Policy

A Traumatic End to the DTV Transition?

3/27/2005 7:00 PM Eastern

Washington— On Capitol Hill, caution is an unwritten clause in the Constitution.

So why are a few key lawmakers so eager to shut down analog broadcasting in a few months and run the risk of enraging millions of voters stuck with useless TV sets?

Money is motivating some. Spectrum to be returned to the federal government after the transition is a gold mine that could yield $17 billion at auction — a nice chunk of change for a fiscally wanton Congress desperate to plug some budget holes.

Broadband policy is another factor. Companies that win licenses in the auctions are expected to provide mobile high-speed data services, representing potent new competition for the cable/phone company duopoly that currently dominates broadband access.

SECURITY CONCERNS

National security looms large for others. They want first responders to control a clear swath of the airwaves, ensuring that the type of communications problems that occurred at the World Trade Center after the Sept. 11, 2001, terrorist attacks are not repeated.

Driving the debate is House Energy and Commerce Committee chairman, Rep. Joe Barton (R-Texas), who plans to soon introduce a bill that would terminate analog television broadcasting on Dec. 31, 2006 — an event few thought they would live to see.

Working closely with him is Rep. Fred Upton (R-Mich.), the House Telecommunications and the Internet Subcommittee chairman.

Barton’s bill could be risky if some essential elements collapse. Without analog signals saturating the airwaves, 73 million TV sets would become useless unless their owners obtained an over-the-air digital converter, a new DTV set or a connection to cable or direct broadcast satellite.

The idea that Congress would initiate a plan to end analog broadcasting within 20 months and possibly leave millions of TV sets behind strikes some Republicans and Democrats as not just unrealistic, but suicidal.

“We face, as I’ve said many times, our own political peril. Thus, I don’t believe a 2006 deadline is possible,” said Rep. Eliot Engel (D-N.Y.)

Added Rep. Mike Doyle (D-Pa.), “I cringe to think of the backlash that would come if we don’t get this right, which is why we need to get this right.”

Even free-market Republicans said Congress can’t assume consumers would be prepared for a digital-only world in such a short period of time.

“I think the market is probably the best place to resolve this issue. Consumers aren’t exactly ready for this transition,” said Rep. Greg Walden (R-Ore.)

Americans love their TV, and messing with it could inspire a backlash. Just a few years ago, Congress was stunned by the outpouring of anger generated by some of the 500,000 satellite-TV subscribers that were close to losing access to distant feeds of ABC, NBC, CBS and Fox programming.

“I think it’s going to be ugly,” said Josh Bernoff, vice president of Boston-based Forrester Research. “The real name for this hard date should be, 'The No More Television for Poor Old People Act.’ ”

Barton, though, is confident his plan can work without inspiring the Grey Panthers to stage a pitchfork-and-torches rebellion. He is not concerned about the 28 million analog TV sets in cable and satellite homes not connected to either pay TV service. Nor is he troubled about all 45 million analog sets in the 21 million homes that rely exclusively on over-the-air broadcasting.

He sees just one role for government: Protecting one analog TV for each off-air household that can’t afford a converter.

“I don’t think you need to put a converter box in every TV in every home that doesn’t have digital capability,” said Barton, himself the owner of 13 analog and 2 digital sets spread among three homes.

Barton’s bill will likely establish criteria to determine who deserves assistance, as well as the method of compensation. Financial support will likely be means-tested and could take a couple of forms — either a tax credit or a voucher system, akin to the one used to ration gasoline during World War II.

“We haven’t worked out the details of the subsidy and the means test,” Barton said.

Administrative issues are not unimportant, said Rep. Edward Markey (D-Mass.).

“We must remember the neither the [Federal Communications Commission] nor the Commerce Department has any experience in administering this type of program,” Markey said, noting that the number of U.S. households that are broadcast-only roughly equals the total number of households in all of France.

In a recent report, the FCC said subsidizing only low-income households with a single converter would cost the government $340 million, based on a box price of $67 and 5 million eligible households.

On the high end of the estimate scale, the FCC said supplying a $67 subsidy for a set-top, a DTV set or a pay-TV subscription for each TV household would cost $7.6 billion.

A February study from the Government Accountability Office, which juggled the same factors as the FCC, produced a cost range between $460 million and $10.6 billion.

The FCC’s estimates did not include the administrative costs of running the subsidy program, or the cost of providing technical assistance to consumers that don’t know how to wire a converter box. Nor were new antenna costs included — but those costs could be minimal, because current antennas can function with digital receivers.

FUNDS FROM AUCTION

Barton and Upton prefer to fund the subsidy with auction proceeds. Spectrum revenue could range from a few billion dollars to a whopping $17 billion, depending on market conditions, according to Barton’s estimates.

