The story of Italian television as Discovery Channel would tell it

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The Italian industry of television is commonly known as utterly concentrated and highly politicized; the political influences over the public broadcaster Rai and the major stake of the Prime Minister Berlusconi’s family in private broadcasting are usually held up as examples of an overwhelming regulatory failure. International experts often look at it as at a basket case and shrug their shoulders. But rather than considering it just as a doomed system, there is also a chance to give a look to it from a different perspective. This is not to advocate the way this system works, nor political influences over television, of course; this is rather an experiment in natural science. Charles Darwin had to sail all the way down from England to Galápagos Islands to find evidence of evolution in different environments; on the contrary economists and media scholars have given life to an endless debate on the marketplace of ideas and to what extent it ought to be regulated. Advocates of light-touch regulation in name of free speech oppose the supporters of a stricter regulation of the market in defense of the public interest; each of the two parties try to develop hypotheses about what would be the consequences of any possible regulatory framework and which of these frameworks would be the most effective in guaranteeing freedom of expression, competition and pluralism. Nobody has ever thought that, rather than  taking an effort of imagination to hypothesize the effects of free competition and no regulation on the television industry, it would be sufficient a quick look at what happened in Italy. It is obviously quite an oversimplification to define as free competition what has rather been stateless competition; without going too deeply into the reasons why the story went like this, we are offered the possibility to see what happens in reality when competition in the sector of private broadcasting is practically not constrained by any piece of regulation. “TV competition in a natural environment”, a bit like those anthropologists in the past centuries who studied the relationships between nature and culture by observing the behavior of unfortunate children grown up in solitude and excluded from the society. Unfortunately, while Darwin actually got the chance to visit exotic lands, lawyers and other social scientists seldom visit more exciting places than libraries, and there will be no need to pay a visit to Italy to discover this alternative side of its television industry – thus forget about the sea and the sun. But it can be interesting nonetheless.

We are now in Italy, back in 1954. When the Italians sit in front of their TV’s for the first time, all they can watch are the programs televised by the state-owned public broadcaster Rai. There is only one channel and most of its scheduling is generally a bit stiff but definitely quality-oriented and with a distinct, rather paternalistic interest in educating the audience. Something a bit like the “good old” BBC, the most celebrated model for public broadcasters, in whose footsteps this pioneering Rai walks successfully. In its first years, the Italian public broadcaster offers a substantial contribution in spreading Italian as a commonly spoken language in a Country where many people, in those times, are still relying mostly on local dialects for their ordinary life, and around one million and a half adult illiterates, from 1960 to 1968, succeed in their primary school exams thanks to the evening educational show Non è mai troppo tardi (“It is never too late”).

A few years later the public monopoly receives a first legal acknowledgment, when the Constitutional Court (sentence. nr. 59/1960)  sanctions the constitutionality of monopoly as a mean to protect the “general interest” in preventing undue concentrations of a scarce resource, such as the ether frequencies, in the hands of a fistful of private entrepreneurs. The public broadcaster can thus keep working undisturbed and in 1961 it launches its second channel, Rai 2 (a third channel will be launched in 1975). Then suddenly something new happens. Guess what – some private amateur broadcasters discover cable television in 1973 (41 years later then in the United Kingdom and 25 years later than in the United States) and begin delivering their own programs. The Government reacts by passing the Legislative Decree nr. 156/1973 which extends to cable the public monopoly regime. The resulting dispute is finally decided by the Constitutional Courts which confirms the constitutionality of public monopoly for air broadcasting (sentence nr. 225/1974) but not for cable transmission (226/1974).

Contrary to what you might think, this is not the dawn of the era of Italian private cable TV. Cable broadcasting is soon abandoned by the Italian operators in favor of air broadcasting. By 1976 at least 112 radio stations and 32 TV outlets are operating on local scale, without any legal basis for doing so. When several of them are sued before local courts, it is time for the Constitutional Court to spend some words on this matter again. The new sentence (nr. 202/1976) marks a turning point: the Court finds that the argument justifying the public monopoly on national level (the scarcity of frequencies) does not apply to local broadcasting. Private broadcasters can thus transmit by air on local level.

