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Digital dogfight! FCC's gift to TV sets everywhere.

In August, the Federal Communications Commission adopted a set of digital broadcast regulations that will have significant implications for the technology industry. In what was perhaps the best evidence of the importance of the announcement, the outcry from consumer electronics makers--particularly television manufacturers--was fierce. But all companies in high tech will be affected, so it's worth examining how the FCC decision will impact the overall technology market.

According to official estimates, 81 million homes in the U.S. contain televisions that are not connected to a pay-TV service; this represents about one-third of all TVs in the nation. These units rely on free, over-the-air broadcasts for their television signals. In addition, 25 million new analog sets are sold each year. Most consumers are unaware that by about 2006 or 2007, these televisions will cease to function, as broadcasters move to fully-digital broadcast signals. Without a separate digital signal processor (in the form of a box usually called a digital "tuner" in television parlance) these sets will not receive broadcasts. Current prices for such digital tuners are about $500.

The FCC ruling, or "order" as it is called by FCC officials, mandates that all new televisions sold in the U.S.--with an implementation schedule based on screen size--must include an internal digital TV (DTV) tuner by 2007. The roll-out schedule includes the following timetable:

* Receivers with screen sizes 36 inches and above: 50% of a manufacturer's units must include DTV tuners effective July 1, 2004; 100% of such units must include DTV tuners effective July 1, 2005.

* Receivers with screen sizes 25 to 35 inches: 50% of a manufacturer's units must include DTV tuners effective July 1, 2005; 100% of such units must include DTV tuners effective July 1, 2006.

* Receivers with screen sizes 13 to 24 inches: 100% of all such units must include DTV tuners effective July 1, 2007.

* TV Interface Devices (VCRs and DVD players/recorders, etc.) that receive broadcast television signals: 100% of all such units must include DTV tuners effective July 1, 2007.

Note the last requirement: All devices that connect to a television and have the capability to receive broadcast signals must also include a DTV tuner. This segment would include the aforementioned DVD players, but also PVRs (devices like Replay and TiVo), and, presumably, devices that receive and broadcast digital audio-only channels sent over the airwaves.

CEA Seething

Consumer electronics manufacturers, represented by the Consumer Electronics Association (CEA), have vehemently protested the order, and CEA has indicated that it plans to appeal the decision in court. The reasons behind the protests vary, but most rely on some fairly shaky math that CEA says indicates that consumers are (and will be) unwilling to pay the additional costs associates with adding a DTV tuner to a television. CEA had proposed that consumers have the option to purchase an external DTV box to add to their sets, but that manufacturers have no requirement to add such capability inside their televisions.

But CEA's argument seems disingenuous for several reasons. The first is historical. In the past, consumers have shown a preference for buying technology devices with integrated features and functions, rather then purchasing such functions as separate products. This buying pattern is clearly illustrated in the notebook PC market: Even with a slight price premium, including such technologies as integrated Bluetooth and WiFi, it makes sense because it expands the market for other compatible devices and eliminates the hassles associated with installation and technical support.

But even if one were to take CEA's argument at face value--that consumers will resist buying new televisions because of their higher associated costs--its price assumptions fall apart under even the slightest scrutiny. As FCC chairman Michael Powell has said, economies of scale and the falling prices of televisions will more than make up for any differential in the price of an external DTV box and an internal tuner card. But the irony is that the external box is actually more expensive than the proposed internal DTV tuner! (Again, the same holds true in the computer industry: External devices cost more.)

CEA claims the ruling is a tax that will cost manufacturers and consumers $7 billion. "The FCC has just imposed a multi-billion dollar annual TV tax on American consumers," said CEA president and CEO Gary Shapiro. He claims that the number of Americans with nonsubscription television service is far lower, and that the addition of DTV tuners is simply a waste of money for people with cable and satellite service.

"With fewer than 13% of American households relying on over-the-air reception for their TV signal, we don't need a digital broadcast tuner embedded in every new television in order to accelerate the DTV transition," Shapiro added. "We need digital cable equipment compatibility--the option for consumers to buy a high-definition set, take it home, plug it into the cable jack in their wall and turn it on just like they do today in the analog world. A mandatory digital broadcast tuner would be a costly vestigial organ in the sets used by millions of American cable and satellite viewers."

Shapiro's claim that "13% of American households" rely on over-the-air reception is partly an issue of semantics, but is accurate to an extent. While Powell says that 30% of households have televisions that rely on broadcast-only signals (81 million sets), in fact, only about half of these are in homes that do not have any subscription-television service at all. The rest are likely third and fourth sets that are simply unconnected to the home's pay-TV service.

