State aid — United Kingdom — State aid C 13/08 (ex N 589/07) — Aid to Channel 4 linked to digital switchover — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (Text with EEA relevance)
Date: 2008-06-04
Institutions: European Commission
Subjects: State aid, United Kingdom, broadcasting, control of State aid, financial aid, public service

C 137/16

EN

Official Journal of the European Union

4.6.2008

STATE AID — UNITED KINGDOM

State aid C 13/08 (ex N 589/07) — Aid to Channel 4 linked to digital switchover

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(Text with EEA relevance)

(2008/C 137/10)

By means of the letter dated 2 April 2008 reproduced in the authentic language on the pages following this
summary, the Commission notified the United Kingdom of its decision to initiate the procedure laid down
in Article 88(2) of the EC Treaty concerning the proposed financial support to Channel 4 to enable it to
meet the costs of digital switchover.

Interested parties may submit their comments on the measure in respect of which the Commission is initi-
ating the procedure within one month of the date of publication of this summary and the following letter,
to:

European Commission
Directorate-General for Competition
State Aid Registry
SPA 3 6/5
B-1049 Brussels
Fax (32-2) 296 12 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

TEXT OF SUMMARY

PROCEDURE

The measures on which the Commission has opened the proce-
dure laid down in Article 88(2) was brought to the Commis-
sion's attention initially by a complainant and later on by means
of a formal notification by the United Kingdom authorities.

DESCRIPTION OF THE MEASURE

The notified measure deals with the notified aid by the UK
authorities to provide GBP 14 million to Channel 4 to help it
meet the capital costs of digital switchover.

Channel 4 is a broadcaster incorporated as a public corporation
with no shareholders and entrusted with a public service remit.
It is the core channel of Channel 4 Corporation (C4C) and is
run on a commercial basis only (advertisement revenues being
the main source of income). In 2006, the Commission received
a complaint by a UK commercial broadcaster which objected to
any kind of possible financial assistance towards Channel 4 on
the grounds that C4C has ample and sufficient cash reserves to
meet the costs of digital switchover without a need for public
support.

The decision of the UK authorities to grant aid to Channel 4
follows an in-depth financial review of Channel 4 by Ofcom in
2007 and an expert report carried out for Ofcom by a consul-
tancy (LEK).

The UK authorities accept that the notified measure constitutes
an aid within the meaning of Article 87(1) of the Treaty. They
argue however that the measure is compatible with the Treaty
by virtue of Article 86(2), having regard to the Commission's
Communication (1) on the application of the State aid rules in
relation to public service broadcasting (‘the Communication’)
and the three particular criteria according to which the compati-
bility of aid of this nature falls to be judged, namely, definition,
entrustment and proportionality.

The complainant contest the need for financial support for
Channel 4. It argues that Channel 4 has significant financial
reserves and ample cash to pay for the costs of digital switch-
over. According to the complainant, although Channel 4 may in
the future face a lower profitability, still its ability to deliver its
public service remit will not be affected thereby, and therefore
the aid is not necessary.

Assessment of the measure

According to the broadcasting communication, in the case of
State support for public broadcasters,
in order to determine
whether there is overcompensation the Commission would need
first to determine the gross costs of the public service remit,
deduct the benefit of the commercial exploitation of the public
service (e.g. advertising) so as to obtain the net public service
cost. Moreover, the Commission has to ascertain that the broad-
caster in question does not engage in unnecessary distortions of

(1) OJ C 320, 15.11.2001, p. 5.

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competition with regard to the commercial activities which are
linked to the public service. If there is a net cost, then the said
broadcaster should be entitled to obtain State aid.

The information provided so far by the UK does not enable the
Commission to assess whether or not given its digital switch-
over obligations, C4 will have in the short term any net public
service cost which would allow it to receive State aid.

TEXT OF LETTER

‘(1) The Commission wishes to inform the United Kingdom
that, having examined the information supplied by your
authorities on the aid referred to above, it has decided to
initiate the procedure laid down in Article 88(2) of the
EC Treaty.

I. PROCEDURE

(2) On 2 August 2006, the Commission received a complaint
(CP 186/06) by a UK-based television broadcaster against a
possible funding support
the UK authorities were
that
about to grant to Channel 4 to help it meet the costs of
the digital switchover.

to

an

aid

their

grant

(3) On 10 October 2007, the UK authorities notified to the
Commission
of
decision
GBP 14 million to Channel 4 to assist it to meet the
capital costs of digital switchover. In the notification the
UK authorities acknowledged that the notified measure
constitutes an aid within the meaning of Article 87(1), and
invited the Commission “to find that this aid is compatible
with the EC Treaty by virtue of Article 86(2) EC, having
regard (in particular) to the Commission's Communica-
tion (2) on the application of the State aid rules in relation
to public service broadcasting (“the Communication”)”.

(4) On 23 November 2007, the Commission asked the UK
authorities to provide further information and to clarify a
the notification. On 22 January
number of aspects of
2008, the UK authorities submitted their reply.

II. DESCRIPTION

— Channel 4, although financed by advertising, has an
embedded specific public service remit to be distinctive
and to experiment, innovate, educate and reach cultu-
rally diverse audiences freed from some of the restric-
tions on other commercial broadcasters, notably share-
holder returns and some programming quotas,

— commercial PSB broadcasters — ITV, Five and Teletext
— also have specific programming obligations. The
public service provision from the commercial players is
delivered in return for privileged access to scarce
analogue spectrum and the right to broadcast (3).

