TRANSCRIPT OF PROCEEDINGS Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 --------------------------------------) In the Matter of: ) ) Advanced Television Systems ) MM DOCKET NO. 87-268 and Their Impact Upon the ) Existing Television Broadcast ) Service ) ) EN BANC Hearing ) --------------------------------------) DATE OF MEETING: December 12, 1995 VOLUME: PLACE OF MEETING: Washington, D.C. PAGES: 1 - 283 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 --------------------------------------) In the Matter of: ) ) Advanced Television Systems ) MM DOCKET NO. 87-268 and Their Impact Upon the ) Existing Television Broadcast ) Service ) ) EN BANC Hearing ) --------------------------------------) The above-entitled matter come on for meeting pursuant to Notice at 1919 M Street, N.W., Room 856, Washington, D.C., on Tuesday, December 12, 1995 at 8:30 a.m. APPEARANCES: Reed E. Hundt, Commissioner Susan Ness, Commissioner James H. Quello, Commissioner Andrew C. Barrett, Commissioner Rachelle B. Chong, Commissioner I N D E X PANEL 1: PANELIST: PAGE NO. Richard Wiley, Advisory Committee ATV 16 Steven Rattner, Lazard Freres and Company 19 Ed Grebow, TELE-TV 22 Neil Braun, NBC, Inc. 24 John Hendricks, Discovery Communications SINC/NCTA 27 Stanley Hubbard, Hubbard Broadcasting, Inc. 29 Lawrence Grossman, Brookside Productions 31 Andrew Lippman, MIT Media Laboratory 34 PANEL 2: PANELIST: PAGE NO. Gigi Sohn, Media Access Project 91 Alan Braverman, Capital Cities/ABC 94 Barry Diller, Silver King Communications 96 Faye Anderson, Douglass Policy Institute 100 David Honig, Minority Media Telecommunications Council 102 John Siegel, Chris Craft/INTV 104 PANEL 3: PANELIST: PAGE NO. K. D. Horowitz, Viacom 156 George Keyworth, Progress Freedom Foundation 159 James McKinney, Advanced Television System Commission 161 Edward Reilly, McGraw-Hill Broadcasting/MSTV 163 John Major, Motorola 165 James Carnes, Sarnoff/Grand Alliance 168 Joseph A. Flaherty, CBS/ATSC Broadcast Caucus 170 PANEL 4: PANELIST: PAGE NO. Bruce F. Allan, Thomson Consumer Electronics 214 Sherwin Grossman, CBA 217 John Abel, Datacast Partners 219 Ralph Gabbard, Gray Communications/NAB 221 David Liroff, WGBH Educational Foundation 223 Joseph Tasker, Jr., Compaq Computer Corporation 225 Meeting Began: 8:30 a.m. Meeting Ended: 4:41 p.m. P R O C E E D I N G S (8:30 a.m.) COMMISSIONER HUNDT: Good morning, everybody. We're going to have a really big show today. I would like to thank our extremely distinguished panelists. They've all taken time from their very busy schedules to contribute to the important public debate about digital television. We're going to have very brief opening statements. You're in the middle of mine, and then we'll go through the different commissioners, and then we'll get started. This hearing today is intended to kickoff a heightened public open debate about digital television. As we will learn today, a group of brilliant scientists has put a digital genie in the bottle, and that genie can grant many different wishes. Our excellent FCC staff has given me a brief guide to avoid terminological implosion and I want to share it with you. So this is the way it goes. The spectrum we're talking about is for digital broadcast. It's currently unused and unusable spectrum. Today large chunks of the broadcast allocation lies unused to avoid interference with the old technology, the current technology, of analog transmission. With the new digital technology, we can add additional broadcasting in the spaces in between. For example, in Washington, D.C, the dark spectrum between analog broadcast on Channel 20 and Channel 22 could be used for digital transmission. in other words, it's the space that would be filled by a Channel 21 if you had a Channel 21. So when we use the term digital spectrum, we're talking about, for example, the 6 MHz in the space between Channel 20 and Channel 22. Digital broadcast licenses are assumed to be 6 MHz. The 6 MHz can be used to transmit a wave, the wave can carry bits, the digital Morse code for delivering voice or video or data. The Grand Alliance transmission standard can use 6 MHz to deliver almost 20 million usable bits per second. The transmission standard can be used to deliver different amounts of bits to display different formats. A very high resolution format will require more bits than a less high resolution format. A progressive format will require more bits than an interlaced format. High definition, as opposed to digital, is just one of many digital formats. High definition is a synonym for highest resolution, and it requires more bits, obviously, than a less high resolution format. Standard definition is a synonym for a format that has a less high resolution than high definition, and it requires less bits but it still produces some terrific pictures. As the engineers have explained to me, the fewer bits that are used for the picture, the more pictures or programs that can be simultaneously delivered by the bit stream. So, for example, if a broadcaster elects to use a standard definition format for digital transmission, the broadcaster probably can send more simultaneous programs. So that's how the experts have explained it to me and ask you to pass on to you and hopefully the many experts who will testify today can build on this brief introduction. In particular, I would like to call your attention to the display of digital video technology at 2000 M Street. It will be open all day today through lunch until 5:30 p.m., and I particularly would like to thank the following companies who set up the displays: The Grand Alliance, Texas Instruments, USSB, DirecTV, Sony Corporation of America, NBC, Inc., Hitachi of America, Microsoft Corporation, and CBS, Inc. If a picture is worth a thousand words, their displays are worth a million bits, and I strongly urge you to visit the site. The digital spectrum is beachfront property on the Cybersea, and, as we all know, Congress and the Administration are discussing whether the licenses to use the digital spectrum should be auctioned. The other apparent possibility is to give the digital spectrum licenses to today's analog broadcasters, and then retrieve, for the public, the analog licenses on some date certain, or when certain conditions are met. Then the analog spectrum could be auctioned. We're happy to hear anyone's comments on this subject, but, of course, these questions will be decided by Congress and not the FCC. Whoever receives the digital spectrum licenses, and however they are meted out, the FCC needs to decide whether there should be any restrictions on the use of the licenses. Should we order that only one transmission standard be used? Should we order that that transmission standards should be used to deliver only one particular format? For example, should we order that only the very high resolution format called High Definition is permissible as a matter of law? Or should we order that only progressive scan formats are permissible as a matter of law? Or should we strive to be deregulatory and to keep our mitts off the marketplace? Should we follow the advice Jack Nicholson gave in the movie "Chinatown," to avoid mistakes, do as little as possible. Well, as opposed to interfering with business judgements about transmission standards and formats, a different question is whether the FCC should ask licensees of analog or digital spectrum to deliver programs that serve the public interest in ways that mere marketplace competition might not do. It comes as no surprise to anyone that, speaking personally, that I'm very interested in hearing the views of the panelists about the possibility of using the increased capabilities of digital transmission to serve the ends of children's education and reform of the campaign process. It is certain that digital transmission will increase the number of TV programs broadcast over the air. Doesn't that mean that it can also increase America's ability to use the wonderful medium of broadcast to serve all the dimensions of the public interest. The great thing about today's open meeting is that this is the right time and the right place to talk about the future of television in this country. The is an historic moment similar to the late 1940s when the FCC and Congress made the fundamental decision that shaped the analog television of the last half century. So let's all recognize that none of us want to use this opportunity -- none of us want to let this opportunity go buy, none of us want to pass it up. We want to debate vigorously, with good cheer and optimism, all the questions and the many answers that digital TV generates. Thank you. Commissioner Quello. COMMISSIONER QUELLO: You bet. Very fine statement and mine will be much less technical. But I hope that maybe years from now, during my fifth and sixth term as Commissioner, I hope to be able to say I was there when HDTV, the greatest invention since color television, was just a glimmer in the FCC's eye, and I hope to be able to look around at the dramatic and widespread public excitement about high definition pictures, at the high penetration levels of digital television that surpass all instruments, and at the proliferation of high definition programming, and at a stronger than ever broadcast industry available free to all the public. However, this day may never come if the Commission, the Congress or the White House makes any serious missteps in the rollout of advanced television. Perhaps the biggest threat, in my mind, would be a decision to either auction the digital channel or to compress the transition to an advanced television to such a short period of time that both broadcasters and consumers would be threatened. Should the government and the American public eventually recover the value of the 6 MHz the broadcasters relinquish? Absolutely. However, they should not be forced to choose between an early return on spectrum and a viable- free advanced television system, and I think transition to HDTV must be a progressive evolutionary process. I will, therefore, be focusing my energies in this very important proceeding, on insuring that high definition is a success for consumers and broadcasters alike. While the goal of a balanced budget is vital to the future of our democratic society, it should not be accomplished by threatening the position of the United States in the global economy or by impeding the ability of broadcasters to bring to every home in America the next and best generation of free television. So I look forward to hearing all of the varied views of this very expert group of panelists. Thank you. COMMISSIONER BARRETT: Thank you, Mr. Chairman. My learning curve becomes a regressive on when listening to myself, so I choose, Mr. Chairman, to put the statement wherever it goes in the record, give it to everyone and to compliment you and Commissioner Quello for your overview. But I also wanted to follow-up on what the chairman had suggested, and that is to take a tour of the -- what's the address, 2000 M Street. I went over yesterday and caught a cold from Commissioner Chong yesterday and I thought that we would also, Mr. Chairman, I'd like to advice everyone, go see Stan Hubbard's son, and you can see what a bright child of his mother, he took after his mother, obviously, but go see Rob Hubbard, who makes a great presentation, Mr. Chairman, who you did see yesterday, and it's an excellent overview. And I want to compliment Chairman Wiley for all of his hard work, and I will forego the statement, Mr. Chairman, and make it part of the record of whatever it is we're doing here today. Thank you very kindly. COMMISSIONER NESS: Mr. Chairman, the subject of this En Banc, whether and how we transition our television broadcasting industry from an analog to a digital system, is perhaps the most challenging issue facing the Commission today. But we're not alone. It is challenging for broadcasters who must decide whether to invest billions of dollars in new equipment without new revenue streams to cover capital costs and without assurance that their audiences will follow. It is challenging for Wall Street, which is not certain such an investment will succeed. It's challenging for video providers, who want the opportunity to compete for digital licenses. It's challenging for consumer, electronics and computer manufacturers, who much rapidly roll out equipment to retrofit our video population. And above all, it will be challenging for consumers who are mostly unaware that in a decade or so, their analog television sets and VCRs may become obsolete. Digital broadcasting offers a future that is full of promise. One need only visit the advanced television demonstrations across the street to appreciate the extraordinary progress that has been made to date. Many have labored to achieve what is truly a remarkable product, the Grand Alliance standard. I want to express my appreciation publicly to Chairman Dick Wiley and his committee for their very fine work. We're at a crossroads in this country, should we proceed with the digital transition as proposed or should we consider other options? I begin today's hearing with some preliminary thoughts: First, free, over-the-air broadcasting provides and invaluable service to the American public. It serves us all any time, any place, rich or poor, urban or rural. It educates, informs, and entertains. When widely held, its diversity of voices serves as an insurance policy for our democracy. Among video distributors, only broadcasting is available as a free advertiser-supported service throughout the country. We must be cognizant of the millions of consumers who depend upon broadcasting for their news and entertainment. Whatever we do, we must ensure continued service to all, including those who cannot or choose not to subscribe to pay services Second, of all the video competitors, only broadcasters much receive this Commission's blessing before it can upgrade its service to digital. Cable can be digital without FCC's permission. DBS already is digital and can provide high definition if it so chooses. Video dial tone, wireless cable, and LMDS are all planning to go digital. If our goal is to promote competition among video providers, broadcasters must have the digital tools to compete. Third, the Grand Alliance system was carefully crafted through a very public process. It was designed, developed, and paid for, not by government, but by private industry. The broadcasters, both commercial and public, as well as cable, computer, manufacturing and film industries, invested their time and their talents. Extraordinary efforts were made to accommodate every sector without sacrificing the goals of digital broadcasting. The Grand Alliance standard provides great flexibility, is computer friendly, and ha plenty of headroom for new advances. And it is homegrown. It has the potential to expand domestic jobs and grow industries. Advocates of other systems will have a high burden of proof. Fourth, spectrum is a national resource. We must ensure that it is efficiently used. As I study various spectrum transition scenarios for broadcasting, I will be focusing on both short-term and long-term benefits, particularly the possibility or freeing up 100 to 150 MHz at the end of the process through increased efficiency. Fifth, historically, broadcasters were viewed as stewards of the airwaves. In this special position of trust, broadcasters were given mandatory carriage and channel positioning on cable systems. In exchange, broadcasters were expected to serve local communities in "in the public interest." If incumbent broadcasters are to receive a free second channel for digital conversion, I want to know more clearly how their public interest obligations will be fulfilled. Finally, and most importantly, our decisions must be in the public interest. I want to better understand the impact that our digital television proceeding will have on consumers. If we go ahead, for the first time, a major transition will not be backwards-compatible. I therefore want to examine what maximum public benefit we can have while minimizing disruption and cost. These are some of my thoughts, Mr. Chairman, and I look forward to hearing our distinguished panelists' comments on these issues. Thank you. COMMISSIONER CHONG: I just want to clarify that it was Commission Barrett that had the cold yesterday, and I'm pretty sure he sneezed on me when we were looking at Stan Hubbard's and I woke up this morning with a runny nose, so it's your fault. I wanted to add my thanks for everyone coming. I know you have busy schedules and the fact that you all made it is terrific. I wanted to thank the staff, first of all, for pulling this hearing together. I think that I was the one that asked for this back when we were doing the digital notice because there was a lot to learn, both policy-wise and technology-wise and I thought this might be helpful that we would all focus. It seemed to me, back then, that a lot has changed since the first decisions were made about digital television and it was important for us to have a thorough understanding of where our technology had brought us at this moment in order make good decisions going forward. I wanted to state up front that I have a very central concern, and that is, preserving and promoting free over-the-air television, which I think is central to a democratic society. And, as a result, I think that the transition that we're going through from analog to digital is inevitable and we can't really expect broadcasters to maintain their audiences if they're going to be in a Startrek era with Gunsmoke technology. So these are the concerns I'm going to be asking about when we get to the panelists. We have said that we think that the principal use -- I have said that the principal use of the spectrum ought to be for free over-the-air broadcasting. Is this going to be a reasonable approach given the increased flexibility broadcasters will get when they transition to digital? And if broadcasters do use the spectrum for ancillary uses, non-free broadcast, I want to know whether it would be fair to make them pay for that. Secondly, in past decisions, the Commission has decided to loan a second 6 MHz channel to broadcasters to avoid disenfranchisement of viewers during the transition, and I want to know whether this approach is still the right one, given that some parties have expressed some interest in standard digital channels that might possibly require less than 6 MHz. And if we do allocate less than 6 MHz, doesn't this undercut the very commendable and impressive achievements of the Grand Alliance. As a world leader in HDTV right now, why would be backtrack on that decision at this point? If this transition happens, how do we ease the transition? This is the primary area of my concern. What would a reasonable transition period be? Can we learn from any past experiences, such as the transition from black and white to color, or the introduction of CD-Rom and what about consumers? I shudder to think about what would happen when Aunt Beulah turns on her analog TV in 10 years and it doesn't work. There's going to be a couple of irate phone calls made at that point. So how do we ease the transition for consumers, what's reasonable, and what about the impact of the transition on the small and the medium-sized broadcasters, including community broadcasters? What about public television stations which are suffering from budget cuts right now? I want to hear ideas on how we can accommodate the needs of these broadcasters. And finally, spectrum efficiency, are there ways we can manage the transition to maximize the use of the spectrum, freeing up valuable spectrum for other uses is a very important governmental interest. So, that's plenty to ask about, I look forward to a full and lively discussion and I thank you again for coming today. COMMISSIONER HUNDT: Thank you very much. Let me move quickly into the panel. First, I'd like to note the addition of Andy Lippman from the MIT Media Labs to the panel over here on this side, and thank you very much, Andy, for coming. And before I kick it off by asking foreman chairman Dick Wiley, who also the chairman of the advisory committee to make the first remarks, I'd like to especially acknowledge people on the FCC staff who are responsible for all of the work behind this particular day: Donna Jean Ward, Roger Holburg, Alan Cohen, Dan Bring, Brett Tanitser, Mary Beth McKerrick, Manya Bagdadi, Tom Tanosovich, and in particular, probably the key person in the Mass Media Bureau for this whole effort, who has been providing us all on the Commission tremendous assistance, Saul Shapiro. The timekeepers are harsh and strict disciplinarians. They have cards to warn everyone, including the Commissioners, of how short the time is and if you go over their rules, they will leap across the table and choke you until you stop, an embarrassing experience that all of us will want to avoid by simply following their advice. Dick. MR. WILEY: Mr. Chairman, Commissioners, it is a privilege to appear before you this morning. Each of you has received the Advisory Committee's final recommendation. I won't take the time to discuss this conclusion this morning. Suffice is to say, that the Grand Alliance's digital standards represents world leading technology -- (Bad mike, unable to hear.) MR. WILEY: I'll start. Mr. Chairman, Commissioners, it's a privilege to appear here. Each of you has received the Advisory Committee's final recommendation. I won't take the time to discuss its conclusions. Suffice it to say that the digital TV standard of the Grand Alliance represents world leading technology permitting ATV's dazzling pictures and sound, multiple SDTV programming, and myriad NII data services and all on a dynamic basis. In my written testimony I describe some of the key technical issues that the Advisory Committee faced including progressive scanning versus interlaced scanning. Now, as you know the Grand Alliance technology incorporates both formats at minimal additional cost, thus reasonably meeting the needs of all affected industries. As such, and let me emphasize here, it would represent the world's only progressively scanned television system and with fully advances and compression technology, it should be possible to migrate to an all progressive scanning format in the future. Now, let me offer my own brief rules on four criticisms of the FCC's long-standing ATV program. First, that the FCC's planned transition to digital television represents a "give away" of valuable frequencies to existing broadcasters. But in reality, it is only an exchange of one spectrum block for another with, with the public ending up with a greatly enhances video service in the process. Second, that the digital channel, so to speak, should be auctioned, but this could disrupt the Commission's orderly transition plan and likely deprive broadcast viewers of the full advantages of ATV. A better alternative, in my view, is to auction the returned and probably more valuable channel. Third, broadcasters might be given less than a full 6 MHz channel, but the Grand Alliance system cannot be sliced up in this manner. Instead, an entirely new transmission system would have to be designed and tested, assuming anyone had the financial incentive to do that. And in the meantime, the American public would be deprived of the services provided by digital HDTV including NII interoperability, and the United States might well lose its position of clear technical superiority which ultimately should add greatly to our economy. Fourth, and finally, that the lower resolution SDTV is just as good as HDTV. But the hundreds of advisory committee technical experts and lay viewers did not see it this way. The truth is that high definition television represents a whole new video platform and a quantum leap forward in the state of the art. Fortunately, however, the Grand Alliance's supple framework eliminates any need for choice, we can have both HD and SD. In all, ladies and gentlemen, the United States and the FCC stands today on the threshold of an exciting new video era. But to bring it to fruition, a new television transmission standard should be should be established and I urge you to do so as soon as feasible. Such an action will make it possible for the American public to enjoy the greatest advance ever in broadcast and video technology. Thank you, and good luck. COMMISSIONER HUNDT: Mr. Rattner. MR. RATTNER: Speaking as a member of the financial community, I believe that the financial world will ultimately consider what emerges from these deliberations with two parameters in mind, certainty and flexibility. Investors have traditionally favored the media industry for a variety of reasons, strong financial performance being, of course, the principal one. But investors have also appreciated that while certain sectors of the media industry have been heavily regulated, that regulation has been accompanied by a degree of certainty. For example, in financing television stations, Wall Street has been able to assume with confidence that station licenses would continue to be renewed, that no fees or taxes would be levied on the spectrum, and that no other significant regulator action would impede the ability of broadcasters to earn profits while meeting their public service obligations. In contrast, that confidence was somewhat shaken in recent years with regard to the cable television industry, as we went from regulation to deregulation and back to regulation. While I know from my own experience in Washington that regulators by and large take their responsibilities very, very seriously, the inevitably tortuous process of developing new regulatory frameworks can cause considerable angst on Wall Street. Thus, my first suggestion is that whatever policies are developed with regard to the new spectrum be specific, clear, as simple as possible, and subject to as little change as possible after their adoption. To the extent that the Commission can convey such an approach convincingly to Wall Street, the ability of broadcasters to raise capital to finance ATV projects will be enhanced. The second principle that I would set further would be flexibility. Wall Street recognizes the extent to which the media and communications businesses are changing. Take, for example, the matter at hand. Five years ago, HDTV appeared to be the focus of attention in this area. Today, opinions differ dramatically on the best use of new available spectrum. Since we all have difficulty predicting new technological developments and consumer preferences, investors generally hope that the government will let companies make their own strategic choices. This can also be viewed as in the public interest as it is likely to maximize the chance that whatever services are provided are those of greatest interest to consumers. This is certainly true in the case of digital television, which has the potential to provide new services for consumers and help insure that broadcasters become active participants in the next phase of information delivery. Specifically, I think investors are most interested in the opportunities for multiplexing and new communications services since it is hard to see how HDTV alone will generate sufficient additional revenue to fund major capital expenditures. Regulatory action that limited broadcasters' ability to enter new businesses would almost certainly decrease the availability of capital for digital conversion. None of this should be construed to mean that there are not circumstances under which the FCC should mandate service. History suggest that in some instances, such as the introduction of UHF, mandates are essential to generating consumer interest. Certain common technical standards may also well be sensible. We simply must weigh very judiciously the benefits of the mandate against the market's potential to determine the best available use of resources. These two principles are the major thoughts that I would like to convey today, and I thank you all for letting me appear. MR. GREBOW: Mr. Chairman, Commissioners, TELE-TV is a partnership formed by Bell Atlantic, NYNEX and the Pacific Telesis Group. We announced in October of '94 our intention to offer a wide range of advanced television programming, consisting of both "traditional" channels as well as communications and interactive capabilities. We will launch, by the end of 1996, through digital wireless transmission and hybrid fiber-coax cable, as well as on switched digital (fiber-to the curb) systems to be deployed by our partners beginning in 1997. TELE-TV promises a new generation of television, offering not only unequalled breadth, diversity and quality, but also interactivity and interconnectivity available today only in the telephone environment. TELE-TV thus represents a convergent blending of the best of telephone, computing and television. The Commission has asked whether digital technology will make broadcasters a more effective competitor in the increasingly challenging video marketplace. I think the answer to that question is a clear yes. Digital technology will allow broadcasters to offer both high definition television and multiple free over-the-air standard definition television, neither of which broadcasters can do today. Should the Commission decide to allocate free spectrum for the conversion of broadcasting to digital technology, we believe that the Commission should continue its policy of promoting HDTV. Specifically, the Commission should encourage broadcasters to offer a minimum amount of HD content. There are several sound public interest reasons for such an approach: the public interest in assuming technical excellence in the broadcasting service, the public interest in stimulating the marketplace for new and innovative HDTV digital TV sets and the public interest in avoiding confusion between standard definition and HD standards. The Commission has also asked about the impact of broadcasters' use of digital technology on broadcasters' competitors. Aside from additional competition, about which we do not believe that competitors can complain, there are two policies the Commission should refrain from adopting to avoid adverse effects on competition in innovation. First, the Commission should not mandate the carriage or processing by competing media of any non-free over-the-air service offered by broadcasters. We acknowledge the powerful arguments, both for and against mandatory carriage requirements, for free over-the-air broadcast signals in the analog domain. However, should broadcasters be permitted to use new digital technology for other than free over-the-air broadcasting, they lose, it seems to me, their unique and powerful public interest arguments. Like any other competitor, these carriage arrangements should be worked out in marketplace negotiations. Secondly, the Commission should continue its policy of not requiring other media to utilize transmission schemes compatible with the Grand Alliance HDTV System, or set specific signal or equipment standards for this purpose. Specifically, the Commission should not take any steps to impose mandatory standards or other regulatory constraints on the wide range of innovative proprietary set-top boxes now being introduced into the marketplace. Such a policy avoids action that might inhibit the rapid innovation of digital technology in non-broadcast media. In closing, I want to take this opportunity to congratulate the Commission on the work it has so successfully overseen in this field. Thank you very much. COMMISSIONER HUNDT: Thank you, Mr. Braun. MR. BRAUN: As president of the NBC Television Network, I'm honored to be here today to discuss digital broadcasting. NBC shares the excitement over the potential of digital broadcasting but my goal today, is to ask you to evaluate everything you hear against one seminal principle. Please make sure that FCC rules and policies give broadcasters the opportunity to compete on a level playing field in the digital domain. In order to compete, broadcasters must first have the technical capability to provide consumers with comparable picture and sound. HDTV, if that's what consumers want and that's what our competitors are giving them. Imagine, could broadcasting be competitive today if government policies had forced us to remain a black and white medium while all other video services had moved to color, of course not. Our competitive disadvantage will be just as acute, if we don't have the ability to offer the same high definition pictures and CD quality sounds that will be available on cable, telco and satellite programming services. Broadcasting is the only competitor to these paying media that is free and available to everyone. We're not asking for special treatment, quite the contrary. We're trying to prevent the tilting of the competitive playing field against us. Secondly, in order to compete, broadcasters must be able to reach the entire potential audience, we need universal access. Once we have access to the audience, we'll compete with all video services. What we cannot tolerate is a gatekeeper who stands between broadcasters and the audience, and we're particularly concerned about gatekeepers who own their own programming or program services and, therefore, have ever incentive to favor their proprietary interests over others. If our ability to attract a mass audience is impaired, the economic base of broadcasting will almost certainly be destroyed, and if the public's access to broadcasting is curtailed, broadcasters will find it increasingly difficult to serve the needs and interests of local communities. It is important that government rules and policies allow broadcasters to compete for several reasons. To begin with, broadcasting will be the foundation for and delivery of all digital video technology. If broadcasting isn't competing in digital, it will take consumers far longer to buy digital sets. Without the programming investment and promotion of broadcast television behind them, many of the new services you will hear about today will never be launched, many of that are launched will fail or be marginally successful. But if broadcasting cannot compete, it will affect more than television. The unique promotional power of broadcast television is critical to the launch of new consumer products and services and therefore critical to the GNP. Entertainment programming is one of this country's biggest exports with television programs accounting for 21 percent of the $8 billion generated abroad during 1994. So, as broadcasting is diminished, it will negatively affect the balance of trade. Equally important, over-the-air television is the one medium that provides the same high quality programming to both the haves and the havenots. It is the most widely shared experience of our society. For these reasons, the decisions the FCC faces are momentous. I implore you to make those decisions in a way that allows NBC and other broadcasters to succeed or fail in the marketplace as equal competitors. Please don't condemn us to an early demise by forcing us to compete as an analog or inferior digital pace against the pay services of tomorrow. Thank you. COMMISSIONER HUNDT: Thank you, Mr. Hendricks. MR. HENDRICKS: Mr. Chairman and Commissioners, my name is John Hendricks, and I'm the founder, chairman, and CEO of Discovery Communications. Discovery is a privately held multimedia company which manages and operates the Discovery Channel and The Learning Channel and other related businesses. I'm testifying today on behalf of the National Cable Television Association, which, as the principal cable industry trade association, represents the interests of cable programming networks such as Discovery. However, let me devote just one sentence to my role as a TV consumer every night, and how generally excited I am about the new differentiated services that my broadcast competitors will be introducing through advanced digital television. I appreciate the opportunity to appear before your to discuss, from the perspective of a non-broadcast, cable programmer, the implications of the transition to digital television. The cable industry generally has been ahead of the back in embracing technological advances such as digital compression. For example, we, at Discovery, have taken the lead in enhancing consumer control over viewing opportunities through the development of at digital satellite service called "Your Choice TV." From the perspective of a cable programmer such as Discovery, the most important digital spectrum policy decisions will be those the Commission will make regarding the application of must carry and retransmission consent rules to digital TV. Discovery believes the imposition of must carry requirements severely interferes with competition in the video marketplace and impedes the development of new programming by forcing cable operators to devote a significant portion of their capacity to the carriage of programming without regard to viewer preference. Must carry artificially restricts the availability of capacity to cable programmers who have no over-the-air access to viewers. As a result, cable programmers cannot build and develop their audiences and entrepreneurs will be unwilling to risk their capital by investing in new services and programming. Most importantly, must carry will deny the American public the choices and services that will evolve out of a more robust, unrestricted competitive digital TV environment. I also urge the Commission to consider carefully the potential for broadcast retransmission rights to create similar competitive disadvantages. In particular, I urge the Commission to adopt safeguards to prevent broadcasters from unfairly leveraging their retransmission consent rights to demand carriage of additional over-the-air services. In conclusion, I would like to emphasis that cable programmers intend to a vital part of the digital TV revolution. There already are nearly 200 networks vying for carriage and dozens more are in the planning stage. For example, Discovery has announced plans for the development of five new digitally transmitted services focusing on niche programming areas, including at least one service specifically devoted to children's programming. The public's access to these and other new services should be determined by the marketplace, not by regulations that skew the competitive environment. Thank you. COMMISSIONER HUNDT: Thank you, Mr. Hubbard. MR. HUBBARD: Thank you, Stanley S. Hubbard's my name. I thank you very much for the opportunity to be here. I think that everybody in this room believes that the transition to digital will be a very good thing. I know I do, I was there when the switch was turned on in 1948 and I was there when the color switch was turned on and I hope to be there when the HDTV switch is turned on for terrestrial broadcasters. But in order for that to work, it must be done in a very carefully crafted manner. I've heard a lot of talk about give away of channels, and I can assure you that when we, as broadcasters, have to turn on a more desirable channel for a less desirable channel in order to make the switch to HDTV or to digital, that's not, to me, a give away. I think that being on a fasttrack, too fast a track, could destroy the attempt to go to digital because, as Commissioner Chong said, I don't think people are going to want to wake up one day and find out that in order to watch their free over-the-air television, they must go out and buy a converter or buy a new television set. I believe that this transition is going to take 10 to 15 years, at the minimum. I believe that the broadcasters need all 6 MHz, as Chairman Wiley suggested. I think that any attempt to put more than one broadcaster on a 6 MHz spectrum allocation would be a grave mistake and we would be playing Russian roulette with the interference possibilities. I think it's going to be a wonderful thing, not a negative thing, for a broadcaster to be able to provide two free services at a time. For example, in some day part there may be an entertainment program on a non-HDTV program, while at the same time there may be an educational program on which Chairman Hundt talks about, or there may be a discussion on whether or not there should be higher speed limits in the state of Minnesota. All programming will not be HDTV programming. There are thousands and thousands upon hours of good documentary material, educational material, material that John Hendricks uses which is not in the HDTV format and to suggest that we should use all that 6 MHz all the time for HDTV, I think, would be a very grave mistake. So I commend the Commission, I ask you to please to got carefully. I ask you to, at all time, recognize the important free service that the American people have and to not take a chance and jeopardize any of that service and if they have any questions, I'd be happy to answer them. COMMISSIONER HUNDT: Mr. Grossman. MR. GROSSMAN: Thank you, Mr. Chairman. I want to join my colleagues in congratulating you all for holding these hearings that seek to make Federal Communications policy suitable for the digital era. Certainly the arrival of the digital era gives you and the Congress a unique opportunity to revisit the increasingly outmoded and, I believe, largely archaic regulatory scheme that has governed broadcasting for over half a century. I agree with Steve Rattner, in the conviction that the more complex the situation, the clearer and simpler the rules should be. I urge you to recommend to the Congress three basic approaches to telecommunications policy for the information age. First, to do away with the policy that treats broadcasters differently from everyone else. That sounds rather radical, but commercial broadcasting is a business first and foremost and a very good one, and not basically either a public service, and certainly not a public trusteeship, as anyone who listens to radio and watches television would know. In this age of postcard station renewals, greater public service requirements for thousands of radio and TV stations can't realistically either be either overseen or enforced by any government agency and more are coming on board every day. In the digital age, it no longer makes any sense for broadcasting to have that special status, and if there are requirements to be imposed, I certainly agree with what the chairman has said in the past, that they should be specific and limited and clear and focused very clearly on things like children's programming and the very important political campaign process. Secondly, I urge you to recommend that unused radio spectrum be auctioned off rather than given away to broadcasters for high definition at this point. Let the consumers in the marketplace, not the government, decide what are the best uses for the spectrum and what new commercial services should be introduced. Broadcasters should be encouraged to broadcast in the digital mode and make the best use of their bandwidth to engage as well in non-broadcast services. Winning bidders in spectrum auctions should be required, it seems to me, to provide every existing broadcaster with enough bandwidth for at least one digital TV channel free of charge. And for now, that requirement would best serve the interests of small broadcasters as well as the big ones. And yet, such an auction would still produce tens of billions of dollars, estimates run from $25 to $70 billion as a significant public dividend for the commercial exploitation of the public spectrum. Third, and finally, I urge you recommend that this Congress follow the wise example of a republican Congress more than a century ago, which, in a moment of extraordinary foresight, authorized the sale of unused public land to finance a remarkable educational initiative. The Land Grant College Act of 1862 opened new educational horizons for millions of Americans and it was what build the nation's great system of public universities and educational research centers. Today's equivalent of the unused public land of a century ago is the public's unused radio spectrum and from the money to be earned from the auctions, a brand new educational and civic information trust fund, suitable for the new age, can be developed and it can interconnect schools and libraries and homes for the benefit of all Americans. Thank you very much. COMMISSIONER HUNDT: Thank you, and Mr. Lippman. MR. LIPPMAN: Good morning, and thank you for the opportunity to speak here. HDTV is an idea whose time is passed. In the 25 years since the issue was first invented, it's been eclipsed. The initial vision was a clearer new television set that you'd wake up to on Christmas morning with the same programs, the same programmers, the same audience and the same means of distribution, but it's been overtaken. Instead, we have new programs, new programmers, new audiences and new means of distribution. The variables were right, but the sign bit was wrong. Digital television is thriving, high definition television is withering on the vine. the new opportunity before us is digital broadcasting, not necessarily HDTV or not necessarily even television at all. The explosive penetration of personal computers attest to this, they're begging for networks to attach themselves to. The FCC faces a challenge today, it faces a one gigabit challenge, that's the capacity of the UHF band. The challenge is how to get the bits out and how to leave the meaning of those bits up to society to determine. You might watch high definition television during the scrimmage and download a new operating system to your personal computer in the midst of the huddle. You can't assume that a television set will be tuned into those bits at all, you might assume that computers, pagers, telephones and everything else imaginable, even your jacket, could be tuned to those channels. The Grand Alliance has done a tremendous engineering job building a system for the delivery of high definition television pictures and the delivery of the bits that will carry those pictures. They deserve a shot. We deserve a mechanism and a