Italy is in the midst of the allocation of its digital dividend, a process that promises to be one of the most significant developments in its media and communications sector for many years. The transition to digital broadcasting will allow for a more efficient exploitation of the spectrum and the assignment of new frequencies. This represents a huge opportunity for operators and is expected to foster greater competition by allowing new players – including foreign companies – to enter the market. Although the regulatory framework has not yet been finalised, it is already possible to assess how the Italian digital broadcasting sector will change and what stakeholders can do to influence their position within it.
The process so far
On 3 August 2009, the Italian Communications Authority (AGCOM) launched a public consultation on Resolution 427/09/CONS (‘the regulation’), a draft regulation that sets forth the criteria for allocating the digital dividend of five digital terrestrial multiplexes (‘muxes’) made available as a result of the analogue switchoff. Stakeholders were invited to make submissions by 17 September 2009.
The regulation is intended to implement the rules on allocating the digital dividend that were set out in Resolution 181/09/ CONS, which AGCOM approved on April 7 2009. These rules now have force of law pursuant to Article 45 of Law 88/2009 (known as the Legge Comunitaria 2008).
Following the approval of Resolution 181/09/CONS, the European Commission suspended the infringement procedure that had been opened against Italy on the grounds that the Italian legal framework on television was inconsistent with the EU framework on electronic communications. The infringement procedure will be closed once the allocation process is completed.
After the final approval of the regulation by AGCOM – which is still awaited, although the consultation ended in September 2009 – the Ministry of Economic Development will launch a ‘beauty contest’ and issue the relevant tender rules, which will be based on the regulation. The beauty contest is expected to be completed before the end of 2010 - an extension of the previous closing date of December 2009.
The launch date of the beauty contest is particularly relevant to media company Sky. It is still unclear whether Sky will be able to participate in the tender procedure owing to its commitments to the commission, which do not expire until the end of 2011. At present, Sky is prohibited from operating in the digital terrestrial television (DTT) sector as either a network operator or a provider of a pay-TV bouquet. Instead, Sky may operate DTT channels, and indeed it already broadcasts a DTT free channel called Cielo (meaning ‘sky’ in Italian). However, Sky is attempting to obtain an early revision of the commitments from the European Commission that would allow it to participate to the beauty contest for the digital dividend. It is believed that the commission has asked the Italian government and AGCOM to delay the launch of the beauty contest until it has made a decision on Sky.
The digital dividend
According to AGCOM’s plan, there will be 21 Digital Video Broadcasting – Terrestrial (DVB-T) muxes following analogue switch-off:
- Sixteen DVB-T multiplexes will be assigned to existing operators – eight to operators of existing analogue networks and eight to operators of existing DVB-T muxes, according to a 1:1 ratio.
- Five DVB-T muxes will be allocated as digital dividend.
An additional Digital Video Broadcasting – Handheld (DVB-H) mux, used for broadcasting television programmes to mobile devices, may be allocated to an operator that does not already own a DVB-H mux.
Table 1 describes the current framework and how it will change under AGCOM’s frequencies plan after switch-off.
It is to be stressed that there is debate as to the need to divert some of these frequencies to telephone communications rather than TV. Indeed, the decision of AGCOM and of the Italian Government to devote to TV all frequencies freed in connection with the switch-off process seems inconsistent with the EU guidelines, according to which at least part of such frequencies should be used to develop mobile broadband.
The beauty contest
The digital dividend will be allocated by means of a beauty contest, rather than by competitive price bidding. Applicants will be ranked by a commission, which will be appointed by the Ministry of Economic Development (under Article 7 of the regulation) and supported by an independent adviser.
The beauty contest is open to foreign operators.
Article 6 of the regulation provides that the beauty contest is open to any company established in the European Economic Area that has already obtained the general authorisation required for network operators pursuant to Article 25 of the Electronic Communications Code.
Article 3 states that asymmetric rules will apply as follows:
- three muxes will be allocated by a contest from which operators owning two or more analogue networks (ie, RAI, Mediaset and Telecom Italia) will be excluded; and
- two muxes will be allocated through a beauty contest open to all operators, including RAI, Mediaset and Telecom Italia.
No operator may control more than five DVB-T muxes as a result of the beauty contest. Therefore, RAI and Mediaset may not obtain more than one mux (since they have now five terrestrial networks – excluding the DVB-H muxes – and after the switch-off, they will have four DVB-T muxes). Telecom Italia may not obtain more than two muxes (it now owns four terrestrial networks and, after switchoff, will have three muxes: so it will lose one network, like RAI and Mediaset). However, following the beauty contest it should be possible to aggregate operators to a holding beyond the threshold of five muxes.
