favour only certain broadcasters meant that the competition was distorted at the expense of cheap operators that could come from other Member States.

Having deemed the measure to be State Aid, the Commission moved on to assessing whether or not it was compatible with the market, in terms of the dispensations listed in ex Article 87, Paragraph 3, letter c, TEC. According to this the aid is compatible if it promotes an objective in the common interest in a necessary and proportionate manner, for example to correct a possible anomaly in the given market. Even if the Commission had found that broadcasting switching from analogue to digital technology and the diffusion of open standards for interactive services were to be considered as objectives in the common interest, the measure did not turn out to be either necessary nor proportionate, due to its useless distortion in favour of the terrestrial broadcasters already present in the market. This being a market apparently characterized by a rigid oligopoly and in which such distortions could have a considerable effect upon competition.

The Commission concluded that the grant given by Italy in favour of digital terrestrial broadcasters that offer pay TV services and to cable operators of pay TV, by subsidizing decoders that allow the reception of television signals that use digital terrestrial technology, constituted State Aid, as described in Article 87, Paragraph 1 of the EC treaty and that this aid was not compatible with the Common Market. Besides, Italy had not communicated their intentions to the Commission as detailed in Article 88, Paragraph 3 of the EC treaty, and the measure had been unlawfully implemented without the authorization of the Commission, making it thus also illegal aid. The Commission’s final verdict was inevitable : it was asked that the aid be paid back.

Italy then attempted to avoid disaster by claiming that it was impossible to know how much aid there was to recover and especially that it would be difficult to decide who should repay the money. However, the Commission clarified things by stating that, according to the precedent set at the European Court of Justice, the monies should be recovered from the actual beneficiaries, so in this case from the digital terrestrial broadcasters that offer pay TV services and the cable operators of pay TV. In addition, also according to the precedent set at the Court, no community regulation obliges the Commission to fix an exact sum to be repaid. Rather it is down to the procedures set down in the law of each Member State ; the matter comes under the jurisdiction of the national judges. Should the matter go to court, it is up to the latter to determine on the amount of money to be paid back, subject to possible referral to the Court of Justice for clarification.

The verdict

Moving on to the verdict reached on 15th June 2010, when the European General Court (EGC, formerly the Court of First Instance) pronounced its verdict on Mediaset’s appeal against the decision by European Commission. Once again, the broadcaster was out of luck. The EGC agreed with the Commission’s reasoning and confirmed their decision, throwing out Mediaset’s appeal and condemning them to pay legal costs. In particular, the EGC expressed agreement with the Commission’s assertion that the grant did not have the required “technology neutrality” and that “on one hand it gave consumers an incentive to move from an analogue system to a digital terrestrial system, thus limiting expenses for that digital terrestrial television broadcasters, and on the other it had allowed these same broadcasters to consolidate their position in the market compared to new competitors, in terms of brand image and reinforcing the loyalty of their clientele.” The EGC also added that even if all the satellite broadcasters had been able to benefit from the measure with the sale of a “hybrid” decoder (a decoder with both terrestrial and satellite technology), they would probably have been faced with extra costs anyway, that would have then in all probability been reflected in the sale price for the public. Thus these decoders would still have been less popular than those that receive only digital terrestrial signals, which are funded by the grant.

It wasn’t very surprising, then, to see Sky raise the stakes. Having had the European Commission decide in their favour by condemning Mediaset, amongst others, to repay the State Aid granted for the purchase of a digital terrestrial decoder - a measure which had opened the door to the pay TV market for these providers, a domain over which Sky had been considered to have an absolute monopoly for years - as well as a verdict from the General Court confirming the aforementioned decision, Sky is back in the game. Thanks to digital terrestrial television, the pay TV market is no longer Sky’s exclusive dominion, and Mediaset has sufficient potential, with its pay channels, to “steal” current subscribers and possible future clients from Sky. So the latter considered the restriction placed on it in 2003, to prevent it from accessing digital terrestrial frequencies to transmit programmes “in the clear” (i.e. free to view) to its consumers, was no longer justified.

On 20th July 2010, the European Commission agreed to free Sky Italia from the restriction imposed in 2003 that prevented it from competing for the allocation of digital terrestrial television frequencies. The restriction should have expired on 31st December 2011, but now, thanks to the Commission’s decision, within a few months the company will be able to join the bidding war to transmit free to view television programmes for a period of five years.

