WASHINGTON -Local-TV stations received a gold mine in free spectrum to launch digital service and offer the very best in sound and picture quality to consumers connected to state-of-the art television sets.
But more than three years into the transition, broadcasters are still searching for a business model to ensure that their fortune in free frequencies won't end up a money pit.
As TV stations are fast learning, the economic realities of digital TV are daunting. Some 1,400 commercial TV stations need to spend billions of dollars by May 2002 to upgrade their facilities, with full knowledge that the delivery of sharper pictures and clearer sound will do nothing to generate additional revenue from the industry's sole source of income-advertising.
Even if they split their signals four or five ways, the economics still don't work in a static ad market.
In a bid to make digital TV begin to pay for itself, dozens of broadcasters have decided that the quickest route to cost recovery isn't high-definition television but data broadcasting at sizzling speeds to 50 million computer owners desperate to avoid Internet congestion.
At least two data companies, both based in California, are up and running: iBlast and Geocast Network Systems Inc. Both will receive a dedicated slice of a TV station's digital bit stream to saturate markets with rich media content for display on computers. And both plan to provide consumers free access to movie trailers, software, video games, books and music.
In the Telecommunications Act of 1996, which gave the Federal Communications Commission discretion to award the digital licenses to broadcasters, Congress made it clear that TV stations had the right to use the new airwaves in a flexible manner, including for data provision.
Because iBlast and Geocast require a substantial portion of a station's 19.4-megabit data stream, their services are raising questions about whether data would be so bandwidth intensive as to preclude HDTV-for some, the chief reason Congress wanted the spectrum in the hands of commercial broadcasters.
Geocast and iBlast are businesses that likely merit the close attention of the cable industry, especially in the context of FCC rules that may require cable operators to carry analog and digital broadcast signals in their entirety.
The National Association of Broadcasters, for example, is urging the FCC to require cable operators to pass through the entire bit stream, even if it includes data services that are not intended for display on TV screens. The agency has taken no action on the carriage issue, even though it's been under review since 1998.
On another level, iBlast and Geocast possibly represent a threat to the traditional network-affiliate relationship. None of the "Big Four" networks-ABC, CBS, NBC or Fox-has entered into an agreement with iBlast or Geocast. With only so much spectrum to go around, the Big Four might be shut out of the data game when they finally get around to fashioning their strategies.
Based in Beverly Hills, Calif., iBlast was founded by 12 broadcast and media companies, including Tribune Co., Cox Broadcasting, Gannett Co. Inc., the Washington Post Co. and the New York Times. The company presently has deals with 225 TV stations with signals that reach 90 percent of U.S. homes.
iBlast needs to install TV station facilities that collect and feed data to transmitters. Although the company would not disclose the cost, the company said that outlay was almost insignificant compared to the $10 million some stations will need to pay to erect new towers, install digital transmitters, buy cameras and overhaul studios.
iBlast said the up-front cost for consumers will be minimal-between $50 and $100 for a small antenna that connects to the computer. And the antenna is the only cost on the consumer end, because iBlast intends to provide its content for free.
"Our goal is for the entire process for the consumer to not cost more than $50 and, if possible, we want to subsidize it as close to free as possible," iBlast vice president Ken Solomon said in an interview.
So how does iBlast make money if its service is free and an assault on the local advertising market is off limits?
The new revenue stream would come from content providers that see the service as the fastest and cheapest method to distribute their products to a mass audience, said Solomon.
Movie studios will pay for distribution of their trailers, software companies for transmission of their latest upgrades and music companies for broadcast of their hottest CDs.
Today, rich-media distribution over the Internet is both slow and expensive. Solomon said iBlast solves that problem for its content providers, who in turn solve broadcasters' problem of making the digital spectrum a paying proposition.
"We've given broadcasters and television stations an enthusiastic reason to move forward quickly, because there is revenue," Solomon said.
CONTENT ON DEMAND
On the Internet today, consumers have access to about 5 million Web pages, a Niagara of data that iBlast couldn't possibly replicate in a one-to-many broadcast model with no proprietary return path.
Despite the profusion of Web content, Solomon said 99 percent of Internet traffic flows to 1 percent of Web sites. iBlast can capitalize on that traffic flow, because two affiliates in a market can flood the consumers with 150 gigabits of information a day-which translates into 80,000 minutes of music, thousands of movie trailers and hundreds of full-length movies and games stored on computer hard drives.
"We can make available to you, waiting for you when you get home, what you want," Solomon said. "There is a stratum of content that represents the vast majority of traffic in every area."
Although iBlast service will occupy between 4 and 7 megabits per second, Solomon claimed there would be peaceful coexistence between iBlast and HDTV, even if a TV station opts for the highest HDTV resolution, called 1080i.
"You can do every network show in high-definition and still do iBlast. I can guarantee you categorically, because no one would have signed a contract," Solomon said.
Tribune Broadcasting, an iBlast partner that has contributed 22 TV stations to the venture, insisted that iBlast would take a backseat to HDTV.