And now the fun begins. Straight after this decision local TV stations pop up everywhere. It is difficult to say the exact number – some say 550, some other say 1500, apparently nobody ever really counted them. What matters is that by the beginning of the 1980s all the spectrum is full. In the U.S. the idea that some sort of frequency allocation process would be necessary in order to manage this limited resource was legally implemented, relative to the radio, yet in 1912. Some seventy years later, in Italy, anyone could still pick up any available frequency and transmit their programs, since this idea of directing the traffic in the spectrum has been alien to the mind of the Italian legislator until then. The resulting situation is commonly known in Italy as “the Far West of television”; but we could also say, even with not too much irony, that frequencies have effectively been allocated on a first come, first served basis.

The debate on the allocation of frequencies and the different ways to deal with it is one of the longest disputed issues of media regulation; while several possible approaches have been considered in different experiences, both in theory and in practice, a similar approach in dealing with the spectrum probably cannot be found in any other Country, and not even the most libertarian scholars, those adverse even to the lightest regulation of this sector, have never proposed anything like this. Still, it is worth to spend some words on it. The “first come, first served” approach is rather different than a lottery, because the former has a much lesser degree of casualty than it seems: the frequencies will go in fact, as we are seeing in a bit, to those who are better equipped to use them (more resources, the most technologically advanced devices, and also the brightest ideas on how to use them). In this sense, this approach seems better than a lottery, in terms of favoring the most efficient allocation of the spectrum; but it is definitely worse than the most common approach, the auction. The Italian experience offers indeed an argument against those who criticize auctions alleging that they would favor large-size companies: a less regulated approach does not prove any better than auctions in this regards, as the Italian experience shows; plus, it does not allow the State  to raise any revenue from the allocation of the spectrum, on the contrary of auctions. Would it have been any different if the use of the frequencies had been granted with property rights? Is is difficult to say, since obviously it would have been quite inappropriate to grant such rights on goods which simply had been taken in possession by their occupiers. It can only be supposed that large-size companies would be in the best position, again, to buy more frequencies when available on the market. Anyway, although the “first come, first served” approach seems quite irrational and not really efficient, this the way Italy deals with the spectrum in the earliest days of its broadcasting – and still quite for long afterwards.

Things get more complicated now. At this point some of these local broadcasters have a smart idea (not a big surprise, remember we are in Italy): what if an entrepreneur would acquire a local station in each region and establish a sort of network by providing all of these stations with the same programs pre-registered on videotapes to be televised simultaneously (or with just a few seconds’ gap) all over the Country, somewhat similar to the U.S. model of broadcast syndication? In such a weakly regulated landscape, a similar arrangement is on the border of illegality but not explicitly forbidden by law. And that is how, in 1980, two private channels (Prima Rete Indipendente, owned by the press company Rizzoli – Corriere della Sera; and Canale 5 – formerly known as Telemilano 58, and later renamed following the merger with other five local stations – owned by the financial holding Fininvest, controlled by the then building contractor Silvio Berlusconi) begin to actually operate as national networks. Rai reports the breach of its monopoly rights and as the case goes to trial it soon reaches – once more – the Constitutional Court. While awaiting decision of the Court, Berlusconi claims that it is just not feasible to stay in the market for television without competing at national level, and that the sector does not need to be any more regulated because market forces will be enough to lead it on the right track. Whatever he means for right track, the Court does not share his view and with decision nr. 148/1981 confirms the principle of public monopoly for national broadcasting, and meanwhile urges the Parliament to regulate the private television sector. Despite urged to adopt some measures, the Parliament remains silent and the following year two more private networks join the club of de facto national broadcasters: Italia 1, owned by the publisher Edilio Rusconi, and Rete 4, similarly owned by another publishing house, Mondadori.

