The Rocky Road to Digital TV

The grand plan to transition the U.S. to digital television is hampered by a set of stubborn interlocking chicken-and-egg problems. Recently, the FCC attempted to bring some clarity to the picture. It remains murky. And nobody is happy.
Manufacturers aren’t happy because they aren’t selling many high definition TV sets. They’re not selling because they’re frightfully expensive and there isn’t much high definition TV programming to receive. With so few high definition TV sets out there, broadcasters aren’t eager to go to the expense of airing high definition TV programming. Consumers aren’t buying expensive high definition TV sets because broadcasters aren’t airing much high definition TV programming. And without significant consumer demand, the cost of high definition TV sets won’t come down. On top of all this, providers of the next generation of wireless services (the ones that are supposed to have an even greater impact on our lives than the Internet!) aren’t happy because they want the spectrum that the broadcasters are to relinquish as they complete the transition to digital TV. But the government won’t get that analog spectrum back until the transition is nearly complete. (If things weren’t already complicated enough, the FCC plans to auction off most of that spectrum by 2002, even though it won’t be returned until the end of 2006 or, perhaps, later.) Taxpayers aren’t happy because the government can’t raise the $30 to $70 billion that auctions are expected to yield unless the wireless industry believes the government will be getting the analog spectrum back from broadcasters in the reasonably foreseeable future. And Congress is unhappy because it’s counting on those billions in its long-term budget projections.

A refresher on television technology and a little history may help bring all this into focus.

First a refresher. The analog-TV system currently in place in the U.S. is based on a not-so-sophisticated compression technique called "interlace" that was first used in the U.S. in 1928 and is used in analog-TV systems throughout the world. The technique is "not-so-sophisticated" because it compresses TV pictures to permit transmission but never restores the pictures to their original resolution. The TV camera captures an image, consisting of 480 horizontal lines, every 1/60th of a second. But the chunk of broadcast spectrum allocated to each analog-TV channel isn't wide enough to transmit the full 480-line image 60 times a second, so the signal is compressed by discarding half the lines. The resulting image, not surprisingly, is noticeably less crisp than what you'd get if all 480 lines were transmitted.

To get a sense of the resolution that's lost when half the lines that make up the image are dropped, compare the image you get on your interlace TV to the crisper image you get on your personal-computer monitor. The imaging system used on your computer monitor, called "progressive," displays all the lines that make up the image.

Now some history. In the early 1980s, TV-set manufacturers developed the first high-definition TV system in Japan. That system was an analog one that used interlace compression but added more lines of resolution to obtain crisper pictures. The sets made to receive these enhanced signals were big and very expensive. Though the sets displayed better pictures than standard analog sets, size and price discouraged consumers.

In 1986 U.S. broadcasters, concerned because the FCC was about to give away spectrum in the TV band to fire, police and rescue services, invited the Japanese to demonstrate high-definition TV to Congress. As a result, the Federal Communications Commission established the Advisory Committee on Advanced Television Services, or ACATS, to recommend an American high-definition TV system. The FCC also deferred dedicating to emergency services any of the TV spectrum that might be needed to implement such a system.

For eight years ACATS discussed, debated and negotiated. It wrestled with whether the new American high-definition TV system should be analog or digital. A digital system has the advantages of crystal-clear pictures and allowing multiple standard-definition programs (programs with the resolution we get with the existing analog system) to be transmitted on each channel that under an analog system could carry only one signal. And it wrestled with various TV-standards issues, such as how the picture would be compressed, how it would be displayed (video formats) and how it would be transmitted. Ultimately, ACATS recommended a digital system. But for a number of reasons, some political, it didn't endorse a single video format. Rather, it recommended 14 different formats, including two different high-definition formats -- 1080 lines interlace (referred to as "1080i") and 720 lines progressive (referred to as "720p") -- and two standard-definition TV formats -- 480 lines interlace (the existing format, referred to as "480i") and 480 lines progressive (referred to as "480p"). In addition, each format had variations, such as the current 4-by-3 picture-aspect ratio (width by height) and a new 16-by-9 widescreen picture. An alliance of TV manufacturers and industry suppliers, however, selected one high-definition format to promote to the public -- 1080i. That format is advertised as "HDTV."

The FCC adopted the ACATS recommendation on how to implement a digital system, but it declined to specify a single video format. Instead, it punted, concluding that the marketplace should decide. The FCC granted each television broadcaster access to a second channel to use throughout the transition to digital TV, so that it could continue to broadcast analog signals on one channel while broadcasting the new digital signals on another. The FCC also established a timetable based on market size and type of broadcaster for inauguration of digital-TV service, and declared that U.S. analog-TV broadcasting would cease by the end of 2006, at which point one of the two channels used by broadcasters during the transition would be returned to the government.

