Modernization of State aid control: Is the market failure logic the way to go in public service media?


Public service broadcasting has been experiencing an unprecedented existential crisis. Over the past few years, the tensions that relate to the need to preserve public service broadcasting have heated up in light of significant market developments that have resulted in an ample variety of programs offered by commercial broadcasters and a bundle of similar or identical services provided by undertakings operating in neighboring media markets. “Niche” channels accommodating to special interests, screen-based entertainment services, Internet surfing and 3G mobile phone usage are indicative of the platforms and the range of content that the consumers may now access. Considering the above, the market is said to cater for all kinds of tastes thereby rendering State financing of public broadcasting activities superfluous and, to the extent that such financing may hinder the undertaking of private initiatives, harmful to competition and consumer choice. The picture became more complex recently in light of the expansion of public broadcasters to new media markets. The provision of services other than traditional broadcasting, such as online games, chats, data banks and online shops has given rise to doubts about whether such services substantiate a public service mission or whether this expansion simply enables spillovers of public money to commercial operations. In that respect, two main questions come to the fore: What kind of services fall under the public service broadcasting -now public service media- umbrella? In other words, should public service operators be limited to providing content that is not already provided by the market? And, what is the Commission’s role when assessing the compatibility of such schemes with the Treaty?

It is well-known that Article 106(2) TFEU explicitly allows for a derogation from the rules on competition where the application of the latter obstructs the performance of the tasks assigned to undertakings entrusted with a public service mission.[1] Therefore, an exception to the general State aid prohibition laid down in Article 107(1) TFEU may be justified provided the aid measures supporting the provision of services of general economic interest have a favorable impact in overall Union terms.[2] In that regard, State aid may be declared compatible with the Treaty insofar as the aid scheme pursues objectives of common interest, whether social, regional, economic or cultural, and to the extent that it does not appreciably affect intra-Union competition and trade. Conditions under which State aid measures may prove effective instruments for accomplishing objectives of common interest may be met in, for instance, cases where there is a market failure to correct. In other words, State intervention may be approved where the outcome of the free markets is not efficient.[3]

In 2005, in its effort to modernize State aid control, the Commission published the State Aid Action Plan[4] (hereafter SAAP), a consultation document laying down an indicative roadmap for State aid reform. A new approach to State aid control would be based inter alia on a refined economic approach as a means for the Commission to conduct an appropriate evaluation when it balances the positive effects of the measure under investigation against the potentially negative impact on intra-Union competition and trade. [5] One of the core elements of this economic approach is the analysis of market failures which enables the Commission to better define whether the State measure under scrutiny may be justified as the most suitable means to achieve the objective pursued.[6] The SAAP explains that market failures may have various causes such as externalities, imperfect information, coordination problems, market power or the provision of public goods.[7] In this latter case, and considering that public goods are goods which are beneficial for society but which the market does not commonly provide, the SAAP lays down that under the public goods category may fall certain types of public broadcasting services.[8] This would be the case for, for instance, programs or thematic channels catering for linguistic minorities’ interests[9] and similar types of services that attract too small an audience to generate cost-recovery revenues. In the same context, post-SAAP, sector-specific instruments that the Commission adopted or revised make reference to the existence of market failures for the State measure to be able to be declared compatible with the Treaty.[10]

In the follow-up of this reform initiative, the recently adopted Communication on EU State aid modernization,[11] the market failure argument remains intact. More particularly, in discussing how the objective of the Europe 2020 Strategy to make Europe a smart, sustainable and inclusive economy may be achieved, the Commission takes the view that “State aid policy can actively and positively contribute to the Europe 2020 objectives by prompting and supporting initiatives for more innovative, efficient and greener technologies, while facilitating access to public support for investment, risk capital and funding for research and development”[12] provided that the scheme “targets a market failure and thereby complements, not replaces, private spending”.[13] It is also worth mentioning that three years ago, the Commission introduced changes to its Broadcasting Communication,[14] the soft law instrument laying down the principles that a measure supporting public broadcasting services is compatible with the common market. In its revised version, the Broadcasting Communication deals with the expansion of public broadcasters to new media markets and addresses how the diversification of the public broadcasting offer may take place without the relevant support measure violating the State aid rules: The Member States are now required to devise an ex ante test (also referred to as Amsterdam test after the Amsterdam Protocol on public service broadcasting) whereby the competent authorities must assess beforehand, in addition to the public value that the new service is likely to create, its effects on the market. And, as a factor that may be taken into account when conducting this market impact analysis, the Commission refers to the existence of similar or substitutable alternatives already offered by the market.[15]

Now, considering the above but also the specific mission of public service broadcasting to inter alia form public opinion and promote cultural diversity two questions arise: Has the Commission adopted a market failure logic when assessing the compatibility of measures supporting public broadcasting with the State aid rules? In the context of the State aid reform as previously briefly discussed, should a market failure analysis be the driving factor insofar as the justification of schemes favoring public broadcasting services is concerned?