Here is the wild natural environment. There is now a market made of four competitors, and each of them obtained their frequencies simply by occupying them. One is soon ousted from the market: at the end of 1981 Prima Rete ceases its transmission being incapable already of competing against the others. As for the three left competitors, competition mechanisms play their role in natural selection. The decisive factor is a brilliant idea of Berlusconi. He soon realizes that the market for advertising revenues has still an enormous potential. The sole advertising dealer of those years, exploiting its monopolistic advantage, manages to strictly select the companies advertising their products on Rai while all the others that cannot afford the costs are simply left out in the cold. Berlusconi then launches his own advertising dealer company and begins to get through to those companies and bargain directly with them. Canale 5 becomes in little time the champion of advertisement revenues; its economic power allows it to offer the most appealing programming and to win the battle for audience shares as well. Respectively in 1982 and in 1984, the two losers of this battle, Italia 1 and Rete 4, cannot sustain competition anymore and are acquired by Fininvest: Berlusconi’s media empire is born.

The high degree of concentration achieved in the Italian market is not surprising at all; it is rather interesting how quickly the market becomes so wholly concentrated. The nature of the broadcasting sector as a dual market (where the broadcasters compete both to provide their programs to the largest possible share of the audience, and also to “sell” their audience to advertisers) explains this development. The case of Italy offers an outstanding practical example (probably with no equals all over the western world) that in absence of any specific regulation (or similarly in a regulatory environment particularly propitious to mergers and acquisitions) the companies operating in the broadcasting sector have a strong incentive towards concentration, and that the market can even reach the highest degree of concentration in a shorter time than one would think. The correlation between the two tiers of the market is intuitively self-evident: the larger share of the audience a station can capture, the more appealing it will be for advertisers; when two or more companies, through mergers or acquisitions, take a larger portion of the market, and thus presumably a larger audience, they are in a better position in bargaining with the advertisers, leading to a virtuous circle. Economic theory teaches that media outlets will be likely to merger as long as it is profitable for them; the experience from Italy suggests that mergers and acquisitions can be profitable until a substantial monopoly is reached. It also interesting to see that we are dealing here with monopoly meant as ownership structure, while ownership concentration is not resulting in the diminution of outlets. Economies of scale can explain why this happens, and this case also offers a counter-evidence of some common assumptions. A survey commissioned by the U.S. Federal Communications Commission found that mergers and acquisitions had consistently reduced the number of producers of network programs and suppliers in the period 1958-1967; the comparison between the two cases suggests that convergence is likely to reduce the number of outlets in larger markets (although not at a large extent: the FCC figures depict a decline from 54 to 49 suppliers) whereas in smaller markets an equilibrium where the number of outlets is not likely to be reduced is easier to find.

No need to say that our metaphor of the natural environment is, of course, only a metaphor. In the real world, the three networks were still acting illegally, as the Constitutional Court had vainly reminded to the Parliament. Quite predictably, it could not go on and on like this forever. After having received complaints, in 1984 three local courts order the private networks to cease the interconnections among the local stations. In response to this injunction, the three channels suspend their programming altogether: all that the audience can see, all of a sudden, is a black screen with a writing informing that the transmissions have been suspended “by judge’s order”. This is quite an overreaction: the injunction was to cease the interconnection, not the broadcasting at all, leaving the local stations free to broadcast their own programming. If this was a strategy (most likely it was), it achieves its goal, in terms of a widespread popular discontent over the injunction. Just to give a glimpse of it, consider that in the following days the judge who had released the order for the district of Turin asks the telephone company to change his number because he is receiving loads of threatening calls from angry citizens (the same asks an elderly lady from town, who enters in this story only because she bears the same surname as the judge and thus shares his pain by mistake).