way for us to move forward into the future. They don't deserve an exclusive shot, they deserve one of the many infinite uses of the almost infinite number of bits that are going to be out there. The challenge before you is, get the bits out as rapidly as possible and leave the meaning of those bits up to us to determine dynamically, fluidly, as the technology and the demands of society declare. Thank you very much. COMMISSIONER HUNDT: Thank you all very much. What we are going to do is have a round of questions and answers. It will be six minutes for each commissioner and then another six minutes for each commissioner. If the answer has used up most of the six-minute time, I'm sure the questioners will be frustrated and irritated beyond measure. Commissioner Quello. COMMISSIONER QUELLO: Okay, Mr. Wiley, you've been an effective leader in HDTV, you've seen it for over eight years, but with auctioning of the digital channel still a possibility. However, as distasteful that it might be to some, can you explain in detail what, in your view, would be the economic impact of an auction of the ability of broadcasters to finance the transition to advanced TV? MR. WILEY: Well, I think auctioning of the digital channel would interfere with the FCC's long planned and orderly transition from analog to digital to the detriment of the broadcast viewing public. What you would have is the inefficient analog transmission remaining, perhaps forever, and high definition television probably becoming only a subscription service. There is nothing wrong with that, but I think it should also be accompanied by free over-the-air broadcasting service. And finally, auction revenues are likely to be higher on the returned and repacked NTSC channels, so if we want to have auctions, and we want to get the maximum revenue, if that's the goal, then I think I would auction the return channel. COMMISSIONER QUELLO: Um-hum, all right. Mr. Hubbard, can you provide us with an estimation of the difficulties broadcasters might have in earning a profit in the new digital era. You've taken quite a risk yourself for advanced service to the service to the consumer, what do you see as earning a profit in the new digital era? MR. HUBBARD: Well, Mr. Quello, I think the larger the market, the easier it will be to earn a profit. But, you know, most markets in this country are not New York, Los Angeles and Chicago. You know, when you get to the smaller markets, such as in Albuquerque or Wichita or at Tulsa, it's going to be very difficult and very expensive for those stations to switch over to digital and it's going to take them a long time to return to the profit stream that they have today because the investment is not going to result in any increased profit. COMMISSIONER QUELLO: All right, thank you. MR. HUBBARD: But a lot of increased expense. COMMISSIONER QUELLO: Yes that's the way I see it, too, but -- Mr. Hendricks, on must carry, you know, I've been with that as long as you have or maybe longer, you know. At one time I was able to make the statement that no monopoly or semi-monopoly transmission pipeline should be able to impede or prevent a broadcaster from serving the public -- a broadcaster's license to serve and so on -- that's been pretty much my attitude on must carry and, you know, isn't there a danger that cable operators could extract pre-carries from broadcasters for their very valuable signal without a must carry? You want to take that on, John? MR. HENDRICKS: Sure, I think the -- COMMISSIONER QUELLO: You've heard it before. MR. HENDRICKS: -- the issue boils down to cable programmers, such as Discovery and A&E, we only have one shot to get to the marketplace. We have no broadcast transmission facilities so our primary means of distribution are via cable. For broadcasters, they have, of course, their primary means is over-the-air broadcast. A supplemental means is through cable retransmission. Our fear, and our nightmare, is that a group of five local broadcasters compressing their extra channel, at say, six to one, would have 30 channels that would flood on a must carry basis the cable system. The cable systems are tight as they are today. Some day, they'll have another five channels, perhaps, that can convert to digital, which would be another 30 delivery channels. But, you know, our position is clear, we think that the broadcasters can clearly develop a documentary channel and that would be a great thing to have free over-the-air broadcasting for either at the local level or at the national network level for a broadcaster to have a new documentary channel. But we think it would be enormously unfair for then mandatory carriage then on the cable system that could displace Discovery or A&E or Learning. COMMISSIONER QUELLO: Well, with your multi-channel capacity, why should they have to displace anyone? MR. HENDRICKS: Well, there's a myth that there's this 500 channels of capacity and that ignored the 15-year transition period to digital. A cable operator has to keep up carriage of the analog signal. Once any signal goes digital, it becomes invisible to virtually all of America until they get the new decoding equipment. And so the cable systems today are at average capacity of around 45 channels, through upgrades they'll get another five, perhaps ten, analog channels that could be converted, those additional channels, to digital. So five new channels at six to one compression, would give 30 new channels. Now, someday, maybe 15 years from now when everybody in the United States has digital decoding equipment, that 50 channel cable system could go, say, at ten to one compression and have 500 channels, but that's a long way into the future. COMMISSIONER QUELLO: Well, I think of the broadcasters getting five or six channels for the single channel now is going to be sometime in the future, too, I mean, if that's going to be used as an argument. But, Mr. Grossman, I made the statement and I probably disagree with you a little bit on this, and I said broadcasters had their best executives and the best engineers developing HDTV and digital for eight years. They finally developed it, now that it's developed, they say, well, auction it off. You can compete with all people, have direct payment from consumers and compete with them. Now, we know that going into HDTV will cost broadcasters the price of a transmitter, they will be transmitting initially with people that don't have HDTV receivers, it's going to be a very expensive process. I find it a little hard to accept as fair the fact that broadcasters developed the technology and now they have to bid against everyone that has maybe direct income, whether it's the telephone, cable, or cellular, how do you answer that? MR. GROSSMAN: I agree, it's a very hard decision, Mr. Quello. But I also agree with Mr. Lippman, that in many ways, this has gone by. The broadcasters will have the 6 MHz that they use for analog. Down the road, they may decide and you may decide it would be wise to convert to HDTV if that seems to be the way. The Japanese certainly are having terrible problems in that very conversion, and here you have an opportunity to really let the American people and the companies in the marketplace decide which way this spectrum should be used and how to use it in the most efficient manner and the best way to assure that it will used in the most efficient manner is to see what prices that will fetch and particularly when the public dividend that could be created for that in terms of reducing the deficit and providing for alternative systems for education and specific and public service use. I think the price is well worth it. COMMISSIONER QUELLO: Okay, I've been told my time is up, so. MR. WILEY: Can I just comment on that last point, though. COMMISSIONER QUELLO: Yes. MR. WILEY: That HD has somehow gone past that Mr. Lippman and Mr. Grossman have made. I don't know understand the basis for that? I mean, the Japanese system, which is a satellite delivered system, analog transmission, is certainly not a guide for what could happen here in the United States with the terrestrial system with the world's leading technology. To say that it's simply gone, I think, is just fallacious. Plus we can have, once again, both high definition and standard definition and all the NII interoperability. It's our bullets, we can have it all and I don't know why we should step back to the past simply because the Japanese haven't done it. COMMISSIONER HUNDT: I think Mr. Wiley was borrowing from your time, Commissioner Barrett. COMMISSIONER BARRETT: Meanwhile -- that gives me a little more time. MR. WILEY: Yes, I always thought it was give, give, give. Go ahead, Commissioner Barrett. COMMISSIONER BARRETT: Steve, how are you? MR. RATTNER: Fine. COMMISSIONER BARRETT: We have a heard a great deal about the limited amount of -- Mr. Grossman and Mr. Lippman talked about HDTV having passed by and Dick just responded in kind from his perspective. How does the financial community feel in terms of the capital that they have, given the fact that you have many places to place you invested money in and you have a limited amount to invest, has it passed by from your perspective? MR. RATTNER: I think Stan Hubbard addressed this in connection with STV or with digital TV and I think it goes even more so with HDTV. As I said in my statement, from the point of view of Wall Street, it is difficult for us to see what incremental revenues or profits would result from financing HDTV expenditures. That's not to say that HDTV shouldn't happen, it's just very difficult for us to see how that's going to result, as I said, in additional revenue and cash flow. COMMISSIONER BARRETT: If you had to place in some kind of ranking order, where you would advise institutional investors to invest their money or who they want to invest money, where would HDTV rank? It certainly would rank above video-on-demand, but where would it rank? MR. RATTNER: I'm not sure it would rank above video-on-demand. COMMISSIONER BARRETT: Well, that's interesting. MR. RATTNER: I think, again, if you look at it purely from a profit and loss point of view, putting aside public policy issues which, I don't think, we should put aside but for the purposes of answering your question, I'll put aside for the moment, many of these new services that all of us on the panel alluded to that could be provided, whether it be data transmission or wireless communications or whatever, certainly have the potential for profit and therefore would be of interest to Wall Street. Video-on-demand, a much debated and controversial subject, has some possibility for profit as well. As I said before, HDTV, it's not obvious to me, and I don't think it's obvious to anybody on the panel, where that exactly leads in terms of profits. Not to say it's a bad thing, but where it leads in terms of profits and so what I come down to, in my own thinking on this, is it just strikes me that unless there is some form of HDTV mandate, I think it's very difficult to envision how or why HDTV ultimately happens. I think if you turn the spectrum over to the broadcasters and say, do what you want with it, I would be relatively pessimistic myself that there would be a lot of HDTVs simply because the economics don't push you that way. So if the policy decision is we want HDTV, I think it's going to require some form of mandate from the Commission for that to happen. COMMISSIONER BARRETT: Hum, okay. Dick, you're shaking your head, take at least 30 seconds to -- MR. WILEY: Okay, I'm just have -- all the universe of film product that we have today, in our language, which is a big advantage for this country, is high definition television and I don't have any question that broadcasters, if given 6 MHz, will end up showing high definition television sports and the film product. But I think they should also get the opportunity to do SDTV, multiple SDTV and other kinds of data services. COMMISSIONER BARRETT: Mr. Braun, you had talked about you find it difficult to fund local programming, when things do not occur as it relates to the spectrum. Tell me what programs you're talking you'd have -- MR. BRAUN: Local news in particular, but what -- COMMISSIONER BARRETT: Let me ask you a question. MR. BRAUN: Sure. COMMISSIONER BARRETT: When you do fund that, that's revenue supported? MR. BRAUN: No, don't forget the networks actually pay the local broadcaster to carry their programming so one of the -- there's a vast number of television stations in this country that would not be profitable were it not for the compensation paid them by networks. That money is reinvested in local news. They would not be able to have local news operations if they did not have cash compensation from networks. COMMISSIONER BARRETT: Well, you're right, no question about that but that's part of the affiliation agreement. It seems to me that while I don't always react to the term, and I use it quite often with my colleague, Jim Quello, free over-the-air broadcasting. What we're really talking about is advertise-sponsored local programming and clearly you are not doing this without revenue support from other sources in addition to the network, at a local level -- situation. MR. BRAUN: It's all advertising, no, it's all advertising. It's advertising supported at the national level and at the local level. COMMISSIONER BARRETT: Okay, I just don't want to make people think it's free. We don't pay for it, but it has -- MR. BRAUN: Right, it's free to the consumer, it's free to the consumer. COMMISSIONER BARRETT: Okay. MR. BRAUN: And I -- COMMISSIONER BARRETT: And you were going to respond to my question which basically to Mr. Rattner was from the financial perspective, and Dick from the amount of public policy, I'm not sure where you're from. MR. BRAUN: If I may. Well, the question I would raise is -- COMMISSIONER BARRETT: No, I don't want you to raise a question, are you going to respond to the -- MR. BRAUN: Well, the response to Mr. Rattner's comment is then that likewise, I presume, the financial community would find it uncertain and ambiguous if broadcasters were legislatively or regulatorily prohibited from competing against other forms of delivery for CD quality sound and digital pictures. I think it would be -- COMMISSIONER BARRETT: What other forms of delivery? MR. BRAUN: Other wire line and DDS. So if we don't have sufficient bandwidth to actually deliver comparable sound and picture, I think the financing underpinnings of the broadcasting industry are actually going to be at risk. COMMISSIONER BARRETT: Okay, Stan, were you going to -- MR. HUBBARD: I say Mr. Braun is absolutely right, so is Mr. Wiley. Everybody will want to go into HDTV, it'll start from the bigger markets down, as did color. COMMISSIONER BARRETT: Thank you, Mr. Chairman, I will -- and again -- well, let me go back to Mr. Rattner again because I think it's important that we understand that what Chairman Wiley's talking about and what Steve is talking about certainly, while not compatible while they sit there, we can make good public policy and do the things that make Mr. Rattner survive and certainly do the things that Dick Wiley wants to see come forth. Steve, if you had in your mind to be able to develop the -- a policy in your mind to take care of your financial interests and take care of Chairman Wiley, what would you do as a regulator? MR. RATTNER: Well, let me say, I'm happy to say I think I'm going to survive, whatever we do on this question. But -- COMMISSIONER HUNDT: And very handsomely as well. MR. RATTNER: Excuse me, and you as well? COMMISSIONER BARRETT: Mr. Chairman, I want to tell you, we were in Italy and I had to fly back on a slow plane. MR. RATTNER: Germany, Germany. COMMISSIONER BARRETT: And he took a much faster plane back. Germany, we were in Germany, that's right, Germany. Now, I'll tell the truth, that's where I caught that cold, in Germany last week. MR. RATTNER: It felt like Italy. I think that what I would say on that, and unfortunately, i can't solve your problem for you completely because I'm not a regulator, I'm in the financial world. I have no problem with you, with HDTV, with the Commission mandating HDTV, with broadcasters doing HDTV, and, as a consumer, I probably would actually be a buyer and enjoy it and make use of it. All I'm here to point out to you here are a couple of things. First, that I don't believe that HDTV will happen in a meaningful way without some form of a push from the Commission because I don't believe, for example, if the spectrum is auctioned, that the resources will be available for the existing broadcasters to buy it and use it for HDTV. I don't believe there's any great financial incentive today for a broadcaster's interest in HDTV at all, even if he had the full 6 MHz, simply because I don't know if there's any way for him to recoup that money, and therefore, voluntarily I'm not sure he's going to do it. So, if the Commission decides that from a public policy point of view, from the point of view of promoting American interest internationally, the Grand Alliance, all these different things that we all know about, I think the Commission's going to have to make it happen and that is going to involve a very difficult public policy balance between allocating the full 6 MHz for HDTV, at least part-time, and I take your point, Dick, versus having it being used for other services that could produce greater profits. It's a bit of an apples and oranges comparison, unfortunately. Greater profits on the one hand, versus a public interest or a long-term public benefit of having high definition television. COMMISSIONER BARRETT: Something we do -- and have some high level respect for the investment thoughts and a number of other things. Let me stop and I may, on the next round of questioning, may want to get back into that. MR. RATTNER: Can I just say one last question on this, Commissioner? From an investor yield -- COMMISSIONER BARRETT: That's the end of time. MR. WILEY: You'll get a chance, I'm sure. COMMISSIONER HUNDT: You can a chance, Commissioner Ness. COMMISSIONER NESS: Thank you, Mr. Chairman. Mr. Wiley, you talk about the flexibility of the Grand Alliance system and Mr. Hendricks commented about his concerns with respect to must carry. How do you rationalize, how would you handle if you were here to make a determination about must carry, how would you handle the Grand Alliance system with respect to the limited carriage opportunities on cable? MR. WILEY: Well, I think that is, you know, really a government policy but, from my standpoint, I think if you give the broadcasters four channels, it is a little difficult to require, it seems to me, must carry of cable on all those channels. I think that would be more difficult. I'd like to see the HDTV channel and they use the whole channel for one program. I think that should be must carry, under current policy. COMMISSIONER NESS: Okay, Mr. Rattner, you comment quite eloquently about the dual goals of certainty and flexibility. How do those dual goals live happily ever after in an environment where a broadcaster perhaps would be able to offer paging services or other services in competition with some of the other folks that you regulate, or that you finance, rather, and who have paid for their spectrum? Is that an issue bringing into question the certainty in the marketplace? MR. RATTNER: Well, purely from a financial community point of view, that degree of flexibility would be a plus, not a minus. In other words, the fact that a broadcaster would not be restricted to providing one form of service or another, whatever it might be, would enhance the broadcasters ability to finance because, left to his own devices, the broadcaster is going to develop one or more projects that represent in his mind the most profitable use of the spectrum, he will come to us. The fact that there's competition, we can deal with competition and all these markets are becoming more competitive and there's nothing wrong with that but he will have the ability to come to use and say, I'm going to use Channel X for this purpose, will you finance it, and we will have the confidence to know that he has the right to use Channel X for that purpose, more or less in perpetuity, subject to good behavior and so on. COMMISSIONER NESS: Okay, Mr. Grossman, you talked about requiring the auction winners to carry another broadcaster's signal. Wouldn't that prevent the auction winner from broadcasting in HDTV? MR. GROSSMAN: It probably would, unless it was a broadcaster who won, and the reality is that very few broadcasters would be able to put up the money or would be willing to put up the money, as Steve suggested, to bid for that specific purpose. And the real question is, in the free market place, when consumers, in the end, are making those decisions and investors are making the decisions and nobody can predict what's going to happen, I think it's a high question as to whether you would want to mandate such a system, rather than let it flow out and then you still have the 6 MHz on analog that eventually can be dealt with if everybody decides that HDTV is the way, down the road, when you have more information. COMMISSIONER NESS: Certainly you talk about the ability of choice, but wouldn't it be very difficult if there's not a critical mass of programming out there for an HD opportunity to survive, Mr. Grossman? MR. GROSSMAN: Yes, it would be very difficulty, and again, that's what the American people and what the investment community is going to have to sort out and decide. I think for all of those sort of civic and educational purposes that you consider to be central, and we all consider to be central, then you have an alternate way instead of imposing those requirements on broadcasters as has been traditional, you have an alternate way to fund them, in the manner that I suggested. COMMISSIONER NESS: Mr. Lippman, you talk about having many standards, how, if you were a manufacturer of consumer products, such as a television set, how would you be able to determine what to offer the consumer and would that not, if you had to address many different standards, would that not increase prohibitively the cost of the television set? MR. LIPPMAN: Well, first of all, we already have a plethora of standards out there. Most of the computers that we use in work stations and commercial environments and the ones that are approaching our desktop already sweep out a picture that's clearer than most of the high definition television systems that we've seen today. So the transition to those kinds of scan rates is not difficult, nor is it needlessly expensive, it's rooted in old single-purpose thinking to believe that you have to do it once and you have to do it only one way. The digital electronics that allow you to intermediate between standards are becoming much, much simpler every day and by the time that we have high definition television broadcasts and it's not necessarily obsolete, it's simply not the driver of the transition to digital technology. As those broadcasts emerge, so will our ability to intermediate between them. So it's not an inherently expensive task, it's more like a software task. COMMISSIONER NESS: Mr. Hubbard, finally, in your testimony you mentioned that translators are very important particularly in rural areas, how, for provision of local news, for example, how would we address the issue of local translators the cost of conversion to digital and their carriage in a world of digital television? MR. HUBBARD: Well, there are more than 5,000 translators in this country and, of course, that's the lifeline to many, many people for television service. It would seem to me that this once again underlines the need for a long transition period which will allow these local communities who pay for their translators to raise the money and, at some point, switch over. But if you say to them tomorrow morning, you're going to have to be digital, they'll all be off the air, they can't raise the money. They have a terrible time paying their electric bills. COMMISSIONER NESS: I don't think anybody is assuming that we would immediately be seeing -- MR. HUBBARD: I'm not assuming it either, Commissioner, I just say that that would be a disaster. COMMISSIONER NESS: Okay, thank you, my time is up. COMMISSIONER HUNDT: Commissioner Chong. COMMISSIONER CHONG: Thank you. I want to follow-up with Mr. Rattner. Mr. Gabbard, in the fourth panel, talks about the costs of converting to digital television for small and medium size broadcasters, and he estimated it was about $1.8 million to do a conversion to digital excluding the cost of a new tower. And he expressed concern about how broadcasters would be able to obtain financing from the financial community for this conversion. I wanted to know what you thought about that scenario. Do you think small and medium broadcasters would have difficulty obtaining financing for approximately $1.8 million to convert given the financial situation of broadcasters in that size? MR. RATTNER: It's going to be a function of individual circumstance. I agree with Mr. Hubbard, there's no question that the cost of this digital conversion is going to be significant, it's going to be born, as I've said a couple of times now, without any immediate prospect of additional revenues or cash flow and therefore it's going to have to be financed out of existing station operations. So what that means is that a broadcaster who doesn't have $1.8 million in the bank, is going to go have to borrow it and he's, in effect, going to have to pledge some portion of his existing cash flow to repay that loan over time. If he has no other debt, that probably works and he can probably get that financing. It's not a huge amount even for a smaller station, given the value and cash flows of these. If he's heavily leveraged or otherwise under any financial pressure, it could certainly, at the margin, cause him some problems. COMMISSIONER CHONG: Now, suppose the government conducted an auction of these channels and a smaller medium- sized broadcaster wanted to borrow money to participate in a auction, would a broadcaster have difficulty borrowing that kind of money? MR. RATTNER: It's actually a very similar situation to the one you already asked about, it would be -- assuming the full 6 MHz were auctioned off and they didn't even get one channel for their digital conversion, and they then felt compelled or wanted to buy such a channel, again, without any immediate prospect of additional revenues or cash flow, the cost of that channel, whatever it turns out to be, would have to be financed out of existing cash flow from operations. And the same answer, if they're doing well and they don't have a lot of debt, they presumably could finance it, it would cause them significant pain. If they're not doing well, it could be impossible. COMMISSIONER CHONG: Thank you. Mr. Braun, your fellow panelist's Mr. Grossman, suggested that broadcasters shouldn't have public interest obligations anymore and that broadcasters should buy their channels in an auction and be able to carry whatever they want and then pay fees according to their use of the spectrum. Do you think that broadcasters are amenable to that kind of approach, would they be happy with that? MR. BRAUN: No, not even close. First of all, in response to Mr. Grossman, I'd like to say in terms of the free market idea he's espousing, the consumer would never get a chance to vote with respect to broadcasting HDTV because they don't spend consumer dollars on that, so it would really be the diminution of the market and therefore the loss of advertising revenue which would force the contraction of the broadcasting system, not the consumer's decision that he doesn't want to receive free over-the-air local broadcasting. But, in addition to that, I will tell you, just as good business, the whole so-called affiliate wars of the last year where the networks were all competing for local affiliated stations, it's possible to be misperceived as a fight over VHF band stations, but it's much more than that, it's about stations that have strong local identifies, who have news franchises, who have a relationship with their community that brings audience to the television set because that's good business for us. It's a great promotional platform to tell them what's going to be on when the network time periods come. So more than just having affiliates with strong VHF signals, the long-term viability of local news is critical to the networks. COMMISSIONER CHONG: Mr. Grebow, you were contending that the Commission should encourage broadcasters within constitutional limits to offer a minimum amount of HD content and I was wondering what exactly you meant by that, what constitutional limits were you talking about, and I presume -- I mean, are you saying that we ought to have a minimum or that we shouldn't have a minimum, and if we did have a minimum, what would that minimum be, a quantitative kind of minimum or some other kind of time of day minimum? MR. GREBOW: We believe that the Commission does not require some minimum content of HD, that HD will not happen and that if the Commission believes, as we do, that HD is important, then it is going to have to require it. Now, there are constitutional issues that have been raised that I'm not in a position to address, but the Commission needs to decide if it believes that HD is something that American consumers want, and if it's a public policy important imperative. If it is, we believe that some reasonable number should be required. There is no magic number, some proponents have suggested five hours per week, that's probably sufficient. Remember, it's requiring any HD that forces broadcasters to make the investment, so the importance is to require the first hour, really. COMMISSIONER CHONG: How tough would it be to deliver five hours a week, Mr. Braun? MR. BRAUN: Well, NBC has gone on the record as saying we would support that minimum mandatory requirement so -- that's based on the belief that it's going to be critical to our competitive stance. So however tough it is, we believe we have to do it. COMMISSIONER CHONG: Well, let's ask the cable guy. Mr. Hendricks, cable, are going to be doing HDTV, broadcasters say that they have to be competitive, are you guys going to do it? MR. HENDRICKS: Yes, I think that you'll see high definition television as something that's on the cable menu, you know, three to six years from now. You know, I'm supportive of the broadcaster having 12 MHz to play with so that they can be competitive in being able to multiplex their services as well as be in a position to offer high definition television. COMMISSIONER CHONG: Now, it's my understanding cable's upgrading their system to do precisely that, isn't that true? MR. HENDRICKS: Yes, cable's upgrading its systems to provide additional capacity, and again, it'll take a long time to digitize the entire system, but we should have five to ten additional channels within about three to four years. COMMISSIONER CHONG: Thank you, I think my time's up, Mr. Chairman. COMMISSIONER HUNDT: Thank you. Mr. Hubbard, you have the capability to choose to transmit in the format called high definition right now, isn't that right? MR. HUBBARD: With our direct blockade satellite system, yes, sir, we do. COMMISSIONER HUNDT: And you're not doing that, is that correct? MR. HUBBARD: Well, no, we're not doing it. COMMISSIONER HUNDT: You're not doing that because you don't know of anyone who could watch it? MR. HUBBARD: Well, who would -- there's no one that can watch it, that's the very primary reason. COMMISSIONER HUNDT: So that's a case of relying on the market to make these decisions instead of asking the FCC to order you to broadcast in one particular format? MR. HUBBARD: Yes, it is. COMMISSIONER HUNDT: Mr. Hendricks, the cable industry is deploying boxes of the digital conversion, that's right, isn't it? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: These boxes will take a digital signal over the cable hookup and will translate it to an analog picture so I can watch it on the TV that I already have, isn't that right? MR. HENDRICKS: That's correct. You will get a hybrid transmission from the cable head-in of analog which would be the bulk of the signal, and then a portion of the spectrum would be digital and that's what your box would decode. COMMISSIONER HUNDT: In generalizing about the cable industry which includes many different players, does it appear right now to be the cable industries business strategy to deploy these digital down converter boxes to all of the cable subscribers? MR. HENDRICKS: No, because of the costs of the equipment, we think that most often it would be the cable operator would be advertising that the new convertor boxes are available, the new content services would be advertised and those consumers who were interested in paying for the new services would get the new boxes. COMMISSIONER HUNDT: Do I understand you to be saying that cable's thought is that consumers will be making the decision to spend the money on the digital convertor based on the notion that they can get some new content? MR. HENDRICKS: Well, you have to understand, I think a large segment of cable consumers feel that they are television saturated. There are some consumers, though, that want more services, movies on demand, and it will be those consumers we think that would readily respond to new offerings. COMMISSIONER HUNDT: And what the digital revolution does for cable is it gives cable the opportunity to offer more channels and more content, correct? MR. HENDRICKS: Yes, what digital offers both cable and broadcaster is additional capacity. COMMISSIONER HUNDT: Additional capacity to deliver more programs, right? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: Now, this digital down convertor box that I might choose to subscribe to will display the picture on my analog TV, right? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: So, I will not get, because of the limitations of my television, I will not get the kind of resolution that a high definition picture coupled with an appropriate receiver might give me? MR. HENDRICKS: That's correct -- COMMISSIONER HUNDT: So, in other words -- MR. HENDRICKS: But the cable industry will have to wait until high definition television is first feeded by the broadcast industry to be able to make use of the new sets. COMMISSIONER HUNDT: So, in other words, the cable industry won't have any business plan to deliver a high definition format unless and until some other industry finds a way to convince customers to buy a receiver that will actually display with appropriate resolution the high definition image. MR. HENDRICKS: Yes, that's why I think it's some three to four to five years out. COMMISSIONER HUNDT: Meanwhile, Mr. Rattner is saying it's never going to be out unless we order the broadcasters to deliver a high definition picture. Isn't that what you were hear him saying? MR. HENDRICKS: Yes. COMMISSIONER HUNDT: And you hear Mr. Braun saying the same thing and Mr. Grebow saying the same thing, right? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: In other words, the view seems to be that unless the FCC interferes with the market, there isn't going to be a substantial number of people who are going to buy the receivers that are appropriate for high definition, but, in fact, we can't order anyone to buy that kind of home theater, can we? MR. HENDRICKS: I don't think so. COMMISSIONER HUNDT: We don't have -- our powers are limited, they're limited no matter what we may think, they're limited in some respects, aren't they? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: Mr. Lippman, do you see any public policy reason for us to interfere with the market so as to try to promote a particular format, bits are bits, aren't they? MR. LIPPMAN: It's been said by others on this panel and I certainly agree. I don't agree that without your forcing people to transmit HDTV pictures will never have high definition television. The natural evolution -- COMMISSIONER HUNDT: You mean, it just might happen in the marketplace? MR. LIPPMAN: It not only might happen in the marketplace, but it's unavoidable in a smooth and seamless way through the pure evolution of the screens that we have in our living rooms and on our desks without any CD necessary and by the time those TV sets, as you might call them at that time, defuse through the marketplace, the investment hurdles might be ever so much smaller to overcome and even Mr. Rattner would care to invest. COMMISSIONER HUNDT: But this smooth and seamless evolution that you're talking about would be one driven by consumers and the marketplace as opposed to the government, isn't that right? MR. LIPPMAN: Yes, and the access to the digital networks that you could provide in the UHF band. COMMISSIONER HUNDT: Mr. Rattner, if we auctioned the digital spectrum, presumably someone would pay something for it, you agree with that, don't you? MR. RATTNER: I agree. COMMISSIONER HUNDT: And presumably it would be people who saw that they could make a profit using that spectrum, right? MR. RATTNER: Presumably. COMMISSIONER HUNDT: Now, if we give the digital spectrum to a current broadcast licensee who doesn't have the financial resources to develop it, what logically is that particular licensee going to do with the spectrum? MR. RATTNER: If he can't develop it, depending on the rules, he'll turn it back or he'll sell it as the rules permit. COMMISSIONER HUNDT: Do you think we should prohibit the analog broadcast licensee who might receive the digital spectrum license, should we prohibit them from transferring the digital license? MR. RATTNER: Well, that's a long and broad question. Let me say this, I think that if you -- COMMISSIONER HUNDT: I thought that was a yes or no question. MR. RATTNER: I know, but unfortunately it's not a yes or no answer, so I'm going to give you a slightly different answer. If you -- I don't believe that the problem of broadcasters being unable to develop the digital spectrum is a substantial one. In other words, I think if you give the digital spectrum to broadcasters, I'm not saying whether that's right or wrong, but if you decide to do that, with little or no restrictions as to how they use it, then, I believe, they will find a way to use it and get finance because we will finance them. COMMISSIONER HUNDT: Should we prohibit them from transferring the digital broadcast license? Should we make it unsellable for 15 years? MR. RATTNER: It's a public policy question, it really depends on -- COMMISSIONER HUNDT: Do you see any public policy reason to interfere with the marketplace? Normally, in the market, you'd allow them to transfer property. MR. RATTNER: Normally in the market you would allow them to transfer. I think, in this particular case, there is certainly a significant public policy issue over whether you should give broadcasters a full additional 6 MHz and tell them to use it for anything they want regardless and it's theirs forever. In other words, it is not obvious to me that you should give broadcasters six more MHz and let's assume that they all wanted to go into cellular phones or data transmission, and that they should get that for free and they should have the right to have it in perpetuity. That's not obvious to me, that's a public policy question. COMMISSIONER HUNDT: Because it might be too much of a gift? MR. RATTNER: Yes, that's not part of the deal going in. COMMISSIONER HUNDT: All right. Commissioner Quello. COMMISSIONER QUELLO: I have kind of a hypothetical question for say Mr. Braun, Hubbard, some of those in broadcasting. Say that Congress and the FCC decides that you have to pay for the digital and for the HDTV in an auction. Does broadcast have any plans once you pay for it and you -- that's a big bite, I mean, you're going to have to pay for the transmitter, your transmitting simulcasting to people that don't have very many receivers, yet it's going to be a long evolutionary process, has there been any planning at all, and I'm putting on my old broadcast has now, of maybe providing a hybrid service similar to cable where you would all of a sudden, if you're going to pay for the auction, you're going to have a pay service and let people pay for, let's say, football, baseball, basketball, hockey, the best movies, the soap operas, the best news in the world so that you could -- all of a sudden you go from free TV to a pay service TV and you're sitting now on still the most attractive programming, any plans for doing that? Has that come up in anyone's mind on how you're going to do it you have to pay an exorbitant price for an auction and wouldn't that be pretty much the end of free over-the-air TV? I've said that before, I think we'd be developing a nation of have and havenots. But if I'm going to pay for the auction, I want to be able to finance it and I think, if I have that kind of a proposition, it should be very attractive to Mr. Rattner and all the other people that actually invest money. MR. BRAUN: I'd like to address that, Commissioner. Actually, I had a conversation on that topic just yesterday. Later today NBC is going to be making an announcement about an acquisition of rights far out into the future and of a major event of public interest that's traditionally always been carried on free over-the-air television, and precisely because of the uncertainty that we're discussing today, I discussed with the people negotiating that arrangement to please preserve the flexibility to be able to do whatever is necessary in an economic climate where we can't reach a universal audience in the kind of picture and sound that they're used to. Meaning, in fact, that we would charge -- in fact, have the right to be able to charge for certain types of program, this particular program, in fact, over time, if we couldn't make money on it by delivering it free over-the-air. We have to hedge that bet. COMMISSIONER QUELLO: I think there's a general feeling that broadcasters are entitled to a channel only for broadcast purposes, not for cellular and paging and all the other things that might be very profitable. MR. BRAUN: Right. COMMISSIONER QUELLO: So I was just thinking if ahead, if you're going to get a broadcast channel, how are you going to pay for it? MR. BRAUN: Well -- MR. HUBBARD: May I respond also? COMMISSIONER QUELLO: Sure. MR. HUBBARD: I can't envision any broadcaster being so foolish as to try and charge for their broadcast services. And I can't imagine a Commission allowing that. The very purpose for our licenses and for our being is to be good public servants and provide a free over-the-air service, and I, for one, reject the concept of a broadcaster charging for services. And, if I might also add, if it were to be an auction situation, I don't think very many broadcasters, Steve, would be able to win that auction. You'd have AT&T or USWest or whoever coming in and winning the auction, the prices would be so high that it would then become a pay service. That would be the end of free over-the-air, in my opinion. COMMISSIONER QUELLO: So it's, if you go auction, why it's going to be a pay service, but you can't visualize broadcast every being pay service? Of course, most of us don't want broadcast to be a pay service, either. MR. HUBBARD: I don't either, Mr. Quello. COMMISSIONER QUELLO: We owe that service to the public. MR. HUBBARD: What I'm saying is if there were an auction situation, I think that the market price for the spectrum would be so high that broadcasters would be out of business and then new people would have that spectrum and they would charge because they had paid so much, and that'd be the only way they could recover. COMMISSIONER QUELLO: All right, thank you. Have you got something, Larry? MR. GROSSMAN: I just wanted to -- I certainly agree with that and that's why I would suggest that if there were an auction situation that you do reserve at least enough spectrum for a digital channel for any television broadcaster who wants to use it, so you can have the best of both worlds, in a sense. COMMISSIONER CHONG: Does that include the community broadcasters? MR. GROSSMAN: I beg your pardon? COMMISSIONER CHONG: I'm sorry, Jim, this is your time. COMMISSIONER QUELLO: Community broadcasters, yes -- COMMISSIONER CHONG: Oh, I'm sorry. COMMISSIONER QUELLO: I've just have one more question for Mr. Wiley. Do you respond to Mr. Lippman's argument that there are standards already out there and therefore no need to mandate HDTV? MR. WILEY: Well, I'm not comfortable with mandating certain programming requirements, but I do think it's essential to set a standard. I think to insure efficient use of the ATV spectrum, to give the public certainty to get the service quickly, I think the Commission needs to act and I think it's especially so, and going back to some comments that the chairman asked or the questions he asked, I think the ATV spectrum, after all, is going to be shared, sharing interspersed channels with the NTSC operations and I think you've got to look to having an efficient use of that spectrum. And the nice thing about it is, there really isn't any need for the Commission to do anymore work in this area. The standard had been fully documented, thanks to Mr. McKinney's organization's excellent work. I think there's a questionable precedent here to simply depart after the Commission has said to people, spend hundreds of thousands of hours and millions of dollars to develop this, and then walk away from setting a standard. I think that'd be most unfortunate. COMMISSIONER QUELLO: All right. COMMISSIONER BARRETT: Mr. Hubbard, you said that broadcasters should not be able to do what with the allocations? MR. HUBBARD: Charge for the services they now provide for free. COMMISSIONER BARRETT: If you take a look at the progressive scanning model which is more compatible with computers and you look at the interlaced scanning model which is compatible for higher resolution and you consider the fact that the Grand Alliance can do both, would you have a problem with people using any of