As regards the first question, it has unconvincingly been argued that the Commission has been following a market failure approach in the public broadcasting arena.[16] However, the relevant Commission practice reveals quite the opposite. In a number of cases, the Commission approved measures irrespective of the fact that these were intended to support the provision of services that were already offered by the market. For instance, in BBC News 24, which concerned the launch of a thematic news channel out of the license fee by the BBC, commercial operators active in the relevant market already broadcast a number of news channels.[17] The determining factor to approve the scheme seems to have been, in addition to the public service nature of a news channel, that the service would be provided free of charge and with no advertising.[18] The same considerations are made for BBC Digital Curriculum which dealt with the launch of an online service that would provide interactive learning material to homes and schools.[19] While the Commission took into consideration that there already was a market for electronic learning materials,[20] it declared the measure compatible with the Treaty. Again, a key parameter leading to the approval decision appears to have been that the service would be provided for free.[21] Yet, this is not conclusive as in other cases, for instance in BBC license fee, which concerned the provision of nine new digital services by the BBC, the Commission was not reluctant to give the green light to the British authorities even though the services sought to be provided would imply an additional financial burden for the license fee payers.[22]

There are also cases, for instance Chaîne française d’information international (hereafter CFII) that concerned the launch by France Télévisions and TF1 of an international news channel, in which the Commission took account of the fact that the market was not interested in launching a similar project thereby considering necessary the financing of the operation with public money.[23] More recently, it seems to have taken a stricter stance regarding the provision of new media services. For instance, in Financing of public service broadcasters in Germany, it considered respectively that “[..] online services such as online calculators […] or online dating services or online games may be regarded as complementing traditional offers of public service broadcasters but would not in all circumstances reflect the specific function of public service broadcasters […] while interfering with similar or identical offers on the market” [emphasis added].[24] The Commission, nevertheless, did not exclude the possibility for public operators to offer such services insofar as they fulfill a public service mission with already available offers on the market being taken into account but without the mere existence of the latter dictating whether the service may be provided or not.[25] This approach was incorporated as such in the revised version of the Broadcasting Communication in which the Commission indicatively refers to similar or substitutable services provided by the private sector as a parameter that may be considered when implementing the Amsterdam test.

The above analysis provides sufficient proof that the Commission has not fully endorsed a market failure approach in State measures favoring public service broadcasting.[26] In that regard, the Commission seems to have acknowledged the specific nature of public broadcasting and has been balancing the positive impact of the services against the negative side effects on competition without embracing a pure economic analysis. This conclusion is also laid down in the recent Commission Staff Working Paper on the Application of the State aid rules on Services of General Economic Interest since 2005 where the Commission explicitly states that “[e]fficiency is as a rule not a consideration in these cases”.[27]

This direction accords with the holistic character of the public broadcasting project; If the Commission accommodated to a market failure model, it would degrade the mission of public broadcasting organizations (as laid down in the Amsterdam Protocol) to fulfill the democratic, social and cultural needs of a society as a whole. In other words, if State financing supporting public broadcasters may be justified only insofar as it corrects some type of market failure thereby restricting their role to identifying the gaps and filling them through the provision of services not offered by the market, public service providers run the risk of turning into marginalized organizations whose programming is limited to satisfying the needs of certain cultural elites and linguistic minorities.

In that respect, a market failure approach runs counter to what public service broadcasting represents. And, while the European public broadcasting landscape is rather heterogeneous, there are certain common points of reference (not only on a pan-European but a global scale) which must be taken into consideration in the discussion on what public broadcasting embodies and what is the role of the Commission in protecting the values involved when assessing the compatibility of relevant schemes with the Treaty. In its report under title “Public Broadcasting, Why? How?” the World Radio and Television Council, an international non-governmental organization supported by UNESCO, identified three principles on which public service broadcasting rests, namely universality, diversity and independence.[28] To these principles it convincingly added a fourth, this being distinctiveness, particularly important where public and private broadcasters co-exist as is the case for the European broadcasting environment, meaning that “[i]t is not merely a matter of producing the type of programs other services are not interested in, aiming at audiences neglected by others, or dealing with subjects ignored by others. It is a matter of doing things differently, without excluding any genre. This principle must lead public broadcasters to innovate, create new slots, new genres, set the pace in the audiovisual world and pull other broadcasting networks in their wake”.[29] On similar bases, in addition to the market failure model, another model has been identified referred to as the cultural model comprising three key elements, namely citizenship, quality and universality.[30] In that model, universality has inter alia the meaning of universality of genre, “the opposite of specialized, niche broadcasting. It means the provision of a range of services to meet a wide variety of needs and interests, and indeed to permit self-development through the discovery of unanticipated needs and interests”.[31] Taking due account of these considerations, it is evident that public broadcasting services, for the mission of the system to be fulfilled and public expenditure to be justified, must go beyond what is merely not offered by the market.

