Witness Testimony

Mr. Thomas Lenard
Senior Fellow and Vice President for Research
The Progress & Freedom Foundation
1401 H Street, NW, Suite 1075
Washington, DC, 20005

Advancing the DTV Transition: An Examination of the FCC Media Bureau Proposal
Subcommittee on Telecommunications and the Internet
June 2, 2004
10:00 AM

Mr. Chairman and members of the Subcommittee, my name is Thomas Lenard and I am senior fellow and vice president for research at The Progress & Freedom Foundation.  PFF is a market-oriented think tank that studies the digital revolution and its implications for public policy.  I appreciate this opportunity to testify on the DTV transition, which I believe is one of the most important communications policy issues we face today.

Introduction

DTV offers a number of advantages, including the ability to provide better-quality pictures, a greater array of programming, and new services, such as interactive TV.  But the transition has foundered on the shoals of a government policy that is at odds with the reality of where the market is going.  Specifically, we are embarked on a government-prescribed course premised on a transition to free over-the-air broadcast DTV when, in fact, only about 10 percent of the viewing population receives its television this way, and that percentage is declining over time. 

As a result, the transition has stalled, and something is needed to get it moving again¾which is why the new ideas emanating from the FCC are very encouraging.  Hopefully, the FCC media staff proposals signal the beginning of a broader discussion that will lead to greater certainty and completion of the transition (however that is defined) in a timely manner.  The current policy has large costs because it involves tying up large blocks of spectrum that have valuable alternative uses¾especially now, when demand for the airwaves for innovative new wireless communications technologies is exploding. 

Even at its simplest, the transition to DTV is a classic "chicken-and-egg" problem characteristic of many network industries.  In the early stages of the transition, program producers and broadcasters have a limited incentive to provide digital programming because very few consumers have DTV receivers.  Consumers, on the other hand, have little interest in purchasing such receivers because there is limited digital programming available, all of it is available in analog format anyway, and because digital receivers (especially at the beginning) are very expensive.  Nevertheless, successful transitions to new superior formats in network industries are frequently made.  The transitions from long-playing records to CDs and from VHS tapes to DVDs are two recent examples.

Left to its own devices, the market could be expected to make a successful transition in the case of DTV as well, but probably a transition to digital subscription TV¾cable and satellite¾rather than over-the-air broadcast TV.  However, the federal government is by necessity integrally involved, because of its role as the manager of the radio spectrum, and because each of the program delivery media¾broadcast, cable and satellite TV¾is affected in significant ways by a range of government policies.

The government's primary goal should be to free up the very valuable chunk of spectrum currently allocated to broadcast television, because, under current law, the normal market mechanisms for that spectrum to find its way to higher-valued uses are not available.  Because delay in freeing up the spectrum means delay in making new wireless services available to consumers, there are significant benefits in making this happen sooner rather than later.

The Current DTV Transition Framework

The basic framework for transitioning to DTV was established in the Telecommunications Act of 1996 and the Balanced Budget Act of 1997.  The 1996 Telecommunications Act directed the FCC to give each analog television licensee an additional digital channel free of charge to provide over-the-air digital broadcasting.  Each broadcast station now is licensed to use 6 MHz of spectrum for analog and an additional 6 MHz for digital broadcasting so that, during the transition, broadcasters can broadcast on both channels simultaneously.

The 1997 Balanced Budget Act (BBA) established December 31, 2006 as the conditional deadline for the end of the transition.  After the transition is complete, the broadcasters are supposed to relinquish their analog spectrum, which can then be used by the government for public safety or auctioned to the private sector for other uses.  The initial FCC plan (from the early 1990s) was to release 138 MHz (out of 402 MHz dedicated to television broadcasting), with the remainder continuing to be allocated to television after the transition.  The FCC subsequently reduced this to 114 MHz, with 24 MHz allocated to public safety uses (in response to a BBA directive), and then further to 108MHz.[1]  

The 2006 date for relinquishing the spectrum is subject to three statutory conditions:

1.      All of the licensees or affiliates of the four largest networks are broadcasting a DTV signal.

2.      Digital-to-analog converter technology is generally available (so that individuals with analog TVs can still use them).

3.      85 percent of households in any market are capable of receiving digital broadcasts.  To be counted, a household needs to be able to receive over-the-air digital signals using a digital TV set or a digital-to-analog converter, or subscribe to a multichannel video programming distributor (MVPD, such as cable or satellite) that carries at least one digital programming channel of each broadcaster in the market.

Finally, the FCC has established timetables to speed up the transition:  a schedule for stations receiving DTV licenses to build out DTV facilities, with all commercial stations required to broadcast digital signals by May 1, 2002; and a schedule for manufacturers to include over-the-air tuners that receive digital broadcast signals, with all sets over 13 inches required to include the tuners by July 1, 2007.

How Far Has the Transition Progressed?

If the goal is to meet the statutory conditions (specified above) for freeing up the spectrum, it is safe to say we are not close.  While the first two conditions are not likely to present a problem, there is no market in which the third condition¾85 percent of households capable of receiving digital broadcasts¾is close to being satisfied.  Indeed, the FCC has yet to precisely define what a market is for purposes of meeting this condition.

