home > report on operations> To the Shareholders

To the Shareholders,

In 2009, the Rai Group posted a loss of 61.8 million euros (loss of 7.1 million euros in 2008), with a negative net financial position of 151.5 million euros (positive by 21.1 million euros in 2008).

The Parent Company, Rai registered a loss of 79.9 million euros (37 million euros in 2008) and a positive net financial position of 52.5 million euros (196.8 million euros in 2008).

T he negative results of 2009 can be attributed to the following significant phenomena.

The difficult situation that characterized the advertising market had a strong influence on company decisions to purchase advertising time and drastically redimensioned the budget allocated to expenditure for advertising.

In keeping with the general economic trend, the decline by Rai showed a tendency, quarter by quarter, towards progressively lower rates, closing nevertheless with a decline close to 17%.

The significant drop in revenues from advertising at consolidated level was approximately 200 million euros, which must be added to the 2008 drop of over 47 million euros. The adaptation of the per-unit licence fee, in line with the long-term trend, was unable to do anything but marginally contrast a phenomenon of such a vast extent.

A positive contribution was assured by the dynamics of the subscribers portfolio: paying users, despite numbers growing less than last year, have almost reached the 16-million family mark.

In terms of operating costs, the tendency towards a reduction in expenditure was confirmed � within a constant setting. This was thanks to a cost correction manoeuvre launched by the Company when the first signs of the advertising crisis began to show in the last quarter of 2008. This manoeuvre made it possible to significantly restrict the extent of the loss.

Actions to increase efficiency and rationalisation applied to all corporate areas were strengthened in the second half of the year and this had an immediate positive effect, creating the conditions to permanently consolidate the relative benefits.

The Income Statement also benefited from the stability of labour costs, thanks to the full application of the effects of the early retirement incentives implemented during 2008 and confirmed in 2009.

In greater detail, as regards revenues, the cost of the licence fee for 2009 went up by 1.4% (from 106.00 to 107.5 euros). This is a percentage which is substantially in line with the planned rate of inflation.

The policy for the annual adaptation of the per-unit licence fee has been confirmed on the same basis again for 2010, with a rise of 1.5 euros (to 109.00 euros).

The licence fee continues to be the lowest in Europe for public broadcasting companies and also holds the negative record for particularly high tax evasion, with reference to both the special fee and the ordinary licence fee, the latter being estimated at nigh on 30%, compared with the European average of under 10%.

A gradual alignment with the European standard, with a consequent recovery of significant resources, would require arevision of the payment collection methods, joined by a strengthening of the regulatory instruments designed to combat evasion, which are currently blatantly inadequate.

More effective actions to considerably expand the subscriber portfolio would help Rai in the pursuit of its mission as a Public Service in a rapidly changing context which requires consist investments in technology and particularly in the products offered.

These actions would also have positive effects on viewers, thanks to the balanced distribution of the benefits resulting from the reduction in tax evasion, and also on the audiovisual industry in general.

On the basis of the results of the separate accounting for the 2008 financial year, certified by independent auditors chosen by the Italian Communications Authority, the imbalance between public resources and the costs sustained by the concession holder for the fulfilment of public-service responsibilities amounts to almost 550 million euros. This imbalance falls to 335 million euros after the allocation of the specific share of the advertising revenue from the programming.

As regards the possible developments of the macro economic framework, since March last year, tension on the financial markets has eased somewhat and the quality ratios of the real economy have begun to show signs of a slowing down of the recession. In the months that followed the rise in unemployment figures continued, as did the drop in income, accompanied by continuing volatility of the financial markets, with a negative effect on consumption and investments. The much-awaited inversion in this cycle finally began at the beginning of 2010.

In this context, the advertising market, following the general decline of about 3% in 2008, fell by over 13% (Nielsen figures).

Television advertising posted a loss of about 10% in 2009 (Nielsen figure). The only media that have succeeded in maintaining a positive sign are the Internet and, to a lesser extent, satellite TV.

Moving on to the more specific setting of the reference market, competition entered a new phase. Traditional competition between players operating on the same broadcasting platform was joined by competition between those operating on different platforms, at an unprecedented level of intensity.