(7) In February 2005, Ofcom published the final report and
its statutory Review of Public Service
conclusions of
Broadcasting (PSB) (4). Previous phases of
the Review
underlined why the framework for delivering PSB would
need to change.
In those phases, Ofcom highlighted
amongst other that the existing terrestrial analogue model
of commercially-funded PSB will not survive the transition
to digital and may erode rapidly prior to 2012.

(8) Phase 3 of the PSB Review committed Ofcom to conduct a
more detailed review of Channel 4's financial position in
2006/07. The PSB Review identified that changes in the
market are threatening the established PSB system, in the
sense that the move from analogue to digital, and conse-
quently multichannel, television may mean it is no longer
to deliver
realistic to expect commercial broadcasters
significant PSB obligations due to their fragmenting audi-
ence base.
the review
In particular, a key issue of
concerned the future viability of and operating model for
Channel 4.

Channel 4

service

the public

television channel

(9) C4 Television Corporation (C4C) is an operator providing
public service broadcasting whose principal function is to
provide
called
“Channel 4”. It is incorporated as a not for profit public
corporation but run on a commercial basis. C4C receives
no direct financial support from the State and all of its
income is derived from its channels, such as by the sale of
advertising
of
programmes,
activities
connected with its channels, such as the sale of books and
DVDs.

and from other

sponsorship

commercial

commercial

and

the

Background: Digital Switchover and Public Service Broadcasting
in the UK: A Brief Overview

(10) Channels 4's public service programming remit is defined
in Section 265(3) of the Communications Act 2003:

(5) The system of Public Service Broadcasting (“PSB”) in UK
the course of more than
television has evolved over
70 years and competition was introduced gradually into
the system: Independent television (ITV) was launched in
1955, BBC Two went on air in 1964, Channel 4 came
into being in 1982, and Channel 5 (later Five) was
launched in 1997.

(6) Three appear to be the major sources of PSB in the UK:

— the BBC has historically been at the heart of the PSB
system, with wide-ranging public service obligations.
The corporation is exempt from commercial pressures,
due to its licence fee funding, and as such has been
able to maintain a broad portfolio of public service
activities across television, radio and, more recently,
new media,

(2) OJ C 320, 15.11.2001, p. 5.

“The public service remit for Channel 4 is the provision of
a broad range of high quality and diverse programming
which, in particular:

(a) demonstrates innovation, experiment and creativity in

the form and content of programmes;

(b) appeals to the tastes and interests of a culturally

diverse society;

(3) Ofcom makes reference to a fourth source of PSB, the broadcasting
market at large which includes all other commercial broadcasters
which while not explicitly entrusted with a PSB remit and have received
no funding or privileged access to spectrum, nonetheless produce
content that meets the PSB purposes although the supply its not guar-
anteed,
see “Digital PSB, Public Service Broadcasting post Digital
Switchover”, Ofcom Issue Paper, 27 July 2007, p. 6.

(4) Section 264 of the Communications Act 2003 required Ofcom to
report on the effectiveness of the existing television public service
broadcasters — BBC, ITV, Channel 4, S4C, Five and Teletext — in the
delivery of their PSB obligations; and to make recommendations for
maintaining and strengthening the quality of PSB for the future.

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(c) makes a significant contribution to meeting the need
for the licensed public service channels to include
programmes of an educational nature and other
programmes of educative value; and

Channel 3 licence holders (that is,
if Channel 4's
advertising revenue proved insufficient. The commercial
success of Channel 4 was such that the system never
needed to be activated, and was repealed in 2003.

ITV)

(d) exhibits a distinctive character”.

(11) C4C's statutory powers permit it to engage in activities
apart from the provision of Channel 4 itself. On this basis,
C4C has launched a series of other channels: two general
entertainment channels called “E4” and “More4”, a film
channel called “Film4”, and “C4 + 1”, which runs Channel
itself (5).
4's schedules an hour later than the channel
These channels are not public service channels under
current legislation, and do not have public service remits.

(12) C4C is not permitted to engage in any commercial activity
only for financial reasons: Section 199(1) of the 2003 Act
provides that “the activities that C4C are able to carry on
include any activities which appear to them”:

(a) to be activities that it is appropriate for them to carry
their

on in association with the carrying out of
primary functions; and

(b) to be connected, otherwise than merely in financial
the
terms, with activities undertaken by them for
carrying out of those functions.

(13) Section 199(2) of the 2003 Act defines the “primary func-
tions” of C4C as securing the continued provision of
that channel's public
Channel 4, and the fulfilment of
service remit. Schedule 9 to the Act makes detailed provi-
sion as to the regulation of C4C's commercial activities by
Ofcom who must approve arrangements prepared by C4C
concerning the management of those activities, and those
arrangements must (in particular) address any risks those
activities could pose to the fulfilment of the primary func-
tions, and financial transparency as between the primary
functions and other activities.

The funding of C4C

(14) As stated above, C4C is run on a commercial basis only
and does not receive any State funding. C4C financial
results for 2006 showed post-tax profits of GBP 14,5
million on a turnover of GBP 937 million, compared with
GBP 48,5 million post-tax profits on a turnover of
GBP 894 million in 2005 (6).

(15) In the past,

in order

to ensure that Channel 4 can
continue to provide public service broadcasting, the UK
Government introduced a “safety net” in the form of a
financial support that would be funded by a levy on the

(5) E4, More4, Film Four and C4 + 1 are owned and operated by 4 Ventures

Ltd, which is 100 % owned by C4C.

