Annex 2. Revenues

First of all, it must be clarified that this investigation does not aim to evaluate prices of the ATT and DTT services during the simulcast period or whether the allocation of revenues between the ATT and DTT services was properly performed. This analysis was undertaken in the scope of the audit to MEO's CAS results for the period between 2010 and 2012¹.

The request for information submitted to MEO by fax dated 28 March 2014 concerning revenues and prices was intended, among other aspects, to clarify the relation between the price per channel and the price per Mbps, the latter having been estimated taking into account that all capacity of MUX A would be in use (or was reserved) by television operators.

As spare capacity exists, there is the question of how costs associated to that capacity should be allocated.

MEO informed by letter dated 29 April 2014 that in its (variant²) tender proposal, it defined and presented the tariff applicable to the DTT service, which involved the application of monthly prices per transmitter, which differed according to the power and geographic location of transmitters (Mainland versus Autonomous Regions), which involved the following annual revenues for MEO:

Values in thousand Euros
[ECI]

According to MEO, these annual revenues would guarantee an economical and financial balance and generate an appropriate profitability for the DTT project, compared to investments to be made and associated operating costs.

MEO adds that, taking into account that under the economical and financial plan of tender specifications, bidders were supposed to present an average annual price for the provision of the service per Mbps for the first 10 years (which also corresponded to one of the sub-criteria for evaluation of the public tender), it presented, in its (variant) proposal the respective average annual price per Mbps for the 10 years of the project (including 2009 as the 1st year), calculated as it saw fit, that is, through the ratio between total revenues due for the service provision and total average³ capacity (occupied by 100%) of MUX A transmitters:

Values in thousand Euros
[ECI]

Notwithstanding, MEO restates that it never intended for the average annual price per Mbps (of [BCI]    [ECI] Euros, for the first 10 years) to become the final tariff to be applied, according to the capacity in Mbps occupied by each specific channel.  MEO supports that, otherwise, the value which RTP Açores and RTP Madeira would be required to pay would be the same as other channels (RTP1, RTP2, SIC, TVI and the 5th channel). In its view, this would be wholly disproportionate, because, although they occupy the same space in MUX A, these channels have regional coverage, and the number of transmitters installed in the Autonomous Regions is significantly lower and have lower wattages compared to transmitters installed in the Mainland.

MEO adds also in this respect that, in case in the scope of the presentation of tender proposals, it had taken the price to be applied/charged to television operators as the price per Mbps, it would have defined a price per Mbps other than the one presented, although this would have been deemed to be inappropriate in the case of RTP Açores and RTP Madeira⁴. For illustrative purposes, MEO mentions that it could have possibly presented the individual values below, per Mbps, per channel and per television operator, the result of which would be an increase of the price applicable to RTP Açores and RTP Madeira, to the detriment of the reduction of the price borne by other channels, total annual revenues presented in the scope of proposals remaining the same (which allowed profitability deemed to be appropriate for the DTT project to be generated):

Values in thousand Euros (except as regards the number of channels)
[ECI]

MEO refers that, meanwhile, in the scope of negotiations with television operators, final prices applicable to DTT were agreed in 2012 (and 2013, in the case of RTP), specifically (Appendix 2 sets out in detail the accounting method for revenues of the DTT service in the CAS for the period between 2010 and 2013, and how these revenues are allocated to the years of provision of the service):

(a) Prices in the simulcast period (2010 and 2011):

• In the case of RTP [BCI]      [ECI] Euros;
• In the case of SIC [BCI]      [ECI] Euros;
• In the case of TVI [BCI]      [ECI] Euros.

(b) Annual prices to be applied as from 01.01.2012:

• In the case of RTP1, RTP2, SIC and TVI [BCI]      [ECI]  Euros;
• In the case of RTP Açores [BCI]      [ECI] Euros;
• In the case of RTP Madeira [BCI]      [ECI] Euros.

MEO refers that the annual price of [BCI]     [ECI] Euros corresponds to the value agreed with television operators exclusively for SD broadcasts, not taking into account any share of the reserved capacity for the HD channel. The former annual price of [BCI]      [ECI] Euros, specified in the variant proposal and in MoUs, included the share of the reserved capacity for the HD channel, which was planned to be used in a non-simultaneous way by RTP1, RTP2, SIC, TVI and the 5th channel.

According to MEO, as television operators dispensed with the use of the HD channel in a non-simultaneous way, an agreement on the reduction by [BCI]        [ECI] Euros of the annual DTT price was concluded, falling from [BCI]       [ECI] Euros to [BCI]      [ECI] Euros.
MEO refers that it has borne by itself the charges and burdens related to the spare spectrum which was licensed to it, and has not received any remuneration for the band reserved for the 5th channel, nor for the currently free band (which includes capacity previously assigned to the HD channel).

As such, MEO informs that the occupation of MUX A capacity by the Canal Parlamento did not have any effect on prices agreed with television operators, MEO just having used part of the spare capacity to provide the signal of the Parliament’s internal video network in the DTT network and to receive the respective remuneration for the provision of this additional service (of a non-permanent broadcasting nature).

Lastly, MEO presented the current state of occupation of MUX A transmitters, in the Mainland and Autonomous Regions of the Azores and Madeira:

Values in Mbps
[ECI]

As MEO failed to explain at quantitative level how it arrived at the discount mentioned earlier, ANACOM requested, by fax of 14 May 2014⁵, that the company clarified the matter within 10 working days, submitting quantified and detailed reasoning on the change of prices.

In this scope, it was conveyed to MEO that, if the former price included the capacity reserved for the (shared) HD channel, charges and burdens borne by MEO with this channel should be explained, taking into account, namely, that the reserved capacity for the HD channel corresponds to more than 25% of MUX A total capacity (in Mbps) and that the discount made to television operators corresponds to around [BCI]      [ECI].

MEO replied by letter dated 26 May, referring that “the final price of [BCI]      [ECI] Euros was freely agreed upon between PTC and TV operators, in the scope of the respective commercial and contractual freedom, and in full compliance with the principles of good faith, having been considered by TV operators that the value was appropriate for exclusively SD broadcasts”, which evidences, according to MEO, “its concern and efforts (...) in reaching an agreement with the referred operators”. MEO adds also that “it has been badly affected, over the years, by several constrains for which it is not responsible, which deeply changed the assumptions on which the proposal was based and the profitability of the DTT project”, namely the non-existence of the 5th channel (and the corresponding annual income) and the above-mentioned reduction of price per channel⁶.

MEO also declares that all the investment made was intended for the implementation of DTT in stand alone MUX A (being the price associated to the basic proposal of [BCI]       [ECI] Euros per year and per channel), thus having accepted prices specified in the variant proposal ([BCI]     [ECI] Euros per year and per channel), on the basis of the assumption that a large part of investment and operational costs would be recovered via revenues generated with pay-TV services (MUX B to F).