CHAIRMAN REED HUNDT FEDERAL COMMUNICATIONS COMMISSION WARREN PUBLISHING COMPANY DIGITAL CONVERGENCE: RESHAPING THE MEDIA New York, New York September 30, 1996 A NEW PARADIGM FOR DIGITAL TELEVISION (AS PREPARED FOR DELIVERY) I think if the Grand Alliance of broadcasters and TV manufacturers had a favorite rock song, it would be Tired of Waiting For You by the Kinks. And if they had a favorite book, it should be Great Expectations -- but they are afraid it is Remembrance of Things Past. And if they had a favorite FCC chairman -- well, let's not get into that. I know that when I became Chairman of the FCC three years ago, the Grand Alliance and the Dick-Wiley-led Advisory Committee dreaded the prospect of having to inculcate what B&C called the "mystery chairman" into what they called the "transition plan" for HDTV. And to a degree I know that their worst fears have been realized: they think I just haven't got it at all. But while I definitely haven't agreed with all the advice of the Advisory Committee or all steps of the transition, I believe that the debate about digital TV in Congress, in the newspapers, and in forums like this has brightened the future for digital TV. The debate has clarified that the Grand Alliance didn't just invent a pretty-picture technology; they invented a digital future for television that is far more exciting and perplexing than any event in the history of television since the invention of analog TV a few years before I was born. And it turns out that just at the time that broadcast TV can better its business prospects and social benefits by a quantum leap into digital, the cable, satellite, and wireless cable industries threaten the commercial future of broadcast as it has never been threatened before. In other words, things change. And I give credit to the Advisory Committee for welcoming change -- for embracing a flexible digital technology, for example, and recommending a standard that will allow broadcasters to transmit multiple digital signals over the same amount of spectrum that now only allows one. And you can't fault the Advisory Committee and its chairman, the master diplomat Dick Wiley, for failing to bind the computer software industry and the filmmaking community to the Committee's views. Questions about digital TV, and broadcast TV, are being raised that have never been raised before. And reciting the answers of yesteryear does not a digital TV business make. Nor does it satisfy the congressional mandate that the FCC act in the public interest in matters relating to the airwaves. But the answers of tomorrow can make digital TV a business and public interest success. We have to be willing to talk about the new questions and the new answers, because it's the right thing to do and because it's the right way to guarantee that digital TV is a commercial success. I want to talk about the questions and answers today. And I want to open up with a summary of the answers: there should be only three basic rules for digital television. These would be (1) a rule protecting digital broadcasters against interference; (2) a rule creating spectrum caps to prevent over concentration; and (3) a rule ensuring that digital spectrum is used to provide public interest programming. Here are the basic questions about digital terrestrial broadcast TV: - How can we make sure that in a digital age broadcast TV continues to create the public good of a free medium serving the public interest? - How can we make sure that in a digital marketplace broadcast TV is commercially successful so that the private sector can support this public good? The country needs digital TV to create a public good of free digital programs -- consisting of sports, entertainment, news, free time for political debate between presidential candidates and local candidates, educational shows for kids, public service announcements, and anything else within reason that the public interest demands from the licensees of the airwaves, the public's property. If digital TV doesn't do that, then we might as well just auction the spectrum for any use, subject to interference taboos, and let that be our easy answer to the tricky spectrum allocation issues posed by digital TV. And if digital television isn't commercially successful, then none of our hopes and dreams about digital TV's capacity to help answer many social and business problems has any chance of coming true. It's all very well to talk about what digital TV can do for the country, but if it can't do for itself, then we're just wasting our breath on what will sadly turn out to be the digital version of, say, the pressure cooker, the Edsel and teflon -- products with high hypes that ended up with wide acceptance not as consumer goods but as metaphors. To talk about the commercial future of digital terrestrial broadcast we ought to start by talking about all digital media. We've already got digital satellite broadcast. FCC policies are promoting vigorous competition. Prices for dishes are going down as fast as satellites are going up. We held an auction for a slot and raised $700 million from Messrs. Murdoch and Roberts, proving the obvious fact that spectrum licenses are scarce -- as the D.C. Circuit court just recognized in the Time Warner case. (The court explained: "Because the United States has only a finite number of satellite positions available for DBS use, the opportunity to provide such services will necessarily be limited. Even before the first DBS communications satellite was launched in 1994, the FCC found that 'the demand for channel/orbit allocations far exceeds the