Whatever the definition, only about 8 to 9 percent of U.S. households have DTVs (mostly monitors) and about 1 percent have the ability to receive digital over-the-air signals.[2]  Moreover, in order for cable and satellite to be counted in the 85 percent they must carry at least one digital channel for every broadcaster, which they don't do now, and probably won't in the future, because of capacity constraints and because some of the programming is of limited value to their customers.  If MVPD viewers are not counted the third condition, in effect, means that 85 percent of the viewers in any market must be capable of receiving over-the-air digital broadcasts.  This, in turn, means that consumers would have to buy potentially expensive over-the-air receivers for the third condition to be satisfied.  These receivers would have virtually no utility for cable subscribers and would be useful for satellite subscribers only in selected areas where satellite may not carry the local signals.     

With respect to DTV build-out status, 1,642 stations (97 percent) have been granted a DTV construction permit or license.[3]  Of these, 642 are authorized to be on the air with licensed facilities, implying that the remaining 1000 have not met the 2002 conversion deadline.  Of the 1000, 781 stations are operating with "special or experimental" authority and the remaining 219 are presumably not on the air at all. 

The problem is that the federal government's plan to transition to over-the-air DTV flies in the face of reality, because almost 90 percent of households subscribe to a MVPD¾75 percent to cable and almost 22 percent to DBS.[4]  The remaining 10 percent¾households that presumably place a fairly low value on TV viewing¾will move more slowly, but many of them eventually will get there.  As FCC Chairman Powell has noted, "[I]t seems clear to me that at some point on the horizon, all Americans¾perhaps in 10 years¾will have pay-TV.  As an entity, [over-the-air TV broadcasting] may and probably will be there but as a program supplying interest more than a distribution platform."[5]  By that time, a significant portion of Americans may be getting their TV over the Internet, a technology that was in its infancy when the DTV transition plans were being developed.  As Powell has also noted, "If 100 percent of Americans don't get free, over-the-air TV, what are we protecting?"[6]

Moreover, in the past 10 years, most MVPD has become digital.  The cable industry has been investing heavily in its facilities.  Digital cable service is available to 90 percent of subscribers and, as of June 2003, there were more than 20 million subscribers.[7]  In addition, over 60 million households are passed by cable systems offering HDTV.[8]  Agreement on a new "plug and play" standard between manufacturers of digital television sets and cable systems will help speed the transition to digital cable.[9]

DBS, which barely existed 10 years ago, is all-digital.  Currently, the two major DBS providers, DirecTV and EchoStar, both offer HDTV services and packages.  EchoStar has recently introduced a new satellite dish with which subscribers can receive up to 50 HD channels.[10]

The FCC Media Staff Proposal

If 90 percent of Americans are getting their TV from a subscription service, why do we have a national strategy to transition to over-the-air DTV¾especially since that strategy has associated with it very large costs?  

The FCC staff is proposing a way to move the process forward.  As I understand the proposal, it would establish a new deadline of January 1, 2009 for the end of the transition, at which time broadcasters would return their analog spectrum.  To make this happen, the FCC would require that broadcasters, if they want to assert their "must carry" rights, do so with a digital rather than an analog feed.  The cable operators would then convert the digital signals to analog for viewers who don't have a digital TV.  These subscribers would all count as being able to receive digital broadcasts.  Combined with other initiatives, this would help assure that the 85-percent threshold is met and thereby free up the 108 MHz of analog spectrum that the broadcasters have been scheduled to return in 2006.

Other initiatives should include the "digital white area" proposal currently under consideration as part of the reauthorization of the Satellite Home Viewer Improvement Act (SHVIA).   This provision would extend the distant signal retransmission provision of SHVIA to include distant digital signals.  Measures like this, which increase the demand for subscription TV and for digital TVs, make a lot of sense, especially in the context of the overall DTV transition and the need to free up the broadcast spectrum.[11]

The Value of the Spectrum

Freeing up the analog spectrum will produce public safety benefits, tens of billions for the Treasury and, when benefits for consumers are included, probably hundreds of billions in total economic benefits¾benefits that will accrue to consumers from all the new services that would be available. 

            We should not, however, limit ourselves to thinking about the 108 MHz of analog spectrum, because we are very close to moving the nation the rest of the way from its current approximately 90-percent subscription viewership to 100-percent, and TV over the Internet may be just over the horizon.  All this raises the prospect of being able to reclaim the entire 402 MHz allocated to broadcast TV and auction it off for other, higher-valued uses.   The value of this spectrum in terms of innovative new services would be some multiple of the value of the analog spectrum¾probably well over a trillion dollars.[12]

Conclusion

            In conclusion, I would commend the FCC staff for trying to tackle this very difficult problem.  But, while a firm 2009 deadline is better than a deadline nobody believes will be met, it is still quite a long way off.  The dominant priority for policy makers in the transition to DTV should be to free up as much of the spectrum allocated to broadcast TV as possible as soon as possible.

In this Internet age, it is not too early to start thinking about freeing up all of the spectrum allocated to broadcast, because it may not be long before virtually all Americans will get their TV from another source.  When that day comes, as Chairman Powell has said, "what are we protecting?" 

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