Pushed by the growing discontent, the Government enacts three Law Decrees which temporarily allow the three networks to continue their programming on national scale. The Constitutional Court returns to the argument in its sentence nr. 826/1988, underlying the urgency of an organic regulation of the sector (which the three decrees above do not provide): until the Parliament will regulate the use of the spectrum, in order to prevent undue concentrations, the principle of public monopoly will stay valid, the Court says. The long-awaited organic regulation is finally passed by the Parliament in 1990 (Law nr. 223/1990), but is something different from what one might expect. It does not provide any regulation for the use of the spectrum, neither a licensing procedure; it is, basically, just an act of indemnity for the state of affairs as developed through the years, establishing a legal basis for it. The three private networks are authorized to continue their broadcasting; an ownership limit is set at 25% of the number of all private national broadcasting channels, or a maximum of three television stations owned by any entity; a spectrum auction for the allocation of the frequencies is postponed to 1996. Italian commentators, with a hint of sarcasm, promptly coin the definition of this statute as a “Polaroid law” to refer to a piece of regulation which simply takes things as they come and makes them legal, without putting any constraint upon the market and the behavior of the players.

The metaphor of the natural environment is still valid: from a totally unregulated situation we have just moved to a pretendedly regulated one. The private sector of Italian television broadcasting can be substantially defined as a monopolistic one, since on the contrary of any other national experience in Europe or in America no limits have been imposed by the regulator in order to spread ownership. A first look at the way the system works seems to support some general theories of monopoly like the classic one by Richard Posner who argues that it is a misconception that monopoly of sources of information would harm pluralism, stating that the absence of competition can be an incentive to differentiate the offer in order to capture larger shares of the audience. The monopolist, in other words, has an incentive in avoiding product duplication. According to this view, the monopolist is more likely to produce diversification than a number of different competitors, even in regard to information, which the monopolist is not willing to bias or distort as he would reduce his profit by doing so, losing some shares of the audience. So far, so true: the behavior of the (practically) private monopolist Fininvest group matches these theoretical findings. Canale 5 has the most generalist programming, directed towards a wider audience; Italia 1 seeks younger audience and Rete 4 tries to appeal the female audience. The three channels are not definitely competing each other and they offer a diversified variety of contents. But this evidence refers only to generic programming, not to information as well. Consider that since 1990 the private broadcasters have not been airing newsreels, as they will begin doing from 1991 on. We will not find the same degree of diversification in the news as in the rest of the scheduling, suggesting that some other kind of incentive might be even stronger than just profit maximization, as Posner would think. We will be back to this shortly later.

Under similar market conditions, where the public broadcaster with its three stations contends with the Fininvest group for the audience, there is barely room for other competitors, like the formerly Monegasque television Telemontecarlo (whose Italian language channel was launched in 1974 – foreign broadcasters had been allowed to use non-state owned frequencies by the sentence nr. 225/1973 of the Constitutional Court – and was later taken over by the Brazilian media company Rede Globo and further later by the Italian producer Vittorio Cecchi Gori, who already owned another station, Videomusic later renamed Telemontecarlo 2; the station has been finally taken over by the phone-book publishing house Seat, controlled by the telephone company Telecom Italia, and is currently named La 7), and the first three  Italian pay-TV channels Tele+1, Tele+2 and Tele+3 (later renamed Tele+ Bianco, Tele+ Nero and D+), launched in 1990 and originally jointly owned by the German entrepreneur Leo Kirch, Vittorio Cecchi Gori and Silvio Berlusconi (later on the company has been taken over by the French group Canal Plus and then by the Australian media mogul Rupert Murdoch who now uses the digital platform to televise his channel Sky Italia): all these attempts prove poorly successful and attract little shares of the audience.