Furthermore, the transformation and hybridisation of the consolidated business model of the main and traditional market leaders increasingly proposes free television as an alternative to the pay model. The aspect that best highlights the structural change of the market is the progressive decline in 2009 of the advertising contacts issued by the general interest channels.

Consequently, while the prophecies which proclaimed the imminent demise of traditional television will not come true for a long time to come, the radical change in the market structure, which those with greater awareness perceive even in single operations, has entered forcefully into our daily viewing.

Until just a few years ago, the multiplication of the multimedia offering, which was almost customised and made for non-linear fruition, seemed to be an exclusive prerogativeof generations which have grown up in already digitalised contexts, this transformation is now involving traditional television, which is undergoing an important rethinking and repositioning phase.

The stakes are high for the entire system. For the Public Service in particular, it has become essential to make a decisive contribution to build up the elective platform of users in general, the doorway to access to the digital offering for everyone. This process of breaking down and rebuilding the market and the offering was accelerated by the decision to make the switchover to digital terrestrial television not a purely technological issue left to the free enterprise of the single operators, but a project of the nation.

A project characterized by strictly pre-set timing with brief intervals between interventions, which initially seemed risky but is now proving to be within the system's reach, with a regulatory arrangement which intends to facilitate the admission of new players without unfairly penalising those already in operation.

Rai has chosen digital terrestrial TV as its prioritised platform, around which, in observance of the orders regarding technological neutrality and competitiveness, it is building the mission of the Public Service of the future, already with some significant and important editorial success.

The strategy of the new multi-channel digital environment is already operational and consists in flanking the regenerated and refreshed traditional offering with new specialised channels that require shared distinctive signs and languages that arouse in users a sense of belonging to a tradition and to a single editorial project.

At the end of 2009, the all digital population was about 17 million people, accounting for almost 30% of the whole population. The switchover to digital will involve five more areas of the country in 2010, taking the percentage to 70%. Consequently 2010 will be a year characterized by massive development of the platform.

Competition between the terrestrial platform and the other platforms will increase in intensity in 2010, inasmuch as the delicate switchover phases will represent the best way of intercepting "terrestrial" users who might be feeling a little disoriented, using aggressive promotional campaigns.

Rai's decision not to renew the agreement for the channels produced for the Sky pay bouquet is consistent with this context.

While, on one hand, Sky expected to link the supply of the Rai channels (RaiSat) to the free availability of the whole free offering, also in the future, of the Public Service on the pay satellite platform, on the other, the first viewing figures for the all digital areas show Rai as the clear market leader. This is partly thanks to the contribution of the former RaiSat channels, which previously represented the most important Italian editor within the Sky offering.

Both with a view to complementary broadcasting in relation to dissemination through the digital networks for territorially marginal areas or areas penalised by possible difficulties in reception, and to fulfilling the obligations imposed by the institutions with regard to technological and competitive neutrality, the Public Service concession holder is present with its entire offering also on the free satellite platform, launched in 2009 by Tivù, a company partly owned by Rai together with other national broadcasters.

Rai has made significant innovations to its free editorial offering of the DTT platform, flanking the simulcast of the three general-interest channels with three specially created channels: Rai Gulp, Rai Sport Più and, more recently, in July 2008, and with immense success, Rai4. Lastly, there are the simulcasts of two satellite channels, RaiNews 24 and, more recently Rai Storia, also with national coverage.

These are new channels aimed at audiences and issues considered priority by Rai. They will allow the strengthening of the tendencies towards change which are also affecting the general-interest channels, which will continue to be central in the digital world.

As already mentioned, these are joined, in the all digital areas only, by four more specialised channels (former RaiSat): Cinema, Premium, YoYo, Extra, and Rai Scuola, as well as an experimental broadcast in HD.

The development of DTT requires a consistent financial commitment, starting with that for the construction of the network infrastructure: a technical investment which will absorb resources of about 300 million euros by 2012, much of this being concentrated in 2010, as well as significant commitments and investments in the area of contents to expand the offering.

