State Aid to Digital Decoders

Competition Policy Newsletter

State aid to digital decoders: STATE AID proportionality is needed to meet common interest Sandro SANTAMATO and Matteo SALTO, Directorate-General Competition, unit H-2

1. Introduction nels are available plus those of Sky Italia accessible via subscription or pay per view agreements; and In December 2005 the Commission decided to terrestrial, on which operate 4 national broadcast open formal investigation proceedings on the ers — RAI (free to air), Mediaset (free to air and subsidy provided by Italy to consumers buying a pay per view), La 7 (free to air and pay per view) certain type of decoders allowing the view of dig and Prima TV (free to air) — and 78 local opera ital television programs. The decision is relevant tors. For the time being, cable — operated by Fast for various reasons. It clarifies that even state aid web — and X-DSL — operated by Fastweb and measures which pursue an objective of common Telecom Italia’s Rosso Alice — have small penetra interest — as in this case the digitisation of TV tion. — are subject to control of proportionality and should not introduce unnecessary distortions. It Terrestrial remains the major means of television discusses the scope of the Article 87(2)(a) dero viewing in Italy, with a penetration of roughly gation for measures having social character and 19 millions households over a total of 22 millions. the qualification as state aid of advantages granted The main players in terrestrial TV are the public indirectly to undertakings. The decision also pro service broadcaster (RAI) and commercial broad vides an example of how the compatibility of an caster Mediaset, each with three channels and aid measure can be discussed in relation to its abil accounting together for approximately 90% of the ity to correct a market failure or address a cohe TV audience in Italy. Penetration of satellite TV sion problem. mostly consists of the 3 million customers sub scribing to Sky Italia. At the end of 2005 the two 2. Description of the measure digital platforms — terrestrial and satellite — were 2.1. The context expected to have more or less the same number of viewers (); The Commission’s investigation into the matter was prompted by two complaints lodged by com The aid in question is for terrestrial transmission, petitors of incumbent terrestrial television opera which in Italy is the only platform to still use ana tors in Italy, namely Europa 7 — an Italian com logue mode. Digital mode can normally accom pany with a broadcasting concession () — and Sky modate more television channels than analogue Italia — the monopolist in the Italian market for mode. As from the end of 2003 digital transmis satellite pay-TV broadcasting. sions started alongside with analogue broadcast The measure is to be viewed against the back ing (so called ‘simulcast phase’). The switch over to ground of the digitisation of broadcasting, which the digital mode was to be completed as from the is affecting all the currently commonly available 1 January 2007 and the transmission in analogue transmission platforms, i.e. cable, satellite and mode should be switched off. terrestrial (). The prime benefit of digitisation In the meantime, according to the ‘Gasparri is the increased transmission capacity, which is particularly relevant for terrestrial TV in view of Law’ ( ) regulating the sector in Italy, only broad the limited availability of frequency spectrum. In casters already transmitting with the analogue two communications between 2002 and 2005 the technology are permitted to apply for experimen Commission expressed its support to the digitisa tal digital authorisations and/or digital licences. tion of broadcasting. There is no formal obligation for analogue opera tors to give back the frequencies used for trans There are in Italy two main TV broadcasting plat missions in analogue format after the switch-off. forms: satellite, on which the main free to air chan (3) COM(2005) 541 ‘Communication from the Commis (1) Europa 7, however, has not been able to operate due to the sion on reviewing the interoperability of digital inte fact that the national authorities never allocated to it the ractive television services pursuant to Communication necessary frequencies. COM(2004)541 of 30 July 2004’ containing data of June (2) Therein DVB‑T stands for digital video broadcasting over 2005 and projection on the number of consumer benefi a terrestrial network. Other forms of digital video broad ting of the measure by the Italian authorities. casting are DVB‑S (by satellite) and DVB‑C (by cable). (4) Law n.112 of May 3, 2004.