(6) These results are for the C4C group which includes Channel 4, all other
its new media activities (Channel 4.com), and
non PSB channels,
Channel 4 International Limited which is responsible for the exploita-
tion of secondary rights. C4C also has partial stakes in a number of
other subsidiaries including One Word Radio Limited in which C4C
holds 51 % of the equity, and the 4 Digital Group Limited (which holds
the licence to a national DAB multiplex) in which it has a 55 % stake. It
also holds 50 % of a joint-venture digital channel business with Emap, a
very successful UK media corporation. 4 Ventures also holds equity
stakes in a number of other businesses including Popworld (29 %),
SwitchCo (11 %), Espresso Broadband (10 %), Taste of London (50 %).

C4C and digital switchover

(16) Channel 4 operates under a licence granted to C4C by
Ofcom. New licences were granted to ITV, Channel 4 and
Five by Ofcom in December 2004, and in common with
the other new licences, the Channel 4 licence requires C4C
to provide the service in digital form, and to deliver that
service by digital
television so as to secure
coverage that is equivalent to, or substantially the same as,
that currently achieved by the analogue service. According
to those licences,
switchover must be completed by
31 December 2012. C4C was obliged to accept the new
licence whereas the legislation gave ITV and Five the
opportunity to refuse the new licences.

terrestrial

(17) As part of the UK Government's switchover policy, all the
operators of the PSB multiplexes will need to extend their
transmission network from the current 80 digital transmit-
ters to the 1 154 transmitters currently used for analogue
transmissions.

(18) Channel 4, in digital form, is currently delivered on the
Digital 3 & 4 multiplex (as well as on cable, satellite and
DSL). That multiplex carries the national and regional ITV
channels, Channel 4 and the free to view, commercial
channels E4, More4 and C4 + 1 (all 100 % owned by and
provided by the C4C). The licence for this multiplex is
held by Digital 3 & 4 a company which is owned in equal
shares by the ITV companies and C4C. 48,5 % of the capa-
city is reserved for ITV, 48,5 % for C4C, and 3 % for the
digital version of the public Teletext service.

(19) C4C pays carriage charges to Digital 3 & 4 — the multi-
plex licence holder and operator. They are charged at cost,
and charges are apportioned between the two main users
of the multiplex in proportion to the capacity reserved for
them. Thus, C4C and ITV each pays 48,5 % of the multi-
plex's costs (7).

for new digital

(20) In turn, the multiplex operator must negotiate with the
owners of transmitting masts and sites and the providers
of “managed transmission services” to secure the physical
the services carried on the multiplex.
transmission of
Negotiations
transmission
terrestrial
contracts were concluded in August 2007. The masts and
sites owners actually will
incur the capital expenditure
needed to build the transmission network in order to meet
the coverage obligation in the new licences. They will
recover those costs from the multiplex operator over the
life of
the transmission contract, and the multiplex
operator will in turn pass those costs on to the broadcas-
ters seeking carriage.

(7) C4C, by internal accounting, imposes a notional charge on Channel 4

and the other C4C channels for the capacity they occupy.

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(21) In its notification the UK authorities have estimated that
C4C's share (48,5 % of the total) of the costs of building
out and running the Digital 3 & 4 multiplex to the extent
the coverage obligation in the new
required to meet
licence will be in the region of GBP […] (*) million
through to the end of 2034. The elements of the capital
costs of the project relevant to C4C are likely to be in the
range GBP […] million to GBP […] million over the build-
out period. Digital 3&4 has structured this into a 26 year
to manage the impact on their
management contract
annual cash flows. The front-end of
the management
contract overlaps with the BBC's current licence fee period
from 2008-2013. The amount payable by C4C over the
latter period is GBP 14 million, of which GBP 7 million
relates to the repayment of principal and the remainder to
the cost of financing the capital over that period.

(22) To date,

channels

(although many of

take-up of digital platforms is growing very
rapidly in the UK. This has been driven both by rapid
growth in digital terrestrial television (the Freeview plat-
form), and continued growth by Sky (Satellite). Partly due
television,
rapid penetration of multichannel
to this
existing analogue channels as a whole have also lost share
on every platform, due to increased competition from
digital-only
the more
successful channel
launches have been by the existing
analogue channels themselves). Although analogue chan-
nels including the BBC and ITV have experienced over the
last year a declining audience share, digital only channels
have benefited from (and helped to cause) the main terres-
trial broadcasters' declining audience share. In its “Issue
Paper” of July 2006, Ofcom noted that the digital channels
launched by the existing terrestrial broadcasters have actu-
ally performed better and have compensated in part for
the decline in the flagship PSB (8).

Main features of the aid

(23) The UK government has announced that it will grant C4C
GBP 14 million to enable it to meet the costs of digital
switchover. The main features of the notified aid can be
described as follows.

(24) The aid will be calculated according to the actual costs to
C4C of
running costs)
the capital expenditure (not
incurred in converting the DTT transmission network to a
fully digital operation. Negotiations between Digital 3 & 4
and its preferred transmission provider (Arquiva) were
jointly conducted by ITV and C4C in order to reach the
most advantageous deal with its broadcast transmission
service provider. The actual costs of converting the
network will be known by the time the aid becomes
payable.

(25) The aid will be funded out of the proceeds of the TV
licence fee (levied on every household that uses a television
and administered and
services)
to receive broadcast
disbursed by the BBC. The level of the licence fee, and
hence the level of income to the BBC, has been set in a

manner that takes account of the BBC's possible liability to
pay aid to C4C.

(26) There will be a mechanism to ensure that the BBC is not
over-compensated. The BBC will receive no more from
licence fee proceeds than it is liable to disburse in aid to
C4C or in meeting the reasonable administrative costs of
the scheme proposed measure. In that sense, BBC is not in
any way whatsoever the recipient or beneficiary of the aid,
simply the administrator of the aid mechanism granted by
the UK authorities to C4C.

