World: Media Analysis - Pay-TV rivals do battle in Italy as Mediaset invests in digital

Berlusconi's media group has entered the Italian DTT race.

Mediaset, the media group controlled by the Italian prime minister, Silvio Berlusconi, has long been one of Europe's most solid media brands, as evidenced by strong first-half figures for 2004.

The company mustered an impressive 50.7 per cent increase in profits to 660 million euros, four million euros above analysts' expectations.

Net revenue leaped 11.4 per cent to 1.81 billion euros.

Mediaset, along with the state broadcaster, Rai, and the fledgling channel La7, has been sharing the tentative growth in the Italian ad market after three hard years.

Advertising revenues across all Italian media grew 9.5 per cent in the first six months of 2004, with TV growing 11.5 per cent, according to Nielsen Media Research. As the MediaCom Italia chief executive, Alessandro Cortellazzo, notes: "This year there has been a significant recovery, especially in television. Many advertisers are using TV advertising to counteract falling sales." But why has Media-set benefited from this recovery more than any other broadcaster?

In part, the achievement is down to strong audience ratings, thanks to the continuing success of shows such as Il Grande Fratello (Big Brother), Buona Domenica and Elisa di Rivombrosa, which helped Mediaset beat its main rival, Rai, in both primetime and daytime. But Mediaset has also reined in costs, which fell by 2.3 per cent over the first six months of 2004.

The latest financial results are far from a one-off success. Since flotation in July 1996 on the Milan stock exchange, Mediaset has been going from strength to strength. The Banca Leonardo media analyst Daniele Ridolfi says: "Mediaset is today a rock-solid business from financial, economic and political standpoints. It is the most profitable TV group in Europe."

Mediaset is now branching out into digital terrestrial television, putting itself on a collision course with Sky Italia, the News Corp pay-TV platform that emerged a year ago out of the ashes of the troubled rivals Telepiu and Stream. A 21-channel free DTT service was launched in January and Mediaset was quick to jump on the platform.

"DTT is the natural and inevitable evolution of our core business. It will allow us to compete for advertising revenue in the multichannel and interactive television market," the Mediaset DTT project director, Federico Di Chio, says, adding that DTT will enable it to go big on football and add new revenue streams such as pay-per-view programming.

In June 2004, Mediaset bought the rights to screen games of three Serie A clubs - AC Milan (of whom Berlusconi is the president), Juventus and Internazionale - for three years, starting this season.

The plan is to sell the matches by using a pre-paid card, available from newsagents, in a model similar to the pay-as-you-go formula in mobile telephony. Trials will start in January, with a full-blown commercial offer including other clubs kicking off from next season.

"We think that the combination of premium content with impulse buying is the right mix," Di Chio says, pointing to Italy's record of having the highest percentage of pre-paid mobile phone connections in Europe.

"We don't think that the subscription model will work very well in a country with a strong free -to-air TV offer," he adds. "Sky's subscription figures show that it is failing to penetrate the market as fast as it would like."

Sky Italia certainly has its work cut out to persuade Italians to pay for TV and abandon the national sport of piracy. In the year since its launch at the end of July 2003, Sky Italia added 700,000 customers. It now has 2.7 million. BSkyB has 7.4 million in the UK.

The questions remain which company will come out on top and whether the Italian market can even support two broadcasters. Mediaset is, in some respects, in an enviable position: Sky will have to negotiate with it if it wants to continue to show all Serie A games, as Mediaset has also secured the first option to buy all encrypted pay rights to the three clubs from 2007. Sky, for its part, is betting on its football coverage this season to drive subscriptions, although some believe a rise in the monthly subscription from 47 euros to 55 euros may be too costly for some viewers.

Eugenio Bona, the chairman of the media agency Media Italia, says: "Although Telepiu and Stream suggested that two rival pay-TV players cannot survive in one market, I believe in this case it might be possible since for Media-set pay-per-view represents an additional, rather than its principal, revenue stream." But, he adds: "Mediaset's football activities could make Sky's development plans more difficult."

Despite the intense interest from Mediaset and Sky, with an 18 per cent penetration, the Italian DTT market remains small - the UK market stands at 53 per cent. A government subsidy to the tune of 150 euros per set-top box has generated only around 550,000 sales so far, and only around half of the Italian population can receive DTT. De Chio expects one million decoders will be sold by the end of the year, but acknowledges that the proposed December 2006 analogue switch- off date is "ambitious".

Bona says: "Although the potential for advertisers is enormous, a common-sense view is that any change will be gradual. Very few people believe that there will be an analogue switch-off in a couple of years and Sky Italia is growing at a slow pace." Cortellazzo concludes: "For those in advertising, I don't think digital television will be relevant before four to five years."


Established: 1978 as Telemilano by the entrepreneur Silvio Berlusconi

Free-to-air channels: Canale 5, Rete 4 and Italia 1

Digital terrestrial channels: BBC World, 24 Ore TV, plus a simulcast of

free-to-air channels

Forthcoming launches: Digital children's channel (winter 2004);

pay-per-view football (autumn 2004)

Investments: 52 per cent controlling stake in Telecinco (Spain);

minority stake in Italian telco Albacom

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