CHAIRMAN REED HUNDT FEDERAL COMMUNICATIONS COMMISSION INTERNATIONAL RADIO & TELEVISION SOCIETY New York, New York October 18, 1996 Thank you for that introduction. This is my third time speaking before the IRTS. I've always liked the number three. I have three kids. The other day I gave a speech in which I said I thought that in the digital era, we would only need three rules for broadcasters. Rule #1: No interference. Because all spectrum users need protection from interference. Rule #2: Spectrum caps. We need reasonable spectrum caps to prevent overconcentration. Reasonable spectrum caps foster competition, which in turn encourages efficiency, creativity, and diversity, all redounding to the benefit of viewers. Rule #3: Clear Public Interest Guidelines. 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 business. This is the only fair way to treat the licensees if we're going to have any public interest requirements at all. Telling them to go into business with a flexible public interest standard is either code language for saying there is no public interest requirement or it introduces the kind of uncertainty that inhibits financing and generates huge legal fees to comply with the FCC's unclear standards. And if we want to ensure that the vast land of digital capacity isn't wasted on strictly commercial pursuits, we must carve out public interest territory at the start. We wouldn't have a Central Park in the middle of Manhattan today if the city's founders hadn't set aside land for it almost a century ago. The public deserves to have virtually all of the digital airwaves unleashed for commercial development by the industry's creative geniuses. But the public also deserves a small slice reserved for public interest programming that the market won't provide on its own. 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. And we should expect that indecent shows would be broadcast only late at night when children may reasonably be expected not to be in the audience. And whether we should expect to see distiller spirits advertising -- well, we can discuss that later, but it's hard to see how the public interest would be served by this new and alarming addition to the advertising sea that now washes over us. But the core of any public interest duty wouldn't be the prohibition or channeling of programming or advertising. It would be the promotion of that which the market isn't likely naturally to give us. As the recent Court of Appeals case involving the public interest obligations of DBS providers demonstrates, such a set-aside requirement would pass constitutional muster. So as a starting point, those are the only three rules that I believe we need. But I'd be the first to admit, there's a lot I don't know about broadcasting, although I have had plenty of teachers in the last three years -- and many are in this room. And when it comes to digital broadcasting, my ignorance at least puts me in good company. Few, if any, broadcasters agree on the future of DTV. Some say they want DTV spectrum to multicast. Others say they want to do high definition programming. Another executive is exploring the possibility of convergence between DBS and DTV. This is interesting, but is it an option open to those without a bird in the hand or transponders in the pocket? Barry Diller, in a brilliant speech last summer on new media, said, "I'm not arrogant or foolish enough to believe that I have the answers to reaping the benefits of convergence. I don't. The very point of all this is that you can't know. There are no mavens to be found and no research worth its salt. There are no guideposts, no divining rods to tell you what to do." Diller went on with his confession that he doesn't hold the answers by saying, "But as with any good process, one must start with some fundamental assumptions." I agree. My fundamental assumption is that the last thing we need to do is adopt rules that will burden the digital businesses before the business even starts. Obviously, many disagree. Let me mention some rules I don't think we need. First, some advocate that we require those providing digital television to send a high definition signal a certain number of hours a week. This would be the highest resolution of the several high resolution formats in the Grand Alliance standard. I'm not talking now about the standards issue -- I'm talking about the proposal that by rule we force broadcasters to use DTV to transmit a high definition format a minimum amount of time. This is like telling the New York Times to publish just one glossy section on a given day instead of several sections on regular newsprint. I have a simple question - why? Some argue that we need a government to stimulate the sale of high definition television sets. Why is that something you think the government can do? No one at the FCC ever sold a TV set. Why should the government force broadcasters to air high-definition programming? Why does that intrusion on the business strategies of the fledgling DTV industry serve the public interest? Besides, any such rule mandating HDTV (as opposed to DTV) would be easy to make hollow. What if someone showed high-definition programming five hours a week by showing such programming from midnight to 5 in the morning once a week? What public interest is served by that sort of meaningless appearance of compliance with a HDTV minimum? Or do we need another requirement, advocated by some, that specifies exactly what time periods the broadcaster has to air high definition programming; for example, during prime-time on Monday nights? But what if someone wants to show football in high definition Sunday afternoon? Do we need a rule of substitution? Do we need prime-time high definition on Monday unless you do football high definition on Sunday? Would high definition bowling on Saturday afternoon suffice as a substitute? So then what happens -- the FCC becomes the high definition police. This high definition requirement is a hopeless idea, isn't it? Let's remember the U.S. isn't a dictatorship where if some action is not required, it's forbidden. Here, anything is permitted unless prohibited. So any or none of high definition should be permitted. Here's another rule that's being proposed: should we constrain DTV from being a subscription service -- or