that spectrum for data transmission or anything like that? MR. HUBBARD: No, as long as it accompanies the broadcast service, and I think that broadcasters -- COMMISSIONER BARRETT: What are they -- charge for those services? MR. HUBBARD: I'm going to get shot by friends in broadcasting, probably, but I don't think they should be able to charge for it. COMMISSIONER BARRETT: So, you don't believe in flexible use for the channel. MR. HUBBARD: Yes, I do. Yes, sir, I do, I think -- I believe in the use of any auxiliary channel in coordination with the main broadcast channel. COMMISSIONER BARRETT: How they then now make that attractive to Mr. Rattner's clients, if, in fact, I'm going to limit what they do under the Grand Alliance concept which can handle both of -- the progressive scanning and the interface scanning process? MR. HUBBARD: Broadcasters have a long history, Mr. Barrett, of always trying to give the public the best possible service, how to improve their picture, how to improve their news, how to improve everything. If you give it enough time to transition, I think every station in the United States will go digital and will give the best possible service without having to charge for that service. Without free service we're out of business. There's no point in having broadcasting. COMMISSIONER BARRETT: If we mandate some portion is to be used for broadcast purposes and then, in turn, can, under some concept, bid to Grand Alliance which can do both of the models, and they can provide data services, other services, that are compatible with computers and the high resolution aspect and they can charge for that, do you have a problem with that? MR. HUBBARD: No, I don't, but I also -- and this again, I'm a heretic, but I think that if -- what we get -- we have a broadcast channel which we have that because we developed it, we took the risk and I think to say that we're going to charge for the services without us paying something for the use of that particular service, I think is a mistake. COMMISSIONER BARRETT: Is that attractive, Steve, if, in fact, we limit the use for ancillary programs in addition to the broadcast aspect? MR. RATTNER: Clearly to the extent you limit the use of the spectrum and decrease flexibility, it becomes less attractive to Wall Street as something to finance. COMMISSIONER BARRETT: Neil, you're biting at the chops. MR. BRAUN: Well, the -- I agree with Stanley except for one thing, if, in order to compete in broadcasting in a competitive environment, we need to be able to have 6 MHz for HDTV transmission. If you preserve flexibility and we use it for pay services, we believe it's appropriate for you to make different rules for subscription services using that spectrum as opposed to free over-the-air. COMMISSIONER BARRETT: Well, what rules do we make if, in fact, we're getting what we want at a minimum or a maximum requirement that we have suggested that they do in terms of a broadcasting perspective? MR. BRAUN: I'm not sure I followed -- COMMISSIONER BARRETT: If, in fact, we get what we want for use of that free channel, if I may, of the spectrum, and we get that and you're able to do other things that are compatible with the usage of that spectrum, what difference does it make that I put rules down to limit you in terms of data transmission and things like that? MR. BRAUN: I'm simply making the point that what broadcasters are by and large arguing for is the ability to compete and we need the 6 MHz for that. But we don't need it 100 percent of the time. If we use it for things that generate a new revenue stream from subscribers, that should be subject to different rules and paying for value in that case. COMMISSIONER BARRETT: Why should it be when I'm getting what I want for what I've given you the allocation for, why should I then set a rule for what you can do when you're not using it for 100 percent of what I allocated it for? Why should the government be involved in that? If I'm getting what I want from you as a matter of public vision -- MR. BRAUN: Right. COMMISSIONER BARRETT: -- and I think the Chairman has put it before us more profoundly than anyone, if I'm getting that, even if it's the children's television stuff you had suggested, if I'm getting all of what I want and you have other time usages, and you want to use that flexibility, why should I determine what you should use it for and why should there be different rules for that flexibility? MR. BRAUN: I'm just acknowledging a distinction between those free over-the-air services that are totally supported by advertising and those which ask consumers to take money out of their pocket. I don't know there's a public policy interested in charging us, as long as you're getting what you want, you're right, there may be no public policy interest in charging us beyond that. COMMISSIONER BARRETT: Let me say this, let's assume that Congress says that we need -- you need to have 3-1/2 hours of children's television. And let's assume that we implement that and let's assume that one suggests that you need "X" number of hours of educational programming, if I'm getting that and you still have some time to be used for broadcast for whatever kind of services, why then, for that additional time, should I subject you to governmental rules after you have fulfilled my public policy vision? MR. BRAUN: No, that's clearly a quid pro quo, that makes -- COMMISSIONER BARRETT: I'm not even sure it's a quid pro quo in the legal sense because I've gotten what I want. MR. BRAUN: Well, right. I'm not -- COMMISSIONER BARRETT: Did -- I'm sorry. MR. HUBBARD: I agree, but if you require us to do certain things that are costly, that changes the whole -- COMMISSIONER BARRETT: And you do then. MR. HUBBARD: Yes, and we do them, then I agree -- COMMISSIONER BARRETT: And you have uptime for usage. MR. HUBBARD: Yes. COMMISSIONER BARRETT: Why, then, should the government tell you, set a different set of rules? MR. HUBBARD: You shouldn't, I think we're vehemently agreeing with you. COMMISSIONER BARRETT: Are you a lawyer, are you a lawyer? MR. HUBBARD: I think that all -- I went to law school. COMMISSIONER BARRETT: That's a good answer, we all wish we didn't go to law school. But before I congratulate Dick on his alma mater in Chicago going to the Rose Bowl and I was going to wear purple today, I'll wear it Thursday, this purple and black tie I'm going to wear. How do you respond to that, Dick, given that the Grand Alliance can do all that -- and, Mr. Chairman, I really apologize for doing this, for gone over now, I won't -- COMMISSIONER HUNDT: You're just taking Commissioner Ness' time. COMMISSIONER BARRETT: I apologize, Commissioner. COMMISSIONER NESS: This is a marketplace negotiation. COMMISSIONER BARRETT: Did you understand what I'm saying? I'm getting what I want, we have determined, by whatever mandate, that a certain amount of educational and a certain other kinds of programs we want, I've gotten that. There is still time to be used. Do you think I ought to be telling you, set up a different set of rules for your clients or how your friends ought to use that time? MR. WILEY: No. COMMISSIONER BARRETT: Okay, thank you very much, Mr. Chairman. I apologize, Commissioner Ness. COMMISSIONER HUNDT: He knew a yes or no question. COMMISSIONER BARRETT: He went to a great law school. COMMISSIONER NESS: During the transition from a terrestrially delivered network signal to an earth station satellite delivery, many of the networks provided some compensation or helped to underwrite the cost of those earth stations. I don't recall whether or not NBC fell within that category, but I believe so. I see someone shaking their head yes. Is there a similar -- and the reason it was done was so that it furthered the goal of the network to be able to make this deliver system which presumably had clearer pictures and cost less. I assume that there may be perhaps the same incentive to assist some of the network affiliated stations with a more rapid conversion to digital or to HD, if a network wanted to be able to maximize its audience and thus, perhaps, derive some revenues from delivery of HD signals, is this a concept that has been contemplated by your network, Mr. Braun? MR. BRAUN: It's not one that I've been privy to any conversation with, but, I mean, if I accept your premise that -- I mean, if what we are doing is preserving our ability to deliver a critical mass audience, we will have to think about that. I mean, if we believe that that's a critical issue to the continuation of delivery of a critical mass, we'll have no option other than to consider that. COMMISSIONER NESS: We talked a little bit earlier about must carry because this is still a very difficult issue to address when there are multiple programs streams coming down from broadcast. How, Mr. Braun, would you address Mr. Hendricks' concern about multiple channel delivery and must carry? MR. BRAUN: I think I'm in pretty much agreement with Mr. Hendricks, I mean, the distinction in my mind, again, still is free over-the-air versus subscription. If it's consumer financed, then I think we have to compete against all other services for carriage. If it is free over-the-air on a universal basis and we're making it available to cable operators, I think it should be on the same must carry basis as the primary must carry signal. COMMISSIONER NESS: When you use the digital converter boxes that would enable the viewer to use an analog TV set, are those converter boxes dynamic in that the amount of digital bits coming forward may vary so that you could have, for example, an HD transmission coming through or narrower programming to create more channels? How does that work? MR. BRAUN: I think the first generation might be somewhat limited but I think the boxes that will be available, say, a year -- that will be introduced say two years from now, will be robust enough to carry the full digital spectrum, will be able to reformat the bits and bytes to address the high resolution digital screen at that time. I think the early boxes that will be introduced next year will be somewhat constrained because, again, they'll be largely just passing through the analog signal about 40 channels, but they will be able to decipher that limited digital spectrum and redisplay video on demand and other services. COMMISSIONER NESS: So if an HD signal came through, you would be able to pass through an HD quality picture to the subscriber? MR. BRAUN: I'm just not sure about the first generation boxes, I'm pretty sure that the boxes in the second generation, two to three years from now, will be robust enough to address that. COMMISSIONER NESS: About 70 -- what, I guess about 66 or 65 percent of households now subscribe to cable and much of the cable viewership is to over-the-air broadcast channels. MR. BRAUN: Right. COMMISSIONER NESS: How will we be able to progress to have HD, for example, if the signals are being carried or being watched through a cable system? MR. BRAUN: Well, I think the opportunity here is to have government encourage carriage of certain hours during the week of high definition television. That, by and itself, I think, will drive the technology out. You know, to produce an economic model that Wall Street and Steve Rattner will respond to, I think the local broadcaster will have to probably have four or five new services that will be introduced on a multiplex basis and what we've ignored here is the revenue of advertising which has always been a strength of broadcasting. They can introduce an all news channel to compete with CNN, for interest, and finally people who have free over-the-air television, can have all news all the time, and that could be very powerful in the advertising world. COMMISSIONER NESS: Yes, my concern is if we are going to try to get high definition television, there's got to be a critical mass of viewers out there and even if there were to be sets, if they're not able to receive the HD signal, for example, through cable and they're cable subscribers, how does that work, Mr. Hubbard? MR. HUBBARD: They might buy an antenna. COMMISSIONER NESS: So, in other words, that might encourage folks not to subscribe or at least to use an A/B switch? MR. HUBBARD: Yes, most people will always get a better picture if they have an antenna than they will from a cable anyway, and I think with HD -- well, that's a matter of fact. What a cable company does is use an ordinary household antenna, but they hook it up properly, so there's a lot of people that can buy an antenna as they do for DSS. COMMISSIONER NESS: Okay, what percentage of a broadcaster's time ought to be free over-the-air broadcast? We talked about having the flexibility, if the Commission or if government does not regulate a specific number of hours of HD or other type programming, at what point do you feel that the consumer is perhaps not getting full value if, let's say, there were one stream of programming that were free and the rest of the streams of programming were all pay services, Mr. Braun? MR. BRAUN: It's hard to answer that question as a hypothetical. I would say that that is where the marketplace should determine it. Every technology looks for its killer application, its enabling application. Broadcasting is the application for digital that cumes 100 percent of television households every week. So, as Steve said before, I think it's the first hour of HDTV that's most critical, and I think incrementally we'll see what happens and we will learn by the market place about what level of programming commitment we drive penetration at. It's very had to forecast beyond that. COMMISSIONER NESS: Mr. Hubbard, do you have any thoughts on that? MR. HUBBARD: Well, it took seven years for the first million color TVs to be shipped and it's going to be a long process and broadcasters are better equipped than anybody else to do it. COMMISSIONER NESS: Okay, Mr. Wiley. MR. WILEY: I think we're going to see an evolutionary process, Commissioner Ness, but I think once the public sees it, and I invite anybody to go down there and look at it themselves this afternoon, they're going to say, I'd like to have that in my living room. And keep, again, in mind the fact that we do, in this country, have all that product which was 35 mm cinematography which is the equivalent of HDTV. It's available off the shelf and I think that will help the transition. COMMISSIONER NESS: In other words, absent government regulation, you would not have a problem if the broadcaster were to send out five streams of programming of which only one is free over-the-air and the remainder were all pay services? MR. WILEY: Well, I think that's a government policy decision. I think that Stanley Hubbard is right, a lot of broadcasters might be giving up their birthright in that instance, but some pay programming might make sense. COMMISSIONER NESS: Okay, thank you. COMMISSIONER HUNDT: Commissioner Chong. COMMISSIONER CHONG: I just have two last lines of inquiry. To any broadcaster on the panel, there's been lots of talk about using the additional flexibility you would have if you have digital. To your knowledge, are there broadcasters out there who would want to convert to digital and then, as a primary or entire use of their spectrum, use it for non-broadcast subscription services? MR. BRAUN: No. MR. HUBBARD: No, I don't think so. COMMISSIONER CHONG: My second line of inquiry is about the transition period. I've heard a lot about how, you know, we have, I think, 15 years currently set up in the decisions and some have suggested that maybe shorter was better, others have expressed concerns about the length. Mr. Hubbard, you suggested that maybe we should declare the end of the transition period as 95 percent penetration of high definition TVs into the marketplace. Why did you pick 95 percent, do you think a penetration standard is better than an arbitrary time standard and why? MR. HUBBARD: Well, the lower the penetration number is before its arbitrated, the more people are going to be still relying on the old sets, and 95 percent is 95 million homes and that leaves 5 million homes would have to convert and the fewer that have to or forced to, the better. It's going to be a hard pill for some people to swallow who don't want to do the new system, but at some point you have to bite the bullet. COMMISSIONER CHONG: And what about set-top boxes, I mean, when would be expect to have set-top boxes that are at a low enough price where most of those last 5 percent of Americans could afford it, anyone can answer that. MR. HUBBARD: I would think by that time, I'm in the set-top box business, and I would think by that time the set- top -- they are just chips, and by that time there should be enough of them to make the price very low. COMMISSIONER CHONG: How low do you think? MR. GREBOW: In the '97 time frame, we would hope that the chip sets would be available to do that pretty easily and pretty inexpensively, but it's still going to be several hundred dollars if it's a separate stand alone box. COMMISSIONER NESS: Is it out of the question to think that to provide an incentive for the last 5 percent of Americans to switch that the broadcast industry might subsidize the box for low income Americans? MR. HUBBARD: No. COMMISSIONER CHONG: Stan is shaking his head. MR. HUBBARD: Well, I'm saying no because we don't have any cash flow except our advertising. COMMISSIONER CHONG: Well, what about the possible ancillary services? MR. HUBBARD: Well, that's something that can be looked at. COMMISSIONER CHONG: NBC? MR. BRAUN: You know, broadcasting keeps getting discussed like it's a deep pocket and -- you have to understand there are companies -- it's cyclical like any other industry. Some of us are doing very well, some of us are doing much less well right now. Having available cash to do all the different things we've talked about today to implement the new system, if we had to do them all, I don't think anybody could survive. So picking which ones we have to, I think, is going to be critical. COMMISSIONER CHONG: That's all I have. COMMISSIONER HUNDT: Mr. Braun, are you comfortable with the idea that the government would prohibit NBC from deciding what programs to put on the digital spectrum? MR. BRAUN: Am I comfortable with the idea that the government would prohibit NBC from -- no, I'm not comfortable with that idea. COMMISSIONER HUNDT: Are you comfortable with the idea that we would tell you that you are absolutely obligated to show on the digital spectrum the exact same program that you're showing on the analog spectrum, 24-hour-a-day simulcast? MR. BRAUN: I think -- let's put it this way, whether it's a reasonable thing for a government to do is separate from the question of whether we would have a business problem with it. We're prepared to put a substantial simulcast on because we think that's what's going to drive technology and penetration. COMMISSIONER HUNDT: If you want to volunteer to do that, that's one thing. What I'm asking you is, are you comfortable with the idea that the government would order you to simultaneously broadcast on digital the same show that was on analog as opposed to allowing you voluntarily to make that decision on your own because you thought that was the best way to keep your audience? MR. BRAUN: Obviously, I prefer to do it by my own judgement. COMMISSIONER HUNDT: Okay, similarly, with respect to the decision to broadcast the high definition format, wouldn't you be more comfortable with the notion that you would voluntarily make that decision instead of having the government order you to pick that particular format? MR. BRAUN: Yes, and we will. But my point is, if the 6 MHz isn't available to do it, consumers will never have the choice to get broadcasting and HDTV free over-the-air broadcasting. COMMISSIONER HUNDT: These questions assume that you have the 6 MHz for digital broadcasting and if you will voluntarily decide to use the high definition format, I just have to say, my reaction is, why would you want the government to micromanage your business and order you to it? MR. BRAUN: Well, we don't. COMMISSIONER HUNDT: Let's suppose, nevertheless, that someone were to insist that we mandate a certain amount of high definition format for NBC stations, do you think that we should order you to do that during prime time? MR. BRAUN: I mean, that really does become micromanagement. I mean, I'm trying to envision what the impact of that is. Our prime time programming is already our most expensive programming. It is where the vast majority of our revenue comes from, so while -- if you wanted to gain exposure that might be it, but it's putting the most important part of our business at risk and you're basically telling us how to run the most important -- we've got. COMMISSIONER HUNDT: Well, I'm not, I'm just raising the hypothetical. I'm a lot more deregulatory than that kind of idea would require. Mr. Hubbard, should we order you to use the direct broadcast satellite to delivery a high definition format? You already serve everyone in the country, you've already got the satellite up. If we need somebody to drive the purchase of high definition receivers, why don't we pick on you, you don't even have to pay for the spectrum, why don't we make you use the high definition format? That'd be the easiest way to go, wouldn't it? MR. HUBBARD: Mr. Chairman, we really did pay for that spectrum, we put everything we had at risk to develop that service, so I want to make that clear. No, I don't think you should order us to do that. COMMISSIONER HUNDT: Well, I agree with you, I don't think we should be ordering anyone to take a particular format and I know you put a lot at risk for that spectrum and nobody believed you'd be successful but there you are, up in the sky as being successful. However, if you want a government policy that drives the creation of the high definition receiver and you want somebody to deliver the high definition format, you're the most logical candidate, aren't you? MR. HUBBARD: Let's let the marketplace do it. COMMISSIONER HUNDT: That's an idea. Mr. Braun, I've been told by Mr. Perlman, formerly CEO of Zenith, that the 6 MHz digital spectrum could be used in a high definition format for at least two movies simultaneously, is that the same information you're receiving? MR. BRAUN: I don't believe that's true on broadcast, I believe that's true on cable but there are others here who know more about that than me. COMMISSIONER HUNDT: Okay, I've been told -- pardon me? MR. HUBBARD: Two movies is possible. COMMISSIONER HUNDT: You agree that you could see at least two movies, no question. MR. BRAUN: No question, we do that every day, but two basketball games, a big problem. COMMISSIONER HUNDT: But you could do two movies? MR. BRAUN: Yes, you could. COMMISSIONER HUNDT: Let's go with Mr. Hubbard's statement, he's in the business, do you think, Mr. Braun, that we ought to, by rule, say that one of those movies has to be free and one has to be subscription, or one has to be free, but the other could be subscription? MR. BRAUN: Well, I believe -- I don't think you should say which one should be or one has to be but I think what we're talking about is that there should be a free over- the-air signal as part of the spectrum. COMMISSIONER HUNDT: Well, isn't that the same thing as saying that at least one of those two movies would have to be free? MR. BRAUN: It's saying that -- yes, you're not saying that you have to put a movie on but you're saying that if you did put it on, at least one of them would have to be free. COMMISSIONER HUNDT: Well, if you had two programs at the same time, at least one would have to be free, that's what you're saying we ought to do. MR. BRAUN: Yes. COMMISSIONER HUNDT: Okay, but right now we don't have any rules that obligate you to show free television, that's correct, isn't it? MR. BRAUN: I don't think it is correct. COMMISSIONER HUNDT: You're not doing it because of our rules, look it up. MR. BRAUN: No. COMMISSIONER HUNDT: You're doing it because it's good business. And Mr. Hubbard, you're aware that there have been efforts by broadcasters to try to charge a subscription for broadcast TV, that's happened in the last several decades? MR. HUBBARD: Yes, and the American citizens have a funny thing, they don't want to pay for what they can get for free. COMMISSIONER HUNDT: That's right. But the Commission didn't preclude anyone from trying to charge, the market didn't tolerate it, right? MR. HUBBARD: Not that I'm aware of. COMMISSIONER HUNDT: I'm just saying I don't know why we should start laying new rules on digital broadcast that we don't even put on analog broadcast. Thank you very much. We should stop but -- COMMISSIONER BARRETT: We should all stop -- getting mixed signals from these people in terms of my question, but you followed up wisely on it, don't worry about it, that's fine. COMMISSIONER HUNDT: Okay, we'll take a 10-minute break. I want to thank all of the panelists very, very much, this has been entertaining, informing and very much fun. A 10-minute break, we're going to be quite sharp about that. PANEL 2 COMMISSIONER HUNDT: -- convenience of necessity. The issues in this panel are of particular significance to our very able Mass Media Bureau and I'd like to acknowledge the presence of Roy Stewart, the very able chief of the Mass Media Bureau, who is going to be listening, as we are all, with great attention to these issues because whoever gets the digital spectrum and whatever be the resolution of the issues about formats and transmission, we still face the public interest issues and off we go to the discussion. Preliminary remarks, again, let me remind everybody to visit the demonstrations on the first floor of 2000 M Street, they'll be open until 5:30. No. 2, the format is that there will be three minutes for each of the panelists and then in two rounds of six minutes per commissioner, there will be Q and A, long answers deprive questioners of the opportunity to fire carefully crafted sharp-pointed questions and thus irritate the questioners. Off we go. MS. SOHN: Thank you. I appreciate the enormity of your task. I urge one thing in particular, not to forget your mandate to make the public's interest paramount. The worst thing you could do for the public would be to simply give the ATV spectrum to existing broadcasters, to let broadcasters receive this enormous benefit without imposing any new obligations in exchange, would be the biggest corporate welfare give away of the decade. Unfortunately, there is little in the record here to indicate that broadcasters plan to do anything more for the public than provide prettier pictures. Indeed, until now, this debate has largely been framed in terms of broadcasters needs to compete, to have flexibility, to provide non- broadcast services and to have an adequate transition period. It is now time for the Commission to focus more on the public's needs to have access to diverse sources of information, to be adequately compensated, and to be assured access to free TV. MAP has suggested two approaches to serve these needs effectively. The favorite approach would be for the Commission to permit broadcasters to use only enough capacity as is necessary to provide one free digital service. We call this the condominium option and it somewhat resembles the British government's plan for digital TV. This plan would permit new entrance in unaffiliated programmers to use the new spectrum. My written testimony suggests how this can be achieved consistent with the Grand Alliance standard. The second approach assumes the Commission grants broadcasters the full block of spectrum, notwithstanding Supreme Court prohibiting this outcome. In that event, MAP asks the Commission to require broadcasters to use 3/4 of their capacity for free broadcasting and that it require additional enhances public interest obligations in return for the exclusive opportunity to transition. We suggest three such obligations, free time for candidates, reservation of capacity for low-cost public use, and increased children's television obligations. If I may be blunt, your job would be easier if some broadcasters were more candid about their intentions for the Spectrum. For example, commercial broadcasters say they need to be multichannel providers to compete, yet, their rhetoric and legislative plans indicate that they want to provide just one program service of standard quality. Many broadcasters shun HDTV and predict that they will be able to multicast, yet, when asked to reserve a small portion of that capacity for public uses, they say that they cannot anticipate what technology will ultimately permit them to do. Finally, in the face of auction threats, other broadcasters have reembraced HDTV, even as they urge the Commission not to set minimum requirements. The Commission should stay these proceedings until broadcasters stop being evasive about what they can or want to do with the spectrum. In conclusion, I want to clarify two misconceptions about MAP's position. First, we do not oppose the conversion to digital, what we challenge is giving broadcasters exclusive use of the huge chunk of spectrum without returning something additional to the public. Second, we do not oppose HDTV, but we are skeptical of the public's need or desire for it and we don't endorse minima. Many large broadcasters have pledged to provide HDTV, we saw that on the last panel. That's enough to enable to public to decide if they want more. Time doesn't permit me to discuss other important issues. I look forward to your questions. COMMISSIONER HUNDT: Thank you, Mr. Braverman. MR. BRAVERMAN: In summarizing my written testimony, I would like to make three points. First, contrary to the views of some of my fellow panelists, lending spectrum to broadcasters for a transition period to effect a transition to digital is not a spectrum give away. Eight years ago, the FCC correctly determined that the public interest would be best served by affording broadcasters the means to upgrade this country's free over-the-air broadcast system to the highest quality picture and sound that was technologically possible. After years of work and millions of dollars of investment, private industry has solved the daunting technical hurdles to FCC's upgrade plan. While the goal is accomplished, the means to do so changed from an analog approach to a digital solution with all of the potential for flexibility that digital technology allows. Some now assert that the fact that digitization holds the potential for other uses should cause the Commission to abandon its judgement that broadcasters should be given the means to enable them to upgrade their service to HDTV. We disagree. If digital were indeed a genie in the bottle, it should not change the Commission's wish. Just as it was true eight years ago, the ability to offer high resolution video service remains vital to the continued viability of the free over-the-air system the country now enjoys. Cable, Telco, DBS and other new technologies will surely compete for viewers by exploiting digital's revolutionary potential for improved picture quality and sound. Free over-the-air broadcasting will whither if it is forced to meet that competition through technologically inferior NTSC offerings and the public interest is hardly enhanced by limiting these digital breakthroughs to only the video-by-subscription world. Second, the transition to digital will require the imposition of some ground rules, to assure a successful launch and, just as importantly, an expedited transition. In addition to a simulcast requirement, we believe that a fair market test of HDTV does require a prescribed minimum hours of HDTV programming. We are hardly alone in this view. Contrary to the views of some panelists, the broadcast industry has not backed off its commitment to HDTV and many, in both the broadcast and equipment manufacturing industries support an HDTV minimum. And, third, with respect to the public interest, one vital point should not be lost in the debate. The public interest will be greatly enhanced by enabling our free over- the-air broadcasters to offer to the public an opportunity to enjoy the highest quality picture and sound that's technologically possible. We do not believe that the loan of the new spectrum should or needs to be conditioned on new governmentally imposed public interest obligations. Like all broadcasters, we very much understand that the use of the digital spectrum will and should be charged with an obligation to operate in the public interest both during the transition and after the give back. But this is hardly a new concept. At Capital Cities/ABC, we have operated our stations for many years in the public interest and are proud of our record of doing so. We, as all broadcasters, have met this obligation without the need for the imposition of specific quantified public interest obligations by the government. We have long believed and continue to believe that the imposition of such specific obligations would be bad policy and counterproductive to assuring that the totality of a community's needs are served by the broadcasters that serve it. Thank you, and I look forward to your questions. COMMISSIONER HUNDT: Thank you, Mr. Diller. MR. DILLER: Thank you. Well, the only sane way that I know to begin this discussion is to flatly say how ridiculously complicated the whole topic is. New technologies, old systems, the displacement of old players, new sources of revenue, potentially disenfranchised consumers, eager new players, and, of course, the future of what we now call free broadcasting. The truth is, I don't envy this Commission its task, and I'm somewhat reluctant to play the role of a backseat policy maker. Nevertheless, you've been generous enough to ask my opinion, an always dangerous thing, and I'll do my best to comply. This much I can say with certainty, anyone making hard predictions on how all this is going to come out, is more than likely to be wrong. Guessing at the behavior of 250 million people, except in this year by the programmers at NBC, is no easy trick. So to proceed on the assumption that was can safely lay down a comprehensive ATV policy is ridiculous. Nonetheless, the technology may be on the verge of viability and we have no choice but to set preliminary guidelines lest we artificially retard the process. My gut tells me that in this case, less is more. Rather than over-intellectualize ATV, let's establish that no matter what form it takes, it should be primarily organized as an evolution of our old mass free broadcasting system. This system has served us well for over half a century, providing us with the most prolific and diverse programming in the world along with the most possible complaints about its shortcomings. The mechanism that has made this all possible is that unique, though always precarious, balance between commerce and responsibility. Our system is four parts free market and one part public interest obligation, the latter is more subtle but the recipe is worthless without it. I think the same formula is well applied to rule-making involving future technology. Any absolute dictation to the marketplace, whether mandating HDTV transmissions or fixing the timing of conversion, is bound to do more harm than good. The beauty of our existing system is that it flows with the rhythm of the market and only kicks in to keep the broadcasters from getting too out of sync with the public. We really don't know if consumers will want better pictures or more channels or anything at all. If there's a market for HDTV, someone will go for it. If cable or the Telcos get there first, don't worry, it may be at their last breath, but broadcasters will certainly follow. Or conversely, one broadcaster, believing it will get an advantage, will take the early lead and reap the rewards or fall on its face, in what may be the ultimate chicken-and-egg scenario to force anyone in or out of the coop, except possibly for the fox, would be foolish. However, no matter how many channel choices technology provides us, nor how much free mass broadcasting is worth preserving, free must be a reciprocal street. To the extent that broadcasters maintain their historic obligations to program in the public interest for free, they should continue to get their licenses for free. If they use some of the new digital spectrum for pay services, then it's right and proper that they pay the going rate. And if any free stations, not just strictly defined to news or educational channels, do not demonstrate strong and sincere commitments to the public interests, then such broadcasters should be replaced with programmers that are willing to honor the public's interest. Now, this will definitely require reinvigoration of the Commission's responsibility to proactively enforce broadcasters' compliance with the public interest. But I've been arguing that's necessary regardless of whether you broadcast in digitally delivered fiber or pipe cleaners. Whatever the distribution, we must fix this now or the system we've enjoyed for so long will be truly in danger, and I think balancing new services with general public interest responsibility is a better and more sensible course than mandating all sorts of things like date-certain timings for conversion and auctions based thereon, much less give back to the minimums for a marketplace that doesn't yet exist. Meanwhile, I wish you all the best of luck. Thank you. COMMISSIONER HUNDT: Thank you very much, Ms. Anderson. MS. ANDERSON: Good morning, I want to comment the Commission for initiating an open dialogue on what is indeed a controversial issue, the proposed give away of lose spectrum to broadcasters. For nearly ten years, the debate about HDTV has been the exclusive province of special interest groups, broadcasters, consumer electronic manufacturers and their legions of lawyers and lobbyists with no input from the American public. While the Commission's original plan to set aside spectrum for HDTV has been rendered obsolete by advances in digital compression technology and the utter lack of consumer demand for HDTV sets that cost the equivalent of a down payment on a new car, these special interests loudly proclaim that the public interest will nevertheless be served by doubling the amount of spectrum assigned to broadcasters and giving broadcasters the, "flexibility" to use the new spectrum to provide new digital broadcast and non-broadcast subscription services. If the proposed ATV licensing plan is implemented, broadcasters will reap an unconscionable windfall at the expense of American taxpayers who will unwittingly subsidize their transition to digital technology. Such an eventuality would be the national scandal that former FCC General Counsel Henry Geller warned about in his testimony before the Senate Commerce Committee last July. I believe a discussion of digital broadcasters' obligation to serve the public interest is premature. The threshold question needs to be answered, what public interest is being served by government mandated transition to digital television that doubles the amount of spectrum assigned to existing broadcasters, forces consumers to spend an estimated $33 to $187 billion to receive "free-TV," widens the trade deficit and disenfranchises millions of American who depend on free over-the-air television as their primary source for news information and entertainment. I respectfully submit that at the end of this review, the Commission will conclude that the marketplace should determine consumer demand for digital television and that the public interest will be served by auctioning the spectrum to the highest bidder and earmarking a portion of the revenues for educational technology block grants to the states to a connect the nation's public schools and library to the information super highway. Finally, the Commission and our nation are at an historic moment. In the original assignment of television licenses, the Commission failed to secure concrete commitments from broadcasters to serve the public interest. The tragic consequences of that policy failure and lack of accountability are reflected in survey findings that a whopping 80 percent of Americans believe television is harmful to society and especially to children. The proposed ATV licensing plan presents a farcical notion that the public interest will be served by giving existing broadcasters 12 MHz of spectrum for an indefinite period of time. We can, and indeed, must do better for our country, for ourselves, for our children, and for future generations. My time is up, I'd be happy to answer any questions that you might have. Thank you. COMMISSIONER HUNDT: Mr. Honig. MR. HONIG: Good morning. Throughout the 87 year history of broadcasting, the airwaves supposedly have belonged to the public at large. Yet, even today, minorities own only 31 full power television stations, 2.7 percent of the total, representing less than have of one percent of industry asset value. Owing to the elimination of tax certificates and the disuse or suspension of your other race-conscious licensing policies, minority media ownership is declining rapidly. This is a national disgrace. Your highest priority should be to rectify this insidious and unlawful misallocation of one of our greatest national resources. We urge you to license no ATV facilities until you complete post-Adarand research study and develop a race-conscious plan aimed at insuring that ATV licensees resemble the audiences they will serve. Licensing first and studying minority ownership later will mean locking out minorities forever. We encourage you to adopt four goals in ATV licensing. First, you should ensure that the licensing process will foster diversity in ownership and viewpoints. Second, you should remedy, once and for all, the Commission's long history, over two generations, of official discrimination and ratification of licensees' discrimination. Third, you should take account of the profound difficulties faced by minorities in obtaining access to capital. And, fourth, you should insure that every licensee selected for ATV, irrespective of how they are selected, will implement an aggressive EEO program. The question of the day is this: Which is the most promising algorithm to insure that minorities have a meaningful opportunity to win ATV construction permits, lotteries, comparative hearings, auctions, or a gift to incumbents? The answer is either comparative hearings or auctions, provided that either hearings or auctions are structured to facilitate the licensing of minorities and other applicants with strong commitments to public service. Comparative hearings are the most rational means to enable the best applicants to be selected. Discovery and scrutiny by an ALJ are powerful disincentives to most fraud and front artists and to those with no commitment to public service. Auctioning off the spectrum would insure that only the most well-financed corporations would receive the licenses. Indeed, an auction would probably shut out most of the 31 minority-owned full power NTSC licensees, given their lack of access to the development capital needed to bid in an auction and pay the cost of migration. It would be tragic to lose any of these 31 good broadcasters. Nonetheless, if you decide to use auctions, you should design in a substantial credit for minority ownership of the type you used successfully in IVDS licensing. You should also build in credits paralleling those you would use in comparative hearings, including civic participation, EEO proposals and minority ownership incubation. And you should work with Congress to develop legislation authorizing the application of auction proceeds to public broadcasting, children's programming and a minority ownership equity fund. Finally, we express our concern that the phase-out period for NTSC not be too swift. This morning Stanley Hubbard suggested that it be tied to penetration and we would tend to agree, perhaps, to 95 penetration. The poor depend on television as their window to citizenship. Low income Americans must not be forced to spend hundreds of dollars on high-tech equipment they didn't ask for. COMMISSIONER HUNDT: Thank you, Mr. Siegel. MR. SIEGEL: Good morning. I'm honored to be here today to focus on the nature of broadcasters' public interest obligations in the digital age. We believe that the reference point for analysis of this and all issues relating to ATV should be the maintenance of free universal broadcast television. It's a national jewel and, I might add, the only quality consumer alternative to pay video. Numerous companies, such as ours are willing to risk capital and devote our energies and creativity to the education and entertainment of our viewers. The regulatory framework established by the FCC for the transition from analog to digital broadcasting will largely determine our ability to survive into the next century. Broadcasters recognize that their future lies in the rapidly developing digital technology, but the transition will be risky and difficult. Stiff competition will come from a variety of multichannel, multiservice, wire and wireless pay systems. Our company owns eight television stations and notwithstanding the competitive challenges, we are investing substantial sums to create a new over-the-air network service that can help many local independent stations be competitive. Last January Chris-Craft launches the new UPN network which we own and which six of our stations, previously independent, are now affiliated. We, and INTV's members recognize that as broadcasters we have a special obligation to serve the needs and interests of our licensed local communities. Free over- the-air television will continue to be the core of our business in a digital world, but localism, in the digital age, will mean different solutions for different broadcasters serving different consumers in different communities. Competitive and regulatory flexibility, not rigidity, will be required particularly for the affiliates of our emerging network, many of which are far from the strongest stations in their markets. We