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In December 2005, five multiplexes (frequencies’ encrypted digital signal with ‘no additional cost for blocks including one or more programmes) for the consumers and the content provider’. Accord digital terrestrial had been licensed in Italy. RAI ing to the Italian authorities, ‘reception of non- had two multiplexes, Mediaset one, Telecom Ita encrypted digital signal’ has to be interpreted as lia/TV International and D-Free (TF1 and HCS) the decoder’s capacity of executing any interactive one each. Under the Italian regulatory regime, service provided by any broadcaster. This would network operators holding more than one digital therefore be a synthetic expression to indicate that licence must give access to 40% of their bandwidth the decoder must permit non-encrypted interac to independent content providers. tive functions (i.e. it must be not only ‘interactive’ but it also must allow for ‘interoperability’). These The TV market was once characterised by mass are decoders with an open standard — i.e. of the viewing of free-to-air TV in terrestrial mode and kind supported by Commission’s policy — for the by pay-TV offer on satellite. The introduction of programming interface (API) of which MHP is the digital terrestrial TV and the development of cable almost unique example. 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 3. Does the measure constitute aid? service for premier league soccer matches based At this stage the Commission considered that the on prepaid cards. The pay TV services are allowed, measure at hand could constitute state aid, since in the prepaid card form, by the digital interactive all conditions laid down in article 87(1) appeared technology embodied in the decoders which are to be fulfilled. The most relevant aspect is that the subsidised with the measure. Commission considered that, even if the direct beneficiaries are final consumers, the measure 2.2. The measure could benefit indirectly (i) the producers of decod The measure provides for a public grant of €150 ers; (ii) the television broadcasters operating on in 2004 (€70 in 2005) to be awarded to consumers digital terrestrial platforms; and (iii) the operators who purchase or rent decoders capable of receiv of the networks that carry the signal. Since most ing programmes broadcast using digital terrestrial content providers and network operators in Italy technology and correlative interactive services, are vertically integrated and each broadcaster is and earmark a total budget of €220 million for strongly characterised by its presence on a partic the purpose over the years 2004 — 2005. It has to ular platform, the main concern for the Commis be remarked that the subsidy is not available for sion was the consequent distortion on the markets decoders not receiving digital terrestrial signals for TV audience, the advertising market for free to even if they allow the reception and utilization of air TV and the subscriptions market for pay TV. the interactive services. The grant for decoders for As for the broadcasters using T-DVB/C-DVB, the the cable technology is conditional on the fact that measure helps them in creating and developing a terrestrial content providers had agreed with the their audience at a faster pace, by favouring the dif cable managers terms for the provision of the T- fusion of the technologies necessary for the recep DVB signal via cable. tion of their signal. The same advantage accrues to More than 1.350.000 citizens have bought a subsi the operators of the terrestrial network that are not dized decoder. It is suggested that the large volume vertically integrated with broadcasters. of sales allowed scale economies in production and It should be noticed that the complainant Sky Ita a fall in the consumer price of interactive decoders lia took, at its own cost, similar initiatives, like pro from 300/350 Euro to around 150 Euro. viding its subscribers a free decoder and antenna. The main reasons put forward by the Italian Author Indeed, one has to consider that digital terrestrial ities to justify the measures are: (i) improved use of broadcasting does not only compete with other free frequencies expanding pluralism and TV offering; to air offers but also with pay-TV. Examples from (ii) promotion of economic development based commercial practice confirm the link between on information and communication technologies; platform and programming as certain broadcast (iii) dissemination of e-society services among ers market their decoders bundled with pre-paid the very many TV users thanks to the interactive pay-TV cards. In this respect, the complainant operability of the decoders; and (iv) advancement stresses that the aid allows the T-DVB broadcaster of the European Community policy in favour of to enter the markets related to the pay-TV trans the development of open standards. mission of football games. The Italian Authorities clarified that the subsidy Finally, the Commission doubted that the measure is granted to consumers for purchasing or leas constitutes aid for producers of decoders because ing a decoder that allows the reception of a non- it was unclear if it is possible to draw a distinc

