Summary

A 2001 Business Week editorial argues that the U.S. HDTV transition has failed, leaving broadcasters squatting on valuable spectrum originally granted free for HDTV development. The authors propose a three-part remedy: delay the FCC spectrum auction, mandate digital tuners in all TV sets, and penalize broadcasters who refuse to relinquish their spectrum.

Source document circa 2001 preserved as-is

Friday, March 2, 2001



    By Jane Black and Olga Kharif

    A Way Out of the HDTV Mess Here's how to undo a failed federal policy that has broadcasters squatting on spectrum space that could fetch the Treasury billions


    So much for the high-definition TV revolution. Four years ago, the transition to digital HDTV promised to provide superclear, virtually 3-D video that would change the way America watched TV. Today, it looks like we'll be lucky to get standard digital TV in every American household before 2010.

    That poses a big problem, and not because consumers are crying out for crystal-clear pictures on ordinary TV. The problem is that broadcasters are sitting on a huge chunk of valuable spectrum space they thought would be carrying HDTV signals by now. And they don't want to give it up -- even though the Federal Communications Commission has scheduled an auction to sell it off in September, 2001. Now, both sides are
    bracing for a battle royal.

    There's no denying it: HDTV's promise is dead. And no act of God -- or Congress -- is going to bring it back. Instead, the government needs to focus on making sure broadcasters return the spectrum they were given for free to develop HDTV. The liberation of this spectrum is now key to the development of "third-generation" wireless networks. All that spectrum space should be freed as soon as possible for bidding by new technologies, such as nascent 3G wireless networks, which both covet it and are willing to pay handsomely.

    IMMENSE DAMPER. That's what the U.S. government is banking on. Congress has already penciled $28 billion in anticipated revenues from the sale of this spectrum into its projections for the federal budget
    surplus. Just one problem:

    As long as the broadcasters are acting like squatters on federal property, going ahead with the September auction is likely to put an immense damper on the
    bidding.

    What to do? On Mar. 1, the Senate Commerce Committee begins hearings on how to remedy the failed policy. The lawmakers will mull the issue through the spring and summer. But a three-pronged attack is in
    order.

    First, new FCC Chairman Michael Powell should delay the auction until the agency is sure it can clear the airspace. Second, Congress should eliminate one of the main reasons broadcasters are holding onto the spectrum: not all TVs are wired to receive digital signals. By mandating that consumer-electronics companies add digital-tuning capabilities to all TV sets they sell, broadcasters could return to the analog spectrum they already have in abundance because they don't need high-end digital spectrum to beam standard digital signals into America's living rooms. Finally, a new auction schedule should include consequences for broadcasters that still don't want to relinquish their spectrum. If they don't give it up, Congress should make them pay
    the market rate.

    FOOLS ON THE HILL. How did we get in this mess? The HDTV debacle was born in a heady mix of fear and international rivalry. In 1983, Japan's NHK debuted an analog version of HDTV at an electronics conference in Switzerland. Fearful of being surpassed yet again by the indefatigable Japanese, the U.S. government accepted HDTV as the wave
    of the future.

    But while working on an HDTV standard, American electronics experts discovered that TV programming could be digitized to transmit high-definition pictures. This, experts argued, was a far superior solution to NHK's analog approach. Consumers would get exceptionally high-quality video, and a compressed digital signal would allow a huge band of valuable spectrum to be
    freed for new technologies.

    Congress soon got in on the act. Assured repeatedly by broadcasters and the TV industry that a more sophisticated version of HDTV was just around the corner, lawmakers directed the FCC to grant broadcasters an extra channel of spectrum -- at no charge -- to develop HDTV. The extra spectrum would allow them to broadcast in both analog and digital
    until the switchover.

    WHERE'S THE MONEY? The catch was an ambitious timetable for the transition. Broadcasters would have to return the spectrum by 2006, or when 85% of Americans could receive digital signals. After that, they could broadcast their signals in some new space -- freeing the valuable spectrum for auction. Capitol Hill just assumed that broadcasters -- and TV viewers -- would thank them for this gift of crystal-clear pictures, so it made no specific mandate for HDTV, nor did it attach any penalties to tardy completion of the
    transition.

