home > report on operations> To the Shareholders

To the Shareholders,

Rai posted a loss of 7.1 million euros (the Rai Parent Company recorded a loss of 37 million euros), with a positive net financial position both for Rai and for the Group (at 197 million euros and 21 million euros, respectively), despite a decline in comparison with the previous year.

The 2008 result is largely stable in relation to the final figures of the previous year which closed with a loss of 4.9 million euros, due to the following significant phenomena.

There was a significant drop in revenues from advertising: investments by advertisers highlighted a negative general trend in line with the performance of the economy: an increase in inflation during the first quarter, which slowed in the second quarter and then suffered an even more marked decline in the second half of the year, before collapsing altogether in the last quarter, with an estimate for the whole year drawn up by Nielsen highlighting a 2.8% contraction in the market in comparison to 2007.

The drop in advertising revenues for Rai came to over 40 million euros, despite benefits from income linked to the big sporting events that characterized summer programming (European Football Championships and the Olympics).

The whole decline was concentrated in the last three months of the year, as
a consequence of the international financial recession triggered by the bankruptcy of Lehman Brothers last September.

The contraction of advertising revenues was offset by the rise in revenues from licence fees, which was largely due to the increase in the perunit licence fee, but was also aided by a rise in the number of subscribers. The number of subscribers increased by almost fifty thousand units, reaching a total of almost 16 million
families.

In terms of costs, as in every ‘even’ year, the result was strongly influenced by expenses linked to big sporting events, which had an overall impact (including production costs) of about 180 million euros.

In overall terms, however, the performance of outside costs – net of big sporting events – remained stationary, at the same level as the previous year. This important result, considering the presence of additional charges to improve the
offer of digital programmes, was achieved thanks to the continuation and strengthening of actions to increase the efficiency and rationalisation applied to all corporate areas.

The Income Statement also benefited from the containment of labour costs,
largely stationary, at the same level as the previous year (+0.5% in
consolidated terms). Expenses due to the renewal of contracts and the
absence of welfare bonuses were, in fact, offset by efficient interventions
on the variable components and by the effects of early retirement
incentives implemented during the previous year and also confirmed in
2008.

In greater detail, as regards revenues, the cost of the individual licence fee
for 2008 went up by 1.9% (from 104.00 to 106.00 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 2009, with a rise of 1.5 euros (to 107.50 euros).
The licence fee, which, despite recent increases continues to be the lowest in
Europe for public broadcasting companies, also holds the negative record for particularly high tax evasion, estimated at around 25%, compared with the European average of under 10%. A gradual alignment with the European standard, with a consequent recovery of significant resources, would require a revision 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
have positive effects, not only on Rai, which would be aided in the pursuit of its mission as a Public Service, but also 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 2007 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 420 million euros, falling to about 160 million euros after the allocation of a share of the advertising revenue from the programming.

The international financial recession, which began in the United States and
then spread to the rest of the world, with the collapse of stock market indexes, has gradually affected the real economy, which was already showing signs of slowing down.
The heavy repercussions, extended to all the main sectors of the economy,
with a consequent rise in unemployment figures, have triggered a general drop in consumption.

The extent and depth of the recession have led the Governments of all
countries to launch significant supporting plans, initially for the banks and secondly for the main industrial sectors.

In this context, the advertising market, already characterised by a general
decline in the growth rates of the traditional compartments, closed 2008 with a decline of about 3%.

Due to the recession that hit the sector in the last quarter of 2008, traditional television advertising suffered a loss of 1.2%. The only media which have succeeded in maintaining a positive sign are the pay-TV satellite platform, Internet and, to a lesser extent, radio.

The aspect that best highlights the structural change of the market is the progressive decline of the advertising contacts issued, which has been further accentuated during this phase. This decline is even more consistent with regard to the commercial target, and is also affecting Rai’s main rival, Mediaset.

The consistency of the figures and the gap in prospects between old and new media now leave no room for doubt: what seemed, until recently, way ahead in the future, has now become the market’s present, the reality we have to face up to.

Within the space of a few years, viewers will find themselves projected into a multi-channel digital environment, in which general interest offerings and new theme or minigeneralist channels will compete on equal terms; advertising will follow the evolution of the offer, restructuring its allocation processes; the rights market will also be affected by this systemic change. Competition in general will gain increased importance, as will the competition between free and pay TV.

During this phase of transition in the television system, a leading role is played by the switchover to digital terrestrial television. DTT is the fulcrum, the privileged platform around which Rai is going to build the mission of the Public Service of the
future.

2008 witnessed entry into a phase of acceleration and irreversibility, also due to important institutional decisions: the launch by the Italian Communications Authority of the frequency planning process, adhered to by enterprises, configuring a consensual mechanism to rationalise the spectrum and construction of the
networks and the Government’s implementation of the switch-off calendar by areas, with definite, close dates, such as to complete the process by 2012.

The switchover to DTT – as proven by Sardinia, Italy’s first Region to ‘go
digital’, from 31 October 2008 – requires a clear multi-channel positioning strategy. In this sense, Rai, with its ‘bouquet’ of 8 free channels for everyone, has proved that it can compete successfully, maintaining the shares of the general interest offering, with a clear increase in viewing figures for the digital channels.

