The DTV Transition in the US Evan Kwerel Senior Economic Advisor Federal Communications Commission JSICR International Communications Forum, Tokyo November 7, 2003

Evan Kwerel The DTV Transition in the US -2- Disclaimer n The opinions expressed in this talk are those of the author and do not necessarily represent the views of the FCC or any other members of its staff

Evan Kwerel The DTV Transition in the US -3- Digital Migration n All communications are going digital u Video, voice and data u Wired and wireless n Importance of digital transition for broadcast TV u More and better services for consumers/viewers u Efficient use of the spectrum Analog World Digital World Narrowband Broadband Transition

Evan Kwerel The DTV Transition in the US -4- Where we are: DTV Distribution n Broadcast u 1,230 DTV stations in operation (73% of total DTV allotments) u 96% (114) of the 119 top-4 network affiliates in markets 1-30 u 77% (921) of remaining 1196 commercial stations u 52% (195) of the 373 noncommercial and educational stations n Cable u 60 million homes passed with HDTV service n DBS u All digital format u Some HDTV u 20.4 million subscribers

Evan Kwerel The DTV Transition in the US -5- Where We Are: DTV Content n High definition u Increasing HD content u Broadcast prime-time F All major networks (Fox just committed) u Cable and satellite networks F Sports (e.g., ESPN) F Movies (e.g., HBO, Showtime) F Original content (e.g., Discovery) n Multicasting u Some innovative broadcast DTV multicasting (e.g. PBS)

Evan Kwerel The DTV Transition in the US -6- Where We Are: DTV Equipment n Cumulative US sales of DTV equipment (mid 2003) u Total units: 6.8 million u DTV displays:5.9 million u Tuners (Set-top boxes + integrated receivers)0.9 million n DTV sales small relative to analog TV receivers u 25 million analog-only TV sets sold in US per year u 250 million analog-only TV sets in US households n FCC ATSC Tuner Mandate – Adopted Aug u Phase-in schedule u 100% of sets 13 and larger by 7/1/07

Evan Kwerel The DTV Transition in the US -7- Key Pending Issues n Digital Rights Management u Content owners reluctant to make digital content available without protection against unauthorized copying and retransmission u DRM critical to DTV penetration because digital content (broadcast, cable, DBS, DVD) key driver of DTV adoption u DRM policy seeks to balance incentives for content rights owners to produce and make available digital content with benefits to consumers of copying and sharing content

Evan Kwerel The DTV Transition in the US -8- Key Pending Issues n Digital Rights Management – FCC Actions u Plug and play F Addresses DRM for pay TV content (cable and DBS) as well cable-CE compatibility F Maintains the chain of custody for encrypted programming F FCC adopted rules September 10, 2003 u Broadcast flag F Seeks to limit Internet retransmission of digital broadcast programming F FCC expected to make decision shortly

Evan Kwerel The DTV Transition in the US -9- Key Pending Issues n Reclaiming TV spectrum u Congress set deadline for analog switch off at December 31, 2006 unless household penetration of DTV reception equipment is less than 85% u When will household penetration of DTV reception equipment reach 85% criterion? How will it be defined? u Are there appropriate private incentives to reclaim spectrum used for analog broadcasting?

Evan Kwerel The DTV Transition in the US -10- Lots of Spectrum Allocated to TV n 402 MHz of prime spectrum allocated to TV broadcasting until 1997 n 294 MHz still allocated to TV (core) u 72 MHz in VHF band u 222 MHz in UHF band (8% of spectrum in 300 MHz to 3 GHz band) n FCC reallocated 108 MHz of TV spectrum after passage of 1997 BBA (UHF Channels 52-69) u 24 MHz allocated for public safety (channels 63, 64, 68, 69) u 6 MHz allocated as commercial guard band u 30 MHz allocated for flexible use in upper 700 MHz band u 48 MHz allocated for flexible use in lower 700 MHz band

Evan Kwerel The DTV Transition in the US -11- Reclaiming TV Spectrum n UHF Channels (lower 700 MHz band) u 94 analog TV stations u 168 DTV stations n UHF Channel (upper 700 MHz band) u 97 analog TV stations u 20 DTV stations n How much loss to consumers if stations cleared? u 85% of households subscribe to cable or satellite. (But not all TVs in household connected to pay services) u 15% of households not subscribing to cable and satellite includes those who place a low value on TV and have option of subscribing to cable or satellite or buying a digital converter box u Content broadcast on a stations other channel would still generally be available over cable under must carry rules (w/ option of digital to analog conversion) u Many stations on channels have low viewership

