The Digital TV Transition: The Fairy Tale Continues

November 9, 2001 • TechKnowledge No. 26

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

The promise of high‐​definition digital television was evident more than 15 years ago, when industry and government officials began debating what the next generation of television signals would look like. There was one big roadblock on the path to prettier pictures, however: Where was the spectrum for DTV going to come from? Each broadcaster in America already has a six megahertz (MHz) spectrum allocation that is used to provide consumers old‐​fashioned analog TV signals. But broadcasters argued that they would need the government to give them an additional 6 MHz of high‐​quality spectrum to simulcast digital signals alongside analog broadcasts until Americans made the complete transition to DTV sets. Oh, and there was one more catch: The broadcasters didn’t want to pay for it. The amazing thing is, they didn’t.

Before the magnitude of this public policy fiasco can be fully appreciated, a bit more explanation is needed. According to the U.S. Census Bureau, there are roughly 2.4 TV sets per American household. The vast majority of these sets were built to receive only traditional analog transmissions. New DTV transmissions require that consumers purchase a digital ready TV set or a set‐​top box to pick up digital feeds. So if you want to receive those gorgeous new digital pictures, you’ll need to plop down some serious 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 new digital ready sets or converter boxes. This means the conversion from analog to digital TV is going to take several years, perhaps even decades, to complete. Because of this, television programmers are not providing much of their fare in high‐​definition digital formats. They argue that set makers aren’t bringing down costs fast enough or providing enough built‐​in digital converters to make it simple for consumers to make the transition. At the same time, the manufacturers blame the programmers for lack of content. And both parties blame the cable industry for not allowing digital programming to pass through their systems. This amounts to a vicious circle of finger pointing, with each side accusing the other of not doing its part to make the transition a success.

Meanwhile, a clock has been ticking since 1996, when Congress established a timetable for the DTV transition. The congressional plan “loaned” each existing broadcast station in America a second 6 MHz parcel of spectrum to begin the transition to DTV. Broadcasters would continue to transmit analog signals on their old 6 MHz analog slice of spectrum until 2006, or until 85% of Americans had made the DTV transition, and then return it to the FCC for auction.

While broadcasters claim they needed this spectrum to make a smooth transition, there is no reason they could not have purchased it on the auction block. Instead, the industry used its formidable lobbying 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 the spectrum for the digital cell phones we use today, the broadcasters were getting away with the high‐​tech equivalent of a Teapot Dome scandal by taking this mother lode of free spectrum. How did broadcasters get so many members of Congress to sign off on this unprecedented taxpayer rip‐​off? Their argument went as follows: Broadcasters have historically been given free spectrum in exchange for a promise to “serve the public interest” with high‐​quality programming 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 given an additional parcel of high‐​quality spectrum over which they can begin to make the transition to digital TV.

This “public interest” fairy tale represents the foundation upon which the broadcast industry’s entire history rests, but nobody honestly believes it anymore. Today, well over 80 percent of Americans opt to receive their television programming via satellite or cable, meaning broadcast stations have become just another set of channels in the universe of choices consumers can choose from. Regardless, lawmakers continue to buy in to the notion that broadcasters are “special” and need to be granted even more of an incredibly valuable resource at no expense. But having been “loaned” this valuable spectrum at no cost, broadcasters have been slow to roll out DTV. And given that 85 percent of Americans won’t have DTV by 2006, there is little chance that the broadcast industry will meet the deadline for returning the old analog spectrum. So, what can Congress do now? Here are four options, each of which has a downside:

Option #1 — Make them give back the new digital 6 MHz channel: It’s tempting to tell the broadcasters that we want them to return the “loaned” spectrum they planned on using for digital TV since they’re not doing much with it. But that would just replace one misguided industrial policy with another and would end up hurting equipment manufacturers and other related industries that aren’t at fault.

Option #2 — Make them give back the old analog 6 MHz channel on the predetermined timetable: It’s equally tempting to demanding that broadcasters stick to the schedule and return their old analog spectrum to the FCC by 2006 for re‐​auction, but there’s no chance that the broadcasters could meet the deadline. If broadcasters were forced to meet the deadline, they might pressure the government to give them “digital must carry” rights to cable and satellite networks, forcing those industries to pick up the tab. Worse yet, the federal government would be forced to subsidize household purchases of set‐​top digital converters to give slow adapters access to DTV on old analog sets. Such a high‐​tech entitlement seems like more trouble than it’s worth and might set a precedent for federal subsidization of future technologies.

Option #3 — A “Squatters’ Tax”: Some parties have advocated imposing an annual “squatters’ tax” on broadcasters who delay their transition plans to encourage them to return their old analog spectrum more rapidly. Normally such a scheme would reek of industrial policy planning, but a case could be made that normal rules should be thrown out in this case since broadcasters received this spectrum free of charge and aren’t doing much with it. But while this option might encourage broadcasters to move a little more rapidly, it’s not going to make the transition happen magically by the 2006 deadline.

Option #4 — Allow buyouts: The best option may just be to cut our losses and allow the broadcasters to keep what they’ve got, and more importantly, to sell it as they wish. This option would be difficult for some to swallow, as the broadcasters would be getting away with murder. But it would achieve the very important goal of freeing up the spectrum they’re hoarding by encouraging them to sell it through private auctions to those who value it more highly.

Hopefully, policymakers will have learned an important lesson from the DTV fiasco: Even the most well‐​intentioned industrial policy is doomed to fail if the will of consumers is ignored. Congress should have auctioned off this spectrum back in the mid‐​90s and let the chips fall where they may. DTV would probably have emerged, but through other means (satellite or cable), and other wireless providers would have snatched up the spectrum at auction and put it to better use. As it stands now, we’re left with the mother of all industrial policies, and very few pretty TV pictures to show for it.

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