available supply.' Continental Satellite Corp., 4 F.C.C.R. 6292, 6293 (1989). Recently, the last DBS license was auctioned off for $682.5 million, the largest sum ever received by the FCC for any license to use the airwaves." So, while there's talk about the demise of the scarcity rationale and Red Lion, the reports of their death have been greatly exaggerated -- as the staggering purchase prices show. ) Can digital terrestrial broadcasting be competitive with digital satellite? The satellites after all are just real tall TV towers with very broad reach; what advantage do the lower, earth-bound digital TV towers of terrestrial TV have? There are potential advantages, primarily relating to localism and cost, but because we're talking straight here today let's start with some of the disadvantages. First, do we see a single-minded, aggressive entrepreneur like Rupert Murdoch or Charlie Ergen or Eddie Hartenstein -- our current satellite stars -- arm-wrestling the new digital terrestrial technology into a good fit with a business plan? Will this sort of leadership l be easy to develop if digital TV is divided into 1500 separate licenses and awarded to the 700 or so firms that own analog licenses? Government policy has fractionated the analog broadcast business. Even if that is good policy for other reasons, that fractionation makes it difficult for broadcasters as a group quickly to develop a competitive business plan. Second, there hasn't been nearly as much national experience with digital terrestrial as with digital satellite. That's why broadcasters are saying they need extra spectrum reserved for digital licenses in case real-world interference problems prove to be worse than the computer models have predicted. Third, digital broadcast will come to the market later than digital satellite, digital cable and digital wireless cable. Time is on the side of first movers in all digital businesses. That's why the FCC needs to get the licenses for digital TV out next year. More important, that's why there will be substantial business pressure on the DTV license holders to put up their towers and get started. Putting up a digital transmission system will probably cost somewhere between some hundreds of thousands of dollars to a couple of million dollars per site. In the bigger markets the business plans will make sense even assuming small penetration. But in smaller markets the case may be tougher to make. And someone will need to help finance the digital system, particularly for smaller markets. Will networks and other investors bring money to the table for the affiliates? On a national basis perhaps a couple billion dollars at the most could build a national digital TV system (excluding the conversion of cameras and studio to digital, which is going to happen even for analog TV transmission). This total cost for the terrestrial digital broadcast system compares very favorably to the price-tag for buying a digital satellite license and paying for a satellite and a launch and an uplink. But still, people with licenses have to pay the money. If the digital TV licenses are auctioned, then the financing can be assumed, since no one is going to bid the highest price for a digital TV license without a concrete plan for building the station. But if, as I expect, the new Congress directs us to give the licenses away to today's broadcasters, many of those recipients, perhaps most, really don't have seem to have this particular present high on their Christmas list. They still regard digital TV as a burden they're being asked to carry instead of a business opportunity they're being granted. If they're right, that's trouble; and if they're wrong, then their attitude is trouble for this nascent industry. How will this challenge be addressed? Should the FCC have a mandatory build-out plan to force someone to face this question? Is that sort of government intervention necessary? Is it possible that allowing broadcasters very attenuated transition to digital, such as the 15 years sought by some, would be the kiss of death to digital TV? After all, way before 15 years I think we can assume other digital transmission technologies will have long since captured much of the broadcasters' audience. Fourth, what are the business plans for using the 20 Mbps bit stream of digital broadcast in a profit-maximizing way? Who has signed up the local newspaper for the rights to deliver the news over the air to TV's and PC's? Have any lined up 4 or 5 channels worth of programming for multicasting, in order to take advantage of the counterprogramming opportunities that could draw new advertising revenue? Every other industry that has asked for a spectrum grant from the public has tried to lay out a compelling vision for their spectrum use. That vision is persuasive with the FCC, they hope. But it also helps finance the new business. I have heard plans to simulcast in high definition the licensee's identical analog broadcast program. I don't know what consumers' reactions will be to high definition television. They should have the chance to sample it. But it isn't clear that the simulcast plan is the best and brightest of the ideas for making the most of digital TV. Many people have told me that the audience for simulcast HDTV will be so skimpy that they believe it's not enough to support the construction of a digital TV system. Where does that leave those of us who want to see broadcast TV be economically successful and also successful in serving the public interest in a digital age? And fifth, if I haven't learned as much in my job as you might wish, I