Testimony of Larry Irving, Assistant Secretary of Commerce for Communications and Information House Commerce Committee -- Subcommittee on Telecommunications and Finance March 21, 1996 Good morning, Mr. Chairman and members of the Committee. Thank you for the opportunity to testify today. The National Telecommunications and Information Administration, (NTIA), which is part of the Department of Commerce, is the principal adviser to the President on domestic and international telecommunications issues. I am pleased to be here today as the head of NTIA to present the views of the Administration on the matters before this Committee. The focus of my testimony today will be the conversion from analog television to advanced television (ATV) and the preferable way of meeting the twin goals of ensuring that the American people receive the benefits of digital television as well as fair value for use of a scarce valuable national resource. The transition to a digital television system is unlike anything previously attempted in American mass media. Because ATV is a digitally-based system that cannot be received by currently-used television receivers, simply turning off the analog signal and turning on the digital signal would disenfranchise the nation's millions of television viewers. In addition, an incomplete or partial transition could result in a fragmented television market operating in two different incompatible transmission standards. A successful transition will require acceptance of -- and investment in -- new technology by consumers, programmers, and broadcasters and other video program distributors. If accomplished completely and quickly, the transition to digital television will provide unique and historic opportunities for the American people. We believe that these goals can best be met by following the framework of the Federal Communications Commission's (FCC) original plan and loaning existing broadcasters for the transition period the spectrum they need to upgrade to the new digital technology and then reclaiming the spectrum for licensing at auction. This would be a "loan" because the broadcasters would be provided the additional spectrum at no charge for a limited time with the expectation that a channel would be returned. The Administration believes, however, that the FCC's original 15-year transition period is too long and would result in the loss of economic opportunities that a more rapid conversion might otherwise foster. A number of factors have developed since 1992 -- when the FCC outlined its proposal -- that suggest that a shorter transition period is warranted. A ten-year transition period would provide ample time for a successful conversion without harming consumers or broadcasters but would have the added benefit of making valuable spectrum available sooner for a wide range of new wireless services. The Administration is committed as part of this effort to finding ways to ease the transition to digital television for the smallest broadcasters and would like to work with Congress to develop suitable proposals. While the Administration realizes that certain details of this proposal could undoubtedly be improved, we believe that, when measured against competing alternatives, it best balances the varied public policy objectives associated with a smooth transition to ATV. Before proceeding, I'd like to clarify one aspect of this discussion. Although returned spectrum is sometimes referred to as "analog" spectrum and the new ATV channels as "digital" spectrum, it should be noted that these are merely short-hand ways of referring to different methods of transmission over the electromagnetic spectrum rather than different types of spectrum. I. Why Advanced Television is Important Advanced television represents the next stage of development for America's free broadcast television system. Despite the proliferation over the past several decades of different methods of video programming distribution, broadcast television remains the primary means of disseminating and receiving information and entertainment in the nation. Unlike cable television and other subscription media, broadcast television is available to virtually the entire U.S. population, has no monthly fee, and requires no special equipment beyond a standard television set. In addition, only broadcast licensees are subject to FCC public interest requirements to serve the interests and needs of their community through locally-oriented news and programming. This system of free locally-based broadcast television has worked well for half a century and is widely regarded as the most successful broadcast system in the world. The localism, universal service, and diversity of this system should be maintained as television advances into the next generation. The shift to digital television is particularly important because the technical constraints imposed by the existing analog transmission standard have until now limited the introduction of substantially more sophisticated technologies. Even when the United States adopted a color television standard in the 1950s, we perpetuated the spectrally inefficient features of the NTSC system to avoid making existing black and white receivers obsolete. Broadcasters have long advocated the importance of converting from analog to digital television. Now we have the opportunity not only for dramatic television improvements but also to make the nation's broadcast television system more spectrum-efficient and to free up substantial amounts of spectrum to auction for a variety of new wireless uses. Digital technology can dramatically improve television and bring important benefits to millions of Americans in at least three areas -- better quality pictures and more viewing choices, advancement of American technological strength, and the more efficient use of the radio frequency spectrum. Advanced television could give viewers dramatic, new entertainment and educational experiences. And, if digital broadcasters choose to provide multiple channels using a