III. CHANNEL

FINANCIAL REVIEW BY OFCOM

4
(JUNE 2007): THE LEK STUDY

(27) During the PSB Review in 2006, Ofcom found no strong
evidence of a short term funding gap at the time of the
review for Channel 4 which could threaten the delivery of
its remit but stated that there would be a need to revisit
the issue. In 2007, Ofcom carried out the Financial Review
of Channel 4 to assess the Channel 4 Group's financial
viability in delivering its PSB remit by looking into the
historic and current financial position of Channel 4 and
the likely resilience of its funding model
in the face of
changing competitive pressures. To that end, Ofcom asked
LEK, a financial consultancy, to undertake, on its behalf, a
detailed review of Channel 4 Group's financial statements,
business plans and management accounts for the past five
years, and of its future performance projections. In parallel
to the LEK's report, Ofcom examined the delivery of
Channel 4's public service remit, mainly how Channel 4
defines and implements its remit.

(28) In short, LEK found that “there is likely to be a slow dete-
rioration in the Group's surplus” to 2008 (9), but noted
that since Channel 4 has “substantial” cash reserves, there
would be “no immediate, pressing risk to Channel 4” (9).
Even taking into account significant variations between
their “low”, “high” and “central” scenarios, LEK identified
“no significant risk of intractable financial challenges emer-
ging before 2010” (10), and “little evidence to suggest that
Channel 4's remit delivery would need to be fundamentally
compromised before 2010” (11).

(29) LEK, however, concluded that “it is likely that the Group
will cease to be profitable around 2010, and will become
increasingly unprofitable thereafter … LEK's assessment is
that Channel 4's funding model is likely, in the medium
term, to become unsustainable”. The Group's other chan-
nels are expected to move into profit in 2007 but LEK did
not expect returns from this source to be sufficient to
offset losses on the core channel (12).

(30) LEK identified the following as the key trends driving the
C4C future performance (i) flat or declining advertising
revenues; (ii) higher prices for acquired programming and
competition for its original productions; (iii) cost inflation;
and (iv) a more pessimistic view of the likely profitability
of the Group's ancillary businesses than the group itself
takes.

(*) Confidential data.
(8) Ofcom: “Digital PSB, Public Service broadcasting post Digital Switch-
over”, Issue Paper 27 July 2006, “For Channel 4 — where the main
channel has performed well — strong digital share and revenues have
meant its overall performance has improved substantially”, p. 16.

(9) Section 3, paragraphe 3.2.
(10) Section 3, paragraphe 3.5.
(11) Ibid.
(12) Section 3, paragraphs 3.6 and 3.7.

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(31) In the light of this analysis, Ofcom took the view that the
current and future market pressures on Channel 4 “could
have a gradual, but cumulatively serious,
impact on
Channel 4's delivery of its remit” (13). For Ofcom, there is a
wider issue of how to measure and enhance the moni-
toring of Channel 4's PSB output (14).

(32) Ofcom considered that there is a need to be open to
looking at fundamental reform of Channel 4's financial
in the long term (15). Contrary to LEK's figures
model
which suggested that there is time to monitor performance
further before intervening, Ofcom considered that it might
take time to identify and implement a long-term interven-
tion and that accordingly there is a case for the UK govern-
ment to look at short-term, transitional measures which:

— they would provide support during the transitional

period between now and 2011-2012,

— they would be quantifiable and hence provide the

Group with greater certainty,

— the Group would be able to demonstrate how these
measures would help delivery of Channel 4's remit,

— they would not have long-term effects or implications

for longer-term policy (16).

(33) Although Ofcom expressed no opinion on the notified aid,
the UK authorities consider that the notified aid meets
Ofcom's above listed criteria.

IV. COMMENTS FROM THE PARTIES INVOLVED

The UK position: the justification for the aid

(34) The UK authorities argue that the aid to C4C is justified
for two main reasons. First, as a public corporation with
no shareholders, C4C has no access to the capital markets;
and second, any calls on its resources would mean that
there is less money available for other aspects of the busi-
including public service programming, since the
ness,
reserves accumulated from previous years are finite and
partly required to fund the working capital requirements
of the business (17).

(35) In

in

cash

have

terms,

2007 C4C will

spent
GBP 636 million on programming for Channel 4 and its
other non-PSB digital channels. At the same time, the UK
expects that income from Channel 4 over the same period
is likely to fall, as a result (in particular) of the fact that, in
a fully digital environment, Channel 4's audience share will
drop, with a corresponding effect on advertising revenue.
In particular the UK has produced data showing that

(13) Section 3, paragraph 3.16.
(14) Section 3, paragraphs 3.16 and 3.17 and Section 5, paragraph 5.10.
(15) See Section 5, paragraphs 5.35 to 5.40.
(16) Section 5, paragraphs 5.24 to 5.27.
(17) The UK acknowledges that C4C's currently healthy cash balances are
being used to acquire increased commercial footprint and further
cross-media access, e.g. moving into radio to address long term struc-
tural
including through investment in a company which
secured the newly-awarded national DAB multiplex as a joint venture
with a consortium of radio broadcasters.

issues,

Channel 4's share of viewing is highest in an analogue
terrestrial home (14,5 %) with access to only five channels,
and lowest in a cable or satellite home having hundreds of
channels available (6,7 %). Digital switchover would mean
that the number of analogue terrestrial homes — where
Channel 4 performs best — will eventually fall to zero as
the remaining homes in the UK without digital television
are required to opt for one or the other of the multi-
channel platforms.

