TV Advertising as a Giffen Good Substitution Effect, Income Effect and the Paradox of the Gentiloni Draft Bill Augusto Preta Università di Sassari SIDE Conference 2007, 9-10 novembre 2007 Università Bocconi, Milano

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 2 Giffen goods and the income effect In the XIX century Scottish economist Robert Giffen observed the rise in price of certain goods (inferior goods) led to an increase of their consumption and a consequent reduction of luxury goods For example higher chips price result in less money available for fish and therefore in a decline of its consumption. Adversely, lower chips price provides more money available for fish and a decline in consumption of chips Giffen paradox based on income effect (as opposed to substitution one) has long been a matter of debate among economists But, even if it can be accepted for some inferior goods, does Giffen paradox apply to advertising TV for mainstream television? In the XIX century Scottish economist Robert Giffen observed the rise in price of certain goods (inferior goods) led to an increase of their consumption and a consequent reduction of luxury goods For example higher chips price result in less money available for fish and therefore in a decline of its consumption. Adversely, lower chips price provides more money available for fish and a decline in consumption of chips Giffen paradox based on income effect (as opposed to substitution one) has long been a matter of debate among economists But, even if it can be accepted for some inferior goods, does Giffen paradox apply to advertising TV for mainstream television?

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 3 Giffen paradox and substitution effect in voice communication In the XXI century people set a budget for voice communication Evidence shows that fixed-to-fixed calling exhibits the fastest decline in volume and spend On the other side, mobile voice calls display the the fastest rate of growth in volume and spend. Consumers tend to maximise their consumption of mobile voice, even though they could save money with cheaper fixed calls As VoIP will make fixed telephony even cheaper, the effect is likely to continue: cash is freed up for more desirable kinds of calls, such as mobile originated and fixed to mobile. In the XXI century people set a budget for voice communication Evidence shows that fixed-to-fixed calling exhibits the fastest decline in volume and spend On the other side, mobile voice calls display the the fastest rate of growth in volume and spend. Consumers tend to maximise their consumption of mobile voice, even though they could save money with cheaper fixed calls As VoIP will make fixed telephony even cheaper, the effect is likely to continue: cash is freed up for more desirable kinds of calls, such as mobile originated and fixed to mobile.

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 4 Source: Analysys Fixed Voice as a Giffen Good

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 5 DDL Gentiloni The Gentiloni draft Bill intends to correct excessive concentration in the TV market through a quantitative intervention The shift of one channel from analogue to digital for Rai and Mediaset with the negative impact on their ads revenues and the reduction of commercials imposed to the dominant player on the TV advertising market should release resources for other broadcasters and media, such as press. Substitution effect is at the basis of the relevant market analysis envisaged by DDL Gentiloni The Gentiloni draft Bill intends to correct excessive concentration in the TV market through a quantitative intervention The shift of one channel from analogue to digital for Rai and Mediaset with the negative impact on their ads revenues and the reduction of commercials imposed to the dominant player on the TV advertising market should release resources for other broadcasters and media, such as press. Substitution effect is at the basis of the relevant market analysis envisaged by DDL Gentiloni

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 6 Dominant positions and remedies (1) Art. 2. Limiti alla raccolta pubblicitaria nel settore televisivo e altre misure a tutela della concorrenza e del pluralismo nella fase di transizione al digitale 1.Fino al 30 novembre 2012 e comunque fino alla completa conversione delle reti alla tecnologia digitale, il conseguimento, anche attraverso soggetti controllati o collegati, di ricavi pubblicitari superiori al 45% del totale dei ricavi pubblicitari del settore televisivo, riferito alle trasmissioni via etere terrestre in tecnologia analogica e digitale, via satellite e via cavo, costituisce una posizione dominante vietata […] 3.Nell'anno solare successivo all'accertamento, ciascuna emittente televisiva in ambito nazionale via etere terrestre su frequenze analogiche, facente capo a soggetti in posizione dominante ai sensi del comma 1, trasmette pubblicità in misura non superiore al 16% del tempo di ciascuna ora di programmazione. Le disposizioni di cui al presente comma non si applicano ai soggetti che, allesito dellaccertamento, trasferiscono su una diversa piattaforma trasmissiva una o più emittenti televisive già operanti su frequenze terrestri in tecnica analogica ovvero, che cessino la trasmissione di pubblicità su una o più emittenti Art. 2. Limiti alla raccolta pubblicitaria nel settore televisivo e altre misure a tutela della concorrenza e del pluralismo nella fase di transizione al digitale 1.Fino al 30 novembre 2012 e comunque fino alla completa conversione delle reti alla tecnologia digitale, il conseguimento, anche attraverso soggetti controllati o collegati, di ricavi pubblicitari superiori al 45% del totale dei ricavi pubblicitari del settore televisivo, riferito alle trasmissioni via etere terrestre in tecnologia analogica e digitale, via satellite e via cavo, costituisce una posizione dominante vietata […] 3.Nell'anno solare successivo all'accertamento, ciascuna emittente televisiva in ambito nazionale via etere terrestre su frequenze analogiche, facente capo a soggetti in posizione dominante ai sensi del comma 1, trasmette pubblicità in misura non superiore al 16% del tempo di ciascuna ora di programmazione. Le disposizioni di cui al presente comma non si applicano ai soggetti che, allesito dellaccertamento, trasferiscono su una diversa piattaforma trasmissiva una o più emittenti televisive già operanti su frequenze terrestri in tecnica analogica ovvero, che cessino la trasmissione di pubblicità su una o più emittenti