digital signal, ATV would also provide 4 to 6 channels for every channel provided today. By using a digital medium, broadcasters will also have the flexibility to offer a variety of other "ancillary and supplementary" services to consumers, as envisioned under the recently-enacted Telecommunications Act of 1996. ATV's technological benefits are already being seen in the medical and research fields. For example, telemedicine applications are now available that allow doctors to "examine" patients in remote locations. The flexibility and versatility of this new transmission standard will undoubtedly stimulate myriad new applications in fields such as teaching, manufacturing, and science that cannot even be dreamed about today. Finally, ATV technology uses radio frequency spectrum more efficiently than the current system. As a result of ATV technology, broadcast television's current requirement for 402 MHz of spectrum could be reduced significantly to 252 MHz, making up to 150 MHz of prime spectrum available for other uses. More importantly, although today's broadcasters must be reassigned to a new channel for that service, the channel it vacates may be even more valuable after the FCC has repacked the spectrum and allocated it for new uses. II. The ATV Transition Process In the mid-1980s, when the potential for advanced television first burst upon the American scene, it appeared as if America had already lost the race to develop the new technology. The importance of competing in this technological race was an issue this Subcommittee spent a great deal of time on. The development of digital broadcasting in 1990 by U.S. companies and researchers, however, propelled America to the lead. After many years of hard work through the FCC's Advisory Committee on Advanced Television Service, four competing companies reached a pact to combine their systems, resulting in the formation of the HDTV Grand Alliance in 1993. The Grand Alliance proposed a transmission standard that sought to accommodate the competing needs of the television, cable, and computer industries. For nearly a decade, the FCC has been wrestling with the question of how best to convert the nation's television system from the current NTSC format to this next generation of technology without disenfranchising the nations's television viewers. With the development of a workable digital system by the Grand Alliance, the debate has narrowed over the past several years as attention has focused on a few specific transition alternatives. Under the scenario outlined by the Commission in several 1992 releases, each existing broadcast licensee would be loaned additional spectrum in the form of a new paired ATV "transition" channel, which would be used in part for simulcasting during the conversion to digital television. After a period of 15 years, broadcasters would be required to cease analog broadcasting and to return the analog channel to the government for reallocation to other uses. It should be noted that this plan represents only a tentative proposal by the FCC, and the Commission has not yet made a formal decision on the best way to proceed. Continuing technological advances suggest the transition will be more rapid than previously expected. The Administration's proposal adheres to many of the FCC's tentative conclusions but provides for a more rapid transition to digital and requires the licensing of the returned "analog" spectrum through auctions. Existing licensees would be loaned a second channel for a transition period and would be required to cease analog broadcasting and return their original channel to the government no later than 2005. The FCC would reorganize or "repack" the spectrum to maximize both the amount and desirability of spectrum available to be auctioned for other services. Returned spectrum would then be licensed at auction for other uses. As discussed later, the Administration believes ways can be found to alleviate the burden that this transition plan might cause rural broadcasters. Under a third proposal, referred to as "digital auctions," the new ATV channels would not be assigned to existing broadcasters but would instead be licensed at auction to the highest bidders. This proposal would allow entities other than current television licensees to compete in the broadcasting business and would allow auctions for the new spectrum to be held relatively quickly. Under this plan, analog and digital licensees would both broadcast in different transmission standards for an indefinite period, since analog licensees would continue broadcasting in NTSC format (although they could potentially switch to digital at a future, though indeterminate, date). III. The Administration's Proposal Balances Sound Public Policy Objectives Because of the importance of the Nation's broadcast television system, it is essential to devise a transition mechanism that is least disruptive to viewers and ensures that both broadcasters and viewers are able to make the transition from analog to digital television. Loaning existing broadcast licensees for a limited time the spectrum needed to make possible a transition to digital television -- and licensing the returned spectrum at auction following a ten-year conversion period -- is the best means for achieving this conversion for several important reasons. We believe this approach would benefit the viewing public and broadcasters as well as meet the Government's budget objectives. A. "Analog" Auctions Would Ensure a Orderly Transition for the Nation's Television Viewers and Broadcasters The Administration's plan to auction returned "analog" spectrum would, as did the FCC plan on which it is based, allow a transition to digital television that would protect the nation's television viewers. Under the plan, they would be able to continue to use their current televisions since broadcasters would be required to broadcast in both analog and digital formats during the transition period. Thus, an orderly transition to digital television as envisioned in the FCC's