***************************************************************** International Display Report Vol. 6, No. 4, April 11, 1997 *************************In This Issue*************************** The Great Digital TV Scam of 1997 1. Introduction 2. The Politics 3. The Real Facts 4. An Explanation ***************************************************************** by David E. Mentley, VP Research, Stanford Resources. Stanford Resources, Inc. is a market and technology research company specializing in electronic displays. In addition to a full line of comprehensive industry analyses on the markets for flat panel displays, projection displays, CRT and LCD monitors and large screen displays, Stanford Resources offers custom consulting for strategic planning and investment decisions. International Display Report is written by David E. Mentley, Vice President of Research at Stanford Resources. You can contact him at (510) 669-0521 (V), (510) 669-0624 (fax) or at dem@ix.netcom.com. Stanford Resources is located at 3150 Almaden Expressway, Suite 255, San Jose, CA 95160 and at www.stanfordresources.com. >>>><<<< 1. Introduction Digital television is in the news a lot. In fact, one can hardly open a newspaper, magazine or trade journal without seeing an article on the subject. After 10 years of indecision and hardball politics, the Federal Communications Commission (FCC) has given approval to television broadcasters to begin digital TV transmission. This sounds like a big boost for the display industry and a major benefit to the all American television viewers. Over 95% of American households have televisions. The reality is that the entire situation is so complex and is such a tangled web of politics, technology and marketing issues that predicting the distant future is impossible and digital television over-the-air broadcasting is not likely to make impact. Much of the reporting focuses on the digital aspect of this new television broadcasting technique. In fact, digital television is not new. It has been around in the form of direct broadcast satellite (DBS) since July 1990 and there are now over 5 million satellite TV subscribers to four major services in the United States. The recent news about digital television could be viewed in two ways. One is the FCC is trying its best to serve the people of the United States by allowing willing service providers to deliver a desirable new type of entertainment. Another view might be that it is nothing more than a cynical manipulation of public opinion coupled with a mad rush to loot the U.S. treasury of another limited natural resource i.e., part of the electromagnetic spectrum estimated to be worth more than $70 billion. Misunderstandings about the issues abound. The general public is now convinced that the local TV stations will be broadcasting digital HDTV within a year and a half and that each household will need to spend $2,000 to $3,000 for a new television if they want to watch. This would be quite an accomplishment since the average television sells for around $400. No one seems to understand or want to admit that the "TV set" is made from two parts, a receiver and a monitor. They are separate subsystems. They have been separated, if not physically, then at least functionally for decades (via a cable box, VCR, satellite receiver, A/V receiver or a laserdisc player.) Most of the talk about digital television does not involve the monitor portion of the television. It can and will remain an analog device as long as electron beams and phosphors are used to make the image and human eyes are used to view it. This is a very important issue – the monitor part of the television must be considered as a separate component in the current marketplace. Any manufacturer who does not make an independent, stand-alone monitor with all of the cable, satellite and over the air broadcasting options is taking an extraordinary risk. 2. The politics In order to understand the political situation, it helps to identify the players. The list is long and growing longer. * Cable networks * Local broadcasters * National networks * Television manufacturers * Satellite service providers * Satellite receiver companies * Cable decoder companies * Broadcast equipment makers * Movie studios * Cellular telephone companies * Local telephone companies * Trade industry organizations * Federal agencies * Lawyers * Lobbyists * Computer hardware makers * Computer software companies * Internet providers * The viewing public * The non-viewing public .. there are certainly more to come All of the groups above have divergent goals. They also have demonstrated that they are completely unwilling to work together and actually fight with each other in public quite a lot. One could say that they behave like six year old children, but from personal experience, I can vouch that six-year olds do not behave that badly. They are acting more like two year olds attending the Niccolo Machiavelli Memorial Preschool. Children between two and three years of age (known as the terrible twos) tend to answer every question with a "no", regardless of their true intentions. It is an ideal environment in which to generate such confusion since the technology is so complex, the scope is so large, the stakes so high and the money behind the players is substantial. 