In fact, in 2003, the Commission allowed News Corporation Limited to take over Italian channels Telepiù Spa and Stream Spa, as part of the formation of a new satellite television broadcaster, Sky Italia. Since this operation put Newscorp in a very strong position in the pay TV market, the Commission’s authorization for this project came with a string of extremely strict conditions attached, which were due to lapse on 31st December 2011. According to these conditions, the company could offer pay TV only on satellite and was not permitted to own or acquire digital terrestrial frequencies. Such restrictions aimed to limit Sky Italia’s market power in the pay TV sector. Simultaneously, the Commission looked to facilitate matters for new companies entering the market, by guaranteeing them access to the necessary infrastructure and content to be able to efficiently offer pay TV services in Italy, irrespective of the platform.

In November 2009, Sky Italia asked the Commission to lift the restriction regarding the digital terrestrial platform so that they could compete in the future race to be allocated five new frequencies that the Italian authorities were setting up. In effect, if the Commission accepted that the situation in the Italian television market had changed significantly since 2003, they could decide to modify the restrictions in question.

In this sense exactly, the Commission noted that thanks to the commitments attached to the decision in 2003, different operators have entered the Italian pay TV market via digital terrestrial, including Mediaset and Dahlia (network part-owned by Telecom Italia) , even if Sky has maintained its dominance on the satellite platform. In a short time, digital terrestrial has become the principal platform via which digital television is watched in Italy, and it is probable, according to the Commission, that this will continue to be the case for several years after the so-called “switch-off” of analogue transmissions, which has been postponed to 2012. Finally, since September 2008, a new digital satellite platform, called TIVU Sat, created by Mediaset, RAI (Italy’s state broadcaster) and Telecom Italia, has been available to Italian consumers.

This next bidding contest is an unique opportunity for Sky Italia to make its entrance on to the digital terrestrial platform and compete with existing broadcasters. In fact there are currently 21 frequencies, and a substantial proportion of these are owned by operators already competing in the market. Mediaset, RAI and Telecom Italia own 11 between them, and a further five have already been allocated or are in the process of being so. The market enquiry has nevertheless calmed fears that Sky’s significant power in the pay TV market would be strengthened by its entrance on to the digital terrestrial platform. In order to eliminate these fears, Newscorp has made certain commitments, namely that Sky Italia will bid for only one of the five remaining frequencies that are up for grabs, and also that if they win, they will use it only for free to view transmissions, i.e not pay TV, for a period of five years.

Reaction

At the news that Sky’s restriction had been lifted, Mediaset declared itself “utterly bewildered” and announced that it would appeal to the European Court of Justice, claiming that “ the conditions fixed by the European Commission in 2003 that prevented Sky from operating on the digital terrestrial television platform until 2012, due to its dominant position in the pay TV market, are still valid.”

Sky Italia gave exactly the opposite reaction, declaring through CEO Tom Mockridge that, “We are extremely happy with today’s decision. The Commission has confirmed the Italian TV market has undergone significant changes in the last few years, driven also by Sky Italia’s constant commitment to bringing new competition, innovation and choice to a market historically dominated by two incumbents.” Mockridge went on to provoke Mediaset, adding “I would really like to understand whether Mediaset sees Sky as a monopolist or as a competitor. Are truly dominant in the pay TV market, or have Mediaset Premium managed to acquire 4.4 million clients, as they claimed during their presentation to the analysts, a figure which, considering Sky Italia has 4.7 million, would seem to somewhat contradict the first statement.” If Sky Italia succeeds in the battle for the allocation of digital frequencies, Mockridge concludes that, “It is Italian consumers who will gain once again.”

It seems likely that this story will run and run. We now await Mediaset’s appeal to the Court of Justice and the subsequent verdict from the community judge. In the meantime, all that the individual viewer can do is change channel, or, for those feeling brave, turn off the TV. After all, it’s August and time to go on a summer holiday, to switch off from everything and everyone. How better to prepare yourself for deciding which pay per view package to subscribe to in September ?

Picture captions : Holding up the complaint made by Sky, the Commission had already judged the switchover the digital terrestrial as State Aid.

The European General Court rejected Mediaset’s appeal against the European Commission.


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