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 7 A new provision of the Bill will also include tele-promotions* in the bundle of commercial communications, whose broadcasting time is limited to 18% of each broadcasting hour Tele-promotions are any kind of advertising consisting in displaying or showing goods or services made by the broadcaster within a programme, with the purpose of promoting the provision, against payment, of the displayed goods and services Dominant positions and remedies (2)

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 8 Before DDL Gentiloni Mediaset 58.5% Rai 29% Other 12.5% Source: ITMedia Consulting The expected effect of Gentiloni Bill Expected impact Mediaset 48% Rai 25% Other 27%

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 9 Effect of TV inflation onto radio + Poor - Rich Radio share Total adv share and TV share Source:OMD

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 10 Effect of TV inflation onto radio + Poor - Rich More Radio?? Competitiveness of other complementary media increases: Sat TV Other analogue Digital Scenario Less Radio! TV +5% TV +10% TV +15% Radio – 0,3% Radio – 0,9% Radio – 1,3% TV Inflation Source:OMD

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 11 TV Advertising as a Giffen Good An increase of TV price causes a reduction of Radio revenues, thus proving that: a.In TV advertising income effect prevails against substitution effect b.Since demanded quantity of Giffen goods is an inverse function of income, a price increase of TV advertising will cause higher demand for TV advertising. This trend concerns especially big investors, that, however, represent more than 70% of the market. A shock caused by negative externalities, such as the proposed Gentiloni Bill, may consolidate the power of those players whose dominance it intended to limit

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 12 The dominant players expected behaviour Once compelled to transfer one channel on digital networks, and to reduce broadcasting time devoted to advertising [tele-promotions= commercials], response of the dominant players may be as follows: a.To increase the appeal of analogue programmes, so to recover losses caused by the digital shift through higher audience b.To increase price (up to 10%), so to reduce losses from tele-promotions

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 13 Spot + Telepromotion P Q D RAI Mediaset P0P0 Q0Q0 CURRENT SITUATION: Quantity (Q 0 ) completely absorbed. Price (P 0 ) is the most efficient price for both players, as for available capacity. Mediaset S < 18% TP = 20% + RAI S TP = 12% +

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 14 P Q D Q0Q0 Q1Q1 P0P0 P1P1 D1D1 P2P2 Mediaset Med RAI Med + RAI Spot = Telepromotion (Mediaset) S S Mediaset TP = 18% + RAI TP = 12% + DDL GENTILONI IMPACT: Negative externalities reduce total available capacity (Q 1 ). Demand curve moves upwards, and so does Price (P 1 )., Mediaset further reduces the negative externalities because higher value of slots shifts even more upwards the Demand curve (P 2 ).

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 15 Before DDL Gentiloni Mediaset 58.5% Rai 29.0% Other 12.5% After DDL Gentiloni Mediaset 57.3% Rai 28.5% Other 14.2% Source: ITMedia Consulting The possible effect of Gentiloni Bill

Augusto Preta, TV Advertising as a Giffen Good SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano 16 Conclusion In spite of strict legal intervention, the market for TV advertising will not change The draft Bill acts according to a substitution principle, while the TV advertising market works following the income one The two main players will retain their market shares No new entrants are expected within this scenario Competing media, such as publishing, will not benefit from released resources