Television’s Digital DilemmaPublished: August 28, 2002 in Knowledge@Wharton
If the struggle over digital television in the U.S. were made into a TV show, it would be a tale of intrigue, backstabbing and hidden motives. One thing’s for sure: It wouldn’t be an episode of “Friends.”
On August 8, 2002, the Federal Communications Commission issued a ruling requiring that all TV sets 13 inches or larger include tuners to receive over-the-air digital broadcasts by July 1, 2007. The digital tuners will begin to phase in on the largest sets, 36 inches and above, by July 2004. The FCC’s mandate is aimed at getting digital TV sets into the hands of consumers so broadcasters can meet a 2006 deadline for turning off analog TV signals.
But the battle at hand doesn’t just involve broadcasters and TV set makers, says Wharton public policy and management professor Gerald Faulhaber. The tuner mandate is part of an attempt to establish order over a technological vortex that has sucked in the government, broadcasters, cable companies, TV set manufacturers and Hollywood.
“The real signal is not for the broadcasters,” says Faulhaber. “Less than 15% of U.S. households get their primary [TV] distribution from broadcast television … It’s a signal from [FCC] chairman [Michael] Powell that he’s serious about this, and that he’s going to hold people’s feet to the fire.”
A Look at the Players
To an outsider, the world of digital television can feel like a scene from Alice in Wonderland. Opposing stakeholders claim utterly contradictory things, all of which are true. Here’s a guide to who’s claiming what:
Digital television, or DTV, is a method of transmitting television signals. While DTV signals will be clearer than analog, they won’t necessarily be higher-resolution than existing TV. Digital broadcasters will be required to do some sort of broadcasting in HDTV, or high-definition television, a set of standards offering super-crisp, DVD-quality images. A third of the nation’s TV stations already send out a limited schedule of HDTV programming, according to Dennis Wharton, spokesman for the National Association of Broadcasters.
But they can also choose to broadcast some of their programming in SDTV, or standard-definition television, and use the added efficiency of digital broadcasting for multicasting (expanding the number of channels available over the air), video-on-demand or data services.
Many Americans already enjoy digital cable or digital satellite, which offers a somewhat sharper picture than analog TV and hundreds of available channels. But they are not enjoying the full digital experience because they are usually watching digital cable on analog TV sets, which have lesser resolution than purely digital sets. Also, current cable systems use digital compression tactics that are invisible on current sets but would compromise a high-resolution image.
Presiding over all of this confusion, the government just wants its spectrum back. Once broadcasters switch to digital, they will be forced to give up 108 mhz of radio spectrum across the country. The FCC is already looking forward to handing out that spectrum to emergency services, two-way radios and mobile-phone companies. So the agency wants to do whatever will get DTV off the ground quickest. As David Farber, professor of telecommunications at Penn, puts it: “The [government] wants that spectrum back very badly.”
The TV set makers, represented by the Consumer Electronics Association, should be gung-ho about selling billions of dollars of new sets. But they are appalled at the tuner mandate, calling it a “TV tax,” and they blame the cable companies for not settling on a ‘plug and play’ standard that would let TV sets plug into digital cable lines without set-top boxes in the middle.
“We need digital cable equipment compatibility – the option for consumers to buy a high-definition set, take it home, plug it into the cable jack in their wall and turn it on just like they do today in the analog world,” CEA President and CEO Gary Shapiro says.
Two TV makers, Zenith and Thomson, have bucked the CEA’s front and chosen to support the tuner mandate, seeing more profits in DTV sets than potential losses in the cost of DTV tuners.
The cable companies, disingenuously, point out that they are already launching digital cable around the country with a solution based on various proprietary set-top boxes. The issue between the cable companies and TV manufacturers is power: Cable companies want to control their viewer ship by tethering them to rented set-top boxes, and TV manufacturers want to cut out the complexity and expense of set-top boxes and thus be able to sell more sets. (There isn’t much overlap between TV manufacturers and cable set-top box manufacturers; 75-85% of the set-top box market is controlled by Motorola and Scientific Atlanta, neither of which make televisions, according to research firm Cahners In-Stat.) Cable operators also oppose government mandates in general, according to National Cable and Telecommunications Association spokesman Mark Smith.
“The U.S. cable operators are … protecting their franchise,” says David Mercer, vice president of Strategy Analytics, a research firm in the UK. “Even if a common digital delivery system were in place, which it is not in the U.S., they would still ensure that they control the digital gateway.”
The broadcasters don’t want the cable companies to control whether digital TV reaches Americans – and they don’t want to spend billions converting their facilities to digital if nobody has sets to pick up the over-the-air digital signals. So they love the FCC mandate. “Not creating a [tuner] requirement puts broadcasters at the mercy of cable and satellite distributors … It’s really a battle over power,” says Joseph Turow, professor at Penn’s Annenberg School for Communication.
And then there’s Hollywood. Movie studios don’t want to release their films in high-resolution digital formats for fear consumers will try to save or copy them, experts say. It’s no coincidence that on the same day the tuner mandate appeared, the FCC offered a news release discussing potential copy-protection of digital TV broadcasts. Hollywood, notes Turow, “is really afraid of copying.”
A Game of Chicken
The situation with DTV is known in game theory as a “holdup problem,” according to Wharton management professor Louis Thomas. Although all the stakeholders want some form of digital TV, none wants to be the one to make the initial investments and mistakes.
“No one’s willing to go first without knowing what everyone else is going to do,” he says. The government has to come in and define universal standards, particularly when it comes to integrating cable tuners with TV sets. But the government also has to be serious about its deadlines. “The question is, how credible is the government’s statement?” Thomas asks. “If I’m a TV set manufacturer or broadcaster, I’m not sure it’s credible, and it becomes a game of chicken.”
According to Wharton management professor Keith Weigelt, the confusion over standards has stopped consumers from buying expensive digital TV sets. “If you are an early adopter and put in the equipment, and the standards change, it’s a tough problem.”
But in the end, does this whole mandate mean anything? Maybe not commercially – but it certainly does politically. Mercer has seen over-the-air DTV crash and burn in the UK with the spectacular collapse this year of mega-broadcaster ITV Digital. If digital terrestrial broadcasting didn’t work in the UK, where only 40% of households subscribe to cable or satellite, it has even less of a chance in the U.S., he says. “Digital terrestrial television can never be commercially viable … It will fail because it cannot compete with cable and satellite.”
Faulhaber agrees. Cable companies have already won the battle for Americans’ sets, he says, and over-the-air digital TV won’t change that balance of power. “The cable companies are a monopoly and it’s really unpleasant already. Broadcast is not very much of a competitor.”
But, according to Farber, the broadcast mandate is very important politically. A good chunk of the American countryside is dependent on over-the-air broadcasts, and rural America is politically powerful. “If they shut off free television,” he says, “the screams of agony in rural America would be loud and politically noisy.”
Meanwhile, the FCC broadcast tuner mandate will only be the beginning of the agency’s moves to establish law and order in the land of DTV, notes Faulhaber. “Hidden in the [FCC’s] order,” he points out, “is a promise saying there will be another proposed ruling coming shortly about cable and satellite.”