This evidence shows how difficult is to enter the concentrated market for any further competitor. This can be easily explained by the theory of monopoly: barriers to entry (in terms of economies of scale, capital requirements, cost advantages, technological superiority and so on) are a fundamental part of monopoly power. This is even truer in regard of television, an industry characterized by high capital requirements due to high fixed costs, mostly related with the launch of the business, and lower marginal costs. Leaving the market free from legal constraints thus means to let if free to reach a level of concentration where the number of the competitors originally existing in the market will dramatically reduce, it is not sure whether the number of available outlets will reduce as well, and it will be practically unfeasible for new competitors to enter the market. All this said, in a similar scenario a decent level of diversification of general contents is still likely to be available for the audience.

And so we come to  the final pages of our story. Nothing really changes in the following years as the crosstalk and the conflicting relationship between the legislator and the Constitutional Court keep going on the same path: in 1994 (sentence nr. 420) the Court describes the 1990’s statute as “incoherent and unreasonable”, and ineffective in guaranteeing pluralism as it does not tackle the already existing concentration and prevents further competitors from entering the market. The regulation is thus amended in 1997 (Law nr. 249) and the ownership limit is lowered to 20%, an Authority for the regulation of telecommunications is instituted and (finally!) a national frequency allocations chart is provided – but  not yet actually enforced. Because of the postponement of the coming into force of the chart, the channels exceeding the 20% limit can keep broadcasting even longer, under condition that they start testing digital broadcasting. The prorogation regime can last until the Authority considers that saucers are sufficiently spread in the Country.

The national frequency allocations chart is then approved in 1998; the Authority determines eleven frequencies with national coverage: three of them will be reserved to the public broadcaster Rai and the remaining will be allocated through an auction. The licenses are finally granted to Canale 5, Italia 1, Tele+ Bianco, Telemontecarlo and Telemontecarlo 2, Elefante Telemarket and Europa 7. Rete 4 loses the right to broadcast because the Fininvest group exceeds the ownership limit; in its place another station (Europa 7, owned by the Italian entrepreneur Francesco Di Stefano, who after appealing to the Court of Cassation even obtains a second license for his other station 7 Plus) wins the bid.

The metaphor of the natural environment terminates here, since an unnatural happening (such as the enforcement of a legal provision, out of metaphor) has altered the course of the events. But rather than being the end of the Far West, this is instead the beginning of a possibly even wilder story, so it is worth of being told. When the auction is closed, all the licensees are well established channels which have been on air for years (including Telemarket, a station which broadcasts telesales of artworks and jewelry since 1982), thus they can just retain the same frequencies they have been using (or rather occupying) for long time; on the contrary Europa 7 seeks to launch a brand new station and needs Rete 4 to free its portion of the spectrum. The Ministry of Telecommunications assures that a suitable arrangement will be found soon. The decree enacted shortly afterwards can be hardly considered “suitable” for Europa 7, as it allows the non licensed stations to retain their frequencies in order to pursue the testing of digital broadcasting. Europa 7 promptly files a lawsuit and the Constitutional Court in 2002 (sentence nr. 466) declares the unconstitutionality of the permission to use the frequencies granted to the unlicensed stations. The Government then enacts another decree further extending the permission to use the frequencies for those stations, until the transition to digital broadcasting will be completed; the following Law nr. 112/2004 establishes the Integrated System of Communications, where the ownership limits are calculated on a different basis including television, radio, press, Internet, cinema and advertisement and any entity cannot exceed the limit of 20% of the revenues of the market. Quite predictably, the three channels of the Fininvest group do not exceed the limit any more, once that such a broad market definition is adopted. Moreover, the law states that are entitled to pursue broadcasting those entities which either hold a license or were already engaged in this activity “by general assent” with a coverage of at least 50% of the population. The principle of “general assent” is later confirmed by the Legislative Decree nr. 117/2005. Shortly after these regulatory novelties, the Administrative Court of Lazio rejects another appeal for damages filed by Europa 7, finding that its right to obtain the frequencies was founded on legal provisions which are changed in the meanwhile; the Court nevertheless acknowledges that the Government should have allocated the frequencies that Europa 7 was entitled to use straight after the auction. Later in 2008 the European Court of Justice affirms that the Italian regulation is not in line with European law as it does not provide objective, transparent and non discriminatory criteria for the allocation of the frequencies. Despite this, Europa 7 suffers a new defeat before the Council of State (the Italian supreme administrative court) which declares the appeal inadmissible on the ground that spectrum allocation is of exclusive competence of the Government. The story comes to an end only thanks to a recanalization of VHF frequencies that renders a further slot available for Europa 7’s transmissions. The “new” channel can thus begin broadcasting on July 2010, twelve years after winning the bid.