have learned that if you want to have an impact you need an audience. We want digital TV to have a business and social impact. So who is going to be in the digital TV audience? And we definitely want the audience to receive some digital broadcast for free -- at least some digital channels. That's the definition of the public good that free analog television represents. To be a commercially viable free service (to a degree), digital TV will need advertising support, at least for commercial stations. Won't advertisers be eager to see that digital TV quickly reaches many, and soon reaches 100 million homes? If it doesn't, are advertisers going to be willing to support digital TV? We could assume that digital TV should include some subscription channels to mitigate this problem. That makes sense. But if digital TV doesn't deliver at least some quantifiable, concrete, specific amount of free TV, then how does it create a public good? So how will it come to pass that 100 million homes will be able to watch digital terrestrial broadcasts? After all, digital satellite and digital cable are systems incompatible with the Grand Alliance transmission standard. And you can expect those industries to fight tooth and nail against any notion that they be compelled by the FCC to transmit the digital broadcast signal. And my understanding is that digital cable boxes are not currently being designed to decode the high resolution signals. So what's the plan for getting 100 million or even 10 million American homes to receive digital TV? If it's a plan for viewers to receive digital TV over the air, what's the strategy for weaning viewers away from cable and satellite? If the plan is for viewers to receive digital TV through cable and satellite set-top boxes, what's the plan for ensuring that cable and satellite retransmit all of the broadcasters' signals in their intended resolution? One industry executive said in a speech two weeks ago that the target audience for DTV was the consumers who buy 60-inch TV's. He seemed to imply that they would buy 60- inch digital home theaters. I have been told by others that at $3,000 a crack these receivers are not likely to be purchased by more than a few million American homes. I suppose that Mercedes Benz will be interested in advertising to such niche audiences. But will Pampers and Chevrolet and the others who underwrite our free over-the-air broadcast TV industry? And what about the hotly-contested issue of the transmission standard? The dedicated and hard-working members of the Advisory Committee tried in good faith to produce a consensus standard. Unfortunately, they did not succeed. Important players in two huge American industries -- Silicon Valley and Hollywood -- object strongly to some elements of the standard. These groups support much of the Grand Alliance's work as endorsed by the Advisory Committee, especially the creation of a flexible and dynamic digital broadcast standard. But the failure to reach consensus over the interlaced format and the aspect ratio has led to a time-consuming and important debate in which all advocates are making serious points. I'm still hoping for a consensus to emerge; the future of DTV will be stronger if all parties to the standards issue find consensus. Maybe a good way to start to resolve the standards question would be to lock all the interested parties in a room -- the TV manufacturers, the broadcasters, the cinematographers, the computer software groups, maybe the digital cable and digital satellite industries, too -- and keep them locked together until they hash out a de facto standard that will accommodate each of the legitimate issues raised -- and that is good for consumers. Could that technique work? I am sure there are answers to these questions. But I think we spend too much time in Washington talking about other questions and other answers. There's plenty of debate about spectrum allocation, auction, and broadcaster lobbying power. There's plenty of chances to see demonstrations of the sharpness of high definition television. It is very sharp. It is so sharp that with HDTV you could see the stitching on the ball in the baseball playoffs and the wart on the nose of the broadcast anchors, as if they had such blemishes. But the questions I'm kicking around with you today are just as important and timely as whether or not broadcasters will persuade the Congress elected in November to let the FCC give them the digital licenses. And the answers I'm looking for are probably harder to find than the answer to that particular question. In addition to the business questions about digital TV, there is the public interest question. How can we guarantee the right amount and kind of public interest benefits from this very, very large allocation of the public's airwaves? To begin, how much of digital TV should be free? Is one channel all the time from a digital licensee enough? If a broadcaster wanted to multicast five channels with a license, would we care if four were subscription channels? That scheme might be a good solution to some of the economic problems I mentioned earlier. Would there be anything wrong with that? Of course, that would require a quantification of the amount of digital TV that had to be broadcast for free. As I said in New York last week, quantification of the public interest is common to cable and to satellites and, with the children's TV rule, is applicable to broadcast. (It was not unknown to broadcasters prior to the 1980's, for that matter.) It will be necessary to define with specificity how much of DTV will have to be free. Some