During 2009, according to the calendar drawn up by the Government, the population of digital viewers will reach almost 17 million people, almost 30% of the Italian population. Consequently it is necessary to organize special measures in support of the development of the DTT platform, including the use of suitable
communication campaigns.

In this framework and in order to build a platform with a strong and recognisable identity, Rai, together with the other national broadcasters (but also with the possibility for entry by associations of local broadcasters), has set up a company, called Tivù, which will develop - under a single brand - the services required for the
best possible operation of the free digital terrestrial platform.

Moreover, for the territorially marginal areas, due to possible difficulties with reception, and therefore with a view to providing a complementary service in addition to broadcasting via the DTT networks, during 2009 Tivù will launch a free satellite platform which, for the public service concession holder, will also help with the fulfilment of the obligations imposed by the Institutions in relation to
technological neutrality.

As mentioned earlier, Rai has already significantly innovated its free offering through digitial terrestrial broadcasting, flanking the simulcast of the three general interest channels with three specially conceived channels: Rai Gulp, Rai Sport Più and, more recently, in July 2008, the highly successful Rai 4. Last, but not least, two satellite channels, Rai News 24 and the brand new Rai Storia, have been added in simulcast. Each of the new free channels deserve a specific mention, because all of them are committed, successfully and within the context of a strategic unitary vision, to building the new face of the Public Service in the digital age.

These are channels aimed at audiences/themes prioritised by Rai and which will allow the strengthening of the trends towards change that are also influencing the general interest channels, which will retain their central role in the digital world.

Rai Gulp, the channel dedicated to children aged 4 to 10; Rai Sport Più, the channel that offers the broadest coverage of all sports, both big events and the ‘minor’ disciplines which are not guaranteed by the general interest channels;
Rai 4, the channel for young adults aged 18 to 30, without age actually
becoming a discriminating factor; Rai News 24, the public service news channel; Rai Storia, the educational channel which also benefits from the immense heritage of the Teche Rai.

The development of DTT does however require a consistent financial commitment, starting with the construction of the network nfrastructure: a technical investment which will absorb resources for about 300 million euros in the space of just a few years, concentrated between 2009 and 2012.

Despite enjoying a healthy financial position and a good level of solidity with regard to capital, Rai will have to handle this consistent investment programme in an extremely critical market phase, with a very negative impact for Rai on the significant reduction of advertising income, without the possibility to hazard any form of forecasting with regard to the duration.

In this difficult context, the initial indications for 2009 were laid down, according to a flexible, modular arrangement, in such a way as to be promptly adapted to suit the effective performance of the market, on the basis of challenging goals in terms of cost rationalisation, in order to minimise the impact of the recession.

These goals, shared by all areas of the Group, implicate the containing of programming costs, the reduction of investments in repeated utility products
(television films and series) and the slowing down of the growth in personnel costs.

The audiovisual industry is facing an extremely turbulent period: the business model is radically changing; the number of players on the market is rising constantly, to an extent where they can determine role reversals and the inversion of hierarchies between incumbent and follower; the distribution of advertising resources will inevitably be influenced by the new balance which will be created.

As proven by the result of the past two years, Rai is well equipped to tackle these challenges. It has clearly identified the strengths and weaknesses of its competitive placement; it has irreversibly opted for the digital terrestrial platform for its broadcasts and has begun building an offering dedicated to DTT, destined to audiences which had shown a certain detachment from the public service general interest programming.
This said, during 2008 it confirmed the strength of its general interest offering, remaining stationary at the levels of the previous year (44.1% of the prime time share and 42.3% over the whole day), despite the ongoing migration of audiences to digital, with an accentuated advantage in terms of viewers over its main competitors. More recently, it has successfully extended its mutliplatform vocation
towards the Internet.
The latter change, following those undertaken by the leading European broadcasters, has resulted in the debut of the new websites www.rai.it and www.rai.tv.

The Rai.it homepage can now be reprogrammed in terms of content and form by each individual user. The new website offers the chance to choose the contents to be displayed from 14 thematic boxes and decide how to position them on the page. A wide range of multimedia elements is available. A particularly significant
item for those with an interest in the news being access – via Rai Notizie –
to all information live and on demand.

Rai.tv: Rai live on the web. With 22 channels, double video quality and shorter info search times, Rai.tv expresses Rai’s vision of the passage of television to the web.

The production and editorial efforts which Rai is about to make are important and cannot be deferred, despite the serious domestic and international economic situation which could justify a slowing down of the timing restrictions.

Rai has no intention of delaying the switch off calendar for the various
areas as the uncertainty that this would generate for the project would be counterproductive for the whole industry and would only increase the success of the only rival platform, satellite pay TV.

However, Rai is convinced that the effort made to guarantee the nation an extensive multi-channel offering, free for everyone, forms a significant corporate project which, especially in this phase of recession, should be accompanied by a marked increase in public resources, both through tangible actions to combat tax evasion and with specific contributions in terms of investments.

In this context it also seems fundamental to guarantee Rai a clear legislative and regulatory framework which also clearly identifies the separation between the profile of managerial responsibility typical of the business activity and correlated risks, and the exercise of actions to direct, defend and protect the particular features of the Public Service.