In the House, the scope of the subsidy is a raging debate. Although Barton and Upton favor a minimalist approach, Rep. Rick Boucher (D-Va.) wants to paint the whole canvas, with the federal government ensuring that all analog sets continue to work after the transition at no cost to the consumer.

Congress, Boucher said, can’t complete the transition on the cheap without producing an outcry.

“I don’t think any of us would expect these individuals to bear the burden of a transition that will turn their televisions into scrap metal,” Boucher said. “Anything less than supplying a government-funded converter box for each one of these 73 million sets is going to set off that predicted public furor.”

Barton’s rationale for moving quickly is rooted in the flaws he sees in current policy. Under a 1997 law, the transition won’t end in each market until 85% of TV households have digital reception equipment.

Barton argues that Congress failed to provide for the 15% without digital set-tops or DTV sets when the 85% test is met.

“I think that’s bad public policy,” he said, calling current law a “soft transition.” But a hard date, combined with consumer education and subsidies for the needy, would mean “life could go on,” Barton said.

Industry perspectives on Barton’s plan don’t vary much. His main opposition is the National Association of Broadcasters.

The cable industry supports a hard date, provided MSOs have the ability to downconvert digital-TV signals at the headend to avoid having to issue set-tops to millions of analog customers, some of whom might resist having to lease a new piece of equipment that adds to the coaxial bird’s nest next to their televisions.

“If we convert at the headend, no consumer will have to add a box or change a box,” Insight Communications Co. CEO Michael Willner said. Insight is the ninth-largest cable company in the U.S., with 1.3 million subscribers.

Both DirecTV Inc. and EchoStar Communications Corp., the two main DBS carriers, support a hard date.

Broadcasters consider Barton’s approach a disaster. They fear losing their over-the-air viewers if set-tops aren’t universal and worry that cable will castrate their digital signals by degrading them to analog at the headend, which would mean that consumers that had spent thousands of dollars on upscale DTV sets wouldn’t get HDTV programming.

SIMULCASTS ON CABLE

A hard date would mean no change in the status quo, because consumers with DTV sets would have access to local DTV signals carried by the local cable system, Willner said, a comment that suggests cable would voluntarily transmit a TV station’s signal in both analog and digital.

“It would be two streams going out at the same time,” Willner said.

Cable’s support is firm even though a hard date would expedite return of the analog spectrum for exploitation by companies that plan to compete with cable-modem service. It’s unclear whether the FCC will bar cable and phone companies from acquiring analog spectrum in markets that overlap with their networks.

Telecommunications-equipment manufacturers want a hard date. The Telecommunications Industry Association has told Barton and Upton that its members would likely be the lead vendors to companies that intend to use the analog broadcast spectrum for wireless broadband services.

“The absence of a date certain for completion of the analog to digital transition is delaying the provision of significant benefits to the American public,” TIA said in a Feb. 23 statement.

Although broadcasters don’t have any industry allies, they can likely rely on economic and demographic vectors to slow down Barton’s effort to force millions of consumers to spend discretionary funds to participate in the digital transition.

For example, half of broadcast-only homes earn less than $30,000 a year; 40% of Hispanic households are broadcast-only, the highest among all U.S. ethnic groups; and elderly citizens on a fixed income comprise a substantial percentage of broadcast-only viewers.

“Of the 21 million [broadcast-only] households, approximately 8.6 million include at least one person over the age of 50. Millions of these consumers are on fixed incomes and/or are in lower income brackets,” said American Association of Retired Persons board member Lavada DeSalles.

Forrester Research’s Bernoff cautioned Congress to think twice before imposing involuntary DTV equipment costs on consumers.

“I think that these politicians who are right now salivating over the billions of dollars that they can get for the analog spectrum, they may become a little less avid when they realize that there’s going to be a bunch of their constituents who are very unhappy about that,” Bernoff said.

Voluntary cooperation by the consumer-electronics industry is critical to the success of Barton’s plan.

Barton’s effort would likely stumble if CE companies fail to produce an affordable set-top. But Barton’s bill is not expected to require production of such boxes.

“That strikes me as a pretty ugly scenario for a Republican Congress to go down the road of forcing an industry that is generally not regulated to actually produce a product that it is otherwise unwilling to produce,” said Paul Gallant, a former FCC official now with the Stanford Washington Research Group.

NO BOX MANDATE

Barton indicated that a set-top mandate was unnecessary.

“I’ve been in discussions with some very major manufacturers and they absolutely assure me that if we tell them the market is there by a time certain, they’re going to put some of these converter boxes on the marketplace at a price the Wal-Marts and Radio Shacks are going to be very, very happy with.”

The record to date suggests that Barton’s faith in CE firms might be misplaced.

When DTV sets began to hit the market, they did not include over-the-air digital tuners, angering broadcasters and, ultimately, FCC chairman Michael Powell. Powell decided to force tuners into all but the smallest DTV sets by July 2007.

