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report on operations

Shareholders,

The consolidated financial statements of the Rai Group closed with a profit of 4.1 million euros and a negative net financial position of 272.4 million euros.

The result for 2011 is better than that for 2010 (loss of 98.2 million euros), largely due to the actions to rationalise spending, as well as to the favourable dynamics in the number of subscribers.

The adjustment of the unit licence fee, which was in line with the historical trend, anchored to the rate of inflation, determined – partly due to the effect of the positive contribution of coercive collection – higher public resources for 23 million euros.

This result was favourably influenced by the dynamics in new subscribers, despite the decline on 2010: paying users have now exceeded the 16-million family mark.

Following the significant drop – of about 247 million euros – suffered in 2008-2009 and the recovery of just over 40 million euros in 2010, revenues from advertising lost about 64 million euros in 2011, corresponding to just over 6 percentage points.
The constant deterioration of the economic prospects, together with difficulty in forecasting the spending intentions of advertisers, made it necessary to constantly mark down the initial estimates, with a decline of almost 90 million euros.

Other revenues, those of a typically commercial nature, present a slight recovery on the previous year, of around 3 million euros.

In terms of operating costs, taking into account the absence – as in every other odd year – of costs linked to big sports events, the tendency towards a reduction in expenditure was strengthened, within a constant setting – i.e.: a substantial invariance of production layouts –, thanks to a combination of coordinated projects.

Actions to improve rationalisation and efficiency, and reductions in spending across all areas of the company, including product and related investment, had an immediate positive impact and created the conditions to consolidate the benefits permanently.

These results were achieved through a combination of targeted and selective operations which made it possible to attain real and significant increases in operating efficiency and to optimize the level of utilisation of internal resources, also thanks to the implementation of more streamlined and effective production models.

The income statement also benefited from stable personnel costs, with dynamics settling under the rate of inflation. Managerial operations entered into, including early retirement incentives and the substantial blockage of retribution policies, made it possible to reinstate the retributive component linked to the achievement of specific targets/objectives, not examined in the previous year due to a lack of the necessary requirements.

The marketplace in the Eurozone was rather weak, with a negative accentuation in the last part of the year, leading to a markdown of the growth prospects for 2012. Product dynamics were affected by the rise in the cost of funding, due to the deterioration of the sovereign debt crisis and the deceleration of global trade, which continues, nevertheless, to support economic activity. The reduction in domestic demand was also due to corrections in public funding, indispensable to avoid more serious consequences on economic activity and financial stability.

In this context, the advertising market, following the decline of over 13% in 2009 and the recovery of almost 4% in 2010, posted a decline of about 4% in 2011, with television advertising falling by just over 3%.

Moving on to the more specific setting of the reference market, emphasis should be placed on the huge change in competition, characterised by broader, more articulated, multilevel, and consequently multi-dimensional, competition between different platforms, business models and operators.

Competition takes place at different levels: between broadcasting and commercial platforms to adjudicate audiences forced to abandon terrestrial analogue television due to the switch-off processes by technical areas, which has almost been completed; between free channels and pay-tv channels; between the operators active within the two market segments.

The main drivers of the evolution in the competitive context are the switchover to digital television and the consolidation of the Internet.

The switch-over to digital television initially determined the extensive development of pay-TV and subsequently the creation of interesting market spaces for the affirmation of new specialised free offerings, determining a strong acceleration in the audience breakdown process to the detriment of the general-interest offerings.

The consolidation of the Internet in terms of volumes and frequency of use, and the relative capacity to attract advertising investments, have made the Internet indispensable for individuals and advertisers.
Moreover, thanks to innovations in content/services and the performance of broadcasting infrastructures and devices for fruition, the foundations were laid for the final affirmation of a new market, characterised by the powerful entry of global players, often of a non-broadcasting origin. The Internet is, in fact, becoming a platform in direct competition with the traditional communication media.

With the affirmation of digital terrestrial TV, free-TV has changed immensely: no longer just general interest channels, but a wide and varied offering of over 60 channels, and this number looks set to rise even further. After enduring the competition of pay-TV channels, the general-interest channels are now enduring the rapid climb of the new free channels, boosted by the semi-general interest channels and those dedicated to children.

The framework outlined is represented by the evolution of the resources of the television system, characterized by the extensive growth of revenues from access to pay TV and pay per view services, which now account for over 35% of the total, and by the market shares of collection of payments for advertising. Mediaset showed a stable performance, while Sky enjoyed a significant increase and Rai suffered a decline.

Rai is Radio, Rai is Television. Thanks to constant commitment to the development of presidia of new distribution channels on the Ip protocol, Rai is increasingly present on the Internet.

In such a complex and increasingly open market, Rai confirmed its role as undisputed leader of the television market once again in 2011: with a 40.2% share over the 24 hours and with 41.3% in primetime, Rai prevails over the Mediaset Group, with an advantage of about 4 percentage points.