free entertainment or other market-driven programming is not all the public interest deserves from DTV. Digital technology will give broadcasters the ability to air many more programs than they can now. As broadcasters' capacity increases, their obligations to serve the public interest ought to increase as well. The right time to set some of that new capacity aside for public use is now, while the territory is still wide open. We never would have gotten Central Park if all of Manhattan had been opened to commercial development, and we wouldn't have gotten it if we'd decided that we wanted the park after the land was already covered with buildings. Is there any reason not to get at the inception of digital TV a clear, specific, economically reasonable, reliable, modest but meaningful commitment to help fix the campaign finance calamity by distributing some free DTV air time to political candidates? We are seeing this fall a marvelous effort to introduce the free time idea in analog TV. With great gratitude we should applaud the original initiative by Fox and the recent steps by CBS, Fisher Broadcasting, and A.H. Belo. How do we want to further these steps in a digital broadcast medium? How can we ensure that in the digital age, for a couple of months every other year, broadcasters give candidates for federal and state office free time during prime time at the same time? And is there any reason not to ask digital broadcasters to help educate kids by giving us a guarantee of a reasonable amount of truly educational shows? Some say, with respect to quantified public interest obligations -- when will it stop? This is a reasonable question. Of course with respect to noncommercial analog stations, there is no stopping; in other words, our rules require the maximum quantified amount of public interest programming: namely, 100% noncommercial programming. If that were the amount set for commercial TV, the station would be out of business unless it had another revenue stream like subscriptions. But suppose a commercial digital TV broadcaster used a 6 MHz license to show four successful standard definition subscription channels or a couple of high definition movies (the frame rates of film permit greater compression). Suppose, thanks to compression, it could economically support a 24-hour public interest channel within the spectrum grant? Should that extra free uncommercialized channel be what the public gets in return for its licensing of its property to a business user? Maybe that would be too much to ask. But it is true that we will need an answer to the question of "how much public interest programming is enough?" And the answer does not lie in responding to the wish of any FCC Chairman or Commissioner, whether he or she agrees or disagrees that the public interest can be quantified. Moreover, the answer to the question of how much public interest programming is enough requires, first, an estimate of the revenues necessary to sustain the economic success of digital TV, and second, a statement of what is missing in our broadcast media today. Little or no debate has occurred in Congress or in the FCC on the connection of either of these broad and terrifically important questions to digital TV. But the last few years have featured engaging and ultimately positive debates about the V-chip and educational TV and other broadcast issues at the Commission and in Congress and in other public forums. These debates ought to be the precursors of the discussion we need to have, and have quickly, about the public interest in digital terrestrial broadcast TV. If we don't have this debate before the digital TV licenses are granted, we will be hard pressed to have it on fair terms later. In particular, we should not adopt a "flexible" definition of the public interest if flexibility is a synonym for vagueness, uncertainty, ad hoc decision- making, and unpredictability. This worrisome kind of flexibility helps neither the public nor broadcasters. A clear requirement fosters First Amendment values by generating more speech and by ensuring the broadcasters' freedom to speak without risking undue pressures at license-renewal time. A good example is the federal requirement that DBS operators reserve 4-7% of their channel capacity "exclusively for noncommercial programming of an educational or informational nature"-- a requirement that the D.C. Circuit court's Time Warner decision recently upheld as plainly constitutional. A concrete standard furthers the goals of the First Amendment by encouraging the production of more speech and fostering freer speech. Specific requirements ensure that the public will receive at least a modicum of programming not driven by the bottom line -- such as free access for political candidates, children's educational television, and the like. First Amendment values are furthered by the promulgation of speech that, though valuable, may not be generated by the market, for the First Amendment is served by the availability of more, and various, speech. Clear guidelines also protect broadcasters' freedom to speak without fear of government pressure or retaliation. Vague standards permit government officials to exercise -- and perhaps misuse -- their discretion in judging a broadcaster's record; concrete requirements place limits on that discretion. Specificity means less possibility of abuse or unfairness in the license-review process. And a clear guideline gives broadcasters fair notice of their obligations so they can fill the rest of their programming time without anxiety about whether they've fulfilled their