submit that a station's compliance with its public interest obligations should be judged on the basis of the totality of its free over-the-air offerings and that the extent of that obligation should not be determined or affected by the number of such offerings that might be offered over the station's digital channel. As we transition to digital, the public is best served if stations are given the greatest flexibility in determining how to utilize their bandwidth. Thank you. COMMISSIONER HUNDT: Thank you. We'll now do the six-minute blocks of questions and answers. Commissioner Quello. COMMISSIONER QUELLO: Okay, Mr. Honig, you know the goal of increasing minority ownership is supported, I think, by about everyone up here, including me, and in fact, I still favor tax certificates and as a strong supporter of it, I think it's too bad that some how or other it got thrown by the wayside. But, No. 1, HDTV spectrum's going to be very expensive for anyone getting it, I mean, you are transmitting to an audience that isn't there yet. It's going to be very, very -- a very tough thing to get financing. Do you have any ideas on how we could, you know, in light of Adarand and help enhance the ability of minorities to secure financing. I mean, give us your best shot? MR. HONIG: There are a couple of approaches. One would be to designing an incentive for applicants to incubate minority owners as a means of selecting which applicants receive the most desirable or the most space. The National Association of Black Owned Broadcasters developed such a proposal and we would endorse it. Probably, I think the important point is that the Commission is going to have to grapple with this question of race-conscious remedies through it's post-Adarand study before it takes to undertakes to license, probably this last great, great opportunity for ownership. That's the most important point. If it licenses this spectrum first, before it grapples with that question, then it does the study and finds that it could have used incentives such as that, at that point it's too late. And the opportunity will be forever lost to us. COMMISSIONER QUELLO: I think the idea is that what requirement is there if say a minority would have to get enough money to bid for it, but if they got it, would there be some provision where they'd have to operate it or could they just transfer it to someone else? MR. HONIG: Right now, there are 31 stations, suppose new costs are imposed on them and often these are fairly small operators that are highly leveraged now, in effect, the Commission would be saying, you must go to the banks, you must borrow against revenues that you don't now have and, in effect, you're going to have to turn over much of your company to other investors and really become a different kind of company simply because we want bigger pictures. I question whether that makes sense and until the Commission grapples with how we're going to insure diversity, it really shouldn't -- that's a necessary decision to all of the rest of the licensing decisions that be made. COMMISSIONER QUELLO: It's just a matter of financing, I mean, that's a real tough problem on how we can get it. Mr. Diller, I'm glad to see that you are advocating definite and increased public interest obligations at this time. I just want you to know, on a personal note, that I was here when we authorized home shopping services and I also want you to know that I caught hell from some my best friends in Congress for authorizing it. It was a very controversial thing, so -- MR. DILLER: Probably me too, since I was the competition. COMMISSIONER QUELLO: Wondering what we were doing and the only argument I had at the time was that, look, they're meeting a commercial demand, they're serving that, but -- I mean, home shopping is 100 percent commercial if you want to take that approach and I had a tough time with it. I finally voted for it. So I have to agree with what you're saying today, but how do you square increased public interest requirements with the current realities of the marketplace in which broadcasters are facing more channels than ever before, facing an increasing and a variety in the strength of multichannel competitors. MR. DILLER: I don't think that abrogating those are going to lessen their competitive edge. I think that the system, this mass engine broadcast system that has always worked somewhere in the nexus of the balance between commerce and responsibility and has given every broadcaster kind of a secondary agenda, has not only delivered generally good programming, but has made it the -- but it has been the service that has been the one that is the only one right now that is mass. All of the other alternatives that do chip away, chip away from a rating and a half, .7, 1.3, but for bigtime broadcasting, it's in the hands of the people who deliver it with these responsibilities intact and I think that they're strengthening of those responsibilities is only going to allow broadcasters to be more competitive, not less competitive. COMMISSIONER QUELLO: Well, there is a cost, of course, involved in this thing and, as you heard this morning, the broadcasters certainly feel that they have a public interest obligation and they perform a valuable public service. So, in a speech about three months ago, I had two pages of existing broadcast regulations -- going away, there's a lot of regulations still on the book, issues in programming is one of the big ones, but there are so many others. But I was interested in your comments and I'm glad to see that your creativity is being put a very practical use these days with your expansion and good luck. MR. DILLER: Thank you very much. I will add that we have, in our petition or filing or whatever it is technically called, for a change in control of the Silverking Stations, we have said that our plan is to migrate them from home shopping, to be full service local providers of entertainment, news, information, etcetera. So that's my comment about home shopping on broadcasting. COMMISSIONER QUELLO: All right, thank you. You know, Ms. Sohn, what if a station -- is my time up? COMMISSIONER HUNDT: Do you have -- COMMISSIONER QUELLO: Oh, yes, I'm all through, thank you. COMMISSIONER BARRETT: Could you tell me what page those comments are that you just described in terms of this -- what it is you agreed to do? MR. DILLER: What page? COMMISSIONER BARRETT: Yes. MR. DILLER: You must be joking. It's in here, I promise you it's in there. COMMISSIONER BARRETT: You mentioned that broadcasters -- COMMISSIONER HUNDT: It's on the front page. COMMISSIONER BARRETT: You mentioned that broadcasters -- MR. DILLER: Was it on the front page? COMMISSIONER BARRETT: -- ought to pay the going rate. MR. DILLER: Yes, sir. COMMISSIONER BARRETT: Should that be in programming or cash? MR. DILLER: No, I think probably it should -- if they're going to use the spectrum for anything but free broadcasting, they should pay in cash to the government the going rate for such services. COMMISSIONER BARRETT: Notwithstanding the fact that you -- I think you were recorded as suggesting that there ought to be more children's programming and broadcasters ought to adhere to that or commit to that, would that -- would you accept that as a substitute? MR. DILLER: Well, I think you get into difficulties when you mix these things. I think that the true principles, you know, you operate free broadcasting and you get the license for free, then you've got to program in the broad public interest, which obviously, over different periods and times, that interest changes and if your -- if, in fact, you're taking care of your responsibilities, then all ought to be okay in that bargain, everybody is getting something quite appropriate. We have a great system, that was based on that. I think it's eroded in recent times and I think it can be strengthened in those respects. If, however, you're going to have it not be free and people have to pay for it, then that is a totally different standard and that should go to the highest bidder, however you want to organize that. COMMISSIONER BARRETT: But you would not accept the programming that you have been supportive of most recently in terms of additional or more children's programming, a quantitative amount for the cash? MR. DILLER: No, because I think once you get into those kinds of judgements, you end up making lots of mistakes. COMMISSIONER BARRETT: Okay. MR. DILLER: You slice the salami like of in probably contradictory ways over a period of time. COMMISSIONER BARRETT: Ms. Anderson, I'm not sure -- you made two statements that I'm sure that Gigi and certainly David would probably disagree with you on and that is that the public has not input in this process, and secondly, that we've failed to serve the public interest. It may be that we don't agree -- you don't agree with how you think we have served that interest or the fact that one has missed filings or have not filed, but -- I don't think there's any evidence that we've violated either of those. It is clear to me that David writes so much it almost makes you sick, even though we're glad to hear it, so I don't think there's any evidence that we've violated any of those two things. MS. ANDERSON: Well, I'm not suggesting that. COMMISSIONER BARRETT: Okay. David, let me ask you a question. If I owed a station in San Diego and I own a station in El Paso, Texas, and I own a station in San Antonio, Texas, do I serve the community for my racial persuasion or do I serve that community there? MR. HONIG: We would need to know a lot more information. COMMISSIONER BARRETT: Well, what information do you need to know other than my economic suggests to me that I serve the market where my audience is? MR. HONIG: Who makes the decisions, who do you hire, who do you entrust -- COMMISSIONER BARRETT: Obviously it's not clear what I am but I'm saying, it seems to me that the driving force behind my serving in San Diego, and El Paso, Texas and in San Antonio, Texas would have absolutely nothing to do that I was a minority owner, it had to do with my wanting to stay in business and I would need to serve that public, which brings me to -- does it really make a difference who owns a station or does it make a difference what kind of programming they provide? MR. HONIG: What kind of programming you provide is in very large measure determined by who owns the stations and -- COMMISSIONER BARRETT: Is it? Let me ask you this, are you aware of WGCR in Chicago which has the No. 1 drive show in the morning which probably has two or three in the afternoon, it is No. 1 or 2 in Chicago. It is just -- overflows in terms of its community committee. MR. HONIG: And Gannett owns it. COMMISSIONER BARRETT: Uh-huh. MR. HONIG: That's right. The -- COMMISSIONER BARRETT: Well, let me finish my point, does it make any difference who owns it as long as they program satisfactory to that community or does the ownership make a difference? MR. HONIG: Two point -- COMMISSIONER BARRETT: If I own the station, I'm going to program to the economics of how I can survive and not to a community. MR. HONIG: First, Gannett would not be the progressive company it is without having led the industry in equal employment opportunity within its own ranks from the middle '70s. Second, our point is not that non-minorities can't provide good service to minorities or vice-versa. The point is that when minorities are included in the mix of owners, you tend to get more -- a greater opportunity for viewpoints that might not otherwise be heard, to be heard by some of those broadcasters. There are three or four minority owners in Chicago, too, I think Chicago is much better because of them. COMMISSIONER BARRETT: But you don't program from a racial persuasion perspective or a politics or philosophy, that's a loss of your economic base, though, do you? MR. HONIG: That's one factor. COMMISSIONER BARRETT: I mean, it would be foolish for me to be in the three towns that I mentioned and notwithstanding who I am to program for Chicago's -- certain segments in Chicago and New York and L.A., doesn't make very much sense, if I want to stay in business. MR. HONIG: It's much more subtle. A minority, if they're involved -- if the minority owner, or any owner, is involved in the making of program decisions, that person's background, any owner's background, brings non-pecuniary values to the table in who they hire, who they entrust with those decisions, how they make editorial judgements. At the margin, when you can't make precise economic judgements about what program is better, which one you choose. The research data has supported that and those finding in Metro to that effect have been not been specifically overruled, I think they were valid. COMMISSIONER BARRETT: Okay, I have to stop, I'll follow up later. Thank you, Mr. Chairman. COMMISSIONER HUNDT: Commissioner Ness. COMMISSIONER NESS: Mr. Siegel, you mentioned -- you were talking about public interest obligations, what are those public interest obligations, can you describe them, please? MR. SIEGEL: Well, serving our local communities, the children's programming, which we certainly support, providing information, ascertaining what our communities are all about and trying to meet those needs. COMMISSIONER NESS: If you -- you mentioned that we should look at the totality of offerings that are free over- the-air, if a station had flexibility with its digital spectrum under the Grand Alliance standard, and it were to place all of its public interest programming, be it the children's programming or carriage of political advertising or any of the community service needs, on one of the streams of programming outside of the mainstream programming that might be carried, for example, on cable, would that, in your view, be deemed to be serving the public interest? MR. SIEGEL: I think it could be deemed to be serving the public interest, yes. I think that -- for example, what we're talking about here is an advertising supported service and, yes, I think that it could be deemed to supporting the public interest, yes. COMMISSIONER NESS: Ms. Sohn, do you agree with that? MS. SOHN: Well, of course, I don't agree with it but let me try to explain with why. Well, I do agree -- let me just mention that I do agree with Mr. Siegel to the extent that I believe that a broadcaster's public interest service should be judged by the totality of what they do and not that, for instance, children's television obligations shouldn't, you know, be attached to each individual service that they provide. But where we disagree is that I don't think it's enough just to take the public service obligations that broadcasters have now and say they need to do no more. I view this gift of spectrum, it's not a new loan and it's not a new reallocation of spectrum, and I believe that in return broadcasters should do a bit more. If can address Commissioner Quello's concern about how broadcasters can compete in a multichannel world, they're doing just fine and they'd do even better if they get another 6 MHz of spectrum to become multichannel providers. COMMISSIONER NESS: Mr. Diller, you talk also about public interest obligations, in fact, you waxed eloquently on the topic, how would you enforce those public interest obligations? MR. DILLER: Well, I think that some of the basic rules have to probably be modified. I mean, you can go back to some degree to what it was some time ago and look inside the process where a broadcaster would say, I would recommend that a broadcaster say at the beginning when applying for a license, that he would do in each of these areas or in one particular area, a range of services that very clearly demonstrated public interest programming, whether it be in either news or in educational programming, in children's programming, in local community programming. Whatever it was that he thought, she thought, it thought, that was appropriate and it would have to be significant and significant is not hard and fast. It might be 8 percent, it might be 12 percent, but it wouldn't be lip service, and it wouldn't be just a specific number of meeting some quota. It would be a genuine commitment and three years later or five years later, it would be judged as to whether or not it had been met, if it had been met, fine, if it had not been met, and it wasn't quickly cured, there would be serious repercussions. You would not be able to broadcast any longer. I mean, to me, I think, that is a sensible and flexible way to deal with the issue. COMMISSIONER NESS: Mr. Braverman, do you have some -- do you agree with Mr. Diller? MR. BRAVERMAN: Well, I don't think I agree with Mr. Diller's premise, which is as of today broadcasters are not living up to their public interest obligations. I do agree with him, though, that if there is an issue with regard to that question, it ought not to be tied -- its resolution ought not to be tied to loaning the spectrum to broadcasters to admit them to upgrade their service. This is a very difficult set of questions, as you know, and there's a lot of history here. If one were to conclude that as a general proposition broadcasters are failing to live up to their existing public interest obligations, a proposition I don't endorse, then I think each -- its appropriate to take a look at some of the strategies that were used in the past. I'm skeptical about the promised performance regime that I think Mr. Diller was referring to as to whether that worked, I think it was abandoned in part because of the perception at the time that it wasn't accomplishing the objective. But, again, you have to go back to the premise and the premise is, are broadcasters living up to their public interest obligations today, I believe they are. I do not believe that increased public interest obligations as an abstract proposition should be the quid pro quo for loaning a spectrum in order to upgrade our service to remain a viable service. If there is to be a debate, and, by the way, I believe that we benefit, the whole industry, the public benefits from the robust debate about the very question of whether it resolves in quantitative guidelines or not, I think we are -- should be held accountable to what we're doing, I think we should be challenged as to what we're doing. Having said that I think we're living up to our obligations, I recognize the fact that, as in every other endeavor in life, you can always do more and you can always do better and we're prepared to be challenged. COMMISSIONER NESS: Thank you. Ms. Anderson, you say right now that there's no demand for HDTV, how can you make that determination when there are no sets that are really broadcasting in HDTV. when no broadcasters are broadcasting in HDTV, when there's no programming on the market, etcetera, how would you make that determination presently? MS. ANDERSON: How does -- how did I make the determination there's no demand for HDTV -- that the public doesn't want it? COMMISSIONER NESS: Right. They don't have it right now, how can you say that they don't want it? MS. ANDERSON: Well, that's why I go back to the threshold question, what -- why is HDTV in the public interest? I'm just not convinced pretty in pictures, better quality audio is the most efficient uses of spectrum. There was not, at one time, CD, the marketplace determined CDs value, the marketplace determined the demands for CD. There was not VHS and no BETA, the marketplace determined the demand. All I'm suggesting is let the marketplace determine the demand for HDTV. COMMISSIONER NESS: That may work, for example, with DSS or it may work with cable where there is some flexibility, but for broadcast, broadcasters don't have the flexibility to choose whether or not to provide HDTV unless they have the spectrum and be, frankly, a standard because they need to have the TV sets out there that will receive and show HD if that, in fact, is going to be something that they choose to do. How then would we not be precluding HDTV if we have, as for example, Ms. Sohn, is suggesting, a condominium approach to spectrum management or as some of the folks this morning were suggesting that we just auction the digital spectrum and require -- not make any requirements whatsoever that there be a standard to be applied for that spectrum. MS. ANDERSON: Okay, again, the threshold issue is the need for HDTV. Assuming, for the sake of argument, the Commission determines that HDTV is, indeed, in the public interest, then that begs the question, how much spectrum to give to broadcasters, will there be a commitment to transmit an HDTV. This issue is, if they're not going to use the spectrum for HDTV, why give it to them? COMMISSIONER NESS: Thank you. COMMISSIONER HUNDT: Thank you. Commissioner Chong. COMMISSIONER CHONG: Thank you. Mr. Braverman, if a broadcaster isn't meeting its public interest obligations, would you agree with me that the time for the Commission to address that is at license renewal time? MR. BRAVERMAN: Yes. COMMISSIONER CHONG: Thank you. Ms. Sohn, you know, we've relied on broadcaster discretion for many years, in terms of their meeting their public interest obligations, and in your testimony you suggested that in a digital world we should be much more aggressive and specific in our -- about these obligations. I guess what I was wondering is, why would we expect broadcasters to suddenly to need a change or more direction or the Commission should be more aggressive about the public interest obligation in a digital world. In my view, moving from analog to digital is really just a technology change. I mean, for example, when we went from black and white TV to color TV, we didn't increase public interest obligations at that time, why would we do that now? MS. SOHN: Well, I -- let me just step back for one moment and say, you know -- as well as I do that the Commission should be more aggressive in having broadcasters meet their public interest obligations, so this isn't really a new -- no, while we do say rely on discretion, we sometimes have had problems with the Commission's enforcement of the Communications Act in that regard. This is, you know, I disagree strongly with Mr. Braun on the previous panel that this is akin to going from black and white to color. In my mind, this is a whole new service, I mean, the possibilities that broadcasters will have to do multiple program services, to do non-broadcast services, to do subscription broadcast services, it opens up a whole new world, and it gives them incredible opportunities to make much more money and, in exchange, I don't think it's unreasonable to ask for some more public interest obligations. I mean, the public -- the whole basis of our spectrum allocation, of broadcast spectrum allocation is that broadcasters get it, the public accepting in return. This is a new allocation, I think the public should get more than what it just receives now. COMMISSIONER CHONG: New allocation, are you talking the loan of the 6 MHz channel? MS. ANDERSON: Well, I think it's really semantics when you say loan and some people say this is a reallocation. Let me talk about reallocation first and the case was, and it is mentioned in my comments and my testimony, is really overwhelming that reallocations are mere exchanges. Now, this is not a mere exchange. You heard Mr. Hubbard say that we're going to need a very, very long transition period and, indeed, if you don't set a date certain for a transition period, you may never get this spectrum back. I mean, broadcasters are now saying, oh, yeah, we're going to give it back, we're going to give it back, but give us a nice long transition period. Who knows when that's going to be, who knows when 95 percent penetration is going to take place. It may not take place in our lifetime. COMMISSIONER CHONG: Wouldn't it be sensible to monitor it as it went along and see how the market progresses? MS. ANDERSON: Yes, and I'm not saying it's not sensible and I'm also not saying that there shouldn't be a long transition period. In our comments, we do not advocate a particular amount of time for a transition period. But what I'm saying is, that when you conceive this as a mere loan, you have to look a little bit deeper as to what is really taking place here. COMMISSIONER CHONG: Mr. Braverman, your fellow panelist contend we should increase public interest responsibilities in a digital world. In fact, she wants you to spend 20 percent of your air time doing political public TV, children's television, do you think that with the new potential of digital television and the increased capacity that could bring a broadcaster that broadcasters will voluntarily provide public interest programming? MR. BRAVERMAN: I believe the answer to that question is yes, but let me explain. I think that the public interest obligation has always been a dynamic concept. It has changed over time, it has changed in response to perceived needs of communities and express desires of communities. It's changed with changes in technology and the difficulty in answering that question is like Mr. Diller, I feel somewhat on shaky grounds in terms of predicting how this technology is going to emerge. Some have hypothesized the world in which broadcasters are, in fact, using the spectrum principally to multiplex and therefore have increased airtime opportunities available to them. I do know, that in today's marketplace, broadcasters are trying to differentiate themselves through localism. More than ever before, I think broadcasters are trying to get a feel for what the needs of the local community are, programming to those local needs in part because of the public interest obligation and in part because it's perceived to be good business and in this one instance, the two ideas happily coalesce. And I believe that if, in fact, the digital world unfolds, in a way so that there is, in fact, multiple channels available to broadcasters, that that same drive to accommodate localism would lead broadcasters voluntarily to increase the amount of local news and information and educational program they have. COMMISSIONER CHONG: Mr. Siegel, would you like to comment? MR. SIEGEL: I would agree 100 percent with the concept that it's good business to be involved with your local community and that's what we do. And in terms of quantitative percentages or numbers, I think that we run a great risk that we all want to provide quality entertainment product and quality public service product and we all strive to achieve that. But when you start getting into percentage numbers, you'll find that that will result in the lowest common denominator of that percentage. Currently, we exceed a number of our stations the minimums that are recommended, if you will, are the ones that are being bandied around. But I think that, quite frankly, you'll find that it will be counterproductive to have percentages and it may, in fact, result in harming the very system of free television that, I think, we all hope to preserve. COMMISSIONER CHONG: Thank you. COMMISSIONER HUNDT: Mr. Braverman, right now all the educational TV for kids that ABC provides in its national feed it does so voluntarily, is that your view? MR. BRAVERMAN: On the network level, that is correct, because, so far as I'm aware, there are not legal obligations imposed on the network. COMMISSIONER HUNDT: And how many hours is ABC providing on the network level of educational TV for kids using whatever definition you feel comfortable with? MR. BRAVERMAN: Two hours. COMMISSIONER HUNDT: Two hours, and is that generally true for ABC-owned stations as well, that they're showing two hours? MR. BRAVERMAN: It is generally true that the ABC owned stations are showing more than two hours. COMMISSIONER HUNDT: At least two? MR. BRAVERMAN: Oh, yes. COMMISSIONER HUNDT: I'm not trying to hold you to the numbers, but -- MR. BRAVERMAN: No, no, at least two. COMMISSIONER HUNDT: Now, if it turns out that all the ABC stations receive a digital broadcast license, and if it turns out in the marketplace during most hours of the day they choose to multicast, in other words, deliver, let's say, four different programs simultaneously. I don't think those are unreasonable assumption, at least for the sake of a question. Could we count on ABC to multiply by four the number of hours of educational TV that would be provided, two times four equals eight? MR. BRAVERMAN: I don't know the answer to that question. The fact in thinking through the digital world, it may be that we're constrained in our imagination but thus far, our thinking has been essentially to offer a simulcast feed of existing NTSC service, upgraded to high definition quality for a certain number of hours a day and migrating to more and more of a mix of ATV quality and HDTV programs. So I don't -- we really -- I haven't thought through what the multiplication factor is. I think the principles that would govern us are the ones that I identified in response to Commissioner Chong's questions. COMMISSIONER HUNDT: So isn't fair to say that in the absence of a rule requiring you to do a certain minimum amount of educational TV with a digital license, we can't count on any specific result, not right now. MR. BRAVERMAN: If you're asking -- COMMISSIONER HUNDT: Not predictable and we can't get a commitment from ABC anyhow -- MR. BRAVERMAN: I think if you get a commitment from ABC that we will do our best to respond to the needs of our local communities with regard to that aspect of our public interest obligation. COMMISSIONER HUNDT: Mr. Siegel, you said that you consider children's programming to be part of the public interest obligations that your stations have for analog broadcast right now. That's a fair repeat of your statement, isn't it? MR. SIEGEL: Yes. COMMISSIONER HUNDT: Does that -- did you mean to include specifically children's educational TV within that category? MR. SIEGEL: Well, we would include the whole panoply of what's being applied to the -- COMMISSIONER HUNDT: Yes, but did you mean to include children's educational TV? MR. SIEGEL: Well, I would assume so, yes. COMMISSIONER HUNDT: Okay, now, if you used your digital license for most hours of the day to deliver four programs simultaneously, could we count on your to quadruple, multiply by four, whatever number of educational TV hours you're now showing? MR. SIEGEL: I don't think I would like to commit to that because I think that the digital age will enable us to do many things that we're not even fathoming right now to, in essence, to provide the same kinds of goals that we're trying to achieve to children. For example, we may decide that while with multiplexing, which, quite frankly, I disagree with others that that's a real likely scenario, but if you assume multiplexing you might still have room to sent data in the form of textual materials to computers for children to interact with for them to further expand their knowledge and awareness about the subject matter that you're broadcasting. But, quite frankly, right now, we really don't know how that's going to unfold, and so to put these requirements upon broadcasters in the face of, quite frankly, not having resolved them in the analog domain, I think that we're a little premature and that the digital spectrum is going to be a fluid arena and I think you're going to find that it's going to be good business for ABC or for Silverking stations to send out that material. COMMISSIONER HUNDT: But, Mr. Siegel, while I certainly am excited about the notion of broadcasting software programs over-the-air to children with computers, you'll grant me that I ought to have some concern about children who don't have the money to afford computers and who might want at home to be able to watch educational TV for free over-the-air, so if we give you a digital license and you get four times as many hours of programming, isn't it reasonable for me to ask that you multiply by four the amount of free over-the-air educational TV you're providing for the kids of America? MR. SIEGEL: I agree that it is reasonable for you to ask, but I do not -- COMMISSIONER HUNDT: Well, that's all I wanted to know, if I could ask anyone and still be considered to be reasonable and I would like to ask you, Mr. Braverman, if you, very briefly, could tell me if you could estimate how much money the public would get if we auctioned the digital spectrum instead of gave it to today's analog broadcasters. MR. SIEGEL: I really don't have a number. I suspect that the numbers that have been bandied about greatly overstate the value because I am not -- COMMISSIONER HUNDT: Would you tell me what number is overstated and then I'll assume that a lower number states it. MR. SIEGEL: I've seen 11 billion to 70 billion -- COMMISSIONER HUNDT: Well, what's your view at? MR. SIEGEL: I don't have a view because I haven't tried to quantify it. But let me just say -- make one point which regard to that. COMMISSIONER HUNDT: That's all right, if you don't have a view, I'll get back to you later. MR. SIEGEL: Can I just make this one -- COMMISSIONER HUNDT: Does anyone here have a view that they're willing to share with us concerning how much we could get in an auction? Anyone? MS. ANDERSON: Well, I have a view? COMMISSIONER HUNDT: How much? MS. ANDERSON: Well, the FCC's report is anywhere from 11 billion to 70 billion. As you will recall in a -- COMMISSIONER HUNDT: That's all right, that's enough for me. Do you agree with that? MS. ANDERSON: Well, I would go as high as $500 billion according to William Safire -- panelist. COMMISSIONER HUNDT: All right, suppose we could get, in an auction, between 11 billion and 500 billion, anywhere in that range, or suppose Mr. Braverman is right, that it's worth less than that. Mr. Siegel do you think it's reasonable for the country to ask that we get something in return from that in terms of specific public interest obligations that would be performed? MR. SIEGEL: We are performing the public interest. You're asking for -- COMMISSIONER HUNDT: I'm just asking if it's reasonable to give away spectrum worth whatever number, hundreds of millions or billions of dollars and not ask, at the same time, for specific public interest obligations to be performed. MR. SIEGEL: You are asking and we are satisfying the public interest. COMMISSIONER HUNDT: So you agree we could ask for that? MR. SIEGEL: Oh, I'm suggesting that we do serve the public interest and I think your question is asking -- COMMISSIONER HUNDT: I'm not suggesting you don't. We're at the end here, so we'll have to wait to the next round to carry this on. Mr. Quello. COMMISSIONER QUELLO: Mr. Siegel, what would be the economic impact on HDTV development of requiring broadcasters to quadruple the amount of kids programming? MR. SIEGEL: Well, I can't quantify about that economic development, but I think that what you end up losing in the imposing specific requirements on broadcasters, is you end up losing creativity and innovation that is going to come about in this new digital age. And I would suggest just one more point, we really haven't resolved these issues in the analog domain and what we're talking about is this transitional period and we should let the new things that broadcasters are going to be able the public emerge out of that. COMMISSIONER QUELLO: Um-hum, but there might be other things, too, that will best serve the public interest. Of course, maybe I should get the AARP up in arms, I'm doing more for senior citizens, I mean, I've mentioned that. They're completely neglected, the only reason they're neglected is they don't ask for it, and yet they're the largest voting block around. So I think I can go to two or three of them and get them up in arms and maybe I should. But anyway -- COMMISSIONER NESS: When you become a senior citizen. COMMISSIONER QUELLO: Nice shot, thank you. I owe you a good one. Ms. -- again, what are the practical economic implications of increasing dramatically the public interest obligations of broadcasters? At the same time, we're, one, requiring them to go through a lot of expense, I mean, there's going to be a big investment in HDTV equipment and transmitters without any receivers out there, and at the same time, we are in an unprecedented multichanneled, multifaceted, competitive communications marketplace, 1,500 commercial stations, four networks, two emerging networks, 363 public stations, more than 159 cable channels, more coming on. Video dial tone coming, DBS already here, MMDS coming here. And you want more for someone that's going to spend a lot of money on a new technology? MS. ANDERSON: You're asking a lot of questions but let me try to answer them one at a time. First of all, we're heard a lot of people on this panel and the previous panel that belief of interest is good business. So, I guess, I'm saying -- asking what the problem is. And again, I'm asking for increased public interest obligations because broadcasters are getting a huge benefit. They're getting the opportunity to do far more than they did before. And lastly, I want to address this -- COMMISSIONER QUELLO: That's unproven, but go ahead. MS. ANDERSON: -- this -- of environment. Well, it's unproven, and as Mr. Siegel says, we don't know if we can multichannel, we don't know what we can do, this was in my written and oral testimony. If broadcasters don't know what can be done and what can't be done, what's the rush, or maybe, why shouldn't we let the marketplace decide. Let me address your question about, you know, the -- of environment. I'm sure you saw in Saturday's Washington Post there was an article about how video-on-demand is going down the drain. When people talk about, you know, all the competition that's there, the fact remains is that broadcasting is the No. 1 place where people get their information in this country and the rating shares of the three networks dwarf -- well, of all the cable -- if you took all the rating shares of all the cable networks combined, it would barely reach the rating share of one of the networks. Broadcasting is thriving and they're thriving partially because they get benefits like must carry and they get free use of the spectrum right now. So I am -- I guess, I can't agree with your premise that broadcasters are being crushed by the competition. I think they're coming out way ahead and I'm not convinced that more public interest benefits will kill them. COMMISSIONER QUELLO: I'm not saying they're going to be crushed by competition, but all these other channels also have advertisers and that's a source of revenue and that revenue will decrease. Now, broadcasters still do pretty well, but, you know, network penetration went from 90 percent to 58 percent, it's going to go down more. Now, cable maybe only has one or two percent, but you've got enough one and two percents and that accumulates quite a bit. So I don't see more -- I see more competition benefiting the public maybe but, with more specific program that serves a public need, but I don't see it as a great economic benefit for those that have to compete with that many more channels. MS. ANDERSON: Well, you're permitting -- by allowing this, you're permitting, assuming multiplexing is possible, which, I believe it is, you're allowing broadcasters to become multichannel providers in this by giving them digital channel and therefore that kind of goes to some of the concerns Commissioner Chong has, I think they should be subject to some obligations that multichannel providers have. For example, the sort of the public access idea that I had, cable operators have to provide it, why shouldn't multichannel broadcasters be able to provide it. COMMISSIONER QUELLO: Well, you have public stations that -- 363 of them, you have broadcasters now with public interest obligations, those issues programming, I said there's about -- still 80 or 90 existing regulations and so on, and overall, I think they do a better job than some of the organizational money given credit for -- MS. ANDERSON: I agree. COMMISSIONER QUELLO: However, it's good to exhort people to do a better job of public service, I guess that's what they're here for. MS. ANDERSON: Let me make it clear that myself and my organization has always thought that we had the best system of broadcasting in the world. It can be better. COMMISSIONER QUELLO: All right. I'm through. COMMISSIONER HUNDT: Commissioner Barrett. COMMISSIONER BARRETT: Thank you, Mr. Chairman. Mr. Diller, you remember when you got $8 billion in the one series of auctions, and I think that everyone here agrees with the chairman that we would like to see more children's television and more educational programming. We have a slight disagreement on how do we get there, legislatively or do we get there administratively. If you had had a magic wand, notwithstanding the fact that you're worth about $300 million yourself, at last count, rather than taking part of the $8 billion and sticking it in your pocket in that beautiful home that you have that I want to steal from you, what would you, if you had a magic wand, based on your suggesting that broadcasters should pay the going rate in programming in cash, let's forget the programming and the cash aspect for right now. If you had had the $8 billion which went down a dark hole or something called a deficit or whatever, what would you have done to reach the chairman and all of us, all our goals in terms of more educational children's programming with the $8 billion, rather than tacking onto companies an obligation? MR. DILLER: I'm not so sure that it's quantifiable in dollars, just as I'm not so sure about your dollar evaluations of need, but -- COMMISSIONER BARRETT: Well, you know, do you remember Everett Dirkson, another great Illinoisan? He said a billion here and a billion there and after a while you talk about money? MR. DILLER: Well, I think this -- COMMISSIONER BARRETT: But you're too young to remember Everett Dirkson. MR. DILLER: I remember the hair, which, you know, I'm envious to such things. COMMISSIONER BARRETT: Okay, the white hair. It was the same color as Don King's hair. MR. DILLER: This is great, I don't actually have to answer this. No, I really think that you're not going to get this by any process, you're not going to get these things by any, so to speak, absolutely quantifiable process. I do not, by the way, believe as an aside, my premise is not that broadcasters do not program in the public interest. What I do think is, that as you look to what is happening today, or what may happen today, or what has been proposed in the telecom legislation which would go a long way towards removing what was, which was shaky at best. Not under the wire, but shaky at best. I mean -- ten years, now, it's eight years -- send it in on a postcard and to toss the whole idea that all you do is compete against the person down the road, is not, I think, the way to preserve what has been a very, very good system. I don't like it when I sit around a table with broadcasters and some of them say, we shouldn't make any editorial judgements whatsoever. Why should we have broadcast standards and practices department, what's the point? Those guys don't down the hall in cable or in other First Amendment situations, why should we have to do that? I think that would deliver us a kind of -- I think we'd lose a great deal. So what I want to do is see it strengthen, I want to see it strengthen in a way where broadcasters can say, look, this is what we think would be good for our community and this is what we'll do and on some scale, some reasonable rational scale, it seems like fair quid pro quo for getting this free license and out of it will come educational programming, if somebody wants to do it. Out of it will come increased localism of a kind or out of it will simply come a lessening in the erosion of standards that we see all around us. I think those would all be good things, but, I mean for -- COMMISSIONER BARRETT: Should it be done legislatively or administratively? MR. DILLER: Well, I think you have to set the groundwork legislatively, I don't think -- I think if you say to broadcasters, from now on you send it in on a postcard and you don't have to do anything, I think broadcasters will follow. I mean, frighten broadcasters in certain respects, frightened properly, to the possibility that somebody's going to take that very valuable license away from them, now do the right tend to do the good thing in the breach. After a while of doing it, if they keep getting reminded of doing it, they actually take it on as a kind of proud responsibility. That has begun to ebb, I think that's unfortunate and I think there can be changes which put that back, then the balance will be restored and everything will be fine. COMMISSIONER BARRETT: Two quick questions, David, two quick answers. Would you do it legislatively and how you -- what would you have done with the $8 billion that we got? MR. HONIG: I would have put it into a fund for minority ownership. It would take at least that much to get the kind of diversity that we would need. You would need massive federal intervention to get full diversity. COMMISSIONER BARRETT: How would you have done it, legislatively or administratively? MR. HONIG: Actually, I agree with Mr. Diller, you need the Congress to set some parameters and the Agency to implement them. In fact, I was surprised you agree with most of them -- COMMISSIONER BARRETT: Let me ask another question. Ms. Anderson, watch your partner there -- Ms. Anderson, would you have -- what would you have done with the $8 billion, to accomplish some of the things that I think we all want to accomplish and contrary to public opinion, we all want the same things, the question is, how do we get there, legislatively or administratively? MS. ANDERSON: Right. Well, first of all, I surprisingly agree with just about everything Mr. Diller said. COMMISSIONER BARRETT: Why stir the pot -- MS. ANDERSON: But what I think it needs to be done legislatively that the people need to weigh in on this and the recent precedent for what do you do with the $8 billion. COMMISSIONER BARRETT: Okay, I understand this precedent. Let me just ask because you and Barry are taking up my time. What -- how would you have