Why is anyone included that isn’t in Europe? Why is Australia included, for example?
Eurovision Song Contest
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Because the Eurovision Song Contest is organised by the European Broadcasting Union (EBU). The EBUs primary purpose is to develop and manage technical standards for European TV and Radio. The FLAC audio file format for example was developed in part by the EBU. They are here to make sure a TV or Radio bought in Portugal will also work in Finland and every country in between.
As such they don't really care all that much whether a country is technically located in Europe or not. As long as it makes sense for a country to be part in the European Broadcasting Area it is allowed to join the organisation. That's why North African countries such as Egypt are part of the EBU and that's why Israel is a full member.
Australias case is a bit different. They are here despite not being full members. The participating broadcaster SBS is merely an associate member giving them the same status as American networks CBS or NBC. The inclusion of the singers from down under started as a joke to celebrate the shows anniversary and then they stuck around because SBS payed enough money and general audiences liked the idea.
The FLAC audio file format for example was developed in part by the EBU.
Is this actually true? I don't see that mentioned in their Wikipedia page. According to that the Xiph.Org Foundation developed the format.
You are correct. They are using the file format heavily but didn't develop it initially. The German wikipedia page is a bit confusingly laid out in that regard leading to my mistake (They are classifing the use as a "tecnical development" along with the stuff the EBU actually developed).
The EBU is and was involved in the development of technical specs such as DAB (Digital Audio Broadcasting) or DVB (Digital Video Broadcasting) but FLAC isn't one of them.