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tion between different categories of producers of and in the two Communications relating to the STATE AID various types of decoders and because it was also digital switchover (); In the communication on unclear whether the measure selectively favours interoperability of digital interactive television producers of decoders as a sector. It seemed that services () the Commission also stresses the rele the aid does not selectively advantage any type of vance of ‘interactivity’ and ‘interoperability’ and in producer of decoders on the basis of place of pro particular the Commission ‘takes measures to production nor that manufacturers of decoders com mote the voluntary adoption’ of open standards. The pete with operators in other sectors that cannot Commission stresses how ‘one way of reducing the benefit indirectly from the measure. Moreover, it additional costs to consumers of equipment incor- was considered possible that the measure in ques porating standard execution engines such as MHP tion does not seek, through its object or general is to subsidise purchases at the level of the consumer. structure, to create an advantage for decoders’ Member States may therefore offer consumer subsi- manufacturers but it is the inherent effect of any dies.’ such policy. The Commission invited comments on this aspect. Second, the Commission gauges whether the aid addresses a market failure and, after recognising 4. Doubts on compatibility that the digital switchover may be delayed if the process is left entirely to market forces, it reviews The decision identifies the possible legal grounds possible justifications for government interven for compatibility of this measure as: (i) article tion such as the coordination problem, the com 87(2)(a), aid having a social character, granted to pensation for consumers in need to update their individual consumers, provided that such aid is analogue equipment, the strengthening of compe granted without discrimination related to the ori tition between the different distribution platforms, gin of the products concerned; (ii) article 86(2), the existence of externalities and the promotion of providing a derogation for services of general eco innovation via the supply of interactivity. nomic interest; and (iii) article 87(3)(c) aid for the development of a certain economic activity. Finally, under 87(3)(c) the Commission has to assess whether the distortions of competition and The Commission held the preliminary view that effect on trade are limited, so that the overall bal Article 87(2)(a) derogation did not seem to apply ance is positive. In this case the Commission took here because, according to Commission’s practice, the preliminary view that the very design of the the term social character refers to an aid address measure introduced unnecessary distortions of ing the need of underprivileged part of the pop competition. In particular, the circumstance that ulation, which is not the case here. Likewise, the satellite operators are explicitly excluded has the Article 86(2) derogation did not seem to apply to effect of strongly distorting competition in the the present case. Indeed, the aid is granted to con very concentrated pay-TV market. In these cir sumers and it is not intended as compensation for cumstances, a subsidy which directs consumers the net additional cost of providing a public serv towards one of the platforms can be highly distor ice that had previously been clearly defined and tive. formally entrusted. Finally the decision assesses if the conditions for Therefore the Commission concluded that the bal the application of article 87(3)(c) are fulfilled, i.e. ancing exercise provided for by article 87(3)(c), whether the measure develops an economic activ between positive developments allowed by a given ity — the digital transmission of terrestrial televi measure and its negative effects on competition sion signals — without affecting trading conditions indicated that, while the measure addresses objec to an extent contrary to the common interest. tive of common interest, it creates an unnecessary distortion in favour of the incumbent terrestrial First, the transition from analogue to digital television broadcasters. Therefore, at the current broadcasting and the diffusion of open standards stage of the analysis, the Commission is not con for interactivity are to be considered objectives of vinced that the measure, if aid, can be deemed common interest. Indeed, the Commission itself compatible under article 87(3)(c) EC. considered that the transition from analogue to digital broadcasting (‘digital switchover’) has great (5) COM(2002) 263 final, ‘eEurope 2005: An information advantages in terms of more efficient spectrum society for all’, COM(2003)541 final, “Communication usage and increased transmission possibilities. from the Commission on the transition from analogue to These will lead to new and better quality serv digital broadcasting (from digital ‘switchover’ to analogue ‘switch‑off’)”, and COM(2005)204 final, ‘Communication ices and to wider consumer choice. Therefore the from the Commission on accelerating the transition from Commission actively supports digital switchover analogue to digital broadcasting’. as underlined in the Action Plan eEurope 2005 (6) See footnote 4.