treated the $8 billion that -- which was a great job, by the way, on the part of the -- MS. ANDERSON: Well, assuming -- right, right. Assuming it was not earmarked for deficit reduction as was the case, as I said in the statement, and as Lawrence Grossman said earlier, the historical precedent, the Moral Act, to have the funds earmarked to the states for education technology block grants, that would be the greatest, the best use of the public resource and to get back to Commissioner Ness' point -- COMMISSIONER BARRETT: That's okay. They told me to stop and I was going to go to Gigi, but I'll stop and come back and some -- well, I won't see you all again. Great panel, Mr. Chairman. COMMISSIONER NESS: Thank you, Mr. Chairman. Following up on this conversation, there are some who say that there's, in essence, a fork in the road, we could allow broadcasters to continue to have their special benefits, must carry being one, we discussed that in the first panel a little bit in terms of what that means in a digital world. We could allow them to continue to have channel preferences in placement and then also permit them to go for a transfer from analog to digital with a temporary spectrum. And the reason we do all that is, again, because of the public interest, the benefits to the public that broadcasters have historically provided. We had, on the other hand, a different perspective and that is that there ought to be total flexibility, that it really is a business that we've got to compete in the marketplace and perhaps there ought not to be any specific requirements on what a broadcasters ought to do. Then, might it not be a better way, arguably, to just simply say, okay, let's take the perspective digital channels, auction them, take the revenues, as were suggested, and apply them perhaps towards fulfillment of some of these public interest needs. Anyone want to comment on which way we ought to go in terms of broadcasting? MR. BRAVERMAN: I think the latter would be a terrible mistake and for a number of the reasons that Mr. Diller spoke to eloquently a moment ago. However imperfect it is, however frustrating it may be from time to time to deal with the questions that this Commission has been wrestling with over the past year or so about how do you enforce it, how do you impose it, to go back to the question the Chairman put to me, how can I be sure you'll do it. Those are all very tough questions, but this country would be a lot worse off if the companies that were providing the free over-the-air system, did not believe and take to heart a responsibility to operate in the public interest. Just speaking personally, we have 28 people who do nothing but work in the standards and practices division because they're mindful of the standards questions that Mr. Diller was alluding to and fight against the trends of caving into the fact that simply because there's a competitive offering available on the wire, we, too, should do it. We struggle, believe me, with questions about how do we address the educational and informational needs of children. We may come out differently, we may have differences about quantification, but that is very much part of their mindset and to go -- to approach the fork in the road and to take the road that relieves people of those burdens, of those responsibilities, however ill-defined they are and frustrating to try to quantify, I think, would be a horrible mistake for this country and I think would do a disservice to the public. MS. SOHN: But Commissioner Ness, what troubles me is that what I haven't heard in two panels is anything from any broadcaster saying what they're going to give back to the public more than they have today, and I have to say that if the result is complete flexibility that would permit broadcasters to do one standard definition television service and the rest non-broadcast or subscription, either auction it or just give them enough, and I think my approaches in my written testimony are very valuable. Even under an auction scheme, you can still do the conversion to digital broadcasting. You can have must carry for those that can't afford to buy the spectrum, but I want to hear from the broadcasters what they're going to give back to the public. I'm not hearing it. COMMISSIONER NESS: Mr. Siegel, do you want to respond to that? MR. SIEGEL: There is a fork in the road and it is a very clear fork, every system is going digital, if we, as the free broadcasters cannot transition to a digital transmission system, we will be relegated as a third class, fourth class, fifth class, I don't -- citizen down the road and the whole system of free information and entertainment to the public will go down the tubes because ultimately the pay services will beat all of the ability for all of us to compete by acquiring all the programming and being able to satisfy the entertainment needs and there will be no regulation of those services, and in terms of -- COMMISSIONER NESS: But why would the public suffer from that, can you elaborate a little bit more? MR. SIEGEL: Well, I get from the premise that right now the free television industry offers value to the public. We do not have currently information haves and havenots, we have the potential for every household to access freely television information. If we go down this road and broadcasters are relegated to staying in the analog domain, you will not have that. COMMISSIONER NESS: Okay. MS. ANDERSON: If I could just add -- COMMISSIONER NESS: Please. MS. ANDERSON: You know, we're talking about public interest in the abstract as if we don't have a track record, almost as if it's a given that broadcasters are currently meeting their public interest obligations. I don't think that's the case, as I cited, actually citing the Chairman, that 80 percent of Americans do not believe that television is in the best interests of the country, that, if they were meeting their public interest obligations, there would not be the call for V-chips, if they were meeting their public interest obligations, there would not be the campaign against gangster rap, some of those videos are shown over-the-air free TV. We now have a campaign against talk shows. So what is this about in a digital age, it would be nice if they met their public interest obligations in the analog age. MR. DILLER: Call -- COMMISSIONER NESS: Okay, any other response on that, as I see my time is up? Okay, thank you. COMMISSIONER HUNDT: Commissioner Chong. COMMISSIONER CHONG: Well, you know, Yogi Berra said that when you reach a fork in the road, you should take it. Does that help anyone -- he speakth with forked-tongue. You know, I'm on cold medicine right now, I don't think that's good for the brains. I guess I just have one last line of questioning based on what has just occurred. I thought that was a very helpful discussion. Just what I was hoping would come out of this hearing. I guess part of what I'm troubled about is that Gigi, you seem to be assuming that to do what you want to do, as you lay it out in your testimony, you've got to have -- we're just going to give broadcasters 2 MHz of standard digital television, and what I'm also hearing from the broadcasters at the same time is that they believe that competition will drive them to HDTV and I also read some very interesting surveys that Thompson had done, which is another panel later today, talking about how consumers that were surveyed said they would pay up to $1,200 to get HDTV because it was so impressive, the sound and the picture, they wanted it. When I looked at it, I wanted it, and I know my husband will want it, he loves sports. So what I'm troubled about is, if the market does drive HDTV, I mean, we are a world leader, our industries and broadcasters just spent millions of dollars to develop this outstanding technology, why would we choose to do something less than the best technology that is current to go forward and what I'm thinking about is, you know, when I buy a computer, I could buy a $1,200 PC clone, but I know that in three or four years that computer is going to be outdated and I'm going to want to do Internet surfing and I'm going to have to go out and buy a new computer with, you know, CD-Rom and the most powerful chip there is. So thinking ahead, if the best thing we have right now is HDTV and the broadcasters tell me that they want to do it and that takes 6 MHz, then I don't see how I can do what you have encouraged us to do in your testimony, and I'd like to hear from others besides Gigi, too. MS. SOHN: Well, let me clarify, we are really no longer advocating just giving 2 MHz, what we are advocating is this condominium approach and there's two ways to do it. One way is to either open the spectrum for either comparative bidding or a comparative hearing, whoever wins the spectrum, if it's not an incumbent broadcaster, incumbent broadcaster would get must carry rights to do one digital television service. Now, the winner of the spectrum -- COMMISSIONER CHONG: Now, what happens to the broadcaster who's back on the analog channel? MS. SOHN: Well, they would get -- COMMISSIONER CHONG: They would have to give up the analog channel? MS. SOHN: That's right, and they would get must carry so they could do digital. COMMISSIONER CHONG: Now, you're assuming, then, a very short transition period and so what are we going to do about the consumers, are you going to buy everybody a new digital television? Are you going to issue set-top boxes? MS. SOHN: No, this one -- the transition would still be, you know, whatever transition you deem to be necessary for conversion from analog to digital, it wouldn't affect the transition period at all. The point is, is that incumbent broadcasters wouldn't necessarily be guaranteed the spectrum, they'd either have to, you know -- auctions if Congress authorized it or they would get it in comparative hearing or we don't -- obviously we don't approve of lotteries, but whatever, you know, other way you want to give it out comparatively. But the broadcaster with his analog channel, would be guaranteed a conversion to digital because they would be guaranteed must carry rights on the new spectrum that went to somebody else. COMMISSIONER CHONG: So that broadcaster, are they going to be continuing to broadcast in analog and they'll be must carried on the digitals -- people that won the licenses, is that what you're saying? MS. SOHN: Right, exactly, exactly, um-hum. COMMISSIONER CHONG: They wouldn't have to pay the money to upgrade to digital. MS. SOHN: That's right, they would get must carry - - COMMISSIONER CHONG: And how long would you propose that would go on, into perpetuity, or as long as they -- renewal. MS. SOHN: Into perpetuity. COMMISSIONER CHONG: Into perpetuity. MS. SOHN: Well, obviously, they would be up for renewal, there's no doubt about that, I agree with Mr. Diller whole-heartedly, postcard renewal stinks and whether you're operating in digital or in analog, you should have to be, you know, brought before the Commission and you'd have to show that your performance is correct. COMMISSIONER CHONG: Let me stop for you a minute. MS. SOHN: -- say into perpetuity. MR. DILLER: Not to be impolite, I think that what you proposed worsens things because what will happen is that you will get nothing. I mean, if what you're all after, the whole purpose of all of this is the possibility of getting this enhanced system. Now, since no one knows anything yet and since no one knows how it's going to get developed, give the broadest possible process and then what will happen is, out of that, somebody is going to come along and exploit it on a business basis because any other basis, you're all fooling yourselves, it will not happen. If they do, other people will react competitively. At a certain point you'll look at it and say, everyone is now in this enhanced basis and no one is using that old analog channel any longer, now, let's take it and offer it to someone else for some other purpose, perfectly reasonable and fine. But, if you manhandle this process too early, if you don't just basically say, in this world of unknowns, take -- this is how much bandwidth it takes, do something in it. If you use it for free, fine, take the reciprocal process, if you use it for pay, pay us as much as we can gouge out of you, and if somebody else is going to offer an advanced high definition thing, someone else is going to follow them. That's the best you can do, you can't do better than that. COMMISSIONER CHONG: I have 10 more seconds and I just want to throw out one last thought, which is, as opposed to mandating HDTV, can we do something less than that and just mandate that receivers must be able to receive HDTV? MR. DILLER: I don't know, it's beyond my -- I can't answer it, adopt a standard. COMMISSIONER CHONG: Someone's -- MR. SIEGEL: Adopt a standard. COMMISSIONER CHONG: Adopt a standard says Mr. Siegel. Mr. Honig? MR. HONIG: That would certainly be preferable considering the fact that the reason that we have public interest obligations, the reason for this panel, if you go back to the first year -- is the investment that the public has in the equipment used to receive the programming. $1,200 is a lot of money for a $6,000-a-year family, that's their entire income. If you had a set that was subsidized in some way, they didn't have to pay for the whole thing, you wouldn't have a regressive tax where basically the poor are paying for a 40-foot picture or a 40-inch picture that maybe they don't want. COMMISSIONER CHONG: I understand the set-top box could also be an option at about $150 after time. Thank you, I think my time is up. COMMISSIONER HUNDT: Mr. Diller, you wrote in the New York Times on the 4th of December the very lucid article in which you said, I quote, "The FCC should be instructed to set minimum guidelines for local educational and non- entertainment programming and to put in place a reasonable system for reviewing broadcaster performance based on these standards. If the guidelines are followed, renewal every five years should be guaranteed," unquote. You said a lot of other things as well. I thought it was a very interesting article, suppose the FCC were to follow your advice in whole or in part and were to set minimum guidelines for local educational and non-entertainment programming, with respect to digital broadcast licenses, suppose we were to do that, would it be your view that we should do that at the time we grant the licenses, or should we wait until we're near the end of the renewal period and then reveal what we had kept secret the entire time and, that is, what really were the methods by which we intended to pursue the renewal process. MR. DILLER: That would have a star chamber. I don't think, I mean, I think that you've got to have one omnibus set of rules for what is free broadcasting and if free broadcasting is going to be over a digital system, or over anything, then it ought to have whatever rules it had in its antique analog system. So I don't -- I think that the issue is whether or not you give an environment guidelines, percentages, intentions, however it can be sensibly done to say to people when they apply for a license, how they plan to meet this area and then hold them to account. COMMISSIONER HUNDT: Whatever rules -- this is to Mr. Honig, whatever rules or guidelines or standards we decide to set with respect to digital broadcast licenses, do you agree that we should set them at the time we grant the licenses or do you think we should wait until the renewal period and then reveal what we really intended all along or then make up, at that moment, what would be the renewal process? MR. HONIG: It certainly inspires more confidence in regulation to have firm guidelines set first so that later you're not accused of retroactively imposing guidelines. But at the same time, sometimes conduct can be so outrageous that you might not have predicted it at the time you initially developed the rules, you should retain the flexibility to a renewal time, take action where someone's behavior shocks the conscience. COMMISSIONER HUNDT: Let me speak personally for a minute, but possibly I speak for more than just myself. Take ABC, for example, I think it's a great thing that "Good Morning, America" is available for free at 7:00 everywhere in the country, we share in the news experience. It is frustrating that ABC does not have the capability to provide at the exact same time the creativity that it could give us in terms of educational TV for kids, and I don't see how the FCC would be in any way on sound grounds saying to ABC, we want you to turn off "Good Morning, America" Monday, Tuesday, Wednesday, Thursday, or Friday for half an hour and give us educational TV for kids. The constraint of the single program, but this constraint doesn't exist in the digital license. At the very minimum, it appears from every bit of testimony we've heard so far and everything in the record, that instead of 10 broadcast stations giving us 10 analog programs at one time in Washington, D.C., we are going to get digitally somewhere between 20 or 30 or 40 at any given time. So if that constraint is broken that had bound us so tightly for so long and frustrated everybody on all sides of the public interest bargain, doesn't it make sense for us to take this opportunity to say to the, for example, the broadcast licensees and the digital world in Washington, D.C., we don't care how the 10 of you do this, but figure out how every single morning, Monday, Tuesday, Wednesday, Thursday, Friday, parents will have the choice of some educational TV? You have total flexibility in the market to figure out how to do it. But if you don't, as a group, figure out how to do it, all of you ought to be subject to serious question as to whether you deserve renewal. What do you think of that, Mr. Siegel? MR. SIEGEL: Well, I think that comments that Mr. Diller said that we really don't know how this is going to unfold, but we do know that the Grand Alliance system does contain memory and unlike what Mr. Honig said that certain people of certain incomes may not be able to afford a computer, it is my sense that our service is going to look very much like our existing service, only with enhancements and there's going to be a large portion of that in HDTV and there's going to be enhancements of other matters going out from our transmitters to enhance that which will be of educational value, of entertainment value, to the receivers. And some of those matters will go on the display of the HDTV so that the remote control of that HDTV could click on more things that may be educational inside "Good Morning, America" for the viewer. So I think that that's a distinct possibility. COMMISSIONER HUNDT: But suppose the core point which is reflected in the Children's TV Act is that we want to have free over-the-air educational TV in this country, not something you have to access through a computer, not something you have to pay thousands of dollars for real fancy TV to see, is there anything wrong with saying to the 10 broadcasters who would be doing digital broadcasts in Washington, D.C., we know you're going to get 20 or 30 or 40 different programs simultaneously, you figure out how to guarantee us educational TV. Mr. Honig, last comment on this? MR. HONIG: I'm going to pass that to Ms. Sohn -- comment. COMMISSIONER HUNDT: Ms. Sohn, he's passing it. MS. SOHN: Well, I agree with you whole-heartedly. I mean, the whole premise of my testimony is, if you've got the opportunity to do more, you should do more. COMMISSIONER HUNDT: Well, I appreciate the whole- heartedness, but we have run out of time. Thank you all very much for this extremely distinguished panel and we are now having the lunch break and we will recommence at 1:30 sharply. PANEL 3 COMMISSIONER HUNDT: Good afternoon. Commissioner Barrett is calling you to order, the enforcer. This is the third panel of our extremely interesting digital TV En Banc and, speaking for myself and I bet for everybody else, the first two panels have been entertaining and informational and a lot of important issues are bubbling up and getting more visibility. I think this is just terrific. Our third panel is no less distinguished, is going to be no less interesting and probably will do the right thing as soon as I stop talking. So here we go, Mr. Horowitz, you're first. MR. HOROWITZ: Thank you, Mr. Chairman. COMMISSIONER HUNDT: Very briefly through the rules, three minutes for each of these presentations, then the commissioners will each have six minutes, we'll have two rounds of six minutes per commissioner for questions and answers. I would like to urge you to graciously accept a certain amount of brevity in the answers because the long answers come out of the time allocated to the questioners and the questioners have a lot of different things they want to raise. So if we cut you off at all, as I had to do to Mr. Braverman before, it's only because we have so many things we want to get out on the table. Mr. Horowitz. MR. HOROWITZ: Thank you, Mr. Chairman. Good afternoon. As a worldwide content provider, Viacom wants to supply our products and new enhanced and expanded of our products to every possible distribution outlet, from broadcast, to cable, to telcos, MMDS, DBS, computers and the global information infrastructure. This is consistent with the American consumer's interest in having access to the widest possible range of digital offerings. Our businesses depend upon open access for all of our content, programming from Nickelodeon, Simon & Schuster, MTV, VH1, Showtime, Paramount, video games and interactive services. And digital technology is going to enable us to provide our consumers with new forms of these products. So how can the Commission to make this vision of new diverse digital applications available to all consumers and all Americans? By requiring open access, open access to set- top boxes and ATV receiving equipment for all programmers while deferring to industry for the establishment of specific technical standards. The Commission must act now to prevent technological roadblocks that could be used to exclude programmers or to favor one programmer or one delivery method over another. And although ATV will be used on the -- although the ATV standard that will be based on the Grand Alliance system is open, it alone does not guarantee that consumers will have access to all digital programming. Therefore, the Commission must require interoperability of these set-top boxes. Technological road blocks can occur in two places. The first is where programming enters the distribution pipeline and joins a multichannel package. In other words, you're in the package or you're not in a package, and second, when the programming leaves that distribution pipeline and is prepared for display. In this road block, the deployment of set-top boxes, one has to be careful to assure that they are capable of passing all signals, not a specific or certain signal, or that they can accept only a single proprietary conditional access technology or that they delay the program and deliver by it different service providers. These we need to watch out for. This situation would force consumers to limit viewing choices or pay for multiple set-top boxes. It would slow the overall penetration of digital receiving equipment and it would lengthen the transition to advanced television. So, in conclusion, the FCC should create safeguards against anticompetitive bottlenecks by creating rules of the open road, requiring open standards and interoperabilities. This will help insure that no barriers can be erected between the providers of the digital content and the American public. In a digital world, this flexibility is more possible than ever. Thank you. COMMISSIONER HUNDT: Mr. Keyworth. MR. KEYWORTH: Thank you, Mr. Chairman. I am pleased to testify today before the Commission, especially on a topic of such historic importance. It is important because it addresses one step, and a big one, in the conversion of our outmoded analog communications system to one that is digital. That conversion is essential if we are to sustain the pace of the wholesale restructuring of our economy and of our society that has been underway for more than a decade, and which has helped America regain its position as the world's most competitive producer. This issue is not just about television, nor ever just about telecommunications, it is about whether we can revamp a regulatory process that was designed for another era into one that will let the computer revolution continue to thrive. We have see, in but a decade, the once arcane computer become so pervasive that 40 percent of our homes are now equipped with at least one PC. Virtually our entire economy, both manufacturing and service sectors, is empowered by PCs. If permitted, digital television can be a part of the next step in that ongoing digital revolution which is to connect all those computers to make them even more useful. In our report entitled "The Telecom Revolution, An American Opportunity," we emphasized two reforms that are particularly important in moving from today's analog regulatory environment to one that will accommodate the faster pace of digital connection. The first is to eliminate regulatory barriers to new entrants. Notwithstanding the predictions of many and the debate of the early '80s over competitiveness, America's computer industry today lead the world, largely because if its new players. The success of that rejuvenated computer industry demonstrates how important new entrants are to overcoming the old habits associated with an installed base where the main frames are analog TVs. In computing those new entrants were possible because of the low barriers that characterize a largely unregulated industry. In television, more aggressive steps are necessary. The transition to digital has simply dragged on too long. The second reform is the dezoning of the electromagnetic spectrum. Digital transmission in contrast to analog cannot be regulated by the nature or mode of information moved, thus, spectrum allocations need to be "dezoned," not limited to voice, video, paging, or text because digital information is inherently multi-media. Attempting to regulate the movement of digital information by its nature is tantamount to regulating automobiles by their consumption of hay or oats. in accordance with these two overarching reform principles, I respectfully suggest that spectrum allocated for digital television be dezoned with complete operational freedom within the bounds of antitrust law and interference considerations and with the ability to assign lease or sell that spectrum. Moveover, existing spectrum allocated for analog television should be similarly and simultaneously freed. These actions would facilitate the conversion from analog to digital service but would base the pace of that conversion on consumer demand and on new technology. They would also reduce barriers to new entrants by increasing the number of ways new players could enter the new digital markets. Finally, we view auctions as the more efficient means of allocating spectrum, if used wherever there is mutual exclusivity. But I believe the American people are best served if the auctioning of spectrum for digital TV is accompanied by the simultaneous dezoning of spectrum currently allocated for analog TV. Such a regulator step, a truly digital step, is necessary if we are to let the pace of digital connection catch up to the pace of the technology that is driving it computing. Thank you. COMMISSIONER HUNDT: Thank you. Mr. McKinney. MR. MCKINNEY: Mr. Chairman, and Commissioners, Chairman Hundt, you were correct, indeed, in your recent speech to the IRTS in New York when you pointed out that the Grand Alliance has invented something more than just a pretty picture. Through the ATSC Digital Television Standard, broadcasters will have a level of digital flexibility to serve the needs and interests of the American television public and greater so than they have ever had in the past. But, Mr. Chairman, you erred when you stated that the term "second channel," and the term "high definition" had, therefore, been made historical artifacts. Quite simply, without a second channel, digital television will not happen. Broadcasters cannot survive if they cannot serve both the old analog audience and the new digital audience during the transition. When new technology becomes available in the broadcasting arena, there is always the "chicken and egg" question. In this case, will broadcasters put the new signal on the air if there are few potential viewers? And, for the equipment manufacturers, should they build digital receivers if, in fact, no broadcasters are on-the-air with digital signals? I was chief of the Mass Media Bureau when Bob Pepper's predecessor convinced the sitting Chairman at that time that it would be unnecessary to standardize AM stereo broadcasting, that the broadcast marketplace would work quite well. And so, stereo failed to be activated on most AM stations and the AM radio band today survives primarily on the backs of Rush Limbaugh and other talk show hosts. Stereo television, however, was handled differently. The FCC did standardize that and it thrived. There are few television stations today that do not broadcast their entire day in stereo or surround sound and even lower price sets today are configured to decode it. In a virtually unanimous filing, broadcasters support some minimum level of HDTV broadcasts. If this is implemented, all television manufacturers will build equipment that will decode all formats. You will not have to worry about the chicken-and-egg. And, Commissioners, whenever you get an entire industry sector taking the same position, something rarely achieved, you should give that great weight, it may be that they understand their mass media industry very well. And because of time limits, I'll stop now, but please know that after having spent 30 years in this business, I really offer my services to you and help I can give you during your decision process, I'll be happy to give, thank you. COMMISSIONER HUNDT: Mr. Reilly. MR. REILLY: Thank you. Good afternoon. I'm Ed Reilly, president of McGraw Hill Broadcasting and chairman of the Association of Maximum Service Television, the organization of television stations committed for 40 years to achieving and maintaining the highest technical quality for America's free over-the-air broadcasting system. MSTV has been a leader in every aspect of the ATV process to further one overriding goal, to assure that the public's free and universal service from local television stations can make the giant leap to a new video era. The opportunity for providing HDTV and other broadcast services, which the Grand Alliance system facilitates hinges on the Commission's making available transitional 6 MHz channels through a sound national assignment plan that allows broadcasters to upgrade without disenfranchising our current NTSC viewers. Without this transitional spectrum, HDTV will be available only to those with the means and inclination to pay for it. Inevitably, undermining the mass audience economic model which has sustained the public's free local and universal NTSC analog service, and upon which the successful introduction of free and universal digital television depends. The market will, of course, be the best judge of the desirability of any ATV service, only if the public has a chance to view and to judge those options. That's why broadcasters are committed to programming substantial amounts of the broadcast day in HDTV. Moreover, if the Commission determines that, in addition, reasonable and practical HDTV minimums are necessary to give the service a fair market trial, we are prepared to comply. While our goal is to make possible the retention of the mass programming market for HDTV services, the economic platform which supports universal free local service, we are also ready to apply the packetized capabilities of the Grand Alliance system by experimenting with the delivery of program related material. I personally believe that the system's versatility and text compatibility could allow for new, creative, and expanded public service contributions in a digital ATV world. We don't know today specifically what they might be, but we do know that the opportunities will be lost or fragmented forever if auctions are adopted, thereby biasing the whole system towards subscription services. Broadcasters are willing to make the necessary heavy investments to transition the public benefits of our free, universally available, community-based television system into the digital era. To make that conversion, we depend on the Commission to implement the Grand Alliance standard, technically sound paired channel assignments, reasonable must carry requirement, and ATV receiver standards. Thank you. COMMISSIONER HUNDT: Thank you. Mr. Major. MR. MAJOR: Good afternoon, Mr. Chairman and Commissioners. I'll start with three observations. First, in a speech before the IRTS, Chairman Hundt said, and I'll quote, "the Grand Alliance (nurtured by the FCC Advisory Committee) has...discovered a wondrous digital genie in a bottle. With it you can broadcast multiple signals of higher resolution than today's NTSC signal, or dozens of audio signals, or software packages, or thousands of pages of text, or a pair of very high resolution movies." In short, a world leading, technical marvel on the order of cellular telephony that includes within it the opportunity to create a whole new industry just as cellular did in PSC will. Second, as the Commission's latest Advanced Television Notice points out, today only 120 MHz of the 400 MHz of spectrum allocated to TV is actually use to deliver broadcast services. In other words, the current system, 280 MHz, is going largely unused. Third, while we move purposely to exploit this opportunity for advanced signaling, we cannot lose sight of the obligation to provide for the needs of public safety and essential industries and we cannot lose sight of the potential for market dislocations if new services are allowed without auctions which would then compete with existing services that paid substantial sums through auctions. The U.S. enjoys the best telephone system in the world and that capability has rapidly moved to the mobile environment. We should be proud of what we've accomplished. However, we're now in a new era, 40 percent of today's homes have personal computers. The internet has happened. The NII and GII are becoming a reality. The need to communicate broadband information including files, images and video with full mobility is expected to be as universal as the use of the mobile phone. The potential applications may go far beyond entertainment. New applications for this underutilized spectrum and this exciting new technology are limited only by our capacity to imagine and our ability to deliver a fair, market driven framework to allow it to be developed. I'll suggest a five- point plan: 1. Require that TV receivers shipped after some near-term date be ATV capable. 2. Working with all the interested parties and affected parties, accelerate finalization of the ATV channel allotment plan, associated application filing window, and construction requirements for ATV stations. 3. Strike a balanced approach including technical flexibility and compensation which allows ATV licenses to respond to market requirements. 4. Make recovery of contiguous blocks of spectrum an absolute requirement from the outset, rather than a possible option in this proceeding. 5. Structure allocations of recovered spectrum into segments to accommodate next generation systems which support public safety, essential industries, and general public use. We do not pretend to have all the answers to this complex task. However, by using the above five-point framework, we believe the Commission can accelerate change, provide business opportunities for the broadcast and telecommunications community, and usher in an exciting era of new services for the public. Thank you. COMMISSIONER HUNDT: Thank you. Mr. Carnes. MR. CARNES: Thank you, Mr. Chairman. I'm proud to be here this afternoon representing the Grand Alliance. There was a lot of talk earlier today about the public interest. The Grand Alliance supports the Commission's public interest goals of preserving and promoting free over-the-air television while making the most efficient use possible of television spectrum. We believe both goals will be best served by the rapid introduction of advanced television, especially high definition television. Broadcasters face a very competitive environment. Already computer displays offer higher resolution than current television. Soon, much of the video delivered to homes by cable, satellite, fiber, and tapes or discs will move to high definition. DDS is already delivering digital packetized signals to the home by satellite and is capable of delivering high definition signals today. They don't today, but once an HDTV standard is endorsed and HDTV sets are available, they likely, very probably, will. If free over-the-air television service is to survive, it must remain competitive in this environment. The Grand Alliance system is broadcasters only means for avoiding technological obsolescence. It will allow them to compete on a level playing field, but only if it is implemented. To preserve free over-the-air broadcasting, the Commission must do everything possible to encourage and accelerate the implementation of advanced television, especially high definition television. This suggests the following actions: First, the Commission should quickly approve the advanced television standard so that the industries involved can finish designing the necessary broadcast and consumer equipment. The Grand Alliance system is the most thoroughly tested system of its kind in history. This is an outstanding, world-leading system. Waste no time in approving it. Second, the Commission should encourage broadcasters to implement digital service on the transition channel as rapidly as possible. The transition channels should not be auctioned, for this would slow the process, if not destroy it. Rather, the Commission should hasten the switch to digital so that the NTSC spectrum can be vacated as quickly possible and the advanced television channels can be repacked, thus allowing the reclaimed spectrum to be organized into large contiguous, nationwide blocks. This approach would have far greater value in spectrum auctions than the alternative hatchwork of NTSC to move channels. Third, the Commission should lend each broadcaster a full 6 MHz channel so that full HDTV can be delivered. Fourth, and finally, the Commission should give broadcasters wide latitude in exploiting the unprecedented flexibility of the old digital system. This flexibility can allow broadcasters to play a key role in the national information infrastructure and will enable them to bring new innovative services to the public which can help accelerate and pay for the conversion to digital. Thank you. COMMISSIONER HUNDT: Thank you. Mr. Flaherty, and let me just note that no one has a better claim than Joe to having helped us on the many technical dimensions of this issue and I want to thank you. MR. FLAHERTY: Thank you very much, Mr. Chairman. COMMISSIONER HUNDT: I won't ask anyone else, I'm sure you all will agree with me in this respect. MR. FLAHERTY: Thank you, sir. Commissioners, and the Chairman has noted, I was responsible for introducing HDTV in American in 1981 here in Washington at a demonstration for the FCC. Thus, I may be responsible in part for all of us being here today, and for that, I apologize. Nevertheless, I'm pleased to be here. We are on the verge of adopting a truly remarkable digital television standard that is the culmination of eight years of concentrated work by your Advisory Committee on Advanced Television Service and by a brilliant aggregation of engineers from the entities that became known as the Grand Alliance. This extremely complex system carefully crafted in an open form by this nation's best scientists and engineers is the world's most advanced television system, now ready for adoption. The message from your technical community is that the system has been designed, built, thoroughly tested and it provides outstanding performance now and is future proofed with head room to accommodate ongoing improvements in the future. In order for over-the-air broadcasting to survive in this new environment, it will have to transition to this digital replacement service that will allow it to remain competitive with subscription-based video service providers like DBS, cable, telephone companies and so on. This will require, of course, a massive financial investment by the broadcasters as it did in the days of color, and it will require the temporary grant by the government of this second 6 MHz channel in which to operate the digital television service and HDTV service in parallel with the current NTSC service during the whole transition period. At the end of this period, the broadcaster will return one channel, leaving him with the same bandwidth that he has today, but leaving a nation with a vastly improved service. It's absolutely essential to provide the 6 MHz channels to enable a full range of transmission options including HDTV. Without a 6 MHz ATV channel, terrestrial broadcasters will be forever foreclosed from offering world series, for example, in HDTV, while their cable competitors would be able to offer regular season games and wide-screen HDTV for their paying subscribers. A 6 MHz channel is also necessary to assure that that sufficient headroom is available in the transmission channel to allow for the quality improvements in the various aspects of the Grand Alliance system which will be developed over time. So, it's time to standardize and implement the Grand Alliance system for over-the-air broadcasting and to proceed promptly to assign the temporary 6 MHz channels to existing broadcasters. Prompt action will spur the production of professional and consumer digital equipment. It will allow the U. S. to maintain its world leadership in a role digital broadcast technology, and it will assure that the vast audience of over-the-air television has the same opportunity as customers with pay services to participate in this digital revolution. In short, enable, not overregulate. Thank you. COMMISSIONER HUNDT: Thank you. Commission Quello. COMMISSIONER QUELLO: Okay, Mr. Flaherty, you've been involved with the development of HDTV from the very beginning, can you describe or maybe give us a review in practical layperson's terms of some of the services that broadcasters may be able to provide beyond television? MR. FLAHERTY: Yes, well, that's a very important piece that is often overlooked, that the service is so flexible that in addition to television high definition or standard television services, the system develops a very large data capacity, which occurs when the encoding of the system doesn't require the full data capacity available and that turns out to be a very large data capacity. In one test that was made, for example, in a one-minute commercial in high definition, full high definition, the system developed 60 megabytes of data, enough to transmit six major newspapers in less than one minute. So the capacity is there, the question is, how would it be used and what business can be developed from it. But the engineers or the toolmakers only to this trade, have, in fact, provided a very large data capacity in addition to television. COMMISSIONER QUELLO: Yike, great possibilities. Mr. McKinney some naysayers are concerned that a broadcaster will fight efforts to recover the 6 MHz analog at the end of the transition. Would broadcasts have any reason to keep this spectrum if they have been assigned 6 MHz of digital spectrum? What's your view on that? MR. MCKINNEY: They may well want to keep it. I think that's entirely in the hands of this Commission. I have sat before this panel before when Commissioners have looked down at broadcasters and said, you will give this spectrum back. All you have to do is condition the license specifically, that the frequencies must come back, and they will come back. COMMISSIONER QUELLO: Okay, I think a lot of us feel that's the way to go. Mr. Carnes, you state that an option would slow the transition from analog to digital. Can you explain why a delay would be inevitable, why? MR. CARNES: Well, I think the additional cost is going to slow down broadcasters from implementing digital television and I think that the most value can be gained by -- right now the spectrum, as it exists, with NTSC stations scattered all around and pockets of open spectrum in different places, it's not worth a whole lot. There's a lot of interference from NTSC stations, it's not contiguous, it's not geographically contiguous. You're not going to get a whole lot of money for that spectrum. But if we can move everybody to digital as fast as possible, get the NTSC back, repack it, get big swaths of open spectrum all the way across the country, that's where you're going to get money in an auction. That's where you're going to have money to do whatever you want to do with it, and that's what we ought to be doing. So we ought to be moving to digital as fast as we possibly can and that's one of the big reason. COMMISSIONER QUELLO: Okay, thank you. Okay. COMMISSIONER HUNDT: Okay. Commissioner Barrett. COMMISSIONER BARRETT: Thank you very much, Mr. Chairman. Mr. Horowitz, Mr. Carnes has said we ought to move to digital as fast as we can. Mr. McKinney said we should give great weight to any idea of the whole industry is in complete agreement with it, that would probably the reason I would not give complete hope to them, and someone else suggested that, Mr. Carnes again, said waste no time in approval. You had stated in your testimony that any group, and you've heard all of the great things that the allegedly the Grand Alliance can do in terms of adopting to both of the kind of scanning formats. Do you agree