Rai is also leader in the specialized offering. With an offering of 11 semi-general interest and specialized channels, Rai totals a 4.8% average share, bypassing Mediaset (4.4%) and Sky (4.0%).

Not only does Rai lead the viewing figures, it also enjoys an excellent corporate reputation. The overall judgement of the work of Rai as a Public Service has grown for the second half-year running, reaching a value of 7.1 points on an assessment scale of 1-10 (it was 6.9 in June 2011).

The increase is linked particularly to the growth of the specific contribution of Rai’s activity on the various platforms and to the attention dedicated to programming for the disabled.

In the presence of a structural weakness of resources and the need to strengthen the products on offer, in order to maintain a leading role in the traditional media and web media service system, Rai is developing the 2012-2014 Industrial Plan, which will contain the initiatives necessary to pursue to virtuous activities successfully begun in 2011, heading towards a sustainable and durable prospective economic balance.

The most intense effort, in terms of investments, has been dedicated in recent years to the development of DTT, to respect the switch-off by technical areas decreed by the pertinent Ministry.
This is a project which requires a consistent financial commitment, starting with that for the construction of the network infrastructure which, by the time it has been completed, will have absorbed resources of about 500 million euros, as well as significant commitments and investments in the area of contents to expand the offering.

Rai is facing this considerable investment programme, characterised by decidedly deferred profitability, with its own resources, without the support of public funding which takes into account the specific role of the concession holder and its particular network configuration, in a market phase which is particularly difficult.

The evident insufficiency of resources from the licence fee in relation to the costs sustained for the Public Service activities assigned to the Concession Holder is joined by continuing uncertainties relating to the dynamics of advertising revenues.
The weakness of the economic cycle and the deterioration of growth prospects with the continuation of the recession coincide with an already extremely critical phase for Rai’s advertising sales, with the risk of amplifying the negative effects.

Prospects for 2012 – relying on a return to normality (which is partly underway) by the financial market and lending conditions, which would limit the decline of manufacturing activities, and on the positive impact of structural measures for the relaunch of the economy, with the consequent benefits also on household spending decisions – look quite positive.

In fact, possible tensions in terms of advertising revenues will be offset both by the benefits expected from income connected to so-called “special licence fees” and, above all, by improvements deriving from programmed and increasingly extensive and incisive interventions to rationalise spending.
To increase efficiency and specialisation, recent important organisational revisions, including the establishment of the Entertainment Function, within the scope of the review by Genres/Channels and the reconfiguring of responsibilities connected to the TV Fiction genre will also have an influence. An evolution of personnel costs that are increasingly consistent with market dynamics will also contribute to defending levels of employment.

A considerable contribution in terms of income is expected from special licence fees, in relation to which evasion is very high.
A special regulation was introduced into Law no. 214 of 22 December 2011, by which businesses and companies are required to indicate their television licence number in the tax returns – in order to check payment of the special radio and television licence fee.

Due to the orientation expressed in certain legal provisions, Rai is eligible for qualification as a public legal organization, with the consequential need to apply the instructions envisaged in the Code that regulates public contracts for employment, services and supplies.

Consequently, Rai – operating in a situation in which it has to compete on an increasingly competitive market, having to contend important advertising resources – is required, in order to satisfy its requirements, the only operator in the sector to do so, to observe the principles and public procedures envisaged by the Code, allowing for all the exemptions and simplifications envisaged by the regulations, particularly in consideration of the prerogatives and characteristics of the television business. This is a particularity which also characterizes technological investments linked to the switch-off process, rigidly regulated by the timing of the ministerial calendar and permanent assignments of the relative frequencies, often unfortunately delayed in relation to planning needs.

Rai, the Public Service Concession Holder is – to use a turn of phrase – an integrated part of Italy’s institutions, because the Government has assigned it fundamental tasks which it would otherwise have to perform itself.

Rai, the Public Service and Company – is aware of this responsibility, which simultaneously means proximity and independence: interpretation of the hopes and needs of citizens-users, translated into a rich and varied proposal of high-quality information, entertainment, divulgation and in plural and pluralist culture and vision.

Rai has to be – and intends to be – synonymous with an integral Public Service offering, because being a Public Service doesn’t just condition the types of subjects presented, but also requires a constant effort to achieve quality, innovation and distinction, in terms of the modalities and language used to represent the editorial, radio, television and multiplatform product.

Undeniably, the challenges – also in terms of cultural approach and social responsibility – awaiting Rai require considerable commitment from the technological and offering viewpoint. Every one of us is personally seeing just how much our consumer habits and use of the different communication media are radically changing.

The desire to be in line with the country and keep abreast of the changes taking place on the market cannot do without a financial, regulatory and institutional framework which is as clear and stable as possible.