"THE DIGITAL DILEMMA" Remarks of Commissioner Susan Ness Before American Women in Radio and Television Los Angeles, California June 2, 1995 Thank you Lucille for that kind introduction. I Love Lucie! It is an honor to follow Lucie Salhany this morning. It is also a daunting task. Having to speak after Lucie is like being a public service announcement right after the episode of ER. Lucie is an extraordinary role model. By her commitment to broadcasting and her dedication to the public good, she illustrates what is so special about this industry. I value our friendship. Congratulations, Lucie, on your well deserved award! Speaking of role models, after a speech earlier this year, a woman thanked me for mentioning my children in my remarks. She said it was important to her, because it validated her efforts to balance a family with her career. That meant a lot to me as well. I also want to applaud A.W.R.T. for its fine panel on mentoring. My first contact with A.W.R.T. and the FCC was about eleven years ago when my mentor, Commissioner Mimi Dawson asked me to serve on a panel for female entrepreneurs on financing broadcast station acquisition. I must say that back then female station owners or general managers were a rarity. Jim Duncan, publisher of Duncan's American Radio -- but also known to many of you as Chris Woodward's husband -- recently assessed the progress women have made in the radio industry. He determined that ten years ago, only 4.7% of general managers of group-owned radio stations were women. By last year, that percentage had nearly tripled to 12%. Better yet, he noted that 40% of all radio sales managers are females. Since most general managers move up from sales positions, that bodes well for the future. Speaking of the future -- the world is going digital. The volume of information we process is growing astronomically, and the pace of change is accelerating. Digital technology -- the use of binary code, ones and zeros, ons and offs -- is at the heart of these changes. In one sense, there's nothing new about digital technology. Samuel Morse's telegraph was digital; each opening and closing of the circuit created a "dot" or a "dash." Thus, the basic code was founded on the use of "ons" and "offs." For the past quarter century, we've enjoyed the use of calculators and digital watches. For more than a decade, we've had the personal computer. In broadcast studios and in telephone company central offices, much of the technology has been digital for several years. What's different now is that the transmission media are themselves going digital. Cellular phones, satellite-to-home broadcasting, radio broadcasting, television broadcasting, cable television, telephone services -- all of these are in the process, or on the verge, of converting to digital technology. The transition to digital technology will bring opportunities for entrepreneurial ventures, for employment and for investment. Tomorrow's leaders will be those who seize the opportunity presented by these profound changes. I would like to focus today on what I call "the Digital Dilemma," the plethora of policy issues facing the Commission, the industry and the public, that arise from the introduction of Digital technology. I will comment on two examples which directly affect your business --digital television and satellite delivered digital audio radio. Then I would like to close with some observations regarding the role of government in this process. The Commission is confronting complex and contentious issues about the digital infobahn. The development of new digital technologies requires us to rethink existing rules and policies. What approaches will best serve the goals of market- driven competition, innovation, fairness, and opportunity in a dynamic environment? Historically, analog systems essentially delivered a very specific service, with only a minor amount of spectrum available for other uses. Today, digital compression, transportation and transmission means that streams of video, voice and data can be sent simultaneously. What had once been discreet services are now blurred. Telephone companies want to be video entertainment and information providers over their networks; television operators want to be able to deliver the daily newspaperover the digital airwaves. Cable operators want to provide local switched telephone service. Telephone companies are scooping up wireless cable companies to provide multiple video channels over the airwaves. Over the past few weeks, I have been "on the road" several times visiting with broadcasters, television networks, computer manufacturers and other service and content providers on their turf, to understand more fully their vision of the future and to see what it will entail for broadcasters to convert to digital. As a former communications lender, I find it invaluable to meet with operators and business people directly -- to comprehend the ramifications of our policy decisions. I just spent two days in the Silicon Valley, visiting with companies that are in the vanguard of communications technology development. I visited Intel. You know the little sticker on your computer that you are afraid to remove that says "intel inside"? Well, I went to see the inside of Intel. And Hewlett Packard and Silicon Graphics -- all companies which are working feverishly to bring about convergence of telephony, video, and interactive data at consumer friendly prices. They want policies that will facilitate interoperability. Some are eager for the Commission to reserve adequate radio spectrum for shared, unlicensed uses, where new applications can be introduced and marketed quickly. Some want the FCC to allocate bandwith at the higher end of the spectrum for new services still on the drawing boards. The Digital Television Dilemma In contrast, last week, I visited television stations and TV network facilities to better understand the opportunities and real costs of conversion to a digital broadcast standard from the NTSC standard which has served the public well for nearly fifty years. NTSC stands for Never Twice the Same Color. Understandably, there is a high level of angst in the industry and a desire to ensure that the businesses that they have worked so hard to build will not suffer from conversion. Digital television is the term we're now using to discuss what we used to refer to as "advanced television." When the FCC first started considering advanced television issues back in 1987, the discussion was focused on "high definition" television -- TV with twice the resolution, better color, multi-channel, compact disc quality sound, freedom from artifacts, and a wider aspect ratio. At the time, ATV was contemplated as a substantial