Of course, ending analog-TV broadcasting won't be so easy. As of 1998, the last year for which we have accurate figures, there were 250 million analog-TV sets in the U.S., plus an additional 150 million analog receivers in VCRs. That's about $50 billion worth of equipment that will be essentially useless when the plug is pulled on analog-TV broadcasting.

Understandably, Congress couldn't stay out of the politically sensitive decision to shut down analog TV. It passed a law in 1997 easing the 2006 transition deadline. Under the law, a TV station will be permitted to continue analog broadcasting beyond 2006 (and to retain the extra channel it received from the FCC for the transition) if less than 85% of the households in its market have at least one of the following: (1) digital TV delivered by cable or satellite, (2) a digital-TV set or (3) a box that converts digital-TV signals for viewing on an analog set. But this may not be the end of it. Even if penetration reaches 85%, it may be politically impossible for the government to require broadcasters to cease analog broadcasting and return the transition channel.

Imagine it is 2006. Los Angeles just meets the 85% hurdle. If analog-TV broadcasting is shut off, 15% of the households will receive no TV service since their analog sets will no longer work. This means that roughly 1.5 million people won't be able to watch over-the-air TV. In addition, households with cable or satellite TV have, on average, two unconnected TV sets. So an additional 16.8 million TV sets in Los Angeles would be rendered useless. Not a pretty picture.

Manufacturers have been selling HDTV receivers in the U.S. since August 1998, but through November 2000 had managed to sell only 66,626 units. At that rate, HDTV sales will contribute little to meeting the 2006 deadline. (By contrast, in 2000, they sold more than 30.3 million analog color TVs.) Back to the chicken-and-egg problem. The manufacturers complain that little HDTV content is being broadcast (some of which they have to subsidize). Though 173 stations are now capable of airing HDTV programming, only CBS, among the major commercial networks, regularly broadcasts HDTV programming during prime time. (ABC offers two HDTV movies each week.) HDTV sets are large -- 34 inches to 54 inches -- and the improvement in resolution isn't nearly so dramatic on smaller sets. And they are very expensive: $2,000 to $10,000, not including the set-top box required to receive HDTV signals (add another $750 to $1,000) and, perhaps, a roof-top antenna capable of being rotated to allow reception.

Programmers aren't eager to invest in the new equipment needed to create HDTV programming since few households can view HDTV broadcasts. And early experience suggests that digital-TV signals are more difficult to receive than analog signals, particularly in dense urban areas. (A recent study by major TV broadcasters found that neither the U.S. nor the European DTV transmission standard worked very well.) Moreover, broadcasters in some cities are having trouble finding sites for the new towers they need to transmit HDTV signals. (Washington, D.C., recently halted construction of the huge tower being built by WDCA, the local UPN affiliate.) For their part, cable operators are reluctant to devote valuable channel positions to HDTV signals that duplicate the analog signals of local broadcast stations they're already carrying. At a recent meeting, the FCC faced the contentious question of whether to force cable operators to carry DTV signals before 2006. Broadcasters claimed it would speed up transition. Cable operators claimed mandatory carriage was unconstitutional and that carrying both an analog and a digital channel for each TV station would force them to drop other cable programs viewers wanted. In a decision seen as a victory for cable operators but a defeat to digital transition, the FCC said that it would not require dual carriage. It said that if a TV station returned its analog channel to the FCC, it could force a cable operator to carry its digital channel. The FCC said, however, that it hadn’t entirely ruled out dual carriage in the future and asked for more information from the various affected industries.

Meanwhile, consumers are reluctant to spend lots of money on HDTV sets. There are good analog sets available for well under $500, there's precious little HDTV programming available and there's still a possibility that standards will be changed, rendering any equipment they buy obsolete. (Indeed, some high-end customers have been buying "HDTV-ready" sets not for TV, but rather to get better resolution on their DVD movies.)

Is there a fix? In a letter to Congress sent as he was leaving the FCC, Chairman William Kennard suggested several. He would have Congress reconsider the 85% "loophole" allowing broadcasters to hold onto the analog channel after 2006, tax broadcasters that fail to return the transition channel in 2006 and require TV makers to include DTV converters in all new analog sets.