"In the way that our licensing agreement is, it provides the stations with the flexibility to absolutely do what they need to do to honor their network high-definition programming commitments or their public-service high-definition programming commitments," said Lisa Wiersma, vice president of Tribune Ventures.
Even though iBlast is counting on off-air antennas to access consumers, Solomon said the FCC should require cable operators to pass through iBlast's data.
"We think they should carry the full 19.4 megabits. If they don't for any reason, which we hope doesn't happen, we deliver iBlast through the air," Solomon said.
The cable industry is opposed to carrying digital-TV signals until broadcasters have returned their analog spectrum. And the industry has said that under no circumstances are operators required to carry data services outside voluntary agreements.
While cable has to keep an eye on data broadcasters, the major TV networks would appear to need to show equal vigilance.
Under FCC rules, the four major networks are barred from owning TV stations whose signal reaches more than 35 percent of TV households. If the Big Four networks want to launch data services with a national footprint comparable to iBlast's, they will need TV station partners to reach the remaining two-thirds of the country.
Time is not on the networks' side. iBlast has signed exclusive seven-year agreements with 60 CBS affiliates and between 40 and 60 deals with affiliates of ABC, NBC and Fox.
Tribune, for example, owns the ABC affiliate in New Orleans. That likely means ABC would have problems providing data services in the Big Easy without the cooperation of the local affiliate.
"That's one way you could look at it," Tribune's Wiersma said. "They may have some plans of their own that they haven't told us about."
iBlast has not ruled out bringing the network-owned stations into the consortium, Solomon said.
"We are open to the networks contributing their O & Os to iBlast. It's not that we have an aversion. It's that we haven't been able to find a way to strike an agreement with them," he said.
According to broadcast-network sources, the "Big Four" have been reluctant to throw money at data until they have some idea whether there's money to be made. They said they were not concerned about losing first-mover advantage, claiming they could jump into the data market when they feel confident the business model is sound.
GEOCAST WANTS CABLE
While iBlast's plan for now involves only TV stations, rival Geocast wants to reach beyond broadcasting and strike deals with cable operators and programmers, as well as direct-broadcast satellite providers.
Based in San Jose, Calif., Geocast has not assembled as large a broadcast footprint as iBlast. Geocast TV-station partners include Belo Corp., Hearst-Argyle Television Inc. and Allbritton Communications Co., whose outlets reach about 40 percent of U.S. homes. Other backers include Liberty Media Group and Kleiner Perkins Caufield & Byers.
Geocast's TV station partners have agreed to set aside between 3 mbps and 6 mbps for the data service.
Geocast expects to spend about $400,000 to outfit a station with its technology. Computer owners, who would get Geocast service for free, would need to buy a $300 box that can store 40 gigabits of content. The company is targeting the same pool of content providers as iBlast.
Unlike iBlast, Geocast expects some advertising support, and hopes content providers will start paying when the service is available to the majority of U.S. households.
"It depends on how many users we have. It's a revenue-sharing agreement all the way along the line," said Mark Simmer, Geocast's senior vice president of marketing and programming.
Geocast wants to work with cable operators, said Simmer, claiming the company is not supporting mandatory cable carriage of its service.
"Our approach is that we don't want to bet our entire company on something that is based on a government regulation issue," he said. "It's clearly going to be difficult for broadcasters-we've heard this from a number of sources-to get the entire 19.4 megabits carried."
Although Geocast has no deals with cable operators, it announced in October an agreement with EchoStar Communications Corp. that effectively gives Geocast the national scale of iBlast. The DBS service is launch in July 2001.
"The DBS side of our business is going to be about 30 percent of our business," Simmer said, adding that the satellite service will include a monthly fee, though the initial box cost will be much lower for long-term subscribers.
Geocast does not expect the broadcast-delivered service to compete with the satellite- delivered version, Simmer said. He said Geocast broadcast-service customers would not be authorized to receive the product provided by EchoStar's satellites.
At the same time it is partnering with Geocast, EchoStar is an investor in StarBand Communications Inc., a two-way, satellite-delivered broadband Internet-access service. With a single dish, StarBand subscribers can pay $99 a month for Internet service and 150 video channels from EchoStar. Current EchoStar subscribers cannot use their dishes to access StarBand.
Jim Stratigos, EchoStar's vice president and general manager, said Geocast and StarBand are not rivals because the former is a one-way broadcast service and the latter a two-way interactive service.
"In fact, it's very complementary," he said.
Geocast could become a plausible alternative for cable networks that can get only limited distribution on cable systems, Simmer said. Geocast not only provides an alternative outlet but also the means of distributing branded product in a cost-effective manner-perhaps in two-hour segments, rather than an around-the-clock format.
"The concept of what a network is changes with our service," Simmer said. "So that's a huge opportunity for all of these new media companies like Oxygen and many other that are trying to reach this new interactive user."
But Oxygen Media chairman Geraldine Laybourne said recently her company's goal remains seeking the widest possible distribution on cable systems.