improvement over today's NTSC television, but it was still analog. The proponents of various alternative ATV systems susequently have developed totally digital systems, far superior in quality and flexibility of use. Working with an industry advisory committee established by the FCC, the proponents have consolidated their innovations in a system known as "the Grand Alliance." This system is capable of delivering everything that had been contemplated by analog HDTV systems, but is much more versatile. It can deliver multiple NTSC-quality video channels. Or it can deliver massive amounts of data. Or hundreds of channels of audio programming. Or combinations of video, audio, and data. Or caffe latte, or... With this as background, let's examine some of the major public policy questions that DTV presents. Should the Commission support the use of digital technology that will displace our analog TV broadcasting technology? I believe it should. The Commission may have once been slow to embrace new technology, but that's no longer true. Today, we want to accommodate, even to stimulate, innovation, and thereby increase the benefits that consumers will realize from these new technologies. Competitors to video broadcasting already have gone or will go to digital transmission because of quantity and quality benefits. Broadcasters also must be permitted to upgrade their signals and service. Must the new technology be introduced in a way that minimizes the adverse impacts on incumbent broadcasters? Sure. Broadcasters should be permitted to compete in the digital video marketplace. Access to new channels and temporary use of the old may be the best way to facilitate their transition to DTV and to ensure that consumers will continue to receive the services to which they have grown accustomed. Should consumers be protected against the premature obsolescence of their existing televisions and VCRs? Sure, but the issue is complex. At what point is the cutover complete? Put another way, when was the last time that you threw out a perfectly good but old television set or VCR? Doesn't it usually wind up in another room in the house and used infrequently? We must look first to market friendly solutions to encourage a rapid conversion to digital. Perhaps, after a critical mass of viewers have switched, broadcasters will find it cost efficient to distribute low priced set top converters to remaining hold-outs. Today, few consumers are ready to buy expensive "home theater television sets. However, as programming becomes available in high definition from many competing sources to broadcast, that competition may drive more rapid conversion. One could imagine consumers demanding better quality pictures once they have become accustomed to them. Broadcasters may find it more cost effective to cut over sooner. Then, ironically, the pressure to delay conversion could come from the remaining analog viewers. Although the relocation to new spectrum and return of the original channel may be made mandatory, it might be possible to allow broadcasters to choose to continue to deliver analog programming on their one remaining six megaherz channel instead of converting to digital, thereby providing service to the unconverted consumer. Should the Commission limit the uses of the transition spectrum? This is the focus of contentious debate. Some favor requiring significant "simulcasting" on the old NTSC channels and on the new digital channels. Others say the licensees of the new spectrum should be free to use it in whatever fashion they choose. For example, they should be permitted to broadcast a single high- definition program, or four NTSC-quality signals, or hundreds of audio channels (oooh yes, radio devotees), or to transmit newspapers and magazines electronically, or to make other use. If such flexibility is allowed, it could be an opportunity for you to come up with new programs and services. I would hope that the extra channels could be used in part for quality children's programming. The transition to digital broadcasting will not come cheaply. I recently toured the ABC network facilities in New York. As I walked through that cavernous studio complex, my hosts described all of the equipment that would have to be replaced or updated when ABC converts to digital television. I had already seen some cost figures for the larger pieces of equipment that would have to be replaced, like cameras, monitors, VTRs, and routing switches. But who would have thought that high resolution television would require that even the furniture on the sets be replaced because the screen will capture all of the nicks and scratches. And then there is the potentially large expense of erecting another tower and sending out two broadcast signals for a period of time. Competitors to broadcast televsion are also converting to digital transmission, including VDT, DBS, MMDS, LMDS, and HELP. If the response to the DBS picture is any indication, consumers will notice the difference in quality. Keep in mind channel capacity of these competitors will also double or quadruple by this conversion. How will competition work in this brave new world? Broadcast television today depends on assembling mass audiences and delivering them to advertisers. Will these new channels produce a fragmented audience? How will this affect the economics of program production and of advertising? Also, as a technical matter, will the television set be capable of receiving signals from all these sources, or will the set itself be a bottleneck? Will cable companies or videodialtone operators be obligated to carry the additional signals? We will be looking at these and related questions. Some would argue that we shouldn't bother, that the marketplace will figure it out better without us. However, lack of certainty could inhibit corporate investment in these technologies. Personally, I think it makes sense to have these issues considered by an expert bipartisan agency with a public interest responsibility. So far, Congress has agreed. The Digital Radio Dilemma Radio is another traditional analog service that has not changed much since it was licensed in the 1930's. We have a proceeding underway to authorize satellite delivery of digital audio radio which would enable the signal to be received inside of a moving car. This would launch national radio services blanketing every market in the country with 30 or more stations per licensee. Satellite DARS (you know it as DAB) has the potential of reaching areas underserved by terrestrial broadcast stations. It can amass a narrowly focused audience by aggregating liseners across country. Our job is to draft service rules that will enhance the uniqueness of DARS while minimizing its impact on