Hundreds of pages have been written about the controversial case of Europa 7, and naturally many suspects have been raised by the two hats that Silvio Berlusconi wore (one as chairman of the major private channels, and another one, more important, as Prime Minister) in the crucial moments of it. The same two hats are also usually understood to be the reason of a certain level of bias which several surveys have tried to show in the information provided by Berlusconi’s private channels and even in the newsreels of the public broadcaster, when his coalition dominates the majority of the Parliament (the same could also be true when other parties are majority in the Parliament and thus have control of the public broadcaster; the other case, anyway, might appear to be even worse as it leads to an homogenization of almost all the possible sources of information available on analog television. The political independence of the public broadcaster is anyway a vital issue for the public debate and there is no doubt that in Italy it needs to be taken seriously; nevertheless this is  not what we are dealing with here). Let us go back to what we found above: even in highly concentrated markets, the few proprietors, or even the sole one, are likely to provide a considerable variety of contents in order to maximize their profits. The Italian experience shows that this is not true in regard of political information. There might be a number of reasons to explain why this happens, but of course the direct involvement in politics of the owner of the private televisions is the most probable, to say the least. In similar cases, profit maximization appears not to be the main incentive anymore, because a different interest is at the stake. This is not to say that politicians should not be allowed to own or control media outlets of course; they bare the same rights, including freedom of speech and private economic enterprise, as any other citizen. Once a regulatory toolkit is found to be efficient, there is no point for changing it depending on the nature and personal conditions of the players involved in the game. It is quite a weak counter-argument that media tycoons involved in politics are quite a rare case after all. It still could always happen, everywhere. And even when a media entrepreneur is not personally in politics, they could still have some sort of indirect link or interest in supporting a party. In real life it is not always profit maximization that drives entrepreneurial choices; or, put it in another way, there could be another interest more appealing to maximize than the direct profit.

Despite its unique development and the series of regulatory failures which have characterized it, the worst fault of the Italian regulation of television is probably not its weakness in tackling concentrations. We have seen how, if different interests would not have been involved, a certain degree of diversification could still have been achieved – both in theory and in practice. The moral of this story is that ownership and structural regulation is sufficient at a certain point. The worst fault of the Italian regulation might be, on the contrary, the weakness of its content regulation – or more precisely that these three tiers of regulation are weak all together. The legislation currently in force (Legislative Decree nr. 117/2005, Articles 3-7) mostly disposes a few general principles bur really few precise rules. Other Countries have stricter regulations, like for instance the United Kingdom, where a series of fairness obligations, due impartiality and due accuracy rules and codes of practice are severely enforced by Ofcom. Of course, content regulation is not a magical spell which cures every illness. It must be considered that it is also at risk of breaching such a fundamental right like freedom of speech, or making the public debate even less vibrant than desirable. In some cases it has proved poorly, like in the United States, where the fairness doctrine has been abandoned some years ago, after the FCC lamented the “chilling effect” it would have on freedom of expression. Thus it really depends on how rules are shaped, on the accuracy of the legislative drafting, on how carefully pieces of ownership regulation, structural regulation and content regulation are balanced. What is indubitable is that a combination of the three is needed in order to achieve the goal of an effectively pluralistic landscape of information.

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