As regards the Commission’s role in relation to the above, in particular its role in promoting the cultural rather than the market failure model, reference is made to Article 14 TFEU. The latter is crucially differentiated from Article 106(2) TFEU in that it is not limited to laying down a derogation from the rules on competition but imposes a positive obligation upon the Commission[32] and requires the latter to ensure within its respective powers –in our case the proper application of the State aid rules- that public service broadcasters operate on the basis of principles that enable them to fulfill their mission. This in practice means that the Commission is bound by the Treaty itself to contribute to the advancement of a cultural model as identified above, an obligation which is not limited to the approval of schemes supporting services not already provided by the market but rather extends to declaring compatible with the Treaty measures that allow public broadcasters to cater for an ample variety of societal needs. Besides the Commission’s practice in the public broadcasting arena as developed up till now, both the State Aid Action Plan and the Broadcasting Communication are in line with the above with the former explicitly stating that State measures “can also promote e.g. social and regional cohesion, sustainable development and cultural diversity, irrespective of the correction of market failures” and the latter leaving the same door open by avoiding any reference to market failure justifications for public service broadcasting as opposed to, for instance, the Broadband Guidelines.[33]

The same remarks hold true for the provision of new media services by public broadcasting organizations. And while the development of activities other than traditional broadcasting has been severely criticized by the private sector, there are arguments that can be put forward to justify both the legitimacy and the desirability of this transition from public service broadcasting to public service media. The Member States have long affirmed that the fulfillment of the public service broadcasting’s mission must continue to benefit from technological progress[34] whereas the Commission has accepted that public broadcasters may enhance technological developments and distribute content over different platforms upon the condition that public service provision complies with the State aid rules.[35] The Commission’s tolerance is directly related to the fact that the Member States are, in accordance with the principle of subsidiarity, entitled to define and organize the public service remit as they deem appropriate. In other words, it is up to the Member States to decide whether public broadcasters’ online presence fulfills certain societal needs. The fact that public service media may cater for such needs is not to be disputed. It is now accepted that television is not the point of reference it once was. The consumers’ visions of the world do not necessarily derive from television anymore. In that regard, “being present on the Internet, in social media and on mobile applications should indeed be core public service broadcasting mission and each medium should be used according to its own logic in a strategic way and not solely as a complement to existing television programs. Otherwise, public service media lose their relevance to the public, especially the younger generations”.[36] Additionally, in an era of audience fragmentation through excessive content individualization, public service media’s role in fulfilling fundamental democratic, cultural and societal needs becomes more imperative. Sunstein correctly argues that in a well-functioning system of free expression citizens must be exposed to content that they themselves would not have selected; this is important to secure against extremism, which is a result easy to foretell in cases where like-minded people speak only with themselves.[37] He convincingly takes the stance that the citizens must have shared experiences without which a society will be unable to address social problems.[38] In the context of a globalized world in which more often than not matters of concern transcend national frontiers and where getting acquainted with and understanding different cultures is essential to facilitating social cohesion at international, regional and national levels of governance,[39] democracy flourishes in a society in which well-being is related to solidarity.[40] Through the provision of a wide range of services that achieve these objectives, public service media can play a primordial role in that regard. The questions that should therefore seek for an answer among the decision makers (national authorities and the Commission), academics and the public broadcasters themselves should not focus on whether this transition is justifiable but on how in said transition public organizations may fulfill the distinctiveness criterion as identified by UNESCO 12 years ago and thus become drivers of innovation and not mere imitators of commercial conglomerates.