Evan Kwerel The DTV Transition in the US -12- Reclaiming TV Spectrum Faster n Congress could set a date certain for clearing TV spectrum u Accelerate clearing channels F Mandate ending analog broadcasting on channels F Broadcasters (15) with DTV allotments on channels and analog stations outside would not be required to broadcast in DTV until the end of the DTV transition, but could choose to. F Broadcasters (5) with both an analog and DTV allotment on channels would be assigned replacement DTV channels outside This might require some broadcasters outside to temporarily give up a DTV allotment or discontinue analog broadcasting early. u Accelerate clearing channels F Same idea as above, plus to provide replacement DTV channels some broadcasters on channels 2-51 would need to temporarily give up a DTV allotment or discontinue analog broadcasting early

Evan Kwerel The DTV Transition in the US -13- Reclaiming TV Spectrum Faster n FCC may be able to develop an incentive-based relocation policy for rapidly clearing channels u Voluntary clearing of channels F Incumbents could continue to broadcast on their analog and DTV channels until end of the DTV transition or they could voluntarily negotiate a clearing agreement with the new commercial overlay licensees. F Subject to FCC public interest tests. F Because of co-channel and adjacent channel interference, overlay licensees would have an incentive to clear broadcasters from all of these channels (60-68), including the public safety channels.

Evan Kwerel The DTV Transition in the US -14- Reclaiming TV Spectrum Faster n Possible incentive-based relocation policies for rapidly clearing channels (continued) u FCC 2-sided auction (exchange) F To reduce transactions costs under a voluntary clearing procedure, the FCC might organize a two-sided auction (exchange). F Spectrum held by the FCC (overlay licenses) and agreements to clear spectrum encumbered by incumbent TV stations would be put up for bid simultaneously. F Bidders would be able to make package bids for both FCC overlay licenses and the right to clear incumbent TV licensees.

Evan Kwerel The DTV Transition in the US -15- Reclaiming TV Spectrum Faster n Possible incentive-based relocation policies for rapidly clearing channels (continued) u Rules to encourage participation under a two-sided auction (exchange) approach: F FCC could make flexible use of spectrum occupied by incumbents contingent on simple participation in the exchange (must put clearing agreement up for sale but need not actually sell). F Or an even stronger rule would make flexible use contingent on participation in the exchange and incorporation of the incumbents spectrum into an overlay license either by the incumbent selling its clearing agreement to another bidder who acquires the overlay license, orby the incumbent selling its clearing agreement to another bidder who acquires the overlay license, or by the incumbent purchasing the overlay license itself.by the incumbent purchasing the overlay license itself.

Evan Kwerel The DTV Transition in the US -16- Reclaiming TV Spectrum Faster n Possible incentive-based relocation policies for rapidly clearing channels (continued) u Need mechanism (sharing formula or package bidding rules) to allocate cost of clearing broadcasters that encumber more than one overlay license F Reduces free-rider problem – each bidder wants other bidder to pay cost of clearing broadcaster that encumbers both their overlay licenses, so may not clear when efficient to do so.

Evan Kwerel The DTV Transition in the US -17- Reclaiming TV Spectrum Faster n Possible incentive-based relocation policies for rapidly clearing channels (continued) u Mandatory FCC relocation of all TV stations on channel 69 (reallocated for public safety) F FCC specifies relocation channels outside channels F Mandate needed because 69 is not adjacent to any commercial channel and thus clearing it provides no benefit to any commercial licensees F Legislative prohibitions against short spacing do not apply to relocating TV stations occupying public safety channels

Evan Kwerel The DTV Transition in the US -18- Conclusion n Digital transition for broadcast TV u More and better services for consumers/viewers u Release spectrum for other uses n High priority for FCC and Congress n Remaining challenges include u Digital rights management u Reclaiming spectrum quickly, efficiently and equitably

Evan Kwerel The DTV Transition in the US -19- For More Information n n OSP Working Paper No. 38