FCC's Powell strongly denies CEA's charges. "The Consumer Electronics Association has been vehemently opposed to phasing in DTV tuners in television sets," he said in a statement. "The trade association argues that those who want to watch over-the-air digital broadcasting should be required to purchase an external set-top box. This would be a far more expensive proposition for consumers, given that these boxes currently cost about $500. It is incredible that CEA supports an alternative that would cost consumers 150% more than CEA's own cost projections for the DTV tuner ($200)." Powell continued with a telling remark: "If the trade association's concern about the cost of integrated tuners is sincere, one wonders why they would suggest a solution that would cost consumers more than twice as much."

CEA also claims that the addition of the DTV tuner constitutes an unreasonable technical burden on manufacturers. Powell claims that the willingness of set makers Thomson and Zenith to voluntarily add the DTV tuner refutes this assertion. But CEA asserts that Zenith (owned by LG Electronics) and Thomson (which markets RCA sets) own the patents for much of the technology within DTV tuners, and thus will receive a royalty for each new set that includes a DTV tuner.

FCC is taking the measure because it is concerned over the slow pace of digital television adoption: Digital content and signals are lacking, and sets are expensive.

CEA counters with a decent argument: That the FCC, rather than forcing broadcasters to create compelling digital content, is trying to expand the market by forcing consumers to buy DTV sets. CEA's Shapiro puts it this way:

"Everyone from consumer groups to the Cato Institute opposes a tuner mandate. [T]he FCC has proven the old-saying wrong that there is no such thing as a free lunch. Broadcasters are sitting on a $70 billion spectrum grant from the government. Rather than compelling consumers to buy DTV tuners by providing ample HDTV programming, broadcasters have imposed more costs on the American public. Americans should not be forced to buy over-the-air tuners for DTV when they are choosing not to purchase them on their own today."

Who is right? That depends on whom you ask. Analysts say that both sides make good points, but the fact remains that something needs to be done to spur the growth of digital television.

"With regard to consumers, there is no question that TV sets will be more expensive," said Michelle Abraham, senior analyst for Converging Markets and Technologies Group at Cahners In-Stat/MDR. "In 2004, the price for a set with a DTV tuner will be $150 more than that of one without. With the average price of a TV set in 2001 at $256 according to the Consumer Electronics Association, that is a large differential."

But, In-Star feels, in the long run the FCC ruling will make digital TVs less expensive more quickly than might have otherwise happened. "The large volumes will allow for dramatic reductions in the prices of the semiconductor components necessary for a DTV tuner. Without the large volumes, we would be unlikely to see the prices fall quickly. However, it would be very unlikely for the price difference to be $16 by 2006 as quoted by the National Association on Broadcasters. The semiconductor components alone are likely to cost twice that."

The net result, however, will be a positive one for consumers, who should expect to see more creative offerings from broadcasters, who will have no excuse for not adding new features to their high-band-width digital signals, said Abraham. As a result of the FCC order, In-Stat has changed its forecast numbers for the television market. Its original forecast was for about 8.5 million digital TV sets and monitors to be shipped to dealers in 2006. Instead, the company says there will be 20 million sets, all with DTV tuners.

What might the impact be on the rest of the industry? First, the development is a positive one in the general sense that any move from analog to digital, in any market, will give rise to a slew of devices, some existing and some yet to be invested. More specifically, the move may also be a great boon to the storage market, as hard drives will be used in new PVRs and, conceivably, even in digital broadcast recorders that might be integrated into a digital television itself. While some of these devices may 'be hampered by the Hollings bill currently under Congressional debate (see the June and July issues of CTR), it's likely that some form of digital recording and archiving of broadcast signals will be permissible under the law.

Other parallel developments, including the rise of wireless home LANs, may help (and be helped by) digital television. Even .in the current economic climate, sales of wireless LAN gear continue to climb, according to analysts. In-Stat numbers indicate that unit shipments in the WLAN market grew 15% overall in second quarter of 2002. Interestingly, however, end-use revenue remained flat, with overall end-use revenues falling 1% over the quarter, indicating rapid commoditization of the 802.11b equipment market--good news for consumers, but not so great for OEMs. Nonetheless, more networked homes mean more potential places where DTV could be integrated with other technologies--although, again, it must be, said that the legality 'of re-transmitting signals within the home remains fuzzy.

And what of PC makers? The PC, once the center of the technology universe, now seems relegated to the nether reaches of the home technology galaxy, somewhere between a blender and a shelf stereo system. Could PC OEMs add DTV capability to their machines? Technically, it's possible: Cable TV tuner add-in cards have been around for years. But with PC margins so slim as it is, the costs passed on to consumers from adding DTV processing capability might make systems too expensive for widespread adoption. At the very least, PC makers will probably have to wait until after 2006 before economies of scale kick in and reduce DTV component prices. Another option might be a box that works with a television, adding processing and broadcast capability to a DTV; Steve Perlman's forthcoming Moxi Media Center is an early example of such a device.

Whatever the eventual incarnations it takes, digital television is likely to change the technology landscape in the same way that digital audio has since its development just a few years ago.
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Author:Piven, Joshua
Publication:Computer Technology Review
Geographic Code:1USA
Date:Sep 1, 2002
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