obligations. Do those who oppose quantification of broadcasters' public interest obligations think that the D.C. Circuit court was wrong in the DBS case? Do they think that Congress was wrong to set a clear requirement on DBS operators -- or, for that matter, on cable operators, who are required to provide PEG channels and leased access? If not, why should broadcast be treated differently, with a "flexible"or nebulous standard? Ultimately, a vague public interest standard will reduce to what then-FCC Chairman Mark Fowler and Daniel Brenner, in a 1982 Texas Law Review article, wrote: "The public's interest, then, defines the public interest." In other words, the "public interest" was consciously interpreted during that period to mean nothing more than broadcasting on free TV whatever shows advertisers would support. Over time, that policy led to the demise of many educational TV shows, many substantive news shows, and many other aspects of television that enhanced its appeal to all segments of our population and its utility in serving many social purposes that all Americans of any political leaning believe are desirable. When the broadcasters of the Olympics announce that the Games are the last truly family-friendly show on TV they are telling us what we have nightly noticed. Namely, television has changed a lot. Without a doubt, changing taste and cable TV and other forces have also driven many of the changes. But it is also true that the FCC's writing out of its rules any specific, clear, comprehensible, application of the public interest standard was a contributing factor to some of those changes in broadcast television that the overwhelming majority of Americans find deplorable. And that is what most Americans don't want to accept as inevitable for digital TV. Perhaps the most important aspect of the public interest dimension of digital TV is that the FCC's decisions ought to be responsive to what the American people want from media. I think it is clear that the people generally want more choice of TV channels. So digital TV should not be straightjacketed by a government mandate requiring a single channel of HDTV per license. If the American people want more channels and broadcasters can afford to provide them over a digital signal, government shouldn't stand in the way. And the overwhelming majority of the American people want a choice of more educational TV. Digital TV can readily be used to provide that sort of programming for its niche audiences. Indeed, a digital broadcast could also be used to send curriculum material, including software, over the air to computers and dishes in classrooms, so that broadcast TV became a synonym for learning the three R's as well as sharing generally in popular culture. The American people also overwhelmingly say they want campaign finance reform. Digital television can address this request as well. Digital broadcasts can be addressed to different audiences within a broadcast zone. For example, a digital transmitter on top of the World Trade Center could send different news or different ads to Long Island than to Westchester or Newark. That means that different blocks of free time could be delivered, so that debates between candidates for a congressional seat in Long Island would be broadcast only to that district, and not to New Jersey. Rupert Murdoch already said he'd love to give free time to candidates at the congressional level if this sort of problem could be solved. Digital TV could be a solution. People say they want more control in their homes over the media. Digital TV can easily be coded with information about whether scenes are appropriate for kids. The V-chip could be overtaken in a digital age with software that selected shows according to parameters set by the viewer based on nongovernmental program information. The audience could play a role in watching TV like the role they play in selecting movies or buying books. They choose a movie by reading reviews or listening to word of mouth; they pick a book by reading the jacket or scanning a review. These methods of consuming those media do not defeat sales; they do require different kinds of marketing. Perhaps digital broadcast will gather its audience in the ways other media must do, as opposed to the pipeline approach that characterizes the historical television model. More choice for consumers is, after all, what the FCC's competition policy is all about. And ultimately, if the standards controversy is resolved, that digital television can be a medium for PC's as well as TV's. Indeed it may drive the search for what ought to be the Holy Grail for American invention: a PC in every family. I doubt that it will be possible to participate fully in the Information Age without being PC-literate at home, at work, and in school. Television can help provide content that will permanently take the PC from a plaything for the affluent, a spreadsheet for accountants, and a zippy mail for the typing types, to what it ought to be destined to be: the Model T of the information highway, the vehicle that puts everyone on the road -- the vehicle that in effect builds the road. If the business case for digital TV is made successfully, then all the public interest benefits I have mentioned can readily be supplied by digital TV. And if the business case cannot be made, then we will have to find some other way to serve the public interest goals I've mentioned. I've outlined some of the business challenges for DTV. The FCC should at least not make these challenges harder to meet. I suspect that we at the FCC are most likely to promote the