Rai will have to face this considerable investment programme during a particularly difficult market phase, with a very negative impact for the concession holder due to the difficulties regarding the drop in advertising revenues and to the insufficiency of resources from the licence fee, which provide the main form of funding for the Public Service.

In this context, partly due to the presence of big sporting events (the World Cup), the outlook for 2010 remains negative, despite the important ongoing contribution which will ensure the pursuit of cost reduction policies which will be further strengthened, the medium-term aim of which is to structurally reduce the company deficit.

Rai is dedicating as much energy as possible to this commitment, with all the pride and responsibility of a history which assigns it the role of the country's leading cultural industry. However, the undeniable transformation of the communication system and the speed at which innovation is taking place impose a flexibility and capacity for reaction which are just as swift.

They also require financial resources which can support growth strategies if a possible slow decline or marginalisation is to be avoided.

The Public Service concession holder belongs to the country and is obliged to offer the country the best possible service, interpreting its needs and hopes, translating them into an adequate proposal. It will continue to do so with its increasingly rich and articulated free editorial offering, present on the different leading technological platforms.

The substantial belonging to the Institutions of our country, as an entity which performs a fundamental public mission on behalf of the country, subjects Rai to a series of addresses, directives and restrictions, many of which are extremely severe and which establish the details of the area of activity and, at least partially, the methods used to accomplish it.

Every three years, Rai and the Ministry of Economic Development draw up the Service Agreement, an "operating charter" which, on the basis of EU and national legislation, established the details of the single tasks that the concession holder has to perform. An Agreement which must comply with the preliminary guidelines established by the Italian Communications Authority in accordance with the Ministry of Economic Development.

The Consolidated Law on Finance makes express provision for a mechanism to guarantee the economic equilibrium of the concession holder, acknowledging that public resources must equate to the costs sustained for the performance of the activities delegated to it.

This legal order has not been respected up to now, causing enormous damage to Rai, year after year. If the principle of proportionality between costs and resources had been respected, Rai could have had income for over 1 billion euros in 2005-2008.

Even without the results of separate accounting, the instrument that certifies the deficit of public resources, Rai endures a deduction of resources which is unequalled in other European countries, due to the aforementioned anomalous extent of licence fee evasion.

The reduced annual income for Rai can be quantified at about 500/600 million euros.

The acknowledgement of public resources to Rai in an appropriate amount would have generated positive effects: on the comprehensive prospective balance of market resources, on the audiovisual industry, on the concession holder's capacity to improve its focus on the pursuit of the Public Service mission with a further advantage for the overall quality of programming.

Rai therefore believes that the recovery of the accounts and of a sustainable economic balance, as well as the restoration of a solid financial situation, require a decisive intervention on public resources.

Indeed, the aid guaranteed so often in the past by advertising in relation to the modest income from licence fees is unlikely to be able to make up for insufficient public resources in the future. In addition to this, during recessions or weak market situations, the more restrictive conditions to which Rai is subject have always amplified market difficulties.

The maintenance of the structure of the layouts and area of activity, in relation to which the independence of Rai is bound to the decisions made by the Institutions, poses an obvious limit to the extent of the benefits that can be obtained with recovery policies concentrated solely on rationalising costs, which do however continue.

The prospective economic situation, even in consideration of the extent of expected losses in relation to the turnover and actions implanted by Rai, could still be managed with structural measures, but not necessarily of exceptional nature.

Vice versa, the latter, in observance of the indications which should hypothetically come from the Institutions, would become unavoidable unless there is an intention to tackle the economicfinancial deterioration with the rebalancing (even partially) of public resources.

Despite the difficulties, Rai has proven, also with the switchover to DTT, that it is in a position to win important industrial battles. In the new digital context, audiences have renewed their trust in Rai, a brand name which is synonymous with informative authority, narrative power, quality entertainment and attention to disability.

The transformation of the market, with the strong impulse towards pay TV also on DTT, will convey even more visibility to Rai and to its free offering of extensive and widespread quality, aimed at users in general, accentuating its role as and the contents expected of a Public Service.

Characteristics which jointly converge in one direction: to make the licence fee, the public resource, the main and adequate source of funding of Rai.