with what they can do in both of the scanning formats, a quick answer and I want to ask you something that you put in your testimony? MR. HOROWITZ: I've seen it demonstrated across the street. COMMISSIONER BARRETT: That's not what I asked you, about what you saw demonstrated. MR. HOROWITZ: I agree that they both technically. COMMISSIONER BARRETT: Then you had stated in your testimony that any one group of broadcasters could adopt a proprietary access -- standard and then effectively foreclose other broadcasters in the area from reaching the viewer. Can you elaborate on that, if, in fact, you agree you don't have any problem with interoperability, any problem with access with the Grand Alliance's scheme? MR. HOROWITZ: I think, as the core system, as I stated in my testimony, is an open technology and it's an open system. The issue comes when you add a proprietary or closed conditional access on the cription system on it that is not available to every other broadcaster in that same market. So you could have two channels of a licensee broadcasting a proprietary way, would install a slew of consumer boxes in that particular market. Along comes another broadcaster, wants to transport also secured programming into that household and he's stopped, and he's stopped because he can't get access to that closed conditional access system and he's stopped because the consumer now would have to go out and buy, yet, another device to put this -- COMMISSIONER BARRETT: Is it a question of access and interoperability? MR. HOROWITZ: It's a question of access and interoperability to that proprietary piece of closed technology. COMMISSIONER BARRETT: How do we insure the maximum aspect in terms of interoperability? MR. HOROWITZ: I think that the Commission has to recognize and does recognize that there are these potential barriers where the roads can be closed and in your proceedings to develop the rules, you need to recognize that there is a chance that that barrier could be established and you need to basically specify or require interoperable systems, that one system can interopt with the next. COMMISSIONER BARRETT: Do those -- does the further standardization or certain standards delay what Mr. Keyworth and Mr. McKinney and Mr. Carnes talk about we ought to be moving toward as rapidly as possible or does that delay? Mr. Carnes has just suggested we need to waste no time in approval and get a headon? MR. HOROWITZ: I believe it would not delay it if the FCC Commission is specific and direct now, that when you're -- COMMISSIONER BARRETT: What does that mean, I'm sorry? MR. HOROWITZ: Meaning that you require interoperability today, that you recognize that -- you don't want to create an environment where one broadcaster or one delivery system can block the transportation or transmission of another one's system into that consumer's home. COMMISSIONER BARRETT: But I -- you don't assume that's a given from our perspective as a matter of public policy that we want interoperability and access? MR. HOROWITZ: I think it's a given that you want it, I think you have to state it because I don't think it's a given and the marketplace will respond to it. COMMISSIONER BARRETT: Do you have any instances where such a practice is prevalent in the cable or DBS industry, where one cannot have access interoperability in this sense? MR. HOROWITZ: Well, direct TV, consumer has gone out and bought an $800 piece of equipment which is only usable to receive signals off the direct TV satellite. When Echo Star goes up -- COMMISSIONER BARRETT: But they can receive programming from somebody else's satellite, though. MR. HOROWITZ: No, sir. COMMISSIONER BARRETT: If they have a different satellite than direct TV? MR. HOROWITZ: No, sir. The direct TV conditional access system is a closed system. You cannot use it unless you -- COMMISSIONER BARRETT: If they have other choices of systems as opposed to direct TV and their satellite, that's my point. MR. HOROWITZ: If there's another direct -- COMMISSIONER BARRETT: If I want Reed Hundt's satellite as opposed to direct TV, can I get that? MR. HOROWITZ: If you want to buy another box, you can get it. COMMISSIONER BARRETT: That's not what I asked you. Okay, thank you very much, Mr. Chairman. COMMISSIONER HUNDT: Commissioner Ness. COMMISSIONER NESS: Thank you, Mr. Chairman. Mr. Horowitz, following up on this, if the Grand Alliance system is adopted, TV sets would be able to receive that standard. How would broadcasters then be able to establish this bottleneck, you're suggesting that they would take some of their signal, break it up, transmit several programming streams, block off some of them, through encryption and therefore a consumer, having acquired a box to receive that now pay programming, would not be able to receive anyone else's over-the-air programming? MR. HOROWITZ: They could receive anyone else's over-the-air programming that has been broadcast in the clear. However, if another broadcaster was broadcasting some other closed programming that was also encryptive, then the consumer needs the keys to unlock it. Well, if the second system of keys is different than the first system of keys, in other words, you have two locks, then you need, in effect, two boxes. What I'm advocating is that we recognize that there will be both open and closed products offered and that we just make sure that one doesn't lock out the other. COMMISSIONER NESS: Okay. Mr. Keyworth, pardon, I'm following up on keys, I'm sorry. Is there some benefit to manufacturers and consumers in knowing that certain frequency video would be received in a certain format and on another frequency cellular telephones, for example, would work? If we -- that is to say, if we mix all of the services on all of the spectrum, how would a TV set manufacturer or cell phone maker, for example, know what frequencies to use to make it work? MR. KEYWORTH: First, if -- your first question is, if you know what the frequency is ahead of time, of course, makes the technical challenge simpler. However, it is a basic principle of digital technology that the cost of the technology or computing power falls faster than any technology we have ever experienced with, that is what is unique about the digital industry. To make a translator that will basically heal or bridge a mismatch, is, in fact, done all the time. I routinely watch television, NTSC television, on my computer display through $145 card, which, in a few years, will be a $5 chip on a motherboard. So, yes, I agree there, it is simpler. On the other hand, the power of a collapsing computer cost is not to be overlooked. COMMISSIONER NESS: Um-hum. Mr. McKinney, do you have a response to that? MR. MCKINNEY: Yes, I would also point out that there are additional problems than just the question of frequencies, how does the television channel know where to tune, how does the receiver know where to tune, that's a critical question. There's also a question of power, you know, some services use high power from a central antenna. Some services use trunking, some services use cellular technology and some services use Quam or COFDM, or VSB, those are all issues that still have to be resolved. Simply stating that all frequencies are open for all purposes doesn't solve your problem. COMMISSIONER NESS: Mr. Keyworth, you're suggesting now then that we do not need a transmission standard, that the marketplace will make that determination? MR. KEYWORTH: I'm certainly suggesting that we need interference standards, but I do not think, in the long run, we will have a single transmission standard. However, let me qualify that, if I may. I think the advancement that has been made by the Grand Alliance on ATV has gone a long ways towards bridging the transition between analog and digital television. This is a pioneering effort. What I am speaking of is in the long run, and we see this from DBS, we see this with cable, in the long run there will be multiple ways of broadcasting digital TV. COMMISSIONER NESS: So if we go the route of not having a specific transmission standard, then are we likely to be saying good-bye to a free over-the-air system, whereas the ones that you had suggested were all pay services? MR. KEYWORTH: Multifaceted question. First of all, I think the role of what we call free television will be, for a long time, approximated because the customers are used to it and the customers want it. Second of all, I believe that the standard that the gentlemen here have been involved in developing, not myself, is a very powerful standard. It is excellent technology and I believe that the computer industry, and I read the newspaper today, I believe the computer industry can, in fact, accommodate to that standard more easily than one might expect. So I think it is important. All I am trying to say is that I believe the way the spectrum is allocated should be dezoned effectively and that it will allow the maximum number of new entrants and maximum amount of technology to adapt. COMMISSIONER NESS: We have today, for example, 280 MHz of spectrum that's unused because it's diverse spectrum, because with analog you will have the interference problem. Mr. Carnes had suggested in his comments about the value of repacking and therefore getting a contiguous spectrum which ultimately will be more valuable if we were to do an auction. How do you respond to that? MR. KEYWORTH: First of all, I think I'm very, very wary of predicting directions in the technology and timing, it's all moving too fast. None of us could tell five years ago what the status today of digital technology is. We will know that there are coding techniques, spread spectrums, CDMA, others, that will also play a role in determining interference. So I believe that cheap computing power, which is what the digital revolution means, means enhancement of signal to noise ratios, which in turn means, I think, multiplicity of ways to deal with interference. COMMISSIONER NESS: Did you have response to is, Mr. Reilly? MR. REILLY: Well, I just think that as we embark on trying to transition this nation's entire system to a new digital format, the notion of having no standards which consumers can rely on, that broadcasters can rely on, will stand in the way of ever developing any large scale mass market distribution system and we have many, many pieces of equipment that we've got to still assemble to put this whole system together and I think the consumer deserves some assurance that there will, in fact, be high definition programming that will work on the television sets that we're expecting them to buy. COMMISSIONER NESS: Thank you, I'm afraid my time has ended, Mr. Carnes. COMMISSIONER HUNDT: Commissioner Chong. COMMISSIONER CHONG: Thank you. Mr. Major, you stated in your testimony that you think that the Commission should require that TV sets be ATV compatible and I was wondering whether you thought we should mandate that they be HDTV compatible? MR. MAJOR: The Grand Alliance has come out with a darn good spec and when the industry reaches the level of consensus it's achieved on the Grand Alliance standard, the concept of the FCC endorsing that consensus has a lot of mileage in it and some serious thought should be given to that. Yes, I would accept an HDTV standard. COMMISSIONER CHONG: And do you think HDTV service would become available if we don't require sets to be HDTV capable? MR. MAJOR: Yes, it will become available if you don't require HDTV sets to be capable, but -- COMMISSIONER CHONG: And that's because of marketplace forces, do you think? MR. MAJOR: Marketplace forces, but quite frankly, we can easily visualize the environment where it's required that they be capable and that might accelerate the trend. COMMISSIONER CHONG: I've been fascinated by Mr. Keyworth's testimony, I'm trying to think it through. So let's assume we auction off all the transitional channels to the highest bidder, Mr. Keyworth and it looks as though you're suggesting that the people that are currently on the analog channels would stay on them, and everybody should be allowed to anything they want on it, broadcast, cable service, data, whatever they want, right, a bit is a bit is a bit? Now, suppose we do that and there's no one that wants to serve a small rural area in Alaska with any kind of television service because it's not very economic. So all the people in that town that's now currently receiving a couple of television stations would no longer receive it because nobody wants to do it. I mean, do you think that that is a scenario that the Commission would be able to embrace given that we're trying to bring service to as many Americans as possible. MR. KEYWORTH: Yes, I do, because I believe that the Commission is confronting the fact that digital technologies, because of their plummeting costs, are achieving an unprecedented presence and penetration in the marketplace. The penetration of DBS, but before that the penetration of PCs into the homes has been absolutely enormous, and as Tom Sewell pointed out in a Forbes magazine editorial a couple of months ago, no technology has every narrowed the haves versus havenots gap more. Low-cost digital technology is accomplishing that penetration. As far as rural service, we are seeing with -- for example, with fixed cellular technology worldwide, we are seeing cheaper and cheaper and cheaper per line per person costs for telephony. We will see exactly the same thing here and that little town in Alaska that you refer to, I believe, will be the result of some very significant low-cost technologies. COMMISSIONER CHONG: I'd like to hear from others on the panel, do you think free over-the-air would survive? We'll start with Mr. Carnes. MR. CARNES: I think that the technology that has narrowed the gap between the haves and the havenots and the history of the world has been television, the penetration of television is higher than television, and the penetration of PCs is nowhere near that, so I think preservation of free over-the-air television is the way to eliminate that gap and it's not to just open the spectrum up to anything. COMMISSIONER CHONG: Mr. Reilly. MR. REILLY: Spectrum auctions are not compatible with the transition to HDTV format. People that are free to bid for spectrum to use it for purposes for which they will charge, will clearly be able to outbid people who are trying to launch a service for which there is a huge investment simply to replicate the service that they're already giving. Eventually it will cost the public a lot more than whatever the auction generates. The programs that they now enjoy for free will migrate to paid-for high definition digital wired services. The pay services will take on a bigger role in the whole television programming industry. The opportunity for the Commission to even entertain the notion of public service requirements will be lost because the analog broadcasters won't have the wherewithal to continue to serve the public in the same way. COMMISSIONER CHONG: Anybody else. I think, Mr. Flaherty. MR. FLAHERTY: Thank you, I'd like to just address the question of the standard because the idea of doing anything on those channels is really not possible. The reason that we need a transmission standard as opposed to production and other things, is that we already are in an existing NTSC environment which is already interference limited. You don't finally lose the television signal because it fades out, you finally lose it because the station on that channel interferes with you, it's an interference limited service. So the Grand Alliance transmission system was carefully crafted to be able to put 1,500 new television stations on the air in those new channels without causing that interference and there are very few changes that you can make to that without causing interference, literally months of testing of all the channels and all the taboos went into this and quite a few changes were made in the standard in order to improve this interference performance. So there isn't complete freedom in this. And, in fact, the FCC staff hasn't yet finalized an allotment plan which also influences this, what channel do you put in which city and which location in order to minimize this. There is not a great deal of flexibility in transmission in order to minimize the interference into NTSC and from NTSC into ATV and ATV into ATV. The simplicity of doing that and the simplicity of cutting the channels into slices is directly proportional to your distance from the problem. This is not a great flexibility. COMMISSIONER CHONG: Thank you. COMMISSIONER HUNDT: Thank you very much. Mr. Carnes, you said auctions will slow the deployment of digital television. In other words, if Congress decides to auction digital broadcast spectrum, your view is it will slow the deployment of digital television. Dr. Keyworth, you said that auctions are a favored way to go, that's the least regulatory, most market oriented approach. Personally, I believe there are arguments against auctions, but Dr. Keyworth, does it stand to reason, in your view, that if someone pays in an auction for broadcast spectrum, they would, in some way, want to go slow in the deployment of the technology after having paid money for the license? MR. KEYWORTH: Not unless they had free money, no. COMMISSIONER HUNDT: Isn't it logical, Dr. Keyworth, that if somebody had to pay for the license, they, in fact, would think of every way they could to convert their customer base to digital reception so that they would be able to have an audience? MR. KEYWORTH: Yes. COMMISSIONER HUNDT: Isn't that the way the incentives would go? MR. KEYWORTH: Yes. COMMISSIONER HUNDT: Whereas, if you just give the digital broadcast license to someone, they might or might not be interested in taking money out of their pocket to set up a transmission system and converting their audience to digital. MR. MCKINNEY: But, Mr. Chairman, you're only talking -- COMMISSIONER HUNDT: Excuse me, one second. Excuse me, one second. Don't you agree with that, Mr. Carnes? MR. CARNES: Well, I think the problem here is we're already worried about the cost of converting to digital and there's a big problem in dealing with that, it's dealable with, but to add more costs, I think, will cause some people to elect not to move and that's the wrong way to go. COMMISSIONER HUNDT: I agree with you that there are costs and there are costs, you agree with me, don't you, Mr. Carnes, that one cost is for the digital broadcaster, another cost is for the customer to convert to some product, whether it's the PC with the card or the digital television receiver or the box, they need to spend something to be able to watch the digital television broadcast. You agree with that, don't you? MR. CARNES: Sure. COMMISSIONER HUNDT: Okay, now, you said you thought we should have a policy that moved everyone to digital as fast as possible. What do you think of the idea that we've read about in the press, that the administration is floating in the budget reconciliation process, that says that some money ought to be reserved from a future auction of analog spectrum so as to use that money to help the consumers move more quickly in their buying patterns towards digital reception. What is your view about that? MR. CARNES: Well, I think that would probably be fraught with a lot of difficulties as to how that money is actually apportioned and so forth. I think the best way to satisfy the Congressional thing is to do some accounting magic that takes account of the future value of the spectrum and accounts for it in the seven-year period. COMMISSIONER HUNDT: There's been a lot of talk about how free over-the-air broadcast television can survive. I want to ask you, Mr. Reilly, don't you think that one fundamental condition for the survival of free over-the-air broadcast is that digital broadcasters be able to reach 100 million homes, the same way that analog broadcasters, taking the industry as a whole, can reach 100 million homes? MR. REILLY: Certainly the vast majority of that, yes. COMMISSIONER HUNDT: Or 90 million. MR. REILLY: 90 million. COMMISSIONER HUNDT: You need the mass market, isn't that right? MR. REILLY: You need the mass market, yes, sir. COMMISSIONER HUNDT: For advertisers to continue to support in a way analogous to today's market. MR. REILLY: Well, and to be able to amortize the course of the programming and to be able to compete with services that have two revenue streams and can bid for sporting events or programming events with two revenue streams. COMMISSIONER HUNDT: Absolutely. MR. REILLY: We're trying to do it with one. COMMISSIONER HUNDT: Such as cable or satellite and you're talking about different kinds of services. MR. REILLY: Virtually anybody else who is in the business of delivering digital signals. COMMISSIONER HUNDT: Right. Imagine with me, if you will, the following scenario. We give all the analog broadcasters a digital broadcast license. They build out those systems, whether it's fast or slow, whether Mr. Carnes is right or Mr. Keyworth is right, they do make a try at it. MR. REILLY: Yes. COMMISSIONER HUNDT: 50 million American homes decide to buy a digital television receiver. The other 50 million, they don't do it, they don't want to take the money out of their pocket for that choice, you can't make them. Maybe they don't want to do it because they decided to go with the cable industry and bought a digital down converter box instead. But 50 million homes have a digital television receiver and 50 million have shown real reluctance to go along with this transition. What do we do? MR. REILLY: Well, it certainly creates a major problem for the broadcasting industry, because for us to try and maintain, over a long period of time, a parallel system, is not going to be in our best interests. This is one area where the government can rest assured that the broadcasters' interest in a speedy transition is congruent with the government's interest because none of us want to be buying second -- or replacement analog transmitters. None of us want to be buying replacement analog tape machines and it certainly is our hope that the quality of the new product, the new delivery system that we'll be offering, the quality of the augmenting services that we'll be offering will certainly, over a long enough period of time, as equipment wears out, justify people buying new digital, at least digital decoder boxes that will light up their analog tubes. COMMISSIONER HUNDT: But it's realistic to believe that it is least a plausible scenario that the cable industry will get to at least 50 million homes given the additional down converter box, give them all the additional channels they can possibly want, do that before broadcasters are able to compete with that, and generate the 50/50 split that I'm talking about here. Under the circumstances that I'm speaking about, doesn't it make sense to think about incentives to the consumers that would expedite or hasten or promote the transition to digital reception, the very type thing the administration is talking about? MR. REILLY: Well, we're hopeful that the incentives for the consumer to transition is based on the improved quality of the product that we're going to be able to offer, which is the ultimate, I think, incentive for them to try and move to a new generation of -- COMMISSIONER HUNDT: I'm just suggesting a little cash is sometimes an incentive for a consumer, too. Commissioner Quello asked me to go ahead to Commissioner Barrett in the next round since Commissioner Quello has to absent himself briefly, and Commissioner Barrett, as if on que, is here. COMMISSIONER BARRETT: And you asked all the questions when I saw you on television and you had asked the question about the spectrum thing and I got my answers, thank you very much. COMMISSIONER HUNDT: Commissioner Ness. COMMISSIONER NESS: Okay. Following up one last question, Mr. Keyworth, on the issue that the Chairman raised. You mentioned that it would, if one had an auction that would make digital conversion go more rapidly, is that a correct statement? MR. KEYWORTH: I'm saying that lowering barriers to entrants would make it go more rapidly. I'm saying that auction, I believe, is the most expeditious and efficient way that I know to allocate spectrum. COMMISSIONER NESS: Okay, but that does not necessarily mean that that spectrum, unless the Commission were to mandate that the spectrum be used for digital television, it could be used for a whole list of other things and there may never be a conversion to digital television, is that not also the case, Mr. Keyworth? MR. KEYWORTH: There certainly will be a conversion to digital. COMMISSIONER NESS: Of some sort of another, but it may be a conversion to digital PCS, or some other digital service that we're not aware of. MR. KEYWORTH: I certainly think it could be broader than just television. I believe that television will be an issue -- COMMISSIONER NESS: But would television play a role in all of this? MR. KEYWORTH: -- a major role because it is a major marketplace and a major customer demand and requirement. COMMISSIONER NESS: Okay, but absent either mandating a standard or having some other requirement that the spectrum be used for digital television, is there any reason to conclude that auction recipients -- successful auction bidders, would rapidly use that spectrum for the provision of digital television? MR. KEYWORTH: Speculation only, I believe they will use it because it is an unmet demand in the marketplace and it is a very large and attractive market. I believe they will also try to provide as many alternative services as possible. COMMISSIONER NESS: Would they do it if people don't have television sets in the marketplace to receive the signal? MR. KEYWORTH: Well, of course not. COMMISSIONER NESS: Okay, thank you. Mr. Reilly. MR. REILLY: Yes, Mr. Hendricks said this morning that he thought that shortly after the broadcasting community led the way into digital, the cable community would follow along. The fact of the matter is this is a huge expensive undertaking for our industry and it's the broadcasting industry that stands first to try and move the rest of the country into this new digital era. However, if we are for once and all precluded from being able to make the transition to high definition, to digital, other delivery mechanisms who then will see that as a competitive advantage, a single competitive advantage, will move very quickly to sell digital delivery and eventually, I believe, take the lions share of the programming away from us that presents the base for our free and universal service. COMMISSIONER NESS: Assuming we adopt the Grand Alliance standard, for sake of discussion here, and we provide the additional 6 MHz of interstitial spectrum for that purpose, how would you determine when a transition has been made such that the original spectrum can be returned? MR. REILLY: Well, I think it has to be a standard based on the number of consumers who have migrated to the new digital forecasting. I think just as practically as a political matter, disenfranchising -- COMMISSIONER NESS: Is it households, is it number of TV sets in the -- MR. REILLY: I think the standard reasonably would be build around households. COMMISSIONER NESS: Okay, does anyone else have a thought or comment on that? Mr. McKinney. MR. MCKINNEY: No, I don't -- I think that's correct, and I don't think you wait until the last television set in every house has been replaced. I think you do have to have a reasonable position to take and I think that is based on households. MR. CARNES: The cost of a set-top converter might be also a factor in this as it comes down, you might be able to go sooner because of the cost being low. MR. REILLY: There will also be an economic argument on the part of broadcasters. By the time the analog audience gets down to 5 or 10 percent, it's going to be a very difficult proposition to replace your analog transmitter at a half a million dollars, and so eventually those service will - - we won't want to continue to operate those services. COMMISSIONER NESS: We had talked on an earlier panel about must carry, I was wondering if you could give your view as to what channels ought to be must carried? Mr. McKinney. MR. MCKINNEY: No, I'd like not to answer that. COMMISSIONER NESS: Okay, is there anyone who would like to, Mr. Carnes. MR. MCKINNEY: I have a long history on the issue of must carry that Commissioner Quello has -- COMMISSIONER NESS: Okay, assuming that the Supreme Court doesn't give us the answer or another court doesn't give us the answer. MR. CARNES: I don't want to get real deep into the must carry thing, but just point out one thing, that if -- COMMISSIONER NESS: Please. MR. CARNES: Earlier there had been a discussion that if there were for programs on one channel in digital that it would require four cable channels to get them out. COMMISSIONER NESS: Not the case if it's dynamic. MR. CARNES: But if it's digital, the cable guy can just send it down his cable in digital format using the same 6 MHz. Now, beyond that, I have no comment about must carry. COMMISSIONER NESS: Mr. Reilly. MR. REILLY: And perhaps even less, in fact, if they move to a quam system, I believe, they'll be able to get it done in 3 MHz. I think it would be unreasonable for us to expect the cable industry, until it begins to transition its platform to digital, to have to invest simply to deliver our programming. However, once that transition is made, it seems to me that if we are operating in the public interest, then it is in the public interest to get our signals, our free over- the-air -- free universal signals to as many people as possible and continuing a must carry regime for our free programming. Not necessarily for anything that we would want to pay, we'd strike a different kind of deal with the cable people then, but for the free service, it seems to me it's in the public interest to continue to require must carry. COMMISSIONER NESS: Thank you very much, my time has expired. COMMISSIONER HUNDT: Did you want to go? COMMISSIONER QUELLO: I've got one I want to -- COMMISSIONER HUNDT: Go ahead. COMMISSIONER QUELLO: -- for Mr. Flaherty. You know, there was some talk this morning about programming for HDTV and what's available for HDTV and how long will it take for HDTV format to be significantly in place? MR. FLAHERTY: That's a very important question, because this also affects the transition time. People in the end watch programs and not technology, so they are certainly not interested in moving to digital TV sets unless there are good programs. And in this case, the United States in a very unique position in the world. You heard earlier some of the questions about how difficult Japan found it to launch the service. Japan and Europe are in the same situation, they have foreseen to put these services on a satellite so they have instant coverage and no programs. Our problem here is that we have to equip 1,500 television stations to get the coverage, but we have the programs. We started a color service by launching primetime programs in color when the biggest audience watches and when the most attractive shows are on the air, and these same programs, some 70 percent of them, on the commercial television network, have been made in high definition for 35 years. These are all 35 mm film programs, not cinema, made-for-television programs, some 8,000 hours a year are made for television in high definition. And, of course, Hollywood has the complete infrastructure for wide- screen production, changing from 4 x 3 to wide screen is a question of changing the apperature in the printer gate. So the United States could launch a very significant high definition program service and if those attractive primetime programs don't move the audience to buy digital television and high definition television sets then nothing will and we might as well abandon the process. So we do have a very large bank and a very large capacity for a very quick start-up of high definition production in America. COMMISSIONER QUELLO: Any estimate or guesstimate of how long? MR. FLAHERTY: Well, as far as doing it is concerned, presently many of the studios, Warner Brothers, for one, is producing all their television series in wide-screen already, looking toward the residual and the future syndication, I assume. So I would think at the longest it could take a season because it's the same cameras, the same film, the same operation, it's just a question of contracting for the show and the various aspects of choosing the shows. But technically speaking, and only technically speaking, it could be done in a season. COMMISSIONER QUELLO: Okay, yes -- MR. REILLY: I think this is all the more reason to aspire to the HD standard rather than a lower definition standard. The entertainment industry, as someone pointed out this morning, is an enormous engine for earning foreign exchange, it's a positive balance of payments industry. It exports American values and culture around the world and we should be anticipating that we should be enchanting our own Hollywood community to be producing in the highest standard that any other country may wish to adopt someplace out into the future. COMMISSIONER QUELLO: Good, thank you. Mr. Chairman, I'm all set. COMMISSIONER HUNDT: Commissioner Chong. COMMISSIONER CHONG: Thank you. Well, if I hear you all right, some you say for spectrum efficiency purposes, we need to go digital because we can repack closer, there is unused spectrum and it's not very efficient, so let's be smart about it, right? I also hear people saying, you've got to go digital to compete because the satellite people and the cable people, and I presume also the telcos with video dial tone are going to go digital, and they're going to have these nice digital pictures that broadcasters will need to compete with to stay viable, to deliver free TV. So, I always get back to the central question of whether the FCC should draw back from its decision before to mandate HDTV, and I guess I'd like to hear from each of you, if the commission didn't mandate HDTV, what you think would happen? MR. CARNES: I would question whether manufacturers will build sets that receive all formats. Regardless of whether they display at that format, will they even decode all formats, if they're not confident that broadcasters, in fact, will put on the air high definition television. Broadcasters have committed that the will do so, they have told you they plan to do so, and they have even asked that it be placed in the rules and once you do that, it seems to me you then give absolute assurance to broadcasters, to receiver manufacturers, and to the American public that this real, that it will happen and the market will go forward. COMMISSIONER CHONG: So it sounds like you want to give certainty to the programmers that if they make HDTV programs, that there will be the ability to receive it by consumers. MR. CARNES: Indeed, I think that's -- COMMISSIONER CHONG: So the manufacturers obviously need to put it into the set. MR. CARNES: Exactly. COMMISSIONER CHONG: Okay, so let me ask it another way, if you were to not mandate HDTV on the broadcast roles, but to tell manufacturers kind of like what we did with the All-Channel Receiver Act, that you must make your television capable of receiving HDTV and other digital formats, would that be adequate to incent programmers like Viacom to make programming in HDTV formats or digital formats? MR. CARNES: Well, just briefly, my position is that you can do either side. You can either require the manufacturer to build or you can require the broadcaster to broadcast, and either way you go, you've solved the problem, you've solved the chicken-and-egg situation. MR. HOROWITZ: I would like to concur with Mr. McKinney and also to add to something that Mr. Flaherty said, is that the products that have been created, the U. S. has an enormous library and Viacom is just one of those companies that had that library of movie-based product, which, by definition, is done in high definition because it's film. I actually think that I would go one step further and say it's a partnership, I think you really need to require the certainty to the broadcast community that they have an obligation to put a certain amount of HD product on the air and you have a certainty to the manufacturers that, hey, by the way, you shall build it and there's going to be something that will arrive there, at least over the air, potentially by cable, potentially by DBS, but at least over the air. So I think you could probably do either one and take a chance, but there is no chance if you just do both, that's very simple -- COMMISSIONER CHONG: So you would actually advocate both sides. MR. HOROWITZ: Yes. COMMISSIONER CHONG: Just to be absolutely sure. MR. HOROWITZ: Just to be -- because we're asking for a condition to occur -- COMMISSIONER CHONG: Anyone have an opposite view? Oh, this table is going crazy over here. Mr. Reilly. MR. REILLY: Well, there's a third equation -- a third element to the equation and, that is, the consumer has to have a reasonable assurance that after the manufacturers build these things, that they will buy them in sufficient quantity to turn this whole thing into an economically viable practice and I think absent the assurance that broadcasters will, in fact, be generating high definition programs at a certain point in time, it's going to make that just that much more difficult a proposition for the consumer to buy into. COMMISSIONER CHONG: So you're talking about the people that owned the beta maxes. MR. REILLY: All those people have learned a lesson and they've learned -- there's a lot of computer people in the meantime who have learned lessons as well. COMMISSIONER CHONG: Okay, Mr. Carnes. MR. CARNES: I think that mandating broadcasters is the right thing. People watch television programs for the content, they buy sets because they want to watch programs. The most solid way to do this to eliminate any confusion and to sort of hasten the whole process along would be to mandate programs. The fact that broadcasters already are willing to say, we would like you to -- I mean, it's okay if you mandate programs, it's not that you're jamming HDTV down their throat, but they understand that if this whole process is going to happen in a crisp way, that everyone involved, all of the industries, and most importantly, the consumer, are not confused about this. That they have confidence if they buy the set, there will be HDTV programs there and I think that's why you would be best advised to make that mandate. COMMISSIONER CHONG: Okay, Joe, you've got one minute. MR. FLAHERTY: To some extent, the question of these regulations depends on how short you want the transition time to be. If you don't care and it's left to the marketplace, it may take quite a long time. The issue here is that once the broadcaster buys a transmitter and goes on the air and is putting attractive programs on, whether they're mandated or not, the rest of the turnaround depends on the receivers and the transition time really begins the day you sell the last NTSC-only receiver. Any motivation to move that side quickly is what's needed. COMMISSIONER CHONG: I think that's a good point, Joe. I am very concerned about the transition. I'm not worried so much about the early adopters, it's -- you know, I'm a middle adopter, I'm worried about the guys that are, you know, declining to adopt at all, you know, what do we do about them. Thank you. COMMISSIONER HUNDT: Let me ask you a question, Mr. McKinney, if our public policy goal is free over-the-air digital broadcast, free over-the-air digital broadcast, wouldn't the cheapest, easiest, quickest, shortest, most certain thing to do is the following: When we auction the direct broadcast satellite slot on January 18 of next year, we will just say that they have to use at least ten of those channels for free over-the-air digital broadcast. That'll provide it everywhere in the country, including Alaska, all the remote areas and we won't have to worry ever again about whether there will be free over-the-air digital broadcasts in this country, and then we can go ahead and be as flexible as we want and let digital broadcasters do anything they want. MR. MCKINNEY: Well, I'm glad you asked about free over-the-air broadcasting because your previous series of questions, where you asked Mr. Keyworth and Mr. Carnes, were based on a question concerning auction of spectrum for which they will be able to use it only a few years. When you auction spectrum for a few years for a transition to the new digital service, all of those economic arguments about how much will be collected in the auction fall apart. You can, in fact, have free over-the-air television by satellite if you're willing to commit the American consumers, the American television audience, to leave behind free over-the-air terrestrial television and go to a new satellite service and expend the funds necessary, in fact, to do that COMMISSIONER HUNDT: Well, when you say the funds necessary, you're talking about the consumer having to pay for the dish to receive it? MR. MCKINNEY: Oh, not only the dish but the down converter as well and leader phernalia. COMMISSIONER HUNDT: Well, who will put -- MR. MCKINNEY: Yes, possibly $800 worth. COMMISSIONER HUNDT: Well, it's $800 except that we're constantly told here by everyone else that that number, with competition, is going to go to $500 and $400 and that's why the cable industry is going to have competition. But whatever the number is, $300 to $400 to $500. MR. MCKINNEY: It's not local, it isn't local. COMMISSIONER HUNDT: Yes, I understand what you're saying. MR. MCKINNEY: Okay. COMMISSIONER HUNDT: But you haven't been making the argument that our public policy goal was 200 plus markets of local free over-the-air broadcasts, you've just been saying free over-the-air broadcasts. MR. MCKINNEY: I'll be happy to add local. COMMISSIONER HUNDT: So it's a necessity that it be local as well. MR. MCKINNEY: Of course. Of course it would be local as well. COMMISSIONER HUNDT: Of course, all right, now with respect to local broadcasts, within five years, how many TVs will be receiving local broadcast over cable or telephony or wireless cable, all three added together? MR. REILLY: About what time? COMMISSIONER HUNDT: Within five years, how many households will be receiving local broadcasts over a combination of cable, telephone, and wireless cable? Anybody want to give a -- MR. REILLY: Are you talking about digital? COMMISSIONER HUNDT: Dr. Keyworth, you seem to be willing to give me an answer. MR. KEYWORTH: I would simply say the number will be quite large. MR. REILLY: More than 70 percent. COMMISSIONER HUNDT: Over 70 percent. Mr. Reilly, over 70 percent? MR. REILLY: Yes. COMMISSIONER HUNDT: All right, so when we're talking about free local over-the-air broadcasts, we're talking about a service for less than 30 percent of the country in as soon as five years, since everyone else will be getting it over cable or over telephony or over wireless cable, right so far? MR. REILLY: Well, people that get local broadcasts from cable or telephony don't get it free, they pay for that delivery, that additional delivery service. COMMISSIONER HUNDT: I know, that's why I asked you how many would choose to pay for it. So as long as we're clear on what we're talking about here and what group we're trying to preserve. Now, let me ask you, Mr. Reilly, you said you thought we should mandate a minimum number of hours of high definition television as the particular format, what is the minimum number, in your view? MR. REILLY: Well, the number we've been talking about is five hours a week as a start. COMMISSIONER HUNDT: All right. MR. REILLY: However, if I may, the notion that someone mentioned earlier that once you start the regime, it's the first hour that's expensive to try and get out and I would think that more than five hours would become the business practice in a relatively short length of time. COMMISSIONER HUNDT: It may well be, but you're asking for a management of the industry by the Commission and I wanted to know how many hours you thought we should constrain in this manner and your answer is five. That's five of the hours out of 168 hours in the programming week, correct? MR. REILLY: Um-hum. COMMISSIONER HUNDT: So the other way to look at your view is that for 163 out of 168 hours you don't think there should be any government regulation as to format. MR. REILLY: Well, I think if you give the consumer the assurance that five hours a week will come from each of five or six broadcasters, it will mean that the investment in a new high definition set will have an opportunity to see as many as 30 hours a week of high definition television at the start, is a reasonable proposition for the consumer. COMMISSIONER HUNDT: Now, I suppose that's appealing to the consumer as long as those hours they could appreciate on their high definition home theater were not at 4:00 a.m. in the morning. So do we need to also pick the time of day when the high definition broadcasts are going to be delivered? MR. REILLY: I don't think that you'll need to do that in order to get broadcasters to broadcast in high definition and in a time when people will want to watch it. COMMISSIONER HUNDT: You mean voluntarily broadcasters are going to elect to broadcast in high definition format in primetime, for example. MR. REILLY: That would certainly be my expectations. COMMISSIONER HUNDT: So I'm just wondering if voluntarily they're going to do that, exactly why we have to have a government mandate to do it. Now, let me ask -- that's just wondering, that's not a question. Let me ask you, when Mr. Hubbard and Hughes worked together to put up their direct broadcast satellite, they had the problem of having to find somebody who would manufacture receivers and together go to the market with the service and the receivers. But, instead of asking the government to solve that problem, they contracted with Thomson and then with Sony to have a joint enterprise and they offered in Sears and other places the receivers and