proposal would be ensured. A number of factors have developed since the FCC outlined its proposal in 1992, however, that would suggest that a shorter transition than first proposed by the FCC is warranted. First, Congress originally authorized spectrum auctions in 1993. As a result of the phenomenal success of the PCS and subsequent auctions, we now know the value and importance of freeing up spectrum for new services that in turn create new jobs and economic activity. Second, technological developments have considerably reduced the estimated costs of switching to digital technology. In lieu of purchasing a new television set, consumers now will have the option of purchasing relatively inexpensive converter boxes. This means that consumers will be able to receive digital television signals without spending hundreds of dollars on a new television set. Analog transmissions could therefore be turned off sooner without fear of disenfranchising viewers. In addition, estimates of broadcasters' transition costs have also come down since 1992. For example, technological developments now permit the manufacture of lighter transmitters, which may enable broadcasters to continue using existing towers. Also, the increasing demand for space on towers by wireless service providers will permit broadcasters to more readily lease tower space to such entities and recapture much of their tower upgrade costs. The Telecommunications Act of 1996 also allows ATV licensees to provide ancillary and supplementary services on their digital channel. The additional revenue stream from such services was not envisioned in 1992 when the FCC's plan was proposed and will help offset some of the transition costs broadcasters will incur. Finally, it should be noted that a longer transition period will impose additional costs on broadcasters. They will have to continue to simulcast for a longer period, which some estimate may significantly increase broadcasters' transition costs. While some have claimed that under this proposal broadcasters would receive a windfall in the form of free access to a valuable resource, in fact, broadcasters would be loaned an additional channel for a finite period to ensure a smooth transition to digital television. On a date certain, broadcasters would be required to cease analog broadcasting (and return the analog channel), thereby ensuring that digital television becomes the national television standard. On the other hand, "digital" auctions may result in a less orderly and complete transition to digital broadcasting. If we do not develop procedures now to provide incentives for today's broadcasters to migrate to new channels for digital operations, we may find ourselves with a fragmented television system for an extended period of time. B. A Ten-Year Transition Would More Rapidly Provide the American Public with the Opportunity for New Services A ten-year transition to digital television would provide the American people not only with a new and better television system, but it would also provide them with tremendous economic opportunities. Most telecommunications experts anticipate that, as more spectrum becomes available in the coming years, spectrum-hungry wireless applications will multiply at a rapid pace, including land mobile applications, PCS, wireless data systems, telemedicine and biomedical services, and wireless portions of the local loop. History has shown too that these services develop much faster than anticipated. A 1983 study commission by AT&T forecast a total of less than one million cellular users by 2000. There are presently over 30 million cellular users in the U.S., and the number is expected to double by 2000. New services will mean new jobs and economic opportunities for the American people. The cellular industry has created over 250,000 jobs using just 50 MHz of spectrum. The Administration's proposal, which would free up 150 MHz of spectrum, would likely create even more jobs, and the sooner this occurs the more the public will benefit. A 15-year transition would delay these economic benefits for five years, resulting in lost economic opportunity. C. Licensing the Returned Spectrum at Auction Would Allow the American Taxpayer to Recover the Full Value of the Spectrum The Administration's proposal for an accelerated transition would also help achieve the important goal of achieving a balanced budget by 2002 and allow the American taxpayer to recover the full value of this prime spectrum. The Administration estimates that an auction of the returned spectrum would yield at least $17 billion for the U.S. Treasury. This estimate is based on the FCC's range of $20 to $132 billion in revenues from auctioning the "analog" spectrum. Since the auctions of returned spectrum will actually take place in 2002, the most conservative FCC estimate was reduced to allow for the three-year delay in companies' actually being able to deploy services. Based on the phenomenal success of the FCC auctions to date, the Administration is confident that $17 billion will be the minimum that will be raised through auctioning the "analog" spectrum. To ensure that this minimal value is received from auctions, however, the Administration has developed a contingency mechanism that would permit assessment of a fee on recipients of ATV licenses in the event of a shortfall in auction receipts. For the reasons described in the preceding section, the Administration believes that the demand for spectrum -- particularly the prime spectrum located in today's television bands -- will continue to grow in the coming years. In addition, one of the major benefits of auctioning the returned "analog" spectrum rather than the "digital" spectrum is that the former proposal will permit the FCC more readily to "repack" the spectrum after transition, maximizing both the amount of spectrum available for auctioning and the value of the frequencies made available. Under the "analog" auction scenario, the FCC will have the ability to "repack" the broadcast spectrum without regard