The Digital TV Transition: The Fairy Tale Continues

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Americans love their television sets, and the idea of bringingus even more couch potato fare in sharper color, higher resolution,and better sound has driven the broadcasting industry's ongoingefforts to bring digital TV (DTV) to our living rooms. The questionis, what's taking them so long?

The promise of high-definition digital television was evidentmore than 15 years ago, when industry and government officialsbegan debating what the next generation of television signals wouldlook like. There was one big roadblock on the path to prettierpictures, however: Where was the spectrum for DTV going to comefrom? Each broadcaster in America already has a six megahertz (MHz)spectrum allocation that is used to provide consumers old-fashionedanalog TV signals. But broadcasters argued that they would need thegovernment to give them an additional 6 MHz of high-qualityspectrum to simulcast digital signals alongside analog broadcastsuntil Americans made the complete transition to DTV sets. Oh, andthere was one more catch: The broadcasters didn't want to pay forit. The amazing thing is, they didn't.

Before the magnitude of this public policy fiasco can be fullyappreciated, a bit more explanation is needed. According to theU.S. Census Bureau, there are roughly 2.4 TV sets per Americanhousehold. The vast majority of these sets were built to receiveonly traditional analog transmissions. New DTV transmissionsrequire that consumers purchase a digital ready TV set or a set-topbox to pick up digital feeds. So if you want to receive thosegorgeous new digital pictures, you'll need to plop down someserious cash. New DTV sets still cost a couple of thousand dollars,and set-top converters can cost hundreds.

Consequently, not everyone is rushing out to purchase newdigital ready sets or converter boxes. This means the conversionfrom analog to digital TV is going to take several years, perhapseven decades, to complete. Because of this, television programmersare not providing much of their fare in high-definition digitalformats. They argue that set makers aren't bringing down costs fastenough or providing enough built-in digital converters to make itsimple for consumers to make the transition. At the same time, themanufacturers blame the programmers for lack of content. And bothparties blame the cable industry for not allowing digitalprogramming to pass through their systems. This amounts to avicious circle of finger pointing, with each side accusing theother of not doing its part to make the transition a success.

Meanwhile, a clock has been ticking since 1996, when Congressestablished a timetable for the DTV transition. The congressionalplan "loaned" each existing broadcast station in America a second 6MHz parcel of spectrum to begin the transition to DTV. Broadcasterswould continue to transmit analog signals on their old 6 MHz analogslice of spectrum until 2006, or until 85% of Americans hadmade the DTV transition, and then return it to the FCC forauction.

While broadcasters claim they needed this spectrum to make asmooth transition, there is no reason they could not have purchasedit on the auction block. Instead, the industry used its formidablelobbying muscle to persuade Congress to fork over, free of charge,an estimated $10 billion to $100 billion worth of "beachfront"spectrum that could have been sold for many other important uses.So while telephone companies were spending billions to buy thespectrum for the digital cell phones we use today, the broadcasterswere getting away with the high-tech equivalent of a Teapot Domescandal by taking this mother lode of free spectrum. How didbroadcasters get so many members of Congress to sign off on thisunprecedented taxpayer rip-off? Their argument went as follows:Broadcasters have historically been given free spectrum in exchangefor a promise to "serve the public interest" with high-qualityprogramming including local news, weather, and other fare.Therefore, to expand this "public trustee model" of free,over-the-air broadcasting, every local affiliate needs to be givenan additional parcel of high-quality spectrum over which they canbegin to make the transition to digital TV.

This "public interest" fairy tale represents the foundation uponwhich the broadcast industry's entire history rests, but nobodyhonestly believes it anymore. Today, well over 80 percent ofAmericans opt to receive their television programming via satelliteor cable, meaning broadcast stations have become just another setof channels in the universe of choices consumers can choose from.Regardless, lawmakers continue to buy in to the notion thatbroadcasters are "special" and need to be granted even more of anincredibly valuable resource at no expense. But having been"loaned" this valuable spectrum at no cost, broadcasters have beenslow to roll out DTV. And given that 85 percent of Americans won'thave DTV by 2006, there is little chance that the broadcastindustry will meet the deadline for returning the old analogspectrum. So, what can Congress do now? Here are four options, eachof which has a downside:

Option #1 - Make them give back the new digital 6 MHzchannel: It's tempting to tell the broadcasters that wewant them to return the "loaned" spectrum they planned on using fordigital TV since they're not doing much with it. But that wouldjust replace one misguided industrial policy with another and wouldend up hurting equipment manufacturers and other related industriesthat aren't at fault.

Option #2 - Make them give back the old analog 6 MHzchannel on the predetermined timetable: It's equallytempting to demanding that broadcasters stick to the schedule andreturn their old analog spectrum to the FCC by 2006 for re-auction,but there's no chance that the broadcasters could meet thedeadline. If broadcasters were forced to meet the deadline, theymight pressure the government to give them "digital must carry"rights to cable and satellite networks, forcing those industries topick up the tab. Worse yet, the federal government would be forcedto subsidize household purchases of set-top digital converters togive slow adapters access to DTV on old analog sets. Such ahigh-tech entitlement seems like more trouble than it's worth andmight set a precedent for federal subsidization of futuretechnologies.

Option #3 - A "Squatters' Tax": Some partieshave advocated imposing an annual "squatters' tax" on broadcasterswho delay their transition plans to encourage them to return theirold analog spectrum more rapidly. Normally such a scheme would reekof industrial policy planning, but a case could be made that normalrules should be thrown out in this case since broadcasters receivedthis spectrum free of charge and aren't doing much with it. Butwhile this option might encourage broadcasters to move a littlemore rapidly, it's not going to make the transition happenmagically by the 2006 deadline.

Option #4 - Allow buyouts: The best option mayjust be to cut our losses and allow the broadcasters to keep whatthey've got, and more importantly, to sell it as they wish. Thisoption would be difficult for some to swallow, as the broadcasterswould be getting away with murder. But it would achieve the veryimportant goal of freeing up the spectrum they're hoarding byencouraging them to sell it through private auctions to those whovalue it more highly.

Hopefully, policymakers will have learned an important lessonfrom the DTV fiasco: Even the most well-intentioned industrialpolicy is doomed to fail if the will of consumers is ignored.Congress should have auctioned off this spectrum back in themid-90s and let the chips fall where they may. DTV would probablyhave emerged, but through other means (satellite or cable), andother wireless providers would have snatched up the spectrum atauction and put it to better use. As it stands now, we're left withthe mother of all industrial policies, and very few pretty TVpictures to show for it.