(36) The UK authorities add that while its audience is bound to
decline with the advent of the DTT and the multichannel
home environment, C4C must still assume the costs of
simulcasting in analogue and digital mode until switchover
is complete.

(37) Accordingly, the UK authorities argue that the negative
effect of switchover on C4C's financial position is signifi-
cant. Although the proposed GBP 14 million aid is rela-
tively small when compared to Channel 4's total program-
ming expenditure, the aid will have a significant impact on
the ability of C4C to continue to deliver its public service
remit. As a commercial broadcaster, C4C's funding model
involves an implicit cross-subsidy whereby its most profit-
to
able programming generates commercial
finance loss-making programming, particularly in tradi-
tional PSB genres such as News and Current Affairs, char-
acterised by high costs and limited revenue potential.
Without the aid, C4C may be forced to divert expenditure
away from certain genres which deliver significant public
value in order to focus on more commercial programming.
In other words, without the aid, the costs of digital switch-
over will have a direct impact on the resources available to
C4C to meet its public service remit. Moreover, since the
obligations of digital switchover and the associated costs
are essentially attributable to the Government's switchover
policy, the UK authorities consider it appropriate for there
to be a contribution to those costs from public resources.

surpluses

(38) Thus, the UK authorities believe that it is appropriate to
remove one of
the pressures being faced by C4C, by
granting State aid to give C4C assistance with meeting the
capital costs involved in converting to a digital transmis-
sion the network that carries Channel 4.

Aid compatible with the Treaty

(39) The UK authorities accept that the notified measure consti-
tutes aid within the meaning of Article 87(1). It argues
however that the measure is compatible with the Treaty by
virtue of Article 86(2) EC, having regard to the Commis-
sion's Communication (18) on the application of the State
aid rules in relation to public service broadcasting (“the
Communication”)
criteria
according to which the compatibility of aid of this nature
falls to be judged, namely, definition, entrustment and
proportionality.

particular

three

and

the

(18) Communication from the Commission on the application of Sate aid
rules to public service broadcasting (2001/C 320/04) (OJ C 320,
15.11.2001, p. 5).

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Official Journal of the European Union

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(40) In particular, Sections 231, 264 and 265(3) of

the
Communications Act 2003, taken with the new licence,
satisfy the “definition” criterion. Sections 23 and 24(3) of
the
the Broadcasting Act 1990 and Section 265(3) of
2003 Act, along with the licence, will further satisfy the
“entrustment” requirement (19).

Channel 4 is not justified. Channel 4 has accumulated
reserves of around GBP 150 million through its commer-
cial operations and is thus in a position to face up to the
term challenges identified by the LEK
expected short
report and the Ofcom review.

(41) With regard to the criterion of “proportionality” the UK
authorities consider that
the sums paid in support of
Channel 4 will not exceed the capital costs of providing
near-universal coverage as a public service, and that any
market distortions implicit in the funding could not be
avoided or reduced by adopting another means of deli-
vering or funding the remit. They argue that the aid will
correspond to the capital costs of converting the transmis-
sion network to digital broadcasting by analysing the
charges paid by C4C to the multiplex operator for the
transmission of its services. The UK authorities clarify that
the costs to expand the multiplex are fixed regardless of
any other
carried alongside
Channel 4. Likewise any income or other economic advan-
tage (higher advertising revenues from a larger audience)
will need to be deducted from the amount of the aid.
Although in the long term C4C will no longer have to
incur any simulcast costs, which will help to reduce the
overall cost of C4C, the UK authorities consider that the if
C4C is entitled to an aid for the capital costs of digital
conversion, it is also entitled to any consequential benefits
that may result thereof.

that may be

channels

(up

cash

time

reserves

through

(42) The UK authorities acknowledge that C4C has built
substantial
to
GBP 170 million). They argue however that a significant
portion of
those reserves is required to manage C4C's
working capital requirements (an average of GBP 75 million
per month). Its average capital balance for 2007 stood at
GBP 137 million. The UK argues that contrary to allega-
tions by others, C4C need to keep these reserves to protect
against revenue variations and to make further investments
in new business activities that could offset the expected
decline of the core PSB channel.

(46) The complainant considers that the question whether in
the longer term the funding mechanism of Channel 4
should be reviewed in detail to take into account
the
changes in the broadcasting market post digital switchover
is a wholly separate issue, one which is currently under
review by Ofcom. The aid should not therefore be used to
address the longer term issues facing Channel 4 under the
disguise of a support mechanism for the capital costs of
digital switchover.

(47) More importantly, the complainant argues that the current
decision-making process has been opaque given that there
has not yet been any kind of assessment of the costs for
Channel 4 to deliver its PSB remit. As a result, there is no
correlation between the GBP 14 million aid pledged for
Channel 4 and the alleged threat that digital switchover
will have on the delivery of its PSB remit.

(48) The

the

that

during

stresses

complainant

period
1999-2005, all
the non-PSB commercial activities of
Channel 4 made cumulative losses of GBP 200 million
which were offset by the profits made by the core
Channel 4. The complainant argues that the aid will allow
C4C to continue subsidising its non PSB commercial chan-
nels distorting competition in the market. For
the
complainant, C4C would be better off in the coming years
sub-leasing the free DTT spectrum in has received for its
the money to
other non-PSB channels and reinvest
support the core PSB channel. The complainant estimates
that
the
3 commercial channels between 2007-2012, C4C would
have between GBP 52 and GBP 116 million more than if
it continued to provide its digital channels.

spectrum used by

subleasing

“free”

the

(43) Finally, the aid will not allow C4C to distort competition
in the advertisement market, given that the advertisement
market does not operate on the basis of discounted rates,
but on the basis of annual purchases of airtime that deliver
a number of “impacts” to the advertiser.