to the more demanding interference characteristics required by analog broadcasting. Repacking would have several benefits. First, repacking would maximize the amount of spectrum available for auction. The amount of spectrum that would have to remain fallow in each market to prevent interference would be determined by the minimal digital separation requirements rather than the greater separation requirements necessitated by analog television. Second, the ability to repack the channels efficiently would result in nationwide contiguous spectrum blocks that could be divided into smaller nationwide bands devoted to specific services such as two-way applications, point-to-multipoint distribution services, as well as mobile services. Systems that are designed to operate nationwide will in many cases be cheaper to manufacture and operate, since the transmitter and receiver equipment will not require built-in flexibility to accommodate different operational characteristics. D. The Costs to Broadcasters and Consumers of a Rapid Transition are Reasonable 1. The Costs to Consumers Because under the Administration's proposal analog broadcasting will cease in 2005, consumers would have to have the ability to receive digital television signals by then. We anticipate that the vast majority of American households will have either a digital television set or some other way to convert digital signals to analog signals. For example, by 2005, it is expected that most cable television systems will either have switched to digital signal transmission and provided their subscribers with converter boxes to receive these signals or will be able to convert digital signals to analog signals at the cable facility. Currently 60-65 percent of television households subscribe to cable and this number is expected to grow. Thus, millions of consumers will be able to receive digital signals without buying a set top converter box or a new television. Estimates on the total number of consumers who, because they do not subscribe to a multichannel service, will need to buy a new television or a set top box to receive digital signals range from 10 to 20 percent. By 2005, some smaller percentage of these consumers still will not have purchased a digital television or a converter. Industry experts have estimated that converter boxes will cost as little as $50 by 2005. The Administration is considering a plan to help alleviate the burden that purchasing converters will impose on some consumers and debating whether, to alleviate the cost to consumers, it would be appropriate to rebate to consumers 50 percent of the cost of the converter box, up to $25. It is important to note that, in return for the cost of buying the converter boxes, consumers will be compensated by the ability to receive as many as six times the current number of channels or a much higher quality television signal. 2. The Cost to Broadcasters The cost to convert each analog broadcaster to digital broadcasting vary dramatically, based on geography and station operations. The 1992 Advisory Committee on Advanced Television Service (ACATS) estimated the cost of conversion to digital for broadcast stations as low as $1.3 to $1.6 million per station, while the NAB's current estimate ranges from $1.5 to 10 million per station. With a date certain of 2005 for spectrum reversion, broadcasters would still have a significant amount of advance notice that equipment had to be replaced. Since the expense of buying new equipment would be spread over time, much of this expenditure would be incurred through normal studio and equipment upgrades. Many stations, especially those owned by networks and large group owners, have already begun to incur these costs as part of their routine upgrades and replacement schedules. A more rapid transition could require broadcasters to purchase equipment before the prices have significantly fallen. On the other hand, market forces may result in prices falling sooner than is now anticipated. The Administration realizes that the rapid transition to digital may be more difficult for small stations located in rural areas, but we believe that mechanisms can be found to ease the burden on such stations. For instance, to meet the equipment upgrade needs of rural public television stations, we have provided supplemental funds through NTIA's Public Telecommunications Facilities Program. IV. Conclusion In conclusion, Mr. Chairman and members of the Committee, I want to emphasize again how important it is that we ensure a smooth transition of our national broadcasting system from one based on analog transmission technology to one that uses digital technology, the best that this country has to offer. Free over-the-air television is vitally important to the nation and must be able to compete with other video providers, such as cable and satellite services. The Administration proposal would ease the transition to digital television by making each of today's broadcasters eligible for an ATV license. At the same time, it would also recapture for auctioning, on behalf of the American public, a full 150 MHz of radio spectrum. While there are alternative ways to achieve this second objective, we believe the Administration proposal is most consistent with sound telecommunications policy. The Administration's ten-year transition plan would provide for a smooth conversion to digital television while ensuring that the American public receives the economic benefit of the new services made possible with 150 MHz of spectrum sooner rather than later. It is a "win-win-win" situation for America's television viewers, broadcasters, and taxpayers. I would also like to reiterate that the Administration is committed to finding ways to ease the transition to digital television for the smallest broadcasters and would like to work with Congress to develop suitable proposals. Mr. Chairman and members of this Committee, again, I appreciate this opportunity to share these views with you. I am ready to respond to any questions that you may have.