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The restructuring of Huta Czestochowa — the Commission’s decision finding compliance with private creditor test but ordering recovery of some previously granted restructuring aid Max LIENEMEYER, Directorate-General Competition, unit G-2

On 5 July 2005, the Commission took a hybrid The waiver of public debt implied forgiving state decision deciding on the one hand that the revenue, which could have constituted state aid, restructuring of Huta Czestochowa (hereinafter where no private creditor would not have done the HCz) does not involve state aid. This cleared the same in a similar situation. To this end, the Com way for the sale of the company to the Ukrainian mission recalled that according to settled case law, steel producer Donbass. On the other hand, the where a debtor in financial difficulties is proposing Commission found that some measures, which to reschedule debt in order to avoid liquidation, were granted prior to the present restructuring, each creditor must carefully balance the advantage were incompatible restructuring aid, and had to be inherent in obtaining the offered sum according to recovered. This was the first recovery case in a new the restructuring plan and the sum he would be Member State. able to recover following possible liquidation of the firm; if liquidation brings better proceeds than restructuring, any waiver of debt within restructur 1. The restructuring of HCz and ing will in principle be state aid (). In the opening the private creditor test of proceedings on 19 May 2004, the Commission indicated doubts that the waivers, in particular The decision in its positive part is a ‘no aid’ deci those of the public creditors holding public claims sion, where the Commission accepted to apply the (i.e. the public institutional creditors), meet the private creditor test as regards a debt waiver com private creditor test. bined with a dept for equity swap, which is as such unprecedented. After the Commission had launched its in-depth investigation, Poland produced, with the help of In fact, the Commission was confronted with the external experts, a comprehensive analysis of all restructuring of HCz, one of Poland’s main steel claims concerned, including the proceeds the pub producers. The company had been in financial dif lic creditors could have expected in bankruptcy. ficulties since some time and liquidation proceed These proceeds could now be compared to the ings had been commenced at the end of 2002. It proceeds the creditors could expect in restructur had therefore been struck from a list of beneficiar ing after the debt write off. Because the price of the ies under the nation steel restructuring programme production assets had risen, given the hausse in the for Poland, which was the basis for Protocol No 8 steel sector, the amount of claims to be written off to the Accession Treaty of Poland, which excep had actually been diminished so that restructuring tionally allowed the listed beneficiaries to obtain had become more attractive, in particular for the restructuring aid (). public institutional creditors. Only for three public institutional creditors with strong sureties restruc However, in October 2003 the Polish government turing remained less favourable than liquidation. issued a law which allowed the state to write off They did eventually not agree to the restructuring. public debts in companies in difficulty in order to restructure them. To this end, creditors having On the basis of the comprehensive analysis of the claims deriving from public law (e.g. social security claims, the Commission was now able to conclude or tax office) and from commercial transactions that restructuring offered for every public creditor (e.g. from the delivery of energy or loans) were a better solution than bankruptcy (as regards the put in two different groups, which in exchange for three creditors who did not agree to restructuring a waiver of their claims received different assets, there existed no more issue of state aid as no claims which were to be sold in order to pay parts of the were waived). This was also the case as regards the claims (). public creditors holding commercial claims. How ever, in one case, there occurred at first sight a (1) Cf. Protocol No. 8 of the Accession Treaty on the restructuring of the Polish steel industry, OJ L 236, 23.9.2003, (3) C-342/96 Tubacex [1999] ECR I-2459, para. 46; C-256/97 p. 948. DMT [1999] ECR I-3913, para. 21 (and para. 38 of Advo (2) See for details the discussion of the opening decision in cate General Opinion); case T-152/99 HAMSA, [2002] Competition Policy Newsletter 2004, Number 3, p. 69. ECR II-3049, para. 167.

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