[1] Case 155/73 Sacchi [1974] ECR 409, [1974] CMLR 177, para. 15; Joined cases T-528/93, T-542/93, T-543/93 and T-546/93 Metropole Television SA, Reti Televisive Italiane SpA, Gestevision Telecinco SA and Antena 3 de Television v. Commission [1996] ECR II-649, [1996] 5 CMLR 386, para. 116; and Communication from the Commission on Services of General Interest in Europe 2001 p. 19, Commission Broadcasting Communication 2001, paras. 5 and 6

[2] Commission Communication on Services of General Economic Interest 2001, paras. 8 and 19

[3] Verouden 2005, 3 and 4

[4] State aid action plan, Less and better targeted state aid: a roadmap for state aid reform 2005–2009, COM(2005) 107 final

[5] State Aid Action Plan 2005, paras. 18 and 22

[6] Ibid., para. 23

[7] State Aid Action Plan 2005, 7

[8] Ibid.

[9] See, for instance, the case of RAI which is bound to provide television and radio programs in German, Ladino, French and Slovenian in regions where such linguistic minorities live, Ad hoc payments to RAI, para. 108

[10] See, for instance, Commission Broadband Guidelines 2009, paras. 39, 41, 43 and Commission Guidelines on State aid for railway undertakings 2008, paras. 90 and 94

[11] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, EU State aid modernization, COM(2012) 209 final

[12] Communication on State aid modernization, supra. 12, para. 10 (referring to Commission Communication “Europe 2020 – a strategy for smart, sustainable and inclusive growth”, COM (2010) 2020 final, 3.3.2010, p. 10) and para. 12

[13] Communication on State aid modernization 2012, 4

[14] Communication from the Commission on the application of State aid rules to public service broadcasting [2009] OJ C 257/1

[15] The Commission entrusts the Member States with setting up a mechanism whereby both the public value of the new service and its impact on the market must be appraised. The Commission does not provide detailed guidance on the public value assessment on the grounds that each Member State is in a better position to decide whether a new service substantiates the wording of the Amsterdam Protocol taking into consideration the specificities of the national public broadcasting systems and the respective societal needs. As regards the impact on the market, the Commission, in an indicative manner, refers to several factors that can be included in the analysis such as the existence of similar or substitutable offers, editorial competition, the market structure, the position of the public service broadcaster in the said market, the level of competition and the potential impact on private initiatives. The Commission requires this impact on the market to be balanced with the public value of the services sought to be provided and “[i]n the case of predominantly negative effects on the market, State funding for audiovisual services would appear proportionate only if it is justified by the added value in terms of serving the social, democratic and cultural needs of society, taking also into account the existing overall public service offer”. Finally, the procedure must also involve interested stakeholders by means of an open consultation (see paras. 86-88 of the Broadcasting Communication)

[16] Ward points to that direction by stating that “the EC has been criticized for applying a market failure approach to this important part of the television sector” 2008, 79

[17] Decision NN 88/98 on BBC News 24, para. 28

[18] Ibid., para. 53

[19] Commission decision N 37/2003on BBC Digital Curriculum, para. 4

[20] Ibid., see, for instance, paras. 19 and 24

[21] Ibid., see, in particular, para. 40

[22] Decision N 631/2001on BBC license fee, para. 19

[23] Decision N 54/2005 on Chaîne française d’information international, para. 48

[24] Decision E 3/2005 on financing of public service broadcasters in Germany, para. 233

[25] Ibid., paras. 310, 328 and 362

[26] This practice must be seen in comparison to Commission decisions in other sectors where the latter conducts a market failure analysis in order to conclude on the compatibility of the scheme under investigation. See, for instance, Decision C 9/07 (ex N 608/06) on the State aid granted by Spain to Industria de Turbo Propulsores (ITP) concerning support for research and development activities carried out by ITP. See, in particular, Section 7, paras. 60 and fol.

[27] Commission Staff Working Paper on the Application of the State aid rules on Services of General Economic Interest since 2005 and the outcome of the public consultation SEC(2011) 397 2011, para. 3.6.3

[28] World Radio and Television Council 2000, 11

[29] Ibid., 13

[30] Prosser 2005, 210

[31] Ibid.

[32] See, for instance, Jones and Sufrin 2008 , 674 and Flynn 1999, 197-198

[33] Broadband Guidelines 2009, paras. 39, 41, 43

[34] Resolution of the Council and of the representatives of the Governments of the Member States meeting within the Council on public service broadcasting, op cit n 3, point (3)

[35] Commission decision E 3/2005 on Financing of public service broadcasters in Germany [2007] OJ C 185/1, para. 231

[36] Pauwels 2010,

[37] Sunstein 2001, 5-6

[38] Ibid., 6

[39] For instance, the protection and promotion of cultural diversity is key to the European integration process. See, in particular Article 167(4) TFEU.

[40] For the link between social cohesion and democracy see, for instance, Henning & Renblad 2009, Sunstein 2001

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