The first two appear impractical. If Congress reconsiders the so-called loophole it might just get bigger, allowing the transition to digital TV to drag on even longer. (Think of the political pressure that could result from the Los Angeles example.) And Congress won't likely tax any broadcaster that has complied with the FCC timetable for launching DTV, even if it hasn't returned the transition channel by 2006. Mandatory converter capability is probably the most practical. Not surprisingly, set manufacturers are unhappy with this proposal. They say analog-TV prices will increase by hundreds of dollars. But, with roughly 30 million sets being sold each year in the U.S., the cost of adding a DTV receiver to each one should drop quickly. So, the FCC recently asked for public to comment on whether it should use its authority to require that all analog sets have the capability to receive and display DTV signals in the analog format. Should it start only with large-screen TVs? It is unlikely the FCC will decide this issue soon. Even if it imposes such a rule, it will have to give manufacturers time to incorporate the components into their sets. It is unlikely any rule would have an effect on the marketplace until Christmas 2003.

Unfortunately, the transmission tests recently completed showed that digital-TV signals can't easily be received with a standard indoor antenna. Therefore requiring that every TV come with a digital converter will not be sufficient to ensure that digital TV reaches 85% of all U.S. households. Some 23% of households don't subscribe to cable or satellite TV and must be able to receive digital signals over the air. (And the average household with cable or satellite service has two TVs that aren't connected and receive only over-the-air signals.) While the tests confirmed that the typical viewer must have a 30-foot, hi-gain directional TV antenna to receive DTV signals, manufacturers have promised new chips that will “solve” the problem by Christmas 2003.

How can sales of digital-TV sets be stimulated? First, there is likely to be little growth in market penetration until set prices are $500 or lower for 27-inch models. The rapid adoption of DVDs and consumer reaction to 480p images suggests that it may be possible to sell more affordable 480p DTV sets in large quantities and drive prices under $500 sooner rather than later. If shows were to be broadcast in DVD-quality 480p -- so far only the Fox Network has shown a serious interest in this format -- sales of less-expensive 480p digital-TV sets would be further boosted.

In theory, at least, it may be possible to get digital TV into the vast majority of U.S. households by 2006: if all new analog TVs come with digital converters, if manufacturers produce inexpensive digital converters that allow consumers to watch digital programming on their old analog TVs, if the prices of digital TVs drop dramatically as sales increase, if cable and satellite services cooperate with broadcasters and programmers to get more digital programming into homes. But that's a lot of ifs. Given the recent revelations about reception problems, the length of time it will take to resolve these problems, the FCC’s decision not to require carriage of digital TV on cable, and its decision to postpone requiring digital tuners in analog sets, a complete transition to digital TV by the end of 2006 seems pretty unlikely.

Though the world certainly won't come to an end if average Americans can't get crisper pictures on their TVs for a few more years, there's a lot riding on a prompt and successful transition to a digital system. In balancing the budget in 1997, Congress counted on the money the government would get from auctioning off, presumably to the wireless industry, the second channel being used by each broadcaster throughout the transition. Wireless-services providers are very eager to get their hands on this prime spectrum. And consumers are eager to get the services that the wireless providers want to provide using this spectrum. But the spectrum won't be available until the transition to digital TV is complete in a given broadcast market.

That hasn't stopped the FCC, at the instruction of Congress, from proceeding with the auctions, which begin this spring. Now imagine the wireless provider poised to bid. It knows that this is prime spectrum, the best it's ever likely to see. But it doesn't know whether the spectrum will be available in 2006, as originally scheduled, or years later, and it needs additional spectrum soon. And if the company's the successful bidder, it will have to pay for this spectrum within months, even though it won't have access to it for a period the duration of which it can't predict. This uncertainty about when the spectrum slated for auction will be available, coupled with the requirement that it be paid for immediately, will almost certainly cause it to be sold at a significant discount to its true value. Congress, in its haste to balance the budget with money it didn't have, may wind up having given away tens of billions of dollars that might have been collected if wireless-industry bidders could have been more certain about when they'd get what they were buying. Can Congress and the FCC orchestrate a prompt and predictable transition to digital TV (and get taxpayers top dollar for a valuable public resource), or is it already too late to unscramble this egg? Stay tuned.

By Jon Hart and Jim Burger

"An earlier version of this piece was published on http://wsj.com, the interactive edition of The Wall Street Journal, as part of Mr. Hart's regular column, @Law, a review of legal issues impacting the new economy."

Jon Hart is a member law firm of Dow, Lohnes & Albertson (www.dlalaw.com) in Washington, D.C., practicing in the firm's media and information-technologies group. He specializes in the representation of new-media and technology companies on a broad range of commercial, operational, transactional and content matters. He can be reached with comments at jon@dlalaw.com

Jim Burger is also a member of Dow Lohnes practicing in the media and information technologies group. He practices at the intersection of intellectual property and technology law. The views expressed here are those of the authors and don't necessarily represent the views of other Dow Lohnes lawyers or of the firm's clients.