terrestrial broadcasters. How many channels are needed to have a viable system? How much bandwith is needed per channel? Should we license all of the allocated spectrum now or in two steps based upon demand? Should we limit providers to those who applied three years ago before the service rules were established or should we open up the pool to new applicants? Should we regulate digital radio as a broadcast service, or should it be subscription based only (but with the ability to have advertising)? Existing AM and FM broadcasters also may join the digital revolution. The industry is testing in band on channel digital terrestrial radio. I heard a demonstration of AM digital at the NAB and it was awesome. As these questions illustrate, technology is bringing about changes that will dramatically affect the marketplace for existing radio and television stations -- and for professionals in every segment of the communications, information, and entertainment industries. As we consider these new technologies and services, we at the FCC must reexamine our existing rules to determine whether they still make sense in this changing world. With change comes opportunity for those who have the foresight and the fortitude to jump in. The Role Of Government in Promoting Progress and Creating Change Now that I have talked about dilemmas facing your industry, let me focus for a moment about my sponsor. What is the role of the FCC in promoting progress and creating change? Some argue none. As we experience all of these changes under existing law and proposed legislation, we have an obligation to examine ourselves to make sure that what we do in fact promotes competition and creates new services. Are we meeting the public interest as its steward of the airwaves? Are we efficient? Have we narrowly tailored our regulations to reduce the burden on industry? The FCC has a fundamental role to play in spectrum management; in transitionning communications sectors from monopoly providers to competition; in helping U.S. industry to compete in international markets; and in protecting the freedom and diversity of voices in our communications systems. Some suggest that the spectrum be privatized -- those licensed get to keep their "etherial real estate" and the rest would be auctioned. Owners could use the spectrum for whatever service they desire. The airwaves are a scarce and precious resource belonging to the public. The FCC's role in spectrum management is essential to spurring industry investment. Allowing private industry to divvy up the spectrum without any concern for the public interest would result in chaos. Imagine: the cordless telephone which operated like a charm in Louisville might be useless in Los Angeles. Spectrum reserved for television signals in Cleveland might suddenly be converted to personal communication service, or satellite program delivery, or ham radio, or any one of a plethora of services that currently uses some part of our electromagnetic spectrum. For historical reasons, competition in the major communications sectors is limited or non-existent. The Commission has developed rules to protect consumers against abuses of market power, such as overpricing of non- competitive services and cross-subsidies. The FCC sets fair rules of competition and eliminates bottlenecks so that the promise of competition can be realized. This makes room for new entrants. Competition would not magically be achieved by abolishing all rules of organization. Adoption of basic rules of the road increases efficiency and the variety of services that can be offered, just as traffic lights and rules of the road improve traffic efficiency and road capacity. What happens when traffic lights are out? Gridlock! Traffic lights are green, not just red. Without the rules of the road, bottlenecks would exist at many corners. Traffic flow would be so impaired there either would have to be fewer vehicles or a lot more roads! Moreover, speaking as a former lender, the financial community needs some assurance that their investments in broadcast and wireless technologies are likely to work. How can one invest millions to develop a new digital TV or radio if by the time it comes to market some of the channels are being used for paging and cellular telephone? Relying on the courts to resolve interference problems, as some have suggested, would clog the judicial system and result in undue delay. Imagine...Excuse me, Judge Ito, but a ham operator is broadcasting over my baby monitor! These critics should know that the FCC handled over 35,000 interference complaints last year. Some critics would have the remaining functions of the Commission transferred to an office within the Executive Branch. Should governement control over broadcasting and other communications be placed in partisan hands? One of the strengths of our democracy is that the FCC is a bipartisan, independent agency. This is a global communications world. Our industry depends on the Commission to assist it in official negotiations on cross border interference, and satellite placement, for example. The CEO's of major international companies that were reprsented at the G-7 Telecom conference released a report recommending that nations create independent regulatory bodies, modeled after the FCC, to manage the transition from monopoly to competition. Why would we want to reverse ourselves at home? In my judgment, the FCC has an important role to play in fostering fair and long-term competition in the emerging digital multimedia marketplace. Your timely participation can help to ensure that the decisions we make comport, as much as possible, with the public interest -- and that they bring new opportunities to the members of AWRT. I want to close with an observation that a friend makes every New Year's Eve -- one that is relevant today. He says that much of life is a juggling act, as we balance work, family, friends, our values. Some of the balls are made of rubber. If you drop them, they bounce back. Others are made of the finest crystal and are priceless. If they are dropped they shatter. The key is to know which balls are made of rubber and which are made of crystal. In this time of great change and challenge, there is a similar observation to be made. Except now, the "balls" represent policies -- such as those fostering diversity of voices and competition in the local marketplace. Policies that have helped to create the richest and most culturally diverse communications marketplace in the world. As we address the dilemmas I raise today, and as we rush to eliminate regulation and privatize functions, may we have the foresight and courage to know which policies are made of rubber and which are made of crystal. Thank you.