business success of digital TV if we apply as few rules as possible to DTV. We're going to have to trust the market. Indeed, there may be not more than the following three rules that are truly necessary. #1 - Protection from interference The first rule is the simplest and most obvious. All spectrum users need protection from interference. In place of the Commission process currently in place for solving interference conflicts, the Progress and Freedom Foundation has proposed that property rights in the spectrum be enforced through litigation in the courts, using traditional legal protections afforded under property law. This is not, to say the least, a sensible idea. Using the courts to resolve these highly technical, complex disputes would result in massive amounts of prolonged litigation that would be costly to business and the judiciary alike -- in terms of time, results, and money. But interference rules can be simple. And private parties can be permitted to negotiate among themselves alternative schemes to avoid interference in specific markets. #2 -- Spectrum caps The second rule is that the spectrum capacity of a single firm in a relevant market must be limited. A cap is needed to prevent one or two owners from controlling the entire spectrum. In the PCS context, we imposed a spectrum cap to ensure that no one entity could control more than about a quarter of the cellular or PCS spectrum in a local market. We also set aside new PCS frequencies in a block to ensure that new entrants and entrepreneurs got their chance to compete. In a similar vein, in the context of LMDS, the Commission has asked whether it is necessary to limit the ability of local telephone companies or local cable companies to buy up LMDS licenses, and thereby limit potential competition. Reasonable spectrum caps foster competition, which in turn encourages efficiency, creativity, and diversity in the use of the digital spectrum, all redounding to the benefit of viewers. The existing rules for broadcast TV -- regulating how many "channels" one can own in a market -- will be outdated. With DTV, a broadcaster's "channel" will yield one HDTV program, or could be used for multicasting of six kinds of programs, as well as other uses. The Internet, too, makes these rules even more obsolete. But some spectrum cap will be necessary. #3 -- Public interest obligations If digital TV licenses have specific and concrete public interest duties, their quantification will be part of the initial business plans of the new digital TV businesses. That is the only fair way to treat the licensees. Telling them to go into business with a vague or flexible public interest standard is either code language for saying there is no public interest requirement or it is the kind of uncertainty that inhibits financing and generates unnecessary legal fees to comply with the FCC's unclear standards. So what can we reasonably expect from digital broadcasters? Given the many thousands of additional programming hours that will be available to broadcasters using digital technology, a modest 5% of programming time on digital TV should be devoted to educational TV, free time for political debate, and the like. As the DBS case demonstrates, such a set-aside requirement would pass constitutional muster. And DBS operators, who must set aside 4-7% of their channel capacity, are now required to pay for their use of the spectrum, while broadcasters use spectrum for free. The DBS case shows that the amount paid for use of the spectrum and public interest obligations are wholly unrelated. One DBS license sold for two-thirds of a billion dollars; nevertheless, as the court upheld, that license still carries with it public interest obligations. Isn't it only appropriate that digital broadcasters be expected, at the very least, to match the public interest obligations placed on DBS operators? After all, spectrum is valuable public property of limited availability, and demand far exceeds supply. Consider that there are, on average, only 2 TV licenses per town -- of towns that have licensed TV stations. Moreover, of the 14,895 cities and towns in the United States, only about 755 have licensed television stations. That's not many. By contrast, think of the huge number of distinct cable systems across the country. The truth of the situation is that there just aren't enough broadcast licenses to go around to the people who want them. The spectrum is scarce, valuable public property, and the public has the right to place conditions and expectations on its use by those who get a license. There may well be some corollaries to these rules. And if the Congress insists on a rapid return of the analog TV licenses as part of a budget bill in 1997, we will have to translate that proposal into rules. But I suggest we start with the premise that these three rules may well be all that are necessary and that anyone who proposes more rules has the burden of proof. As for the business case, I know it can be made. I believe it will be easier to make if the FCC limits its role. Our rules alone cannot make the digital TV business an economic success. What it takes to succeed in the digital TV marketplace is going to be determined by investors and entrepreneurs, not the FCC. We can however establish the deregulatory climate that will most favor such entrepreneurship. And we can clarify and state specifically what public goods and what public interest goals -- modest, achievable, and important -- we expect from digital TV and, for that matter, from all media. So that much we should do, and should do soon. - FCC -