Article 5 states that for a five-year period, existing operators with network coverage of over 75 per cent of the Italian population must offer transmission services at a costorientated price to new entrants that obtain one or more muxes. Access to transmission services may be refused only for objective reasons, which will be subject to AGCOM verification.
Furthermore, Article 4 states that if RAI, Mediaset and Telecom Italia control five DVB-T muxes as a result of the beauty contest, they will be obliged to transfer 40 per cent of the capacity of the fifth mux to independent operators (ie, operators that do not control, and are not controlled by, these three main operators). The procedure for the 40 per cent capacity transfer is as follows:
- RAI, Mediaset and Telecom Italia must submit to AGCOM the contractual conditions for the transfer of capacity and the financial terms of the offer, which must be fair, transparent, non-discriminatory and cost-orientated;
- AGCOM must approve both the contractual and the financial conditions;
- Once AGCOM’s approval is obtained, the independent operators may submit their editorial projects to RAI, Mediaset and Telecom Italia;
- AGCOM will monitor the lists of independent operators in order to verify that they are genuinely independent and to ensure that their editorial projects comply with Italian law; and
- Following this verification, AGCOM will communicate the list of independent operators to which the 40 per cent capacity will be transferred.
The beauty contest criteria for the allocation of the five muxes are set out in Article 9. The operators’ offers will be evaluated by the commission with reference to three sets of factors.
The operator must submit a technical plan for the realisation of the infrastructure, including its capacity, to demonstrate its ability to develop the allocated muxes promptly. The parameters for the evaluation of the technical plan will include:
- the infrastructure project, with a graphical representation and description indicating all of the radio and television stations involved;
- the timetable for completing the infrastructure, which must be backed by a bond or similar guarantee; and
- the degree of technological innovation in the infrastructure.
The commercial plan must set out the services offered, as well as details of the operator’s consumer relationships, market estimates and commercial objectives. The parameters included in the evaluation of the commercial plan must take in:
- the total amount available for investment in infrastructure, which must also take account of the operator’s fully paid-in corporate capital;
- an enterprise plan, including economic and financial feasibility studies with market estimates and objectives;
- key elements of the editorial plans ‘evaluated in relation to the binding agreements with content providers for the selection and diffusion of televisual content’ - particular account will be taken of technological innovation (eg, interactive and high-definition content);
- the amount of free-to-air programming as a proportion of total output;
- the quality of the editorial plans in agreements with content providers, with particular reference to the cultural and educational value of the programming; and
- customer relationships, including customer care plans and a services chart, with particular reference to electronic programme guides and conditional-access, pay-TV programmes.
Operators submitting offers for two or more muxes will be required to make a binding commitment to broadcast high-definition programmes.
Company structure and experience
The operator must present its company structure and its business experience in the television sector, with particular reference to the infrastructure to be developed. The evaluation of company structure will include:
- the company’s experience and investment performance;
- company structure and experience (which in practice is likely to include a description of management experience and the company’s internal organisation);
- the number of employees (excluding those providing call-centre services);
- the employees’ specific skills and abilities; and
- the company’s capacity to self-finance during the network operator licence period.
For a five-year period from switch-off, the winners of the beauty contest will be prohibited from transferring the frequencies assigned, either by trading or leasing, but transfer to a company that succeeded in the beauty contest is allowed. This restriction also applies to changes of control of the owner company.
Room for improvement?
The regulation raises several key issues, the most important of which relates to the inclusion, in a beauty contest for network operators, of several criteria which seem to relate to content providers – particularly the assessment on the basis of elements of customer service and the features of editorial plans. These provisions may hand an advantage to network operators that belong to the same corporate group as a channel provider, with a corresponding disadvantage for ‘pure’ network operators.
There is also an argument for the regulation to be amended to include an assessment of the most economically advantageous offer, which would make the procedure more objective.
The prohibition against trading frequencies appears to be a disproportionate way of enforcing the winners’ duty to implement network infrastructure. When AGCOM consulted on the regulation, many operators submitted comments stressing such issues. It is hoped that AGCOM will take account of such opinions and will amend the regulation accordingly.
This allocation process is a highly significant development in the sector in Italy: it is likely to be the last time that television spectrum is allocated in this way.
Existing stakeholders and potential market entrants all have a strong interest in assessing the likely developments in the digital broadcasting sector and securing their share of the exciting opportunities within it.
This article was first published in the May issue of the IBA's Communications Law Committee Newsletter