try to deter subscription channels by heavily taxing them? Of course, to some degree, we want broadcasters to create the public good of free TV. Some free DTV is necessary to create the public good, the Central Park of free universal access to the medium. But let's be willing to let broadcasters provide subscription DTV either in high definition or in multicasted SDTV. These additional services would be the competitive development -- and so would the additional resulting revenue streams for broadcasters. Incidentally, some want us to write the reverse rule for digital satellite radio or DARS. They want us to require that DARS -- the Digital Audio Radio Service -- be a subscription service. Government shouldn't forbid radio broadcasters from distributing their programming for free any more than it should forbid software manufacturers from distributing their programs for free. If Microsoft had asked the government to forbid Netscape from giving away its browser for free, I'd like to think we would have said no. We should say no here too. Barring predatory pricing, not applicable here, government should never, ever prevent a business from offering a product for free. Why would we? Where's the public interest benefit? Another justification for the restriction against free offerings is protecting existing local radio broadcasters. But if that's the issue, shouldn't we ask whether DTV is actually a far greater competitive threat to local radio than DARS? After all, a national satellite provider is going to rely on a different advertising base than local radio stations. They won't be able to compete with the local news, sports, weather and traffic that will always give local broadcasters a competitive edge. But give local television producers the opportunity to provide a local audio signal, as the DTV spectrum and technology would do, and you suddenly have a competitor who is locally based, works with the same advertisers, and has the infrastructure to provide the local news, sports, traffic and weather. Does this mean we should require those who obtain the DTV licenses to offer subscription-only services? Or prohibit DTV from delivering voice only -- in other words, radio? We just went over that, didn't we? Subscription DTV should not be required or prohibited. Broadcasters should not be prohibited from using DTV for voice or video or data. Still another rule that is urged on us is a government-mandated standard for DTV. I don't oppose standards. Virtually every industry needs standards and manages on its own to set them. Further, under certain circumstances, we should consider blessing a DTV standard by embodying it in an FCC rule. I doubt this is necessary but I'm not dead set against it. I've repeatedly praised the historic breakthrough of the Grand Alliance and Dick Wiley's Advisory Committee. They found a way to transmit terrestrial video programming digitally, flexibly and dynamically. No other country in the world is anywhere near the United States in launching a digital terrestrial television service. We're going to issue digital terrestrial TV licenses within the next six months. The country that's closest -- the United Kingdom -- is way behind us. While Europe is now moving forward with digital satellite television, Stanley Hubbard and Hughes invented that in the U.S. several years ago. They invented the digital satellite television business -- and they made it successful without a government-mandated standard. Japan isn't close to digital television -- whether from the sky or from land-based towers. They are stuck with an inflexible high definition analog satellite television service. They are stuck with the technology of the past. Because we're far in the lead we don't have anyone's mistakes to learn from -- except Japan's analog IID mistakes. That effort failed because it assumed that government policy could substitute for marketplace flexibility. Let's not make that mistake. And in particular, shouldn't we at the FCC assume that the computer hardware and software business is relevant to the future of DTV? The DTV standard is far more likely to be commercially successful if it is adopted by the entertainment and computer industries. And I mean adopted with some enthusiasm. I put Microsoft on the FCC Advisory Committee in the disappointed hope of getting a consensus among all of the relevant industries, not just between TV makers and broadcasters. Unfortunately, that didn't happen. We're still waiting and hoping and pushing for the necessary compromises. Suppose some genius working in the firms of Bill Gates or Larry Ellison or Andy Grove or possibly just in his parent's garage finds a way to send more data, without creating interference, through the DTV bit stream in a way that doesn't fit the exact parameters of the 195-page single-spaced proposed standard? What if the standard we mandate turns out to discourage convergence with one of America's leading industries, the computer industry? What if the standard we mandate is the digital equivalent of a government order that the Model T Ford is the only way a car can be built? And what if our standard turns out needlessly to discourage presentation of programs as their creators intended? Do we want to discourage such genius? Do we want to block convergence? Do we want to frustrate artistic integrity? These problems are typically solved by industry standard setting instead of government standards. There's no government standard for DBS or PCS or DARS or laser disks or CDs or CD-Roms or ADSL or ATM or cable set-top boxes or telephone calls or Internet or MMDS or Big LEOs. And remarkably, there is no government involvement in the development of the DVD, digital video disk, hailed as the recording and playback medium of the future -- compatible with TV, computers, and the needs of Hollywood's creative community. Without government intervention, an agreement has been forged among the very parties who disagree over DTV. With or without government, that's just what we need in DTV. Furthermore, if it is true, in contrast to every other industry, that we need a mandated standard to create market certainty in the DTV industry, at some point that need surely goes away. At some point the market has enough certainty that the government can get out of standard-setting. So