Italy: Digital Terrestrial Broadcasting Regulation Impedes Market Access

The Digital Terrestrial Broadcasting Regulation (435/01/CONS), issued by the Italian Communications Authority, distinguishes between broadcasters, content providers and service providers. The regulation sets out the requirements with which each class of television operator must comply in order to obtain the relevant approval (authorization or licence) from the Ministry of Communications.

However, the requirements for becoming a digital terrestrial television content provider set forth by the regulation may create a potential obstacle to market access.

A broadcaster has

"the right to install, operate and provide an electronic communications network and facilities for the broadcasting, multiplexing, distribution and diffusion of the frequency resources allowing the broadcasting of diffusion blocks to users."

A content provider, on the other hand, has "editorial responsibility for the arrangement of the programmes scheduled for television...broadcasting".

While in the analogue television system operators are integrated vertically and carry out a large range of activities (eg, management of the broadcasting network, creation of content and sale of advertising space), the Digital Terrestrial Broadcasting Regulation requires operators to specialize and concentrate on either the management of the broadcasting network or the creation of content.

This separation is not new to the television sector: satellite broadcasters are similarly divided into 'carriers' and 'editors' of the various channels (this division first occurred in practice and was subsequently reflected in legislation).

The introduction of such separation in the digital terrestrial system should therefore not come as a surprise, since this system will progressively come to resemble the existing satellite system from a structural and systematic point of view. In particular, the key features shared by digital terrestrial television and satellite should include, in the medium term:

• a large number of channels;

• sophisticated systems for the consultation of programme schedules (eg, electronic programme guides);

• the availability of free and encrypted channels;

• the possibility to subscribe to different carriers; and

• interactivity (on a larger scale in digital terrestrial television than satellite).

The comparison between satellite television and digital television may help to clarify why the Digital Terrestrial Broadcasting Regulation requirements for content providers can be viewed, at least in part, as in conflict with their role and function.

The specific requirements which may present a potential barrier to the development of digital terrestrial television are (i) that the applicant be incorporated as a company or cooperative with fully paid-up corporate capital of at least €6.2 million, and (ii)that the applicant have at least 20 employees.

Minimum corporate capital requirement
The reasoning behind the minimum corporate capital requirement is unclear.

First, it may be assumed that some of the obvious candidates to become digital terrestrial television content providers are operators that currently provide content for satellite platforms. Research suggests that only a small number of these content providers have a corporate capital of at least €6.2 million. Notwithstanding this, however, satellite content does not appear to be limited, poor or undifferentiated; rather, even in the limited Italian satellite market the channels on offer exhibit the opposite characteristics, such as quality and variety.

Other future potential content providers are those currently classed as 'independent producers'. Again, very few of these have corporate capital of at least €6.2 million. There is thus a risk that the majority of independent producers will be excluded from acting as digital content providers. Arguably, this is not merely impractical, but is also in breach of the protection granted to independent producers by the European Union (eg, certain programme quotas reserved for independent producers). In addition, it is clear that many independent producers, even those with 'limited' corporate capital, can contribute to the diversification of programme content, create quality products, be economically profitable and so on.

Therefore, such a high corporate capital requirement may have a detrimental effect on the possible future content providers' market.

In addition, the requirement does not seem justified from an economic point of view. This is illustrated by the different characteristics of broadcasters and content providers.

A broadcaster, which is responsible for the realization, management, maintenance and development of a network infrastructure, must make substantial and continuous capital investments and support high fixed costs. In this case it seems reasonable to require a corporate capital that indicates adequate financial stability (assuming that corporate capital is in fact an indicator of an operator's stability and reliability).

A content provider, on the other hand, will normally operate with lower fixed costs and greater flexibility. For example, the primary investment would be in television studios, recording equipment and so on; whereas most of the costs will be variable (eg, actors' fees). Given also that content providers may choose to provide schedules for less than 24 hours a day, it is evident that the necessary capital resources do not justify such a high corporate capital.

Moreover, the assumption that corporate capital is a good indicator of an operator's stability is not necessarily correct. From an economic and accounting point of view, the factors for determining economic viability are rather more complex (eg, net equity and income perspectives). It is only from a purely legal (and formal) perspective that the corporate capital represents a guarantee for creditors. Even this limited function of the corporate capital is becoming less relevant, due to the development of legislation and case law in recent years.

Finally, the corporate capital requirement appears inappropriate in light of the fact that an identical requirement applies in the analogue television sector to entities seeking a government licence for analogue broadcasting, a much more capital-intensive activity.

Personnel requirement
It is also likely that content providers will find it difficult to meet the 20-employee requirement.

The nature of the relationship between content providers and their personnel may often legitimately consist principally of professional collaborations, consulting agreements and one-show engagements. For example, a content provider may engage an actor to play in a set number of episodes of a fiction series.

Further, in recent years Italian law has elaborated and even provided incentives for alternative models of work and professional collaboration, with a substantial reduction in the preference for employment relationships in the strict sense. Therefore, a requirement establishing the exclusive necessity of 'employees' may conflict with these legal developments.

It thus appears that the requirements which the Digital Terrestrial Broadcasting Regulation sets forth in relation to corporate capital and number of employees are inadequate and not proportionate to the scope of the regulation itself. Their rigidity may limit the possible number of entrants to the digital television market.

The possibly unjustified severity of these requirements may represent a barrier to market access for content providers. This may result in a scarcity of content providers, which may cause a dearth of content across the numerous digital channels. The legislation should arguably facilitate a large market of potential content providers, to ensure the plurality and diversity of programmes.

It is arguably possible to establish alternative requirements for content providers which reflect the present state of technological convergence and legislative development, while at the same time according with the purpose of the regulation - that is, to ensure the stability and reliability of content providers.

It may be reasonable to require a corporate capital equal to a percentage of the total investment forecasted in the company's business plan. This criterion is not new to the communications sector: it has already been successfully adopted for some types of telecommunications operators. This would calibrate the corporate capital requirement to the different plans of interested companies intending to become content providers.

Meanwhile, the 20-employee requirement could be modified to include in the head-count all personnel, rather than just employees in the strict sense, including consultants hired on a continuous basis and the like.

The objectives of the Digital Terrestrial Broadcasting Regulation may be achieved by formulating the same requirements in a slightly different way. This would remove some arguably unnecessary barriers to market access for prospective content providers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.