3. The Issues Since the issues are so complicated, I will outline the problem. The following discussion applies only to the market in the United States. 1. Over 65% of homes subscribe to cable television 2. Over 5% of homes have direct satellite service (up from 0% in 1990) 3. The remaining 30-35% (and shrinking) of homes receive over the air broadcasting 4. The 65-70% (and growing) of cable/satellite subscribers are not affected by the FCC ruling 5. The "television" in most homes is essentially a monitor connected to a cable box, VCR, satellite receiver, laser disc player or a DVD player 6. The difference between an analog input monitor and a digital input monitor is a $6 digital to analog converter (plus a handful of other parts) 7. Finally, the population group most likely to be receiving ONLY over-the-air broadcasting is the least likely to be able to afford a new $2,000 digital television and is the least likely to care about it 8. Other groups besides broadcasters are lusting after the spectrum dedicated to digital TV Notice that there was no mention of HDTV above. The very acronym (High Definition TeleVision) has been tainted in the United States by the politics of industrial policy and governmental meddling. It has been changed to Advanced TV (ATV) or better yet - Digital TV. But, I will repeat the point made above because it is so important. We already have digital TV. It is very high quality - 425 lines. It is not expensive. It works great with NTSC composite video, S-video or component video outputs to a TV. A digital monitor or digital display is not necessary and may have even lower quality than a direct view or projection CRT based monitor. Members of the 5 million households with direct satellite and the growing number of cable subscribers with digital systems know this. Apparently, the FCC, the decision makers in the groups above and many of the writers who have produced stories about this in the national press do not know this. A key part of the story is the implied superiority of the digital delivery system. As part of the ploy, about half of the players above would like the public to believe that the new digital broadcasting format will be equivalent to the old-style HDTV picture. In reality, digital transmission allows more efficient DELIVERY of video signals- not the delivery of BETTER TV signals. If the source is low quality, the target will receive a low quality picture. If the source is high quality, a high quality picture will come through. More importantly, about six times as many channels can be squeezed into the same real time data stream with a digital compressed signal. This is the benefit of a digital signal. It is not the hope of someday upgrading to near-HDTV quality. The formats available with the digital television framework are in the following table. Vertical lines Horizontal pixels Aspect ratio 1,080 1,920 16:9 720 1,280 16:9 480 704 16:9 or 4:3 480 640 4:3 You can be sure that the last two in the list are the only formats which will be broadcast over the air for a very long time, since there are no receivers able to handle the first two signals and the base will build up only slowly, if at all. Why would a broadcaster choose to spend a fortune on equipment and squander the hard won spectrum allocation to broadcast a film quality image over-the-air to a few thousand viewers who probably lack the demographics that would be attractive to their advertisers in the first place? If the last two formats are the only viable broadcast options, why all of the interest? We already have digital TV coming down from satellites (and soon cable will be there) with the same picture quality as the ATV standards above AND many more channels than will be available over the air. 4. An Explanation The spectrum handed (for free) to the broadcasters by the FCC is estimated to be worth at least $70 billion. There is no requirement to broadcast HDTV (the first two options in the table above) and there is no firm requirement to use the spectrum for television broadcasting at all. This is probably why the computer and communications industries are so upset. It is equivalent to the U.S. government giving the Mississippi river to the riverboat gambling industry and requiring anyone else wanting to use it for shipping or fishing or water skiing to go talk to the licensee. The broadcasters could decide to provide internet service, video conferencing, movie channels or whatever they want to (as long as it is digital) with they gift. They don’t need to launch satellites, lay cable, fiber or anything else. It’s our river and they can use it for free. Theoretically, they are supposed to use the revenue to build up the infrastructure for continued, free public television broadcasting, but there is no lawful requirement to do that. The battle is for the attention of the American public, the type of hardware they will buy to spend their disposable income on and the entertainment services they use in the future. As you can see, this is extremely complex and the story has only begun to unfold. There have been very few comprehensive looks at the issues and even fewer critical analyses. Copyright 1997 Stanford Resources, Inc. David E. Mentley All rights reserved.