    But after securing the spectrum, broadcasters quickly found that there was no way to make money on HDTV -- free spectrum or not. Broadcasters earn money from advertisers, which pay according to the number of viewers, not according to whether the signal is being displayed on a 5-inch black-and-white or a 65-inch gas-plasma screen. Since only so many people live in each market, broadcasters now argue -- correctly this time -- that they'll attract the same number of eyeballs whether they broadcast in high-definition or standard-definition digital.

    "Will Proctor & Gamble pay more because the soap bubbles look sharper? No. Will we buy more soap if the picture is clearer? No. There is no economic model for HDTV," says Jim Burger, a lawyer with Dow, Lohnes & Albertson in Washington who focuses on the intersection of technology and media.

    BASIC MATH. Oh, the broadcasters have figured out a way to make money with digital signals. But not by using HDTV. After broadcasters return their current spectrum allotment, they'll have a digital stream that carries 19.3 MB per second. In that space, they can send either programming for one high-definition digital channel or programming for five or six standard-definition programs. They won't need the special high-definition spectrum to do it. This technique, which creates mini-networks within each digital stream, is called
    multicasting.

    "We're not under any obligation to provide HDTV," says Bud Paxson, chairman of Pax TV, which owns 18 stations nationwide. "It's what a lot of members of Congress thought we were going to do. However plans change, things evolve." Paxson, a co-founder of the Home Shopping Network, says he has no plans to broadcast in high definition. "With HDTV, we have one network. With multicasting, we can have five, lower our costs, and possibly
    make money."

    Good for them. But letting the broadcasters do so in a space where they're essentially squatters isn't sound federal policy. Just like a house with a bad property deed, the spectrum space can never be truly valued until the deed is
    clean.

    WAIT FOR A MODEL. Besides, this is no time for the FCC to go ahead with a big spectrum auction. The urgency behind 3G networks has eased. In Europe, telcos overpaid for 3G licenses and now are unclear about how they'll make a profit. With an eye on this carnage, U.S. telcos have indicated that they're in no hurry to launch these networks. Furthermore, holding off on the auctions until 3G profit models have clarified and the spectrum deed has cleared would likely make the licenses more valuable. That means more money
    for Uncle Sam.

    Meantime, if Congress were to mandate that TV-set makers include digital tuners in every set, it would enforce nationwide adoption of digital TV. Last year, 33 million analog TVs were sold in the U.S., vs. just 26,000 digital-capable sets. So much for market forces. The upshot of mandating digital tuners? Grandma in Oklahoma with her rabbit-ears antenna won't lose Oprah when the broadcasters decide to pull the plug on analog broadcasts (if she has bought a newer TV with a digital tuner). That would address one of the broadcasters' biggest complaints.

    Congress should also make broadcasters pay for their valuable real estate by attaching a price tag to the spectrum they now occupy. When they approached Congress hat-in-hand, broadcasters promised something they have yet to deliver. Now that this has become abundantly clear, they shouldn't get a free ride on taxpayers' backs. What they should do is fork over the going rate for whatever airspace they occupy. That's what cell-phone
    companies are doing.

    GET TOUGH. These prescriptions won't be popular. The broadcasters certainly don't want to surrender their spectrum or pay for their freebie. Telcos still interested in bidding might scream when the auction gets pulled. And the consumer-electronics lobby is digging in its heels, saying a TV-set mandate isn't necessary because the market for digital TV will eventually drive consumer
    demand.

    FCC Chairman Powell doesn't approve of this confrontation: He calls the September auction a "train wreck" waiting to happen. Government is supposed to stop train wrecks. So the FCC and Congress should step in and keep the train on-track. Clear the spectrum space, make the TV-set manufacturers part of the solution, and force broadcasters pay if they insist on hanging onto their precious spectrum.


    Black and Kharif cover technology for BusinessWeek
    Online

    Edited by Alex Salkever