at a minimum, there ought to be a sunset provision. That means that after a certain set period of time, the mandated standard would no longer be required or exclusive. A sunset provision might allow us to capture the near-term benefits of certainty that come from a mandated standard while avoiding the long-term costs of inflexibility that come from a mandate. So if the FCC should bless or even mandate a DTV standard, then we should agree that it meets the following conditions: (1) it should be open, non-proprietary, nonexclusive; (2) it should be compatible with the business strategies of both DTV manufacturers and computer hardware and software companies; (3) it should be cost-effective both for broadcasters to transmit and consumers to receive voice, video, and data, in whatever combinations their own business strategies suggest are most likely to maximize profits and the viewing audience; and (4) it should be capable of evolving over time as compression technology and other enhancements are developed. A standard that meets those requirements will give broadcasters a clean path to transmit to any kind of digital receiver found in the home -- DTV, personal computer, or the soon-to-be-unveiled combined PC-TV. And the standard that meets those requirements will bring the benefits of convergence to Americans sooner than a standard developed for the exclusive benefit of one industry or group, to the possible detriment of another. If we are asked to provide the special protection of a government-secured mandate, shouldn't we be certain that the guarantee will afford a pay back to consumers in the form of the broader access and lower costs which will result from the digital convergence? As to DTV, there are a lot of other rules that I think we don't need. One rule that has outlived its purpose (if it ever had a defensible one) is the station-rep rule. In the analog world, the FCC forbids networks from representing affiliated stations in negotiations with advertisers. Some say the theory of this market micromanagement is that it promotes competition. Here's what it's done in practice: create a three-firm oligopoly. I don't see how anyone in favor of deregulation and competition can support the station-rep rule. I think we ought to form a complete survey of all analog TV rules to make sure we don't assume they apply to DTV. For example, we have to question for the digital world the need for the dual network rule, the subscription TV rules, and the technical rules on ancillary services. The burden of proof for borrowing a rule from analog TV and applying it to digital TV should be on a proponent of keeping the rule. As we enter the digital era, it's high time for a truly deregulatory approach to television. We need to get rid of anti-competitive rules in all communications markets. If we don't do that in our home markets, we'll have no credibility when we try to get rid of anti- competitive rules abroad. Since we created an International Bureau two years ago, the Commission has worked overtime, arm-in-arm with the U.S. Trade Representative, to open foreign markets to competition from American businesses. We insist on clear and fair rules of competition. We explain that mystery and complexity drive away investment. The topic of clear and fair rules of competition came up repeatedly during my recent visit to China. One of the surprising things about that country is the amount of telecommunications competition that already exists. It's competition Chinese style -- competition between businesses run by different government ministries. But it has caused Chinese officials to wrestle with the very same issues we face here. And it has caused Chinese officials at the highest levels to believe the country needs clear rules of telecommunications competition. That law is now being drafted. This is the path of progress. That sort of law is necessary if the Information Superhighway is going to stretch from the United States to China. But we can't do the missionary work if we are not believers here at home. It will also come as no surprise to you that just as I believe we need to get rid of rules in the video context, I believe the same thing applies to the telephone market. For both markets I think the only rules that make sense are those that serve the goals of competition assuring public benefits from communications. That's why the decision in the Court of Appeals staying our interconnection rules was, with due respect to the court, such a grievous error. After 20 years of labor in the Congress, after an extraordinary effort by this 104th Congress to pass the legislation, after 17,000 pages were filed with the FCC and after the FCC distilled the weight of the evidence down to 48 pages of rules (which by the way, is about two-thirds of the pages of rules for Little League), the 8th Circuit, after giving the FCC 15 minutes of oral argument, set aside the unanimous decision of the Commission in just a few pages of what appears to be a decision on the merits. With respect to the Court, this is an astounding piece of judicial activism. It should make Bob Bork -- who just wrote a book against judicial activism -- recoil in horror. It has the potential of balkanizing competitive policy by encouraging 50 different approaches to how we get competition. But despite temporary setbacks, we are making progress. A year ago when I was here I gave a speech entitled "Digital TV, We Can Work It Out." In fact, we are getting very close to working out all the issues and reaching a final resolution to all the complex DTV questions. But in the end, the success of digital television will not be determined by the FCC; it will be determined by alliances that may not now exist -- alliances between, among others, broadcasters, TV manufacturers, the hardware and software arms of the computer industry, the creative community, and newspapers and other content creators that don't now use spectrum for transmission. It will be driven by market, not regulatory demands. I am confident that you're busily working out business plans, because this is a terrific opportunity, only to be seized by visionaries. I'm certain that within just a few months, the policy debates will be behind us, and the digital future will be before you. In fact, the future is now. - FCC -