the service and you could buy the receiver and the service at the exact same time, and that way, everybody involved knew, through private negotiations, that there would be something to buy and something to watch if you bought it. Isn't that an illustrative and useful model of industry working together in private negotiations instead of asking the government to mandate formats? MR. REILLY: Well, I think it's remarkably different to have two companies get together and cooperate with a manufacturer than to expect 1,500 separate broadcasters, who are owned by hundreds of different companies, located all across the country, to somehow try and get together and contract with a manufacturer or a group of manufacturers to come up with an individual standard. I don't think we have the market discipline, our whole industry is set up on the basis that we don't have that kind of uniform market action. COMMISSIONER HUNDT: We've run out of time. I'm sure, on all sides, we have many, many questions and answers, unasked and unanswered but we've run out of time. COMMISSIONER BARRETT: Can I ask Mr. Reilly one question? Are the 1,500, are you talking about those that are merely affiliates or those that are owned and operated by you? MR. REILLY: No, I'm talking about all the commercial television stations, not the -- COMMISSIONER BARRETT: But you have some influence over those that you own and operate, you're not just -- MR. REILLY: That we own and operate, of course, yes. COMMISSIONER BARRETT: And you have affiliate agreements in which you can put the agreements that the Chairman talked about in those agreements with the local broadcasters. So you're not talking about everybody having to go out and to talk to 1,500 broadcasters? MR. REILLY: Well, but we don't have any affiliate agreements that would require what standard we'd broadcast under. COMMISSIONER BARRETT: You can put -- fill an agreement in order for one to have programming and to use whatever the name will be, at some point. MR. REILLY: I suppose that would be possible, I mean, it would be a negotiation between the separately-owned stations such as myself and the networks with which we're affiliated. COMMISSIONER BARRETT: Uh-huh, okay. But if one of the networks wanted to bring something to you that was comprehensive in nature to get where the Chairman wanted to go, there are avenues for that to be done without one approaching each individual 1,500 institutions or stations. Yes or no? MR. REILLY: I think it would be possible for ABC to come to us with a proposition that said, we want you, in order to remain an affiliate, to get in the high definition business. COMMISSIONER BARRETT: Right, thank you. MR. CARNES: We've already done that, sir. The industry has gotten together and we've made the proposal, all we need is an approval to standard. COMMISSIONER BARRETT: No, no, my question was answered. COMMISSIONER HUNDT: If you are already to agree with each other, I'll just -- MR. CARNES: I'm not 100 percent sure why we're here. I think the Advisory Committee has made the proposal to you. COMMISSIONER HUNDT: Maybe you all could go and agree with each other some more and let us deregulate here. But, in any event, unless one of my colleagues wanted to ask a question, we should thank you very much and move on. Thank you all very, very much. PANEL 4 COMMISSIONER HUNDT: This is the last, and by no means, the least of our panels. This one is entitled, "The Impact on Consumers." It's certainly something that a lot of people in the country are going to be interested in, namely consumers. The Commission also is going to be very interested. Brief recap on the format for those of you who haven't been watching all day, we'll allow three-minute opening statements to each of the six members of the panel. The timekeepers on the right are authoritarian and armed with all enforcement powers. We will then have six-minute blocks, one round and then a second round for each of the Commissioners, questions and answers. If we appear slightly impatient during the answers, it's only because we like to hear our own questions, and we get started. Mr. Allan. MR. ALLAN: Thank you, Mr. Chairman. Thomson and the Consumer Electronics Manufacturers' Association, which joins in these comments, endorses the Commission's goal of preserving and promoting universal, free, over-the-air television while making the most efficient use of television spectrum. These goals can best be achieved by upgrading the nation's terrestrial television system to high definition capability. Once this is insured, broadcasters should be encouraged to develop additional services to respond to the information age needs of consumers. Our experience with the RCA direct satellite system teaches that factors for successful introduction of digital television are early availability of substantial amounts of digital programming, and dramatic improvements in both video and audio quality. The DDS experience also demonstrates that consumers, including many of modest means, will be willing to invest in digital television. Recent market research affirms that in addition to a strongly favorable reaction to high definition TV picture quality, consumers are willing to pay substantial premiums for digital high definition receivers. Thomson currently estimates that retail price premiums for HDTV over large screen NTSC sets will initially be approximately $1,000 to $1,500, will fall to between $500 and $750 within five years, and by the tenth year could be as low as $250 to $350 and even less on some small screened sets. COMMISSIONER HUNDT: Just for a point of clarification, that was for what, exactly? MR. ALLAN: That's the premium of high definition over comparable NTSC sets. COMMISSIONER HUNDT: It was the extra. MR. ALLAN: It's the extra, it's the increment. COMMISSIONER HUNDT: Okay, sorry. MR. ALLAN: Okay, while these premiums seem substantial, remember that when first introduced, color television cost about as much as an automobile. As with similar product, by initially attracting early adopters, manufacturers can build volumes, achieve cost reductions, and drive down prices. Other important facts that point to rapid consumer acceptance of digital television include, first, the seven-year replacement cycle in which consumers primarily replace their main viewing set, the consumer's desire to upgrade his current television set as evidenced by a 30 percent annual growth rate in the sales of large-screen sets, and three, the title wave of digital technology sweeping over the consumer electronics industry creating significant synergies with digital television. These advances make it clear that broadcasters must offer HDTV to remain competitive. By requiring HDTV broadcasts, the Commission can insure early and frequent availability of HDTV programs and send a clear message on the most significant factor driving consumer acceptance of digital television. This will hasten the day when all Americans have dramatically improved television service and allow the Commission to recapture valuable NTSC spectrum much sooner. Thomson, and undoubtedly other manufacturers, will market digital receivers that receive all ATV formats. Beyond these similarities, products will vary widely as manufacturers differentiate their offerings and compete for market share, but in the long run, the competitive market forces will determine both the desired feature and performance levels. In consumer electronics, key ingredients for successful product and service introductions are, first, the broad availability of programming, second, wide retail distribution of receiver hardware and a clear consistent message to consumers. Prompt leadership from the Commission will galvanize private industry to make the investments necessary to turn the vision of digital television into reality. Thank you. COMMISSIONER HUNDT: You only went over because I interrupted you, so it's all right. MR. ALLAN: Okay. COMMISSIONER HUNDT: Mr. Grossman. MR. GROSSMAN: I'm going to tell you about a very large but very different group of TV stations, serving small cities, minorities, and rural areas. You've ignored them so far in your spectrum allocation efforts and the big broadcasters running the ATV show are going to keep ignoring them unless you, Commissioners, tell them to pay attention. Low power TV, a misnomer, it should be called community TV, serves five times more minorities than any other part of the industry. It serves so many people in small towns that if it's ignored, you will have violated the basic tenants of serving the people of this country. There are 1,772 low power TV stations, licensed in every state, most built in the last ten years and built with their investors own money, something you never see anymore. They range from my own station serving 1,200,000 Hispanics in Miami to Granny Evetts' tiny home town station serving 500 people in Etheridge, Tennessee. LPTV stations have no must carry rights, they can't lease cable channels because the rates which you condone are so high but they survive and they serve, and if you throw them away, you'll be shutting down the only local service for millions of minorities and people in small towns and rural areas. How can you justify promoting the internet that you can't get without an expensive computer and doesn't provide local service while shutting down a fundamentally local service with an average of 23 hours a week of children's programming with no government law to make them do it. The world of high tech has done nothing to replace the local broadcaster. When disaster strikes, when Hurricane Andrew hit Miami, the cable went dead. Immediately the official emergency broadcast station for Dade County is my LPTV station. The only reason there wasn't panic is that the people could get information from over-the-air broadcast stations. Full power stations can't survive without a big core central market, but LPTV stations can and do. There is no Spanish language TV in Washington. There is -- LPTV is the only local service in Hopkinsville, Kentucky, Junction City, Princeton, Indiana, where the high school kids run the TV station. These small town people don't read the Federal Register and don't even know you are threatening their only service. They pay taxes and they expect you to look out for them. I have a map here that shows all the stations that are LPTV including over 200 in Alaska. If all the services lost with ATV, aren't we taking a giant step backwards? You know, if it walks like a duck, quacks like a duck, then, by gosh, it is a duck, and you can come up with any legal theory you like but LPTV looks like TV and the public relies on it like TV and we are broadcasters regardless of Paragraph 25 of the latest notice of proposed rule-making. And he said stop. COMMISSIONER HUNDT: Mr. Abel. MR. ABEL: I'm the CEO of a new company, Datacast Partners, which is a partnership of two large broadcast group owners in which other group broadcasters will be joining a few weeks. We're undertaking a venture to develop digital applications that will initially be transmitted in the current NTSC television channels. This involves undeveloped technologies and applications in a less than optimal host, the NTSC channels, but I am confident that, at a minimum, our experimentation will develop a base of knowledge that will aid the creation of applications for the new digital channels. Since existing TV receivers do not have sufficient memory or intelligence to receive, store, and manipulate digital content, we intend, initially, to transmit digital data to computers. The National Data Broadcasting Committee has been testing and evaluating two systems for inserting data into the NTSC signal and one or both of these systems will eventually be recommended to the FCC by the Committee. I encourage the Commission to act expeditiously on that recommendation. I want to emphasize two points. First, my company is working on digital broadcasting applications that will be totally free to consumers. Today, as you know, if you have a computer, you must either pay an on-line service or an internet access provider to enjoy the benefits of digital content an information. Our approach is different. We want computers and ATV sets to be able to receive digital multimedia for free. The free and universal nature of TV broadcasting is what has made us great and that's I think will continue to make it great. Although the total bitstream capacity of the NTSC channels is only a fraction of the capacity of the ATV channels and will not permit digital full motion video, some exciting new applications that we contemplate testing include children's educational software, additional multimedia news content, schools closings and other school information, and digital mass marketing. In addition, we can enhance existing TV advertising campaigns by transmitting additional digital content for products and services that are heavily information dependent, such as a digital multimedia brochure about a new automobile that was advertised for only 30 seconds in a station's main TV broadcast. Our intent is to develop these applications within the limitations of the NTSC channels and then transition them to the more favorable ATV channels once these channels are assigned and activated. The applications under consideration will not replace or change current real time television broadcasting in the current or the new channels, nor do we intend to transmit these digital applications in place of HDTV programming. My partners have given me the opportunity to pursue a vision, risky though it may be, that TV broadcasting in the information age must be more tuned to the information needs of the consumer. I believe that free digital broadcasting is the answer to providing multimedia content and additional information to all consumer, not just those who can afford subscription fees. Thank you, and I'd be happy to answer your questions. COMMISSIONER HUNDT: Mr. Gabbard. MR. GABBARD: Thank you. I appreciate the opportunity to be here today. I come as president of Gray Communications, licensee of six television stations in smaller markets. I'm also chairman of the Television Board of the NAB, and I carry one overriding message to the Commission today, that is, that the general viewing public's interest in ATV, the consumer's interest, is strongly tied to the ability of broadcasters in every market size to bring this new amazing ATV technology into all American homes. This will enable the American viewing public to have full and fair opportunity to judge the benefits of digital TV and decide what they want for their future, for American television. My written statement details the reduced profit pictures in the smaller markets and discusses how tough it's going to be for stations in these size markets to construct ATV facilities. A staggered implementation schedule for mid and smaller market stations would help lighten this load. It would do so by giving them more time over which to spread out these large investments. But, importantly, a staggered construction period would reduce implementation costs by allowing the technology to mature, the manufacturing efficiencies to develop, competition to arise and prices to drop. It would also remove the incentive to raise prices created by a crunch construction period where demand exceeds current production capacity. If the Commission will extend out the construction period for midsize markets to say another two or three years and America's broadcasters, even in the mid to smaller size markets, stand ready to bring ATV to their audiences, the public should be given every opportunity to determine their future. And we would like to see the smallest markets extended out maybe another two or three years because these are the markets that are going to have the most difficulty. This means the smaller market broadcasters must be afforded a reasonable ATV rollout period. Without it, many midsize and most small market broadcasters just could not construct ATV facilities and therefore not be able to bring ATV consumers into the smallest markets. The cost to construct an ATV facility will be high, even just to pass it through, probably just the network, about $1.8 million is a good estimate, and that's for every TV station in every size market, no matter how large or how small. We in the smaller markets want the opportunity to enter the 21st century with 21st century technology, so that American television can remain free, local, and over-the-air as the envy of the world. I thank you very much. COMMISSIONER HUNDT: Thank you. Mr. Liroff. MR. LIROFF: Thank you, Mr. Chairman. In a recent speech you asked, "Will we be able to use this new TV not only to entertain our families, but also to educate our children, participate in political debates, gain knowledge and enrich our lives"? Public television's answer to this question is an enthusiastic yes. We are distinguished from our commercial counterparts in that we are mission driven. We all know the potential for enhancing series like Nova and the American Experience and Great Performances with high definition superior audio and video and we are unwavering in our commitment to bring HDTV to the public. But ATV's multichannel capabilities also offer extraordinary opportunities for increasing public service. A typical ATV schedule might combine primetime high definition broadcasts with a daytime schedule of four simultaneous and distinct educational services, such as a Ready to Learn program for pre-schoolers, advanced high school courses such as calculus, Japanese and physics, otherwise unavailable to students in many parts of the company, the high school equivalency and college credit telecources, and a local government and public affairs channel, a local C-span, if you will. Now, distributed with each of these program services would be course materials, student and teacher guides, computer software as well as closed captioning and video description for hearing and visual impaired viewers. This is not a pipe dream, these very types of services are available today on public TV stations throughout the country, but now each station must choose which type of service to offer and which audience to serve. With ATV, stations will have the ability to unlock the full public service potential of their mission by servicing multiple audiences simultaneously. Thus, with ATV, our public service will increase. Now, it's important to stress that this vision will be made possible only with legislative relief and regulatory support. Public television has proposed to Congress that it use its ATV spectrum to generate revenue to fund its future. But even apart from this legislation, through this rule- making, the Commission can determine if our citizens are to benefit from the full potential of this new technology. We strongly urge the Commission not to auction the ATV spectrum, this would sound the deathknell for public television, to reaffirm the assignment of a full 6 MHz bandwidth to ATV, to maintain its commitment to reserve ATV channels for non-profit educational use in whatever assignment plan is adopted, to clarify that licensees may use the ATV spectrum for ancillary and supplementary uses so long as the revenue generated supports the licensee's public broadcasting service. We also urge the Commission to relax or eliminate financial qualification requirements for public television, to relax the six-year construction deadline, and to continue must carry requirement for both NTSC and ATV program services. Public television is at a critical crossroads. We face the daunting challenge of converting to ATV and the opportunity to significantly enhance our service to the American people, and at the same time, we face the most serious funding crisis in our history. With the help of the Commission, as well as Congress, the full public service potential of this technology can be realized. MR HUNDT: Mr. Tasker. MR. TASKER: Thanks, Mr. Chairman. I'm here on behalf of the Computer Industry Coalition for Advanced Television Services, a group of eight leading companies in the computer industry. Our membership includes Hewlett-Packard, Silicon Graphics, Microsoft, Oracle, Intel, Apple, Compaq and Tandem Computers. The coalition has serious concerns about the compatibility of the proposed advanced television standard, transmission standards with computers and computer technology. The success of the telephone system, and the internet, can be expressed as the simplicity and uniformity of their transmission standards. There is one in each case. Companies are free to create innovation at the ends of the networks, either from the transmission end or the receiving end, but the single simple uniform transmission standards create an environment for maximum competition and lowest cost in both equipment and services available to consumers. Now, let's talk about the ATV transmission standards. One must understand, and I believe the Commission does, that advanced television is not just about digital delivery of pictures and sound to a TV set of the future. ATV will change the nature of TV forever, just as my colleague from WGBH says. What we are calling ATV is a digital data transmission standard, or set of standards, really. Digital data is also transmitted among computer networks or over phone lines in a version similar to the ATV transmission standards, similar, but not the same, and that, in our view, is a great tragedy. The ACATS process has left us with a standard containing residue of the legacy system of the old television in the new television standards. Why a tragedy, because it could postpone, perhaps, forever the transition of television from a stand-alone entertainment system into a competitive conduit for entertainment and other interactive information flow, what we are getting familiar with here in Washington and the rest of the United States as the National Information Infrastructure. Indeed, the ATV supporters promise that it has a lot to offer as a component of the NII and we agree. We think so, too, that's why we're here. But we're here to warn you that the promise will not be fulfilled as long as the residue of legacy systems remain in the standard set. Let me be clear, these problems, interlace scan, rectangular pixels, a few other things that we'll get to you in a technical document, are not merely about watching television on computers. That statement have very little meaning in the future, we're talking about much, much more. What we are talking about is the possibility of continuing today's two set phenomenon, one for computing applications, one for television applications. We are perfectly happy to compete on equal terms with television manufacturers for a position in the consumer's home, but under the proposed standard, the playing field is not level and it is tilted against the American computer industry, the companies I am representing today, and we would like the Commission to correct that inequality in the final standard. COMMISSIONER HUNDT: Thank you very much. Commissioner Quello. COMMISSIONER QUELLO: Yes, Mr. Gabbard, we're interested in certainly having this new advanced picture and technology available to small and medium markets, but how can you afford to convert to ATV in a small market, or what plans do you have to do this? How many stations do you have now? MR. GABBARD: We have six right now. COMMISSIONER QUELLO: Six, that's quite a load for you to handle. MR. GABBARD: Yes, sir, it is. It's going to be a difficult transition, but given enough time to create a demand by the consumer, I think your broadcasters who serve their communities well with local television, use information, children's programming, all the things that we do, will find a way to make the conversion. I don't think every station and every market will find their way, but I think your good ones will. They'll lead the way. COMMISSIONER QUELLO: Um-hum. What can the FCC do to help the small market broadcasters? MR. GABBARD: I would really encourage the FCC to take a look at spreading this out, as I said in my document, two to three years for the midsize markets, beyond your current schedule that's talked about today, and maybe another two or three years beyond that to the smaller markets, giving the stations time to let the consumers create a demand. COMMISSIONER QUELLO: Okay, that'll be quite an investment on your part. MR. GABBARD: Yes, sir, it would be a large investment and may I say, too, Mr. Quello. COMMISSIONER QUELLO: Absolutely, go ahead. MR. GABBARD: I would just like to add, too, it was mentioned this morning that there's about $1.8 million to do digital television to do ATV and I'd like to clarify that as we see it today, whether it's 1.8 million, 2 million, 1.6 million, whatever the number is, that's strictly to pass the network through. That is not to build a facility and convert your news cameras and your studio cameras and your tape machines so that all of your facility is digital. We're talking about strictly a pass-through. COMMISSIONER QUELLO: Okay. Let's see, Mr. Allan, you've had experience with DBS digital system, what do you think are ATV chances for success? MR. ALLAN: Oh, I think the chance is based on what we have seen with DDS, we conclude very quickly that HDTV has a tremendous chance for success. When you look at a consumer who is willing to spend $699 for a digital set-top box, $200 to have that installed so that he can pay a monthly premium for broadcasting, I think that you're seeing right there that the consumer is interested. He's expressed, in our survey, basically two reasons for purchasing. One, program choice, which we're all aware of, and the second one, with approximately 38 to 40 percent of the consumers surveyed reporting that their prime reason for buying was because of the picture quality. With the other market research we're seeing where the consumer is reacting to picture quality, because the difference is significant enough that he sees it, he likes it, and he wants it, we think the chance for success is very high. COMMISSIONER QUELLO: Based on your previous experience, do you think the transition period will be longer or shorter than expected? Do you have any estimate on transition period? MR. ALLAN: Well, I tried to do some homework today and I've looked at numerous things. Color television, as all of us know, started in 1954, did not really take off until 1964 when NBC was broadcasting roughly 3,000 hours of programs a year and then was joined at that time by the two other networks so the consumer was definitely certain that he would receive color broadcasting. In the case of VCR, VCR took off in about 1981 when there was a sufficient amount of prerecorded programming available. When you look at it, we've talk 10 to 15 years today, if we look at the most recent introduction where we can get a reasonable penetration curve, it took VCR roughly 18 years to get to 80 percent penetration in this country that could have been quicker except for the fact that there were two competing systems at the start that created some confusion and it took us four or five years to clearly indicate which system would be the winner. COMMISSIONER QUELLO: What do you estimate? MR. ALLAN: I would say it's roughly 15 years. COMMISSIONER QUELLO: 15 years. MR. ALLAN: It's a primary service that could go faster than VCR because of the benefit offered to the consumer. COMMISSIONER QUELLO: Really, okay, thank you. COMMISSIONER HUNDT: Commissioner Barrett. COMMISSIONER BARRETT: Thank you, Mr. Chairman. Mr. Allan, you talked about $600, was that for a high definition receiver? MR. ALLAN: When I talked $600 a minute ago, I was talking about the DDS set-top box. When I was talking in my comments about pricing starting with a premiums $1,000 to $1,500, depending on feature content, that was a high definition receiver, declining over 10 years to a premium of roughly $350 to $400 above the price of a color television set, and I think if you look at -- COMMISSIONER BARRETT: Over what period of time? MR. ALLAN: 10 years. Basically in consumer electronics you can assume that -- COMMISSIONER BARRETT: It'll be above -- it'll be $300 above the cost of a color television set. MR. ALLAN: Color television set, in 10 years it -- COMMISSIONER BARRETT: The cost of the set now, or the cost in 10 years? MR. ALLAN: The cost in 10 years will still be approximately $350 to $400 above the price of a color television set in today's marketplace. COMMISSIONER BARRETT: What will a color television set cost in 10 years from now? MR. ALLAN: Pardon? COMMISSIONER BARRETT: What will a color television set cost in 10 years? MR. ALLAN: If you're looking at 27-inch, it started at $1,000 seven years ago, it's now $299, so if I add $350 to that, it may be $699 to $700 for a large screen set. COMMISSIONER BARRETT: When you did your -- when you had the market research done and you talked about what people were willing to pay, I'm talking about in your written testimony, not in what you did, what was the demographics -- who did the survey, No. 1? MR. ALLAN: The survey was done by Northwestern University for a group of four consumer electronics manufacturers. Basically the only criteria on selection was that a consumer had purchased or intended to purchase a large screen television set in the future. Of the people that were interested in purchasing a large screen television, they indicated that they were definitely interested in upgrading their current set with a larger screen size and higher performance, and they indicated, over and above that, they would pay an additional premium for high definition television. COMMISSIONER BARRETT: Do you know the income categories? MR. ALLAN: No, I don't, sir. COMMISSIONER BARRETT: So the acceptance and the agreement -- or not the agreement, but the willingness to pay, if you don't know the income level characteristics of those people, may, in fact, be less than 10 percent of the population, less than 15 percent of the population. MR. ALLAN: Well, I think you have to look at DDS where we have real live purchase behavior to answer that question, and in the case of DDS, 40 percent of the initial people that responded to the survey, had household incomes of less than $40,000. So it tells you that there's a broad demographic selection of people buying DDS and we see the same thing in large screen sets with a broad demographic population in large screen sets today. COMMISSIONER BARRETT: When did they do the survey? MR. ALLAN: The survey was done in -- completed in October of this year. COMMISSIONER BARRETT: Given the fact that the income of Americans, probably given the fact that the jobs have been created more by a temporary employment agency than they are in industry in a particular segment of our business, mainly Manpower, Inc., out of Milwaukee, Wisconsin, where do you think people are going to get the money from to be able to pay what, $600 -- $300 over what the television cost will be? MR. ALLAN: Well, I think what we see there, Commissioner Barrett, today, we see many consumers, if video is important in their lifestyle, if video is an important entertainment source for them, they tend to step up and find a way to set their priorities to respond to their needs for and desires for entertainment. They may do it through financing, they may do it through other mechanisms. But we see the tendency in all large screen sets to see a very broad population and distribution sample and our business is predicated on selling to a large mass market. COMMISSIONER BARRETT: I'm sitting here laughing, because you know I am the only -- Jim Quello and I are the only ones that were talking in 1954 when NBC took the lead in color television. She wasn't even born. I know you and I weren't born then either, Sherwin. MR. GROSSMAN: I was there. COMMISSIONER BARRETT: I've really owned two television sets in my life, and I've only bought two because I managed during Christmas and birthdays to make it well known to relatives of my -- you know, I really would like a television, and I will not pay that kind of money to have this kind of a picture and I'm just curious as to what kind of people were you interviewing? MR. ALLAN: Well, I guess what I can tell you is right now the fastest growing segment of the consumer electronics business in the television industry is the large screen segment which is growing at a rate of over 30 percent per year. And again, that is a broad demographic cross- section of the U. S. COMMISSIONER BARRETT: Okay, that's rather interesting. I guess if I had $600 I'd say, well, in -- and hopefully by that time it'll be 10 years as opposed to 12, if I invested $500 in U. S. Savings Bonds, there'd be $1,000 in 8, 9, 10 years, by then. So that's rather a simplistic view from a simple person, but I was just curious as to who the people were that you interviewed. Mr. Liroff, let me ask you a question, notwithstanding the fact that you will do great programming. You talked about the relaxed flexible financial rules for all stations? MR. LIROFF: We were particularly asking for that relief for public television stations. COMMISSIONER BARRETT: All public television stations. MR. LIROFF: Correct. COMMISSIONER BARRETT: Does WBGH and WTW in Chicago need that kind of financial relaxation as opposed to possibly a station in East Lansing, Michigan that comes from a poor state university needing it because they don't have the fund raising mechanism or the University of Missouri or some place like that? MR. LIROFF: I think, as in commercial broadcasting with small markets and large markets, the large markets are probably in a better position to facilitate the -- COMMISSIONER BARRETT: Would the answer -- let me ask you this, then, would the answer be in this area not to have three public television stations as opposed to having possibly one? MR. LIROFF: The legislative proposal proposes the construction of only one ATV transmitter during the transitional period. COMMISSIONER BARRETT: Who would get it in this area, WETA, Howard or the Maryland Broadcasters? MR. LIROFF: Well, the overlapped signals are those that you identified plus those in Northern Virginia, and the process to determine which of those would be the key operator has not been determined but the legislative proposal suggests that the ATV activities be shared by those broadcasters during the transition period. COMMISSIONER BARRETT: Um-hum, will we give financial relief to all of the three in this area or just decide that we're going -- let's assume that we were going to give it -- we'd set up some criteria for all three of those in this areas to meet and the ones that met it, the one out of three, would be the one that we'd give financial relaxation to as opposed to giving it to all three? MR. LIROFF: Well, again, during the transition period, they'd only be building out only one ATV transmission capability to be shared among those stations, so that they would share in the cost of that one ATV transmitter during the transition period. COMMISSIONER BARRETT: Okay, I guess what I'm trying to get you to agree to and you're not going to agree to is that this area doesn't need three public television stations. MR. LIROFF: I strongly disagree, Commissioner. COMMISSIONER BARRETT: Just one good one. Mr. Grossman, who in the world -- this is -- you're going to love this question, Mr. Chairman. COMMISSIONER HUNDT: In that case, go ahead. COMMISSIONER BARRETT: My Chairman just glowed when you talked about 23 hours of children's television. How in the world did you reach that and how can we reach that? MR. GROSSMAN: Our first surveys came from 200 stations that -- COMMISSIONER BARRETT: 23 hours -- MR. GROSSMAN: A week. COMMISSIONER BARRETT: Okay, a week. The Chairman's only trying to get three, you're 20 over what he's trying to get. How can we do that? I'm serious, I'm very serious. MR. GROSSMAN: Commissioner, this is going to sound funny. I've been in broadcasting, I guess, second only as long as Commissioner Quello. COMMISSIONER BARRETT: That's a long time. MR. GROSSMAN: Yes. COMMISSIONER BARRETT: 1950, you look much better than he does. MR. GROSSMAN: Yes, but he's busier than I am. He plays tennis. But seriously, the rules of locally integration, and you have to define local. For example, I was on a panel with the president of CBS and he spoke about the local television that their station in Minneapolis had, and it was the Minneapolis baseball team, which is a National League team, and it is local. COMMISSIONER BARRETT: That's an American League team that the White Sox beat all the time. MR. GROSSMAN: Yes. Well, you see what kind of a baseball fan I am. And it covers an area which is what high power stations do. Whereas low power coverage -- COMMISSIONER BARRETT: Now, you've got to get the answer to my question about the 23 hours because the Chairman's going to get mad. MR. GROSSMAN: -- we call it local local, we cover the schools. We cover the school football games in a town and the local things in small cities. Like in Princeton, Indiana, there's a television stations 60 miles from Evansville, does everything 15 hours a day, owned by the high school, run by 25 kids. COMMISSIONER BARRETT: Okay, I really would like to see something in writing, though, because I think if you're getting that and it's reaching -- MR. GROSSMAN: I'll be happy to send the return from the stations to you. COMMISSIONER BARRETT: -- and I will not call you low power, and that's the end of my question. I wanted to ask John Abel something but John knows everything and I just don't need to ask him anything. COMMISSIONER HUNDT: I agree. Commissioner Ness. COMMISSIONER NESS: Thank you, Mr. Chairman. Mr. Allan, should we be concerned that continued sale of analog NTSC sets might impair the eventual recovery of the analog spectrum? MR. ALLAN: No, I think we're looking at a situation right now where you have numerous consumers that will require an analog set for secondary purposes because they have prerecorded NTSC cassettes, they have other products right now that work with NTSC and I think that one of the things we have always seen is that in consumer electronics, the older systems have uses because of various pieces of software that have been saved that require NTSC demand. COMMISSIONER NESS: -- selling new sets once a standard is adopted? MR. ALLAN: Yes. COMMISSIONER NESS: Some argue that the quality of DDS pictures is sufficient for most consumers. Do you disagree, and if so, why? MR. ALLAN: Obviously, seeing we put the system together, we're very proud of the performance of DDS. However, if we're trying to set a standard that has to last for numerous generations, I think it's essential, one, to have high definition and provide the headroom to further improve that signal and I think when we have shown in the demonstrations at the National Consumers' League on Capital Hill and the demonstrations here recently, that when most people see the differences between standard definition and high definition, or DDS quality, that they find a striking difference and react very favorably to high definition. COMMISSIONER NESS: When do you expect to see flat screen display panels to be available, if at all? MR. ALLAN: That's a tough one. Right now, I mean, the flat panel and the flat screen and the television on the wall has going to be ready in the next decade for the last four decades. There's still a lot of work, some people are doing some very good work in large screen flat panel. It's still in the prototype stage and they're still very expensive. So I think we're still quite some time away from large screen flat panels which is what the consumer really wants. COMMISSIONER NESS: Thank you very much. Mr. Grossman, I have a lot of empathy for low power television stations, I think you do provide a wonderful service for your communities. Since 1987, how many LPTV stations have been licensed? MR. GROSSMAN: Well, there 1,772. I don't know what it is since 1987 -- COMMISSIONER NESS: Do you know when they began -- okay. MR. GROSSMAN: -- but the -- COMMISSIONER NESS: I'm thinking about when we began our investigation. MR. GROSSMAN: Yes, I don't think there was more than 200 or 300 because it was tied up in a log jam legally in the FCC back in the years and then Keith Larson took about a couple of years to straighten it out. COMMISSIONER NESS: Okay. MR. GROSSMAN: Most of the industry was built while the engineering was going on. COMMISSIONER NESS: In reality, rural areas, I would assume, would have plenty of spectrum and it will continue to have plenty of spectrum. The major problem is probably around the urban areas, especially on the east coast, is this correct, in your view? MR. GROSSMAN: Yes, what we're really asking for is a chance to straighten out our own house. For example, in Miami, Miami is on the east coast, it has 14 television stations. I took the allocation plan and got the parameters from the engineering staff and I was able to give myself an ATV channel along with any other LPTV and there's reasons for it. What we're asking for is that an LPTV station, that it have a chance to apply and get it out to its 74 DB curve. I think financially, I know it's money, but, you know, we build 1,500 stations with no bank loans. Everybody built these stations on their own, with their own money, their own guts. I'm not -- we need time like this gentleman says you do. We just want an opportunity to do it, not be shut out after applicants. COMMISSIONER NESS: MSTV has tried to work out a plan for full power stations, have you analyzed the spectrum and come up with any sort of a transition plan that would accommodate LPTV stations? MR. GROSSMAN: What we've been able to find, yes, but we would need time, we're willing to work on it and do it. What we need is from the Commission to say, go ahead and try and save the service and we'll go to work and try and save it. We know we're secondary as far as NTSC is concerned, that was the deal when we got them, I can't change it. We know the interference standards, we need new interference standards and then we'll follow the darn rules. LPTV has been a trouble- free service for the Commission. COMMISSIONER NESS: Okay, thank you very much, Mr. Grossman. Mr. Abel, or Professor Abel, Dr. Abel, how long, John, how long do you think that broadcasters will be broadcasting in NTSC? MR. ABEL: How long? COMMISSIONER NESS: Yes, please. MR. ABEL: For the rest of the life of everybody in the room. COMMISSIONER NESS: Oh, boy. If we all become real heavy duty senior citizens that'll be a real long time. In what way is data that's broadcast over NTSC a test of what it would be like to have data transmitted using a digital system such as the Grand Alliance system? MR. ABEL: What I'm trying to do is develop a small bitstream in the NTSC channel. I would be the same kind of data, it would just be that the capacity of the ATV channel would be significantly greater to distribute more data at much higher rates, so I can provide more services in the ATV channel than in the NTSC channel. COMMISSIONER NESS: Okay, thank you. Mr. Gabbard, I'm also very sympathetic with the concerns about small market broadcasters having lend to many of them, during the course of my lending days, all stations changeout equipment, what are the typical periods over which they would changeout studio equipment for new equipment? MR. GABBARD: Usually, for example, a transmitter might run 15 years, and it's a big, big expensive piece of equipment, obviously. Studio cameras might last five to seven years, so it just depends on equipment. Tape machines you wear out fairly quickly. COMMISSIONER NESS: Okay, how should we handle translators? That has been an issue that was raised in a prior panel. MR. GABBARD: I don't have an easy for that. I know that in areas in particular, Stanley Hubbard's areas, for example, the areas out west where Bill Sullivan operates in Montana and they rely heavily on translators to get the signal to the people in smaller, sparsely populated areas, but it's just as important to those folks to have the service as it is someone who lives in a metropolitan area. So I don't have the answer to how you should handle that, that's more of a technical question that I am not qualified to get into. But I can tell you that they are a very important service. COMMISSIONER NESS: Okay, thank you. Mr. Chairman, if I can just simply observe that our wonderful digital compression demonstration here manages to deliver summer and winter temperatures within a matter of minutes in this hearing room, and I really want to commend everybody that's been able to go through this process all day with us. COMMISSIONER HUNDT: We did this in a deregulatory way until we did not predict what temperature at any given hour. Commissioner Chong. COMMISSIONER CHONG: I think it's colder on the left end because I'm right under a vent. COMMISSIONER HUNDT: That's the way all of us on the left feel. COMMISSIONER CHONG: Is that a recent phenomena since about November? I'd like to go back to Mr. Allan. We're getting punchy, you know. COMMISSIONER HUNDT: It's been a long day. COMMISSIONER CHONG: Yes, it has, but this is a very important panel. I really appreciated all the information you presented particularly in your testimony, Mr. Allan, because I think a lot of us are worried about, you know, only whether rich Americans are going to be able to afford HDTV and what will happen to middle and low income Americans if the HDTV standard is mandated and I was looking, with interest, at your market research on digital satellite systems, and that seemed to refute that concern because you found that nearly 40 percent of early digital satellite system buyers had annual household incomes below $40,000. So -- and, I would not, that a digital satellite system is not a primary service like free over-the-air television service is. So, based on that, would you expect that if HDTV became a reality that even low income Americans would consider purchasing it? MR. ALLAN: Yes, I believe that it is determined by the person's desire, as I said earlier, on how important is that entertainment that the networks and the broadcasters