Since 1998, 16.1 million DTV sets have been sold, but only 1.5 million of them have tuners. Those numbers should improve as the FCC tuner mandate, which started to be phased in last year with larger sets, takes gradual effect.

The Consumer Electronics Association estimates that although 30 million analog sets were sold last year, 16.5 million will be sold in 2005.

A critical question remains for lawmakers: Despite commitments to Barton, what incentive do CE firms have to produce low-cost set-tops that potentially eat into demand for more expensive DTV sets?

In the fall, TTE Corp. is planning to sell a 27-inch RCA set with analog and digital tuners for less than $300. The units, which won’t be able to display HDTV pictures, would need a box to work with digital cable and DBS. The company also plans to sell a digital converter for less than $125, provided Congress adopts a hard date.

In this circumstance, does a consumer with an analog TV keep it running by buying a $125 set-top, which might be worth much more than the analog set itself, or spend $300 to upgrade to RCA’s DTV set? Barton and Upton leave that choice in the hands of the consumer.

Meanwhile, CEA opposes any attempt by Congress to subsidize boxes.

“We generally are not supportive of government handouts,” CEA spokesman Jeff Joseph said. “We, as a general rule, believe in the market.”

Consumers, Joseph said, will buy set-tops in bulk for second and third sets in bedrooms and kitchens, but buy the big DTV screens for living rooms.

“There will be a market for both,” he said. “Consumers will buy the integrated sets, the new sets, for their primary viewing. Those will be the big, huge sets in the family room and the home theater.”

Forrester Research’s Bernoff said the number of orphaned analog TV sets will be sufficiently large to spur production of affordable converters.

“Any electronics product with a guaranteed market will be manufactured,” he said.

Broadcasters are especially annoyed that TV-set makers have failed to affix labels to analog sets — which have a useful life of 15 years or longer — warning consumers about the DTV transition and the likely obsolescence of their analog TVs.

“I most definitely think the consumer-electronics [industry] should start labeling analog-only sets as perhaps being obsolete in a short period of time,” said Barrington Broadcasting Co. CEO James Yager, an NAB board member.

RadioShack Corp. CEO Leonard Roberts said it is inappropriate to provide warning labels without a hard date in the law.

“Such a label could only further confuse and mislead our customers,” Roberts said. “Right now, the actual cutoff date for analog broadcasting is a matter of pure speculation, making it difficult to advise customers or to know which products to carry.”

Upton, whose subcommittee will cast the first votes on Barton’s bill, agreed that a labeling requirement should be combined with a hard date.

“We are going to need a label for the analog sets that are in retail stores across the country,” Upton said. “We cannot do that label — whatever it will say — until we actually have the date certain established.”

In a surprise announcement, Barton said he thinks he has the votes to pass a 2006 hard date in the House, though Senate cooperation is problematic.

“I’ve got to have some help in the Senate,” Barton admitted. “You know, getting the Senate to agree [that] it’s daytime is sometimes an act of moral courage over there.”

Senate Commerce Committee chairman Ted Stevens (R-Alaska) recently indicated that he is not prepared to embrace 2006 until many questions have been answered.

“We do not want to have over-the-air broadcasters prematurely cut off, and we want to make certain that we are dealing with a public that has access to the digital sets,” Stevens said.

Stevens expressed doubt about government-subsidized set-tops. “I hope we don’t have to do that. I’d rather see manufacturers find some way to step into this,” he said.

If Barton’s bill were to arrive at the White House late this summer, it could provide the time necessary for CE firms to build and deploy boxes, but Congress would be cutting it close.

“Set manufacturers need at least 12 to 16 months leadtime to make a new product,” said Dr. Jong Kim, vice president of LG Electronics USA Inc.

Barton’s sunny forecast for the House didn’t seem to square with concerns expressed by members from within his own party.

DUELING PRIORITIES

Rep. Heather Wilson (R-New Mexico) questioned whether set-top subsidies would represent the best use of taxpayer money.

“If we use $2 billion of spectrum auction money to pay for boxes on top of TV sets, that’s $2 billion we’re not using to immunize kids or make sure kids can read or buy body armor for our soldiers,” she said.

Rep. Vito Fossella (R-N.Y.) said he was less concerned about the mechanics of the transition than with the rapid return of analog spectrum for first responders and emergency teams. “That should be, and must remain, paramount to any of these economic discussions,” Fossella said.

White House support for Barton is by no means assured. Last year, the Bush Administration opposed a provision that included a $1 billion subsidy for set-tops, claiming it was unnecessary to meet the goal of providing public safety groups with spectrum. Instead, the Bush administration called for analog spectrum fees on broadcasters, an old proposal that NAB lobbying has killed each time.

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