(44) In their reply to a request for further information, the UK
authorities further clarified that the aid to C4C is indented
to address not only the capital costs of switchover but also
the broader impact
that switchover will have on C4C
medium-to-long term financial performance.

The complainant's position

(45) Although supportive of the PSB system and the State's
intervention to maintain and sustain a high level of PSB,
the proposed aid to
the complainant considers

that

(19) The “definition”, “entrustment” and “proportionality test” are the three
cumulative conditions that need to be met in order or a measure to
benefit from the derogation of Article 86(2), see paragraph 29 of the
“Broadcasting” Communication, op. cit.

V. ANALYSIS

1.1. The existence of aid

(49) Article 87(1) of the EC Treaty states:

“Save as otherwise provided in this Treaty, any aid granted
by a Member State or through State resources in any form
whatsoever which distorts or threatens to distort competi-
tion by favouring certain undertakings or the production
of certain goods shall, in so far as it affects trade between
common
Member States, be
market”.

incompatible with the

(50) In order for aid in the sense of Article 87(1) to be present,
there needs to be an aid measure imputable to the State
which is granted by State resources, affects trade between
Member States and distort competition in the common
markets, and confers a selective advantage to undertakings.

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(51) In the present case, the Commission notes that the notified
measure:
(i) constitutes a transfer of State resources to
C4C (20); (ii) it would favour a particular undertaking in
the market, C4C — BBC is not a recipient or a beneficiary
of the aid insofar as BBC will receive no more from the
licence fee proceeds than it is liable to disburse in aid to
C4C or in meeting the reasonable administrative costs of
the proposed measure (see paragraphs 25 and 26 above;
(iii) by helping C4C to meet switchover costs that other
themselves it would
broadcasters might need to meet
distort, or threaten to distort, competition; and (iv)
it
could affect trade between Member States in that C4C
operates in a European market, even though it is providing
public service broadcasting in the UK — for example, it
competes with other broadcasters for sports and other
programme rights, and the market for the sale of broadcast
advertising is to an extent international. The UK authorities
have stated in the notification that the notified measure
constitutes and aid within the meaning of Article 87(1) of
the Treaty.

Conclusions

(52) In the light of the foregoing the Commission can therefore
conclude that the notified State measure, in as much as it
confers an advantage to C4C which is likely to distort
trade between Member States
competition and affect
constitutes an aid within the meaning of Article 87(1).

1.2. The compatibility assessment

Preliminary remarks

for

the digital

(53) It should be recalled that the Commission is in principle in
favour of public support
switchover
provided that a number of conditions are respected. In par-
ticular, the Commission has stated in the past that it would
take a favourable view for “financial compensation to
public service broadcasters for the cost of broadcasting via
all transmission platforms in order to reach the entire
population, provided this forms part of the public service
mandate” (21).

(54) However, the situation of Channel 4 is different in some
respects from that of other public service broadcasters.
Although entrusted with a PSB remit, Channel 4 is
supposed to conduct all of its business and operations on
the strength of its commercial activities only. Thus, C4C

(20) That conclusion is not affected by the fact that the aid will be funded
from the proceeds of the licence fee of BBC. As the Commission found
in the past, “the compulsory legal nature of the licence fee [of BBC]
and the express approval by the State for the financing of the service
from licence fee funds unequivocally establish the use of state
resources”; see Commission Decision of 1 October 2003, State aid
37/03 — United Kingdom, “BBC Digital Curriculum”, at paragraph 21.
(21) See in particular, IP/05/1394 issued at the time of the adoption of the
Commission Decision in case C 25/2004 “DVB-T Berlin-Brandenburg”
where the Commission also explained how digital TV could be
supported. The Commission is in favour of public support for the
digital switchover also for broadcaster's activities beyond what is
covered by their public service remit. As the Commission has stated in
the past, grants can “aim at covering part of the additional cost of
broadcasters caused by the additional burden to broadcast both in
analogue and digital mode” and “it is also possible to award grants to
broadcasters for investments enabling digital signal transmission”.
Beneficiaries of such grants can be both private broadcasters and
public service broadcasters. Such grants have to be technologically
neutral, beneficiaries have to be selected in open calls for proposals,
the funding has to be necessary for the realisation of the project and be
limited to the directly attributable, actually incurred eligible costs for
the projects; see Commission decision of 16 March 2005, N 622/03
— Austria, “Digitalisierungsfonds”.

does not receive any public financial support (like the BBC
does through a licence fee or any other mechanism to that
effect) but relies on the strength and the flexibility of a
commercial operator to deliver its PSB remit. For that
reason, there is a need to ensure that the market condi-
tions within which C4C competes against other commer-
cial broadcasters is not distorted by the notified measure.
In this respect, the Commission notes that C4C, relying on
the strength of its recent commercial successes, has over
the last years launched other broadcasting commercial
channels, has ventured into video on demand services and
has made a foray into new media internet activities,
share and advertising revenues.
increasing its market
Therefore, one would have expected that Channel 4, as the
complainant has argued, might be in a sound financial
position and able to pay for the costs of its digital expan-
sion, drawing on its current cash reserves and commercial
revenues.