provide to them. I think a perfect example, and I've told the story many times, if you drive along the Ohio River, you'll see many places where you'll see digital satellite dishes and receivers that are more expensive than the homes and the trailers that are utilizing them. I think that is just another indication that if television entertainment is a primary source of information entertainment for the consumer, they tend to try and find ways to adopt the sets. And, of course, we do our best to drive the cost down as rapidly as we can to expand that market and make it as broad as possible. COMMISSIONER CHONG: Now, you've also told us that you think we ought to have a minimum HDTV requirement and you also say, though, that the Commission shouldn't mandate requirements for the consumer sets -- MR. ALLAN: It sort of sounds like the broadcasters, doesn't it. COMMISSIONER CHONG: It does kind of sound like the broadcasters. I've had people argue we should do one or the other or both today and I'm wondering why you took that particular position and what your reasons were? MR. ALLAN: Okay, we have already committed, and we've said all along, that we would build all-format receivers. We think it's a requirement, I'm not about to try and explain to a consumer when signals change that his television goes blank and he's not about to actually receive the signal or wonder why he doesn't have programming. We have also said, in some of the detailed comments, that we would be more than happy as Thomson, to accept a requirement to mandate for all television -- or all-format receivers with an equivalent requirement on broadcasters because we truly believe that the key to making this transition to rapidly and quickly is for a clear message to the consumer that tells him and assure him and make him confident that there will be high definition and standard definition television signals available and there will be receivers to receive them. If we do a clear message, we will hasten the transition and make it happen as rapidly as possible. If we confuse it, you have an AM stereo. COMMISSIONER CHONG: Which was not successful, right? MR. ALLAN: That's correct. COMMISSIONER CHONG: Okay, I'd like to turn to Mr. Liroff from the public TV area. I mean, there's no question of the tremendous benefits that public TV has brought to America and my concern is how we can help public TV make this transition. You have discussed, in your testimony, the proposal that's up on the Hill and I was wondering if you could briefly update us on the status of that proposal and whether you have any sense of whether it will go through or not? MR. LIROFF: My understanding, Commissioner, at this point is that it's not being considered actively until the present conference on the principal telecommunications legislation is completed. We're hoping for some consideration before the end of the calendar year, but, at this point, I don't think it -- it's being discussed by staff, but it's not in active consideration at this point. COMMISSIONER CHONG: Now, you've expressed some interest in some multiplexing, in other words, squeezing four channels out of the 6 MHz -- MR. LIROFF: Absolutely. COMMISSIONER CHONG: -- and my question to you is, if that's something you're interested in doing, do you think the Commission should mandate HDTV at all or would you like to have complete flexibility? MR. LIROFF: We would prefer that there be no minimum requirement. We think that both the commercial broadcasters and the public broadcasters will move into HDTV and that there be some flexibility if there is a requirement, particularly for those ATV transmitters which we propose be shared by several stations during the transition period. COMMISSIONER CHONG: Right. Let me ask you about that. Now, you're talking about sharing one ATV transmitter during the transition, I mean, all the non-commercials in that area. MR. LIROFF: In each service area, right. COMMISSIONER CHONG: And you are going to lease out the excess capacity so that you can fund the public programming, is that correct? MR. LIROFF: The legislative proposal proposes that there be an investment trust set up to whom the spectrum would be assigned, the ATV spectrum. It would assign -- COMMISSIONER CHONG: I see, and they would lease it out and manage it. MR. LIROFF: And, for the purposes of establishing an endowment for public broadcasting, the proceeds from which would then fund ongoing operations of public broadcasting and take public broadcasting off the annual appropriations for the federal government. COMMISSIONER CHONG: Now, would there be any possibility that some of the spectrum that would be leased by the trust could possibly be leased to people like Mr. Grossman's group of community broadcasters? MR. LIROFF: I don't know that there are any conditions that have been proposed that would limit the use of that spectrum. COMMISSIONER CHONG: But it's possible there might be spectrum there that could be available for someone like a community broadcaster? MR. LIROFF: So far as I know, consistent with the desire to generate sufficient revenue to fund public broadcasting. COMMISSIONER CHONG: That's all I have for now. COMMISSIONER HUNDT: Thank you very much. Mr. Allan, the median income in the United States, the last time I looked, was about $35,000 a year for a family of four. You picked the $40,000-a-year number for your survey, substantially more than half of all Americans make less than $40,000 a year, what percentage of your sales of the DDS dishes have gone to people who are truly in the low income category, let's say the bottom fourth in terms of income? MR. ALLAN: In was roughly, and I have to go back and check the figure for you, but it was in excess of 20 percent. COMMISSIONER HUNDT: About 20 percent of your sales have gone to people who make less than what? MR. ALLAN: I believe it was less than $28,000, was the other cut point. COMMISSIONER HUNDT: Now, do you think these people will also, in addition to having purchased your satellite dishes, will they also be interested in buying a home theater for watching the local terrestrial high definition programs that Mr. Gabbard might want to show in that same area along the Ohio River that you were talking about, will they want to do both? MR. ALLAN: Some of them may, but I would assume in that income, they've made a decision with their DDS service, they will stay with that until they feel something is affordable that they can replace it with. So I think it would be doubtful that they would do both. COMMISSIONER HUNDT: So those consumers presumably have already gone digital by buying the Hughes or Hubbard or whoever else is providing the satellite service. MR. ALLAN: They've gone digital but you must recognize that there is a high definition television port on the back of the DDS box that will let them pass the signal by satellite into an HDTV receiver in the event they wanted to do so. So there is an upgrade capability built into DDS for the future so that those people do have the ability to get HDTV. COMMISSIONER HUNDT: Right, and did Thomson try to persuade Hughes or Hubbard to deliver some high definition format programming? MR. ALLAN: We're working with them right now. COMMISSIONER HUNDT: Have you persuaded them yet? MR. ALLAN: We're working very hard on it. COMMISSIONER HUNDT: But you haven't asked the government to order it, you're willing to negotiate. MR. ALLAN: I don't own the satellite and I can prompt them and encourage them -- COMMISSIONER HUNDT: Well, the spectrum is a public spectrum, but you have to come to us and ask us to order a particular format there. MR. ALLAN: But I think you will find that right now they have a competitive advantage with the quality of the program they're putting out and not a business decision. They will make a decision on when it's appropriate for them to take the next step to remain in a competitive advantage. COMMISSIONER HUNDT: That's the kind of thing I like to hear. I've managed to get some of the witnesses in the previous panels to agree with me that at least as to 163 of 168 programming hours, they don't think the government should micromanage the format selection. I think I'm kind of stuck in the last three to five hours, they're insisting that we do a little micromanagement there. Mr. Abel, can you give us your views on this question of whether the government should mandate some specific quantitative amount of broadcasting in the high definition format which, I believe, I think it's Mr. Tasker's statement, says it's one of the 14 formats? MR. ABEL: My view on that is that if makes somebody happy out there and somebody thinks it's going to drive the market, let them try it. I have no objection to a minimum number but I think the minimum number is always going to be arbitrary, somebody is not going to be happy about that particular number. But as far as mandating a particular number, I don't think it's -- if someone thinks this is going to drive the market, that's fine. COMMISSIONER HUNDT: Well, do you think that mandating the broadcast of high definition format from 4:00 a.m. to 6:00 a.m. in the morning is going to drive any particular market? MR. ABEL: Probably not. COMMISSIONER HUNDT: It kind of depends on whether it's the time of day in which there's popular programming being shown. MR. ABEL: I'm not sure it's time of day, I think it depends on program content. COMMISSIONER HUNDT: Program content. MR. ABEL: There are two types of program content that are important. COMMISSIONER HUNDT: Which are? MR. ABEL: Sports and movies. COMMISSIONER HUNDT: Would you suggest that the FCC mandate that sports and movies be broadcast in a high definition format? MR. ABEL: Personally, I would love it. COMMISSIONER HUNDT: Do you think that that's the type of thing broadcasters would like to have us do, Mr. Abel? MR. ABEL: I think that -- COMMISSIONER HUNDT: Excuse me, let's let Mr. Gabbard answer that since he's a broadcaster. Should we mandate that sports and movies be broadcast in the high definition format as Mr. Abel has suggested, says that he would love? MR. GABBARD: I don't think you'd need to mandate it. I think all the networks have already said to you and certainly to me, that they're going to be in the high definition area, that they will take the lead to provide the service and try to drive the consumer. We, as broadcasters, will follow when we're able to, and as I said earlier, I think the good ones will be first and provide it for their communities. But I don't think you need to mandate it. COMMISSIONER HUNDT: Mr. -- I didn't cut you off, did I? MR. GABBARD: No, sir. COMMISSIONER HUNDT: Mr. Tasker, you are suggesting, are you not, that the government should mandate some broadcasting in a different format, mainly progressive format? MR. TASKER: Mr. Chairman, the FCC is going to set some standards here, if the FCC were not going to set any standards here and the marketplace were going to do its work, that would be a different thing. What we are asking for is that we have one transmission standard that, if we're going to do deinterlacing, we do it at a place where it's most economic and efficient and cost effective for consumers and that's, we think, at the head-in, not additional costs to the consumer's box. COMMISSIONER HUNDT: The joint statement of the Computer Industry Coalition on Advanced Television Services, at the top of the second page, points out that the ACATS, our advisory group, has proposed 14 display formats. MR. TASKER: That's right. COMMISSIONER HUNDT: We could well say that any one of those formats should be selected by a broadcaster at any given second and let the market decide. Is that all right with you if we go that route? MR. TASKER: No, we're not asking for that, we're asking for -- there are a selection of formats for different reasons, but we are asking for a progressive scan. COMMISSIONER HUNDT: You're asking that we prohibit some of these formats and allow only those that are progressive, do I understand you correctly? MR. TASKER: We want to see the maximum amount of compatibility to do the kinds of things that you've talked about and Mr. Liroff and others have talked about with text and graphics and video all mixed up in what we call multimedia applications at the lowest possible cost to the widest number of consumers and we think that's done best by specifying progressive scans. COMMISSIONER HUNDT: By progressive -- so you want us to forbid interlaced format, is that correct? MR. TASKER: Yes. COMMISSIONER HUNDT: And, Mr. Allan, do you want us to forbid the interlaced format? MR. ALLAN: No, we fully intend to build sets that handle both interlace and progressive scan. If you look at the specification done by the Grand Alliance, 12 of the 14 formats in the system are progressive scan formats and I think yesterday, as the Commissioners saw when they saw the demonstration, one of the tests of compatibility in the interoperability is being able to read 9-point type and I think in the high definition format, we showed clearly that that was legible and there's no issue in using interlace. As far as the cost of deinterlacing in a set, we have progressive scan sets, we do it today. Our first high definition sets will progressive scan, and they will also be capable of handling interlace materials. So from a set manufacturer's standpoint, we don't see it as a major challenge. COMMISSIONER HUNDT: So, if we didn't prohibit any formats, we just let the market take place in this connection, rollout what it wants, that'd be all right with you? MR. ALLAN: I think the formats have been very carefully defined by over 100 companies in a variety of industries from telco to computer to IC manufacturers, to consumer electronic set manufacturers. There have been many compromises made, it's been addressed numerous times, it's not a new issue, and in each and every case the conclusion has basically been a consensus that the formats that we have are appropriate to go forward and I think if you look at the reports from the NII and their survey two years ago, the people at the NII, in their report, suggested that the Grand Alliance system be promoted and that we try and adopt it and implement it as rapidly as possible and there have been other government agencies and organizations that have had similar views. COMMISSIONER HUNDT: I've gone over a minute, we have three minutes left, would any of my colleagues like to use any of the remaining three minutes? COMMISSIONER NESS: I think we have another round. COMMISSIONER HUNDT: We have another round, I mean, for this particular -- COMMISSIONER BARRETT: Yes, for this panel, we haven't had our second round, yet. COMMISSIONER NESS: This is the last panel and we haven't had our second round yet. COMMISSIONER HUNDT: But what I'm saying is, this panel was supposed to go to 4:15. COMMISSIONER BARRETT: No, 4:30. COMMISSIONER NESS: 4:30. COMMISSIONER HUNDT: Even better than, would anyone else like to ask? COMMISSIONER NESS: I think we're going to continue on. COMMISSIONER BARRETT: I guess we're going to get -- COMMISSIONER HUNDT: I mean, we have another round and -- COMMISSIONER NESS: Yes. COMMISSIONER QUELLO: One more round, Dr. Abel. COMMISSIONER HUNDT: I apologize. COMMISSIONER QUELLO: Dr. Abel, I have great respect for the technical, administrative and academic achievements of Dr. Abel, who you may not have known, was a former candidate for president of my university, Michigan State University, and incidentally, I have to mention, naturally, gentlemen, that Michigan State did beat Michigan this year for a change, and it made our whole year successful. MR. ABEL: Thank you. COMMISSIONER QUELLO: But you know, I'm going to give you a hypothetical question, it's very hypothetical. And this is the kind of a question that every chairman really fantasizes about, including me, and that is, let's assume you are now the sole FCC commissioner and chairman of the FCC, you're in control, I'm going to yield my six minutes to you, what would you do implement and expedite HDTV today, advanced television today, and if you have priorities, list them. COMMISSIONER BARRETT: First of all, you don't have six minutes, secondly, you will recall Reed -- called his excellency, director general, not chairperson. COMMISSIONER QUELLO: Oh, well -- COMMISSIONER BARRETT: If there is one, it'll be his excellency. COMMISSIONER QUELLO: I'd be glad -- I'll repeat then, they'll never call him as long as he has anything to do with the FCC, your serene highness, your excellency, or whatever. MR. ABEL: Well, I think you've given me a really softball question here. One, selective standard, the standard is critical to the selection -- to the development of the market, it's critical to the success of this for the public and the consumer as well as the broadcaster. No. 2, make the standard as flexible as possible. I am the posterboy for flexibility and I appreciate that role, but it would be tragic to go to digital broadcasting and only have HDTV. I think HDTV is a very important part of this. I think HDTV should be maybe the centerpiece of this in the early stages, but the standard should be as flexible as possible. No. 3, you are going to encounter massive problems in implementing HDTV in this country or advanced television in this country that have not been faced yet and I think these problems relate to interference. We've covered some of these issues here today with respect to translators and low power TV stations, but they're beyond that, they go to the issue of interference from the NTSC channels to the digital channels and digital to NTSC. There will be, I predict, some problems with the assignment of the stations of the channels in the sense that broadcaster is going to broadcaster in this and I would like for you to work to minimize those litigation issues to make this advanced television happen as rapidly as possible. I think those are the major points that I would consider. COMMISSIONER QUELLO: Good, I think that's going to take care of me. COMMISSIONER BARRETT: And I next, Mr. Chairman. COMMISSIONER HUNDT: Do you want to give your six minutes to someone else? COMMISSIONER BARRETT: Sherwin, my good friend, how do you propose that we can go forward with digital TV without adversely impacting community broadcasters? MR. GROSSMAN: There are certainly markets that you're going to impact them. I think basically, if we're going to go forward under the present system, we have to have an opportunity to try and work it out and we need 180 days, 120 days to do it -- COMMISSIONER BARRETT: We, meaning your group with others? MR. GROSSMAN: Yes. In answer to Commissioner Quello's, I have a much wilder idea. You could -- if you take seven years as a point where you make all sets during that period are made with a converter, and at the end of that time you switch on the main -- on the same channels we're now broadcasting on, everybody, to digital, bring back your power, it's about a 10 to 1 drop, add an exciter to the transmitter, readjust the main tube, you're broadcasting digital. You don't need a new tower, you haven't gone into the new antennas, they'll work the same, same transmission lines. Now, you have a system because basically you've got a system today where there's over 6,000 transmitters to serve this country. You're talking about reducing it to 1,500, it ain't going to work. COMMISSIONER BARRETT: Okay. MR. GROSSMAN: You're not going to serve the people of this country. COMMISSIONER BARRETT: Okay, thank you very much. COMMISSIONER HUNDT: Commissioner Ness. COMMISSIONER NESS: Thank you. Mr. Tasker, the proposed standard is for broadcasting. Broadcasters say today's technology limits them to interlace for delivering full HD over the air within a single 6 MHz, is that correct, is my information correct on that? MR. TASKER: I didn't say that, it's -- we have a different view. They say that you can't broadcast a 1,000 line progressive scan. COMMISSIONER NESS: Right, to get to the 1,000-line full HD. MR. TASKER: Well, but 1,000-line -- COMMISSIONER NESS: That you don't need full HD. MR. TASKER: -- interlace is comparable to a 720- line progressive and you can certainly transmit a 720-line progressive over a 6 MHz channel, so those are the comparisons. COMMISSIONER NESS: Okay. MR. TASKER: And we think that when you make those comparisons, you will see a big difference in the way the text handled and that the progressive text is a lot better. COMMISSIONER NESS: Have you seen the demonstration across the street? MR. TASKER: I got about half way through it before coming over here, I plan to go back. COMMISSIONER NESS: Okay, my recollection is there was one demonstration, and maybe Mr. Allan can elaborate on this, but there was one demonstration where we saw in interlace, text that was quite clear, I was surprised, in fact, that it was feasible. I think we also saw a demonstration by Texas Instruments, and I'm trying to recall back there as to whether that was an interlace or a progressive display. MR. TASKER: Progressive. COMMISSIONER NESS: It was a progressive display, okay. Did you see the ones that I'm talking about that did show on big screen in the interlace format? MR. TASKER: No, I guess I didn't. COMMISSIONER NESS: If you could read the bottom line, your eyes were supposed to be good, and I could read it and my eyes are awful so I think that that was relatively clear. Now, my recollection was that the working parties of our advisory committee were open to everybody who ever wanted to do work effectively, what was the extent of your participation in the development of that ACAT standard, or the Wiley Standard, as, I guess, it's now called. MR. TASKER: The Wiley Standard, indeed. There have been some computer companies, Apple particularly, that have tried their hardest to participate for as long as possible in the ACATS process, and I think, in fairness to the ACATS folks, the formats that my colleague from Thomson identified as progressive, are probably there because of input from the computer industry two or three years ago, we were concerned that there was no progressive scan in the planning and there are now a number of progressive scan formats and we're very pleased that they exist. Our concern is that the interlaced residue in the system will keep those progressive formats from becoming the dominant form. Now, people can say that Compaq could be faulted for not being in the process earlier. We do not. Three years ago, two years ago, the convergence of technology that would make television a very interesting thing to us, was not apparent, frankly. I mean, the kinds of things that Mr. Liroff is talking about, the kinds of things that make this real interactive, interesting, computer television multimedia, call it what you want, that was not in existence two or three years ago. Now, if we can be faulted for that, television was television then, it's television now, it was television 10 years ago. Ten years ago Compaq Computer Corporation was two years old and barely existing and the personal computer was a very different animal than it is today. We've gone through seven product generations since then. So technology has changed a lot for us and today we find ourselves in the situation where we're all very excited about the growth of the national information infrastructure, at reasonable prices to the largest group of consumers that we can manage to find, and it is just our concern that we make this new system a full part of that -- COMMISSIONER NESS: I agree with you, though, that it's extremely important to have convergence and to be able to interconnect with the benefits of computer, with the television set, but, Mr. Allan, can you tell me approximately how much additional it would cost the incremental cost of putting in a chip that would provide both interlace and progressive? MR. ALLAN: Do interlace? We are already designing sets, the issue becomes the deinterlacer and estimates have been made anywhere from $25 to $35. Our technical group believes they can do it for as little as $10 when we get into mass production, so relative to the price of the sets -- COMMISSIONER NESS: Now, is that retail or is that cost? MR. ALLAN: That's cost. So take $10 and make it $25 at retail. COMMISSIONER NESS: So that pulls up the cost. MR. ALLAN: So we don't see it as a major overall cost in moving the overall standard forward. COMMISSIONER NESS: Okay. MR. ALLAN: I think the other thing, if I may say that we should point out, is that both IBM and DEK have been very active in those meetings in setting the standard and both of them have approved the standard and, at the same time, tried to promote the fact that we should all move to progressive scan as rapidly as possibly and I think that's included in Mr. Will's report. COMMISSIONER NESS: Thank you, and I did note that there were, certainly at the last meeting, that there were members of the Advisory Committee from the computer industry who were present and presumably, when the vote was taken, had an opportunity to vote against the standard. MR. TASKER: May I say that Microsoft is also a member of ACATS, they joined very late. I guess I would only say that Compaq is the largest producer of personal computers in the world, Apple is the second largest. We were not involved in the process. If you believe that consulting with IBM and Digital is consulting with the computer industry, it shows how out of date you are with the modern computer industry. They are very strong competitors, but they are not sufficient to stand in for the computer industry of today. COMMISSIONER NESS: Okay, I appreciate your viewpoint, thank you. In my half minute left, Mr. Liroff, I'm aware public television has really been instrumental and very supportive of the activities of the Advisory Committee. What are your thoughts on the tradeoffs between SDTV and HDTV? MR. LIROFF: The tradeoffs in what instances? COMMISSIONER NESS: In terms of the relative value of going HD or going SD, providing those services to the consumer. MR. LIROFF: We think both are essential and will be of interest, that is, the flexibility that ATV provides will allow us to operate in SDTV when appropriate and in HDTV when appropriate. I wouldn't see one versus the other but both. COMMISSIONER NESS: Okay, I see my time done, thank you very much. COMMISSIONER HUNDT: Commissioner Chong. COMMISSIONER CHONG: One last question for poor Mr. Liroff, who I'm picking on. I forgot to task you one more thing. The small and medium broadcasters had asked us for the possibility of a slightly longer transition period for them, would public television stations also want a longer transition period because of their budget issues? MR. LIROFF: Yes, we are requesting the same kind of relief. COMMISSIONER CHONG: I see, and you would probably want to be treated like the smallest broadcasters, probably. MR. LIROFF: Yes, so far as -- what we have asked for is an indefinite transition period with an obligation to convert to ATV in advance of the end of the transition period once that is determined, but that there should be flexibility to allow for their financial situations. COMMISSIONER CHONG: Thank you. Mr. Gabbard, you provided some really good information about the cost of transitioning for small and medium broadcasters and I found it very helpful. I think you just clarified that it was about 1.8 million just to pass through the signal digitally and that doesn't include a new tower, that doesn't include upgrading your camera equipment and your studio and all that kind of thing, is that right? MR. GABBARD: That's correct. COMMISSIONER CHONG: Now, some have suggested that instead of the Commission loaning a second channel to the broadcasters during the transition period to digital, that we, instead auction the channels. We had a financier here early who was talking about the ability of broadcasters to borrow money in order to finance the transition. I wanted your opinion about how the small and medium broadcasters would do in an auction and whether they could raise the capital necessary to compete in an auction to keep their channels? MR. GABBARD: Obviously we're opposed to auctioning for a lot of reasons, but primarily it's going to hurt the consumer. If we have to step up, and again, the smaller stations, the better broadcasters in the smaller markets, every market has at least one really good broadcaster who is, in most cases, profitable but not to the degree the bigger markets are, they put their money back in to serving the community. That's why they're strong, local, No. 1 broadcaster in most cases. They will try to protect their business and their community and they will try to compete in an auction if it came down to that. But if they had to do it, they're going to have to give up something somewhere in order to pay that back, and what they give up is the kinds of local news they do, the high school basketball games, the community Christmas chorus, whatever it might be. COMMISSIONER CHONG: Now, why would they give that up? Is it because it's expensive to produce that, or what? MR. GABBARD: It's very expensive to produce. It costs a lot of money to produce these -- COMMISSIONER CHONG: So that's local production as opposed to the network feed, is that right? MR. GABBARD: I spend $2 million a year in Lexington, Kentucky to do news. We put that much emphasis on local news and proportionately, as we go down to the smaller markets, Lexington is 68th in the country, as we go down, proportionately we're spending the same money. COMMISSIONER CHONG: So you're telling me that if we go to auction, the small broadcasters might choose to compete to try to keep their channel, one would assume, and to do that, they may have to reduce their public interest local broadcasting, is that what you're saying? MR. GABBARD: I can't think of another area they could get the money, they have to give up something because this is added-on money, this is not money that's laying there to be used. If they have to buy the spectrum, then build a facility, that money has to be paid back somewhere and it has to come out of whatever profits are there, if there are enough to do it. COMMISSIONER CHONG: Thank you. COMMISSIONER BARRETT: Yes, let me ask you a question. COMMISSIONER HUNDT: Were you finished, Mr. Barrett asked if he could -- COMMISSIONER BARRETT: I'm sorry, were you finished? COMMISSIONER CHONG: I will gladly yield to Mr. Barrett. COMMISSIONER HUNDT: I didn't -- no one wants to cut you off, though. COMMISSIONER CHONG: No, I'm done. COMMISSIONER BARRETT: I've heard all throughout the day and I often use the very rather generic term, free over- the-air broadcast, you talk about that if you go into auctions you will -- something will lose out like the local news. I've never seen a local news where you gave them money, I thought all local news, I've seen somebody pay for it, as advertising. So what is it that would cause you, if you, in fact, aren't selling at a discount rate to people that sponsor the news -- what is it that -- what would they lose if you -- are you giving discounts on it now? MR. GABBARD: Let's take a broadcast day, take all the 18 hours or 20 hours. COMMISSIONER BARRETT: No, no, I want to take the broadcast news aspects since you mentioned that. MR. GABBARD: I'm coming to that. COMMISSIONER BARRETT: Can you tell me, what is it that you're giving in the news, in addition to what the sponsors are paying to have their names or whatever propped up on the news, I use the term free over-the-air broadcasts and I accept that premise in terms of some things. But I also accept a premise that it is not being provided free by you, but rather it is sponsored by adverting, people that advertise with you. MR. GABBARD: Okay, at the end of the news, when you take all of our news commercials and say that there's "X" number of dollars there, and at the end of the month, those dollars translate to either a profit or a loss. Let's assume there's a profit, and in the good broadcasters there are profits, those profit dollars have to be used to then fund whatever else you do, whether it be to buy capital improvements or hire more news people or whatever. All I'm saying is this, Commissioner Barrett -- COMMISSIONER BARRETT: Well, let me ask you this, do you not factor in various kinds of costs and you aggregate them into a total advertising -- what you see as your need for a quarter or two quarters or a year in terms of what you need, in terms of new equipment, can't you project those things? MR. GABBARD: Absolutely, we do that, but what we're talking about here is over and above our normal capital cost every year. We're saying, here's a brand new thing and now we're going to have to compete with an auction situation, potentially, and if that happened, how could we do that. There are no dollars there today to that, that's what I'm telling you, in the smaller markets. COMMISSIONER BARRETT: Then that becomes a problem with the size of the market in terms of what you can do in terms of getting ad, but what I'm trying to get rid of, and I use it myself because I believe that we need quote, "free over-the-air broadcast." And I talk about news and whether or not it is raining or snowing or whether or not the school is open on a given day. But I've never believed that you were providing without a cost to someone, and the cost to someone is to the people that advertise with you, either directly or through a placement agency. MR. GABBARD: Yes, sir. COMMISSIONER BARRETT: And I cannot believe you sell ads that do not cover the costs if you anticipated what the costs would be in terms of equipment replacement, raises, any number of other things. MR. GABBARD: We can only get so much money for an ad, it's based on how many people are watching a particular program, that's how we price it. So if I were to go in tomorrow and say to an advertiser, we're now going to charge you 50 percent more or 25 percent more because I have to build a new system here. The advertiser is going to look at me and say, what do I get out of it, are you going to sell more widgets for me? And I have to say, no, I'm just going to charge you a premium because the government's making me do this. That's not going to work very well with the advertiser. He advertises for one reason only, and that is that we sell his product through reaching the consumer who goes and buys the product. So, yes, the consumer pays us to provide that service, but it's doing it through the advertising supported system, and therefore it is free to the consumer at home. COMMISSIONER BARRETT: Yes, and I don't question that, but I'm just suggesting that it's been provided for not by you directly but rather by your having space and time to sell. MR. GABBARD: Right, I just don't want you to assume that there are new dollars laying there that we can sudden take and build a brand new facility over and above what we do every year to stay in business. COMMISSIONER BARRETT: Yes, but I don't want -- I don't want to assume either that you're not covering the costs of providing news to people. MR. GABBARD: We are covering the costs. I never meant to infer -- COMMISSIONER BARRETT: Okay, I just -- oh, I'm sorry, I thought you said that -- MR. GABBARD: No, I'm saying that if we have to provide this new service out of today's operational budgets, then something has to be cut back in order. COMMISSIONER BARRETT: Okay, thank you. I'm sorry, Mr. Gabbard, I apologize. COMMISSIONER QUELLO: I'd like to clarify that answer a little bit, because -- COMMISSIONER BARRETT: Yes, because I did ask it in a rather confusing manner because I'm talking about something I don't know anything about. COMMISSIONER QUELLO: One, you know, sponsorship is -- COMMISSIONER HUNDT: They're not taking this away from time, you know. COMMISSIONER QUELLO: No, but sponsorship is not a sure thing. I mean, you know, sometimes it's sponsored, sometimes it isn't. Now, if you have a lot of money, you can do a hell of a job of news. It so happens I ran a dominant station in Detroit, I was very lucky, it was one of the dominant ones in the country. We had a 14-man news staff, the average news staff for every other station in town was six, so that gives you some idea if you have the money, you have money for better programming, better news, No. 1 radio personalities. If you don't have the money, you can't do quite the same job and if you put all that money into -- COMMISSIONER BARRETT: If you'd have kept that station as opposed to the $700,000 I understand, you'd have had $13 million in today's market -- COMMISSIONER QUELLO: 14-1/2. COMMISSIONER BARRETT: Yes, 14-1/2, and you'd have been able to set up the Jim Quello Foundation and provide all the local news we wanted. COMMISSIONER QUELLO; I know, but look how much use I'm supposed to have been. COMMISSIONER BARRETT: Chairman and I question how much use you've been to us lately. COMMISSIONER QUELLO: Okay, I'll return the compliment. COMMISSIONER HUNDT: My six little minutes. COMMISSIONER BARRETT: I'm sorry -- COMMISSIONER HUNDT: No, that's quite all right, I've enjoyed it. Mr. Abel, you said in response to a question from Commissioner Ness about what would be the duration of NTSC, also called analog broadcasting in the United States. You said broadcasters will be broadcasting NTSC for the rest of the life of everyone in the room. MR. ABEL: For the youngest person in the room, maybe I should have said. COMMISSIONER HUNDT: For the rest of the life of the youngest person in the room. Roughly speaking, let's say that you're predicting a 50 year future for analog broadcasting, would you care to give us the explanation of this particular statement? MR. ABEL: Well, I think that the reality is that in many places in the United States, NTSC broadcasting will go on for a long time. It will be difficult to make this transition easily for both the broadcaster and the consumer. More importantly, I am not confident that ATV is going to be implemented as fast as what everyone in this room seems to think that it is going to be implemented because of the points I mentioned before, contentiousness among broadcasters on the assignment, whether the system is truly flexible or not, interference issues with respect to the implementation. So it may be more like five or six years before we even get it started. Secondly, ultimately the points that you've been raising about the cost of the receiver and so forth, despite what we've heard from the consumer electronics industry that it's going to go down in cost, there still is a premium over and above. I think the average price of a TV set sold in this country last year was under $400 or about $400, this is going to be a premium over and above that. At some point the government is going to look at this and say, who is really adopting advanced television and who is left out. In fact, it could be quite the opposite. You could be coming to us or your replacement could be coming to us saying, can -- COMMISSIONER HUNDT: Successor. MR. ABEL: Successor, sorry, successor, I apologize. But in 30 years, could be coming back to broadcasters saying, please continue NTSC broadcasts because not every household has adopted and there is no really truly inexpensive way for them to adopt advance television. COMMISSIONER HUNDT: Another way to put it, I think, would be that if we simply trust in the market and allow the rollout of digital television to be whatever the market may require, then it's very likely that it'll be decades before analog broadcasting, as a product demand by consumers, fades away. In other words, there will be millions of consumers that will continue to want that product. MR. ABEL: I think that's definitely a possibility. You have -- you said it, I think, if you force the market a little bit, and that's why you need a little bit of forcing with respect to at least establishing the standard, if you force the market a little bit, you'll make this happen more rapidly. But it's still up to the consumer to adopt. COMMISSIONER HUNDT: What's your view of the notion that the administration is kicking around that one way to force the market and expedite the transition and get to a world in which broadcasters won't have to be with the right hand doing the digital thing, or the left hand analog, one way to expedite that would be to prime the pump a little with some cash vouchers to consumers. MR. ABEL: I didn't like the idea. First of all, I wasn't sure if it meant household or per set, I have 13 TV sets, if that goes through, I'm going to go out and buy 100 since I could get the broadcasters to subsidize it. I don't think it's a very good idea and I doubt that it will ultimately seed the market. I think it's better to look at the all-channel or all-system receiver of some sort and to force, on the other end, some push on broadcasters to get it implemented and if you want to do this in terms of auctioning spectrum, it's better to take back spectrum later, after it's been repacked so you have it contiguous across the United States. COMMISSIONER HUNDT: But what you're saying with respect to the receiver is you think another way to force the market would be to mandate that all televisions be capable of receiving analog and digital reception, is that what you're saying? MR. ABEL: That's what I'm saying, yes. COMMISSIONER HUNDT: What about mandating that all televisions, after a certain date, receive only digital signals? MR. ABEL: That might be something to consider once it's been implemented. I think there are too many unknowns here to really know how this would really develop from a consumer side especially, so we should wait until we see how it develops. COMMISSIONER HUNDT: But do you think unless we take some market-forcing step like that, otherwise it will be decades and decades that we see in paralleled both analog and digital broadcasting? MR. ABEL: It could be decades, I think. COMMISSIONER HUNDT: With respect to digital broadcasting, and I, for one, think it's a very exciting possibility, particularly if the government does the smallest amount of intrusion in terms of selecting the formats, but with respect it, today, Mr. Gabbard and his TV stations has 160 hours a week, with digital broadcasting, what, according to your estimates, would be the number of hours that he'd be likely to have to fill or be able to broadcast depending on the way you look at it? MR. ABEL: Well, what I see is he could broadcast multiple services at the same time, not necessarily video, but speaking of multimedia services, which, in effect, make the viewing experience more desirable and perhaps can put more -- well, I believe, more information into this medium that's under-utilized as a medium, I think. So I'm not so focused on the real time hours. In fact, I don't like talking about realtime broadcasting very much any more, I would like to think about non-realtime broadcasting, which is both the broadcasting we have today, and the broadcasting of the future, to allow more services to be packed into that bitstream. COMMISSIONER HUNDT: But broadcasters are always coming in saying, boy, I wish I had a second station in Louisville, or Lexington, because if I had two stations, if I had two streams of programming, then I could counterprogram, increase my aggregate market share, clearly digital broadcasting permits a broadcaster to achieve this pro- competitive goal, isn't that right? MR. ABEL: It does in a way, but it doesn't -- when they're speaking about that, they're speaking about two analog channels, I believe. COMMISSIONER HUNDT: Well, that's all that we have right now. MR. ABEL: Yes, when we get to the -- if you go to a city like Des Moines and the stations are not owned by a network -- not owned by a specific network, just affiliated with networks, I think it would be the worst nightmare for each station to have four or five channels of service, there would not be enough advertiser support to support all of these services in that community. There would not be enough programming, and in fact, the network relationship with affiliate could be reversed such that the affiliate has to pay for programming. If there's not enough programming available, the total quality of the service would eventually deteriorate since there is not enough advertising support and programming is in scarce supply. So, I don't think it's a good solution to this and I'm not sure SDTV is necessarily in the best interests of broadcasters. COMMISSIONER HUNDT: Can I just ask one more question? Mr. Gabbard, would you like to be able to broadcast at least two streams of programming at the same time digitally? MR. GABBARD: Well, I have the same concerns that John has just laid out and we've done a lot of talking about this to try to see vision-wise, is there a business out there. And, again, in the markets that I operate in, I have to put my focus on my main channel, what I do every day, and it's hard enough to keep it sold out, hard enough to keep it programmed properly. Fantasyland, sure, I'd like to have another channel. Could I make it work, I doubt it today, in the markets that I'm in. I might turn to John and say, let me lease you this and you become my program provider. Again, I'm not smart enough to day to know the answers, but we are looking, just like you are, to try to find his answers. COMMISSIONER HUNDT: Because I was just thinking, if you don't want the extra channel, and I say this in all seriousness, we can give it to Mr. Grossman here who otherwise doesn't have the spectrum, so if you quite seriously don't want it -- MR. GABBARD: No, I didn't say that, I said -- COMMISSIONER HUNDT: -- why don't we give it to Mr. Grossman and we solve that problem. MR. GABBARD: I said we want to study it and try to find what the business is because I don't honestly know, and it may be that he plays a role in that. COMMISSIONER HUNDT: Well, we do have a problem because he's right, he's not in the digital picture right now. MR. GABBARD: Right. COMMISSIONER HUNDT: All right. Thank you all very, very much. Very informative, very interesting, entertaining, informational, educational, all the things that TV can be. Thank you very much. (Whereupon the meeting was adjourned at 4:41 p.m.)