(55) It is equally true that as Ofcom has noted in its Review of
Channel 4's financial situation, in the future, Channel 4,
like any other traditional analogue broadcasters, will most
likely have to compete within a fiercely competitive digital
multichannel environment, vying for advertising revenues
and audience capable for sustaining the delivery of its PSB
remit. In that sense, digital switchover presents new chal-
lenges for existing analogue broadcasters (but also more
opportunities).In the present
reasons
explained in more detail below, the information provided
by the UK does not enable the Commission to assess
whether or not, taking into account the market develop-
ment, C4C will have in the short term a net public service
cost which could justify the granting of State aid. If such
net public service cost cannot be demonstrated, any grant
of State aid by the UK authorities would imply overcom-
pensation of C4C.

case,

the

for

Assessment of compatibility under Article 87(2) and 87(3)

(56) As stated in the Broadcasting Communication, State aid
provided for public service broadcasting must be examined
by the Commission in order to determine whether or not
it can be found compatible with the common market. The
derogations listed in Article 87(2) and Article 87(3) can be
applied. However, the UK authorities have not relied on
any of
the above mentioned provisions nor have they
argued that the notified aid falls under the cultural exemp-
tion of Article 87(3)(d). Instead, the UK authorities have
argued that aid should be declared compatible under
Article 86(2) concerning services of general economic
interest.

Assessment of
overcompensation

compatibility under Article 86(2): Risk of

therefore

derogation

and must

(57) As the Court has consistently held, Article 86 provides for
a
interpreted
restrictively. The Court has clarified that in order for a
measure to benefit from such a derogation, it is necessary
that all the following conditions be fulfilled: (i) the service
in question must be a service of general economic interest
and clearly defined as
such by the Member State
the undertaking in question must be
(definition);

(ii)

be

4.6.2008

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Official Journal of the European Union

C 137/23

that

service (entrustment); and (iii)

explicitly entrusted by the Member State with the
provision of
the
application of the competition rules of the Treaty (in this
case, the ban on State aid) must obstruct the performance
of the particular tasks assigned to the undertaking and the
exemption from such rules must not
the
development of trade to an extent that would be contrary
to the interests of the Community (proportionality test). In
it is not contested that the two first
the present case,
above mentioned conditions
“definition” and
is
“entrustment” are fulfilled.
Indeed, Channel 4 has been
entrusted by law with the delivery of a public service remit
supervision of Ofcom.
and is
Channel 4's public service programming remit has also
been defined in Section 265(3) of the Communications
Act 2003.

also subject

to the

affect

that

(58) The Commission has doubts as to whether the financial
support pledged for Channel 4 is necessary and propor-
tional within the meaning of the Broadcasting Communi-
cation. As mentioned above, the Commission's practice
has been to accept that public service broadcasters can
receive aid for the extra capital costs that result from their
obligation to switch to digital transmission and their obli-
gation to continue covering as large a territory as in the
analogue era. In fact, BBC is funding its own digital switch-
over from a corresponding increase in the licence fee.

the

(59) As stated above, Channel 4 position is however different to
the extent that its PSB remit is funded and supported
exclusively by
(advertising
commercial
revenues) of its core channel and all its other broadcasting,
non-PSB channels. Thus, to the extent that C4C may have
the financial resources to meet its PSB obligations on the
digital terrestrial platform (cash reserves), the mere fact
that the switchover may affect its profitability (but not
viability) does not constitute a valid reason for claiming
State funding.

activities

(60) In particular on the basis of the LEK report, the Commis-
sion has doubts as to whether there can be a proper or
adequate justification for the aid given to Channel 4 given
the basic conclusion of the report according to which,
although there may be a long term funding issue for
Channel 4, in the short to medium term Channel 4 faces
the prospect of declining profits, not the loss of its ability
to deliver its PSB remit or indeed to maintain its current
scheduling.

(61) In fact, in a recent Statement by Channel 4 concerning its
Programme Policy for 2007, it is said that “continuing the
corporate strategy initially set out in 2004, Channel 4 will
extend the values of its remit across the digital channels
More4, E4 and Film4 and in its new media services
without diminishing its core channel offer. For the first
time, Channel 4's entire digital TV channel portfolio will
be available free-to-air on all digital platforms for the
whole year in 2007. New media activities will
increase
considerably, with a 2007 budget of 22 million-key devel-
improve-
opments will include the re-launch of E4.com,
ments in the 4oD video on demand service, new auto-
mated online programme support and the redesign of
channel4.com with new web2.0 tools for use across
Channel 4 sites”.

(62) Far from indicating any kind of financial difficulties or
challenges, the above 2007 Statement shows that C4C will
not only maintain its core channel offer (thus no perceived

threat to its PSB remit delivery) but will also invest in new
media, relaunch some of its non-PSB channels and invest
in new video on demand services.

(63) In its reply to the Commission request for information, the
UK authorities stated that the aid is not only intended to
cover the capital cost of digital switchover, but also the
overall impact of switchover on Channel 4's medium to
long-term financial performance. However, Channel 4's
long-term financial performance is a separate issue, linked
to the question of what kind of funding support Channel
4 will need in the future to deliver its PSB remit.

(64) This exercise would require assessing the costs for deli-
vering Channel 4's PSB remit. This has not been done by
the UK authorities for the purposes of the notified aid
mechanism. Accordingly, the Commission does not have at
this stage the required information to assess whether the
aid in question is indeed necessary and proportional to
help Channel 4 meet its PSB remit post digital switchover.
In fact, given that C4C is not currently facing any financial
difficulty, the necessity of the notified aid is not clear.

(65) The Commission's doubts are further compounded by the
fact that all the other non-PSB Channels of C4C are also
benefiting from the digital expansion of the 3 & 4 Multi-
plex given to C4C without bearing the relative costs (22).
At this stage, it is not clear to the Commission why the
non-PSB commercial activities of Channel 4 should benefit
from the aid to Channel 4 if they are not entrusted by law
with the delivery of a PSB remit.

the current

(66) In its reply to the request for information, the UK authori-
ties stated that
reserves of C4C (around
GBP 145 million) are earmarked to meet the monthly
capital expenditure of
the Corporation and cannot be
treated as proper reserves. At this stage, however, it is not
clear to the Commission why the current reserves of C4C
could not also be used for the costs of digital switchover
and should only be used for the on-going financing of
C4C's current and new media and broadcasting activities
that are non related to C4's PSB remit.

(67) It may be recalled that in the most likely scenarios, LEK's
analysis of Channel 4's business model points to declining
profits from 2008 onwards. However, as Ofcom has also
confirmed, in these scenarios Channel 4's cash reserves are
more than sufficient to ensure the survival of the core
channel until at least 2010, “fluctuations in working capital
notwithstanding” (23). This conclusion by Ofcom is at odds
with the UK authorities' position that the cash reserves
should remain intact to protect C4C against possible fluc-
tuations in the working capital requirementsIn more posi-
tive scenarios, LEK's analysis indicates that Channel 4's
business model may be able to deliver stable profits and
growing cash balances throughout the period to 2012.
According to Ofcom, the above suggests that in LEK's
intractable
projections there are unlikely to be “immediate,
financial pressures that would require Channel 4 to make signifi-
cant reductions in its remit delivery before around 2010”.

(22) Non-PSB channels would not meet any of the investment costs related
to the digital expansion. As mentioned in footnote 7, C4C currently
charges non-PSB channels for the spectrum capacity they occupy by
internal accounting.

(23) Ofcom, Channel 4 Financial review, Statement, 14 June 2007, page 1.

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4.6.2008

(68) From 2010 onwards, LEK suggests that financial pressures
on the core channel are likely to grow. However,
the
timing and extent of the pressures cannot be predicted
with certainty. If the programme mix remains unchanged,
LEK's analysis suggests that Channel 4's commercial perfor-
mance is likely to deteriorate, as a result of increasing
competition for its most profitable programmes, and some
ongoing inflation in other programme costs at a time of
flat or declining advertising revenues.

(69) These scenarios are however separate issues not linked as
such to the capital costs of digital switchover, but to the
consequences of the digital switchover itself. The analysis
the
these scenarios may result in an assessment of
of
ability of Channel 4 to deliver its PSB remit in a multi-
channel digital environment. Such an analysis however has
not been undertaken by the UK authorities in the notifica-
tion. The Commission notes that this issue is currently
being analysed by Ofcom and no conclusions are available
at this stage.

(70) One would have expected Channel 4 to have made an
analysis of the expected costs of the public service and
expected revenues from the commercial exploitation of
that service (which according to the broadcasting commu-
nication must be discounted from the public service costs)
in order to assess whether the capital costs of switchover
can be met, or whether State aid is necessary.

(71) It is important to stress here that Ofcom in its latest finan-
cial review of Channel 4 (see above paragraph (32)) did
not rule out the adoption of short term measures “if they
helped Channel 4 avoid making reductions in its public service
delivery in response to uncertainty about it financial position”.
For Ofcom such measures would need to have the
following characteristics: (i) provide support between now
and 2011-2012; (ii) their impact could be quantified and
known to Channel 4 with a reasonable degree of certainty;
(iii) Channel 4 would be able to demonstrate how such
measures would help the core channel continue to deliver
its remit; and (iv) such measures should not have any
lasting consequences that might prejudice the Govern-
ment's longer term policy for Channel 4 (24). Even if we
were to accept that the notified aid is in fact a short term
measure aimed not so much at enabling Channel 4
meeting the capital costs of digital switchover, but the
declining profitability in a multichannel competitive envir-
onment, the notified aid does not appear to have any of
the above characteristics.
In fact, although the notified
measure does not appear to have any long lasting effect on

how Channel 4 may operate in the future, there has not
been any quantification so far of the net costs of C4Cs PSB
remit
in a digital environment, neither Channel 4 has
demonstrated that the aid will be necessary to deliver its
PSB remit.

Conclusions

there is overcompensation,

(72) According to the broadcasting communication, in the case
of State support for public service broadcasting, in order
to determine whether
the
Commission would need first to determine the gross costs
of the PSB, deduct the benefit of the commercial exploita-
tion of the public service (e.g. advertising) so as to obtain
the net public service cost. Moreover, the Commission has
to ascertain that
the broadcaster in question does not
engage in distortions of competition which are not neces-
sary for the fulfilment of the public service mission. Only
if there is a net cost, then the said broadcaster should be
entitled to obtain State aid.

(73) The information provided so far by the UK does not
enable the Commission to assess whether or not given its
digital switchover obligations, C4 will have in the short
term net public service costs which would allow it to
receive State aid.

(74) To conclude, the Commission doubts whether the notified

measure is compatible with the common market.

VI. DECISION

(75) In the light of the foregoing considerations the Commis-
sion requests the UK authorities to provide all necessary
information to demonstrate (on the basis of the appro-
priate financial data) that the aid they intend to grant to
C4 is necessary in order to enable C4 to deliver its public
service remit, and is not going to result in overcompensa-
tion, taking into account also the revenues of C4C from its
commercial activities.

(76) The Commission request your authorities to forward a

copy of this letter to the recipient of this aid immediately.

(77) The Commission wishes to remind the United Kingdom
that Article 88(3) of the EC Treaty has suspensory effect,
attention to Article 14 of
and would draw your
Council Regulation (EC) No 659/1999, which provides
that all unlawful aid may be recovered from the recipient.’

(24) Ibid at p. 5.