U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

21–643PDF 2005

DTV STAFF DISCUSSION DRAFT OF THE DTV

TRANSITION ACT OF 2005

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS AND

THE INTERNET

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 26, 2005

Serial No. 109–28

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas

MICHAEL BILIRAKIS, Florida

Vice Chairman

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi, Vice Chairman

VITO FOSSELLA, New York

ROY BLUNT, Missouri

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

C.L. ‘‘BUTCH’’ OTTER, Idaho

SUE MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MIKE DOYLE, Pennsylvania

TOM ALLEN, Maine

JIM DAVIS, Florida

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

BUD ALBRIGHT, Staff Director

DAVID CAVICKE, Deputy Staff Director and General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

FRED UPTON, Michigan, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

ED WHITFIELD, Kentucky

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

JOHN SULLIVAN, Oklahoma

MARSHA BLACKBURN, Tennessee

JOE BARTON, Texas,

(Ex Officio)

EDWARD J. MARKEY, Massachusetts

Ranking Member

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

MIKE DOYLE, Pennsylvania

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Abud, Manuel, Vice President and General Manager, Telemundo Los

Angeles ........................................................................................................... 73

Chessen, Rick, Chair, DTV Task Force, Federal Communications Commission ........................................................................................................... 23

Goldstein, Mark L., Director, Physical Infrastructure Team, Government

Accountability Office ..................................................................................... 27

Kimmelman, Gene, Senior Director of Public Policy, Consumers Union ..... 95

Knorr, Patrick, Vice Chairman, Sunflower Broadband, on behalf of American Cable Association .................................................................................. 83

McCollough, W. Alan, Chairman and Chief Executive Officer, Circuit

City Stores, Inc., on behalf of Consumer Electronics Retailers Coalition 76

McSlarrow, Kyle E., President and Chief Executive Officer, National

Cable and Telecommunications Association ............................................... 68

Pitsch, Peter K., Communications Policy Director, Intel Government Affairs ................................................................................................................ 102

Shapiro, Gary J., President and Chief Exectuive Officer, Consumer Electronics Association ........................................................................................ 45

Souder, Steve, Director, Montgomery County, Maryland 911 Emergency

Communications Center ............................................................................... 92

Yager, K. James, Chief Executive Officer, Barrington Broadcasting Company, LLC, on behalf of National Association of Broadcasters ................. 51

Material submitted for the record by:

Aloha Partners, letter dated April 27, 2005, to Hon. Joe Barton, Hon.

John D. Dingell, Hon. Fred Upton, and Hon. Edward J. Markey ............ 157

APCO et al., letter dated May 25, 2005, to Hon. Joe Barton, Hon. John

D. Dingell, Hon. Fred Upton, and Hon. Edward J. Markey ...................... 164

Bazelon, Colemen, Vice President, Analysis Group, paper submitted by .... 145

Brattle Group, letter dated May 18, 2005, to Hon. Joe Barton, Hon.

John D. Dingell, Hon. Fred Upton, and Hon. Edward J. Markey ............ 165

Cox, Hon. Christopher, a Representative in Congress from the State

of California, letter dated May 24, 2005, to Hon. Joe Barton ................... 184

Chessen, Rick, Chair, DTV Task Force, Federal Communications Commission, response for the record .................................................................. 140

EchoStar Communications Corporation, prepared statement of .................. 138

Flanigan, Matthew J., President, Telecommunications Industry Association, letter dated May 24, 2005, to Hon. Joe Barton ................................. 226

High Tech DTV Coalition, prepared statement of ......................................... 215

Largent, Steve, President, CTIA, letter dated May 26, 2005, to Hon.

Joe Barton ..................................................................................................... 214

National Troopers Coalition, letter dated September 12, 2005, to Hon.

Joe Barton ..................................................................................................... 227

Public Knowledge, prepared statement of ...................................................... 218

Shapiro, Gary J., President and Chief Executive Officer, Consumer Electronics Association, letter dated May 6, 2005, to Hon. Joe Barton .......... 177

Walt Disney Company, material for the record ............................................. 186

(III)

(1)

DTV STAFF DISCUSSION DRAFT OF THE DTV

TRANSITION ACT OF 2005

THURSDAY, MAY 26, 2005

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON TELECOMMUNICATIONS

AND THE INTERNET, Washington, DC.

The subcommittee met, pursuant to notice, at 11:40 a.m., in room

2123 of the Rayburn House Office Building, Hon. Fred Upton

(chairman) presiding.

Members present: Representatives Upton, Stearns, Gillmor,

Cubin, Shimkus, Pickering, Fossella, Radanovich, Bass, Walden,

Terry, Ferguson, Sullivan, Blackburn, Barton (ex officio), Markey,

Engel, Wynn, Gonzalez, Inslee, Boucher, Towns, Gordon, Rush,

Eshoo, Stupak, and Dingell (ex officio).

Staff present: Howard Waltzman, chief counsel, telecommunications and the interet; Neil Fried, majority counsel; Kelly Cole,

majority counsel; Will Norwind, policy coordinator; Jaylyn Jensen,

senior legislative analyst; Anh Nguyen, legislative clerk; Johanna

Shelton, minority counsel; Peter Filon, minority counsel; Turney

Hall, staff assistant; and Alec Gerlach, staff assistant.

Mr. UPTON. I will note that a good number of my colleagues certainly on this subcommittee and the entire Congress are very interested in this hearing today, and we are in the middle of votes, and

we are going to start now, just because I expect that this hearing

will take a number of hours, and so we will get members as they

come in for their opening statements before we start the hearing.

But in an effort to be out of here by tomorrow, we will start today.

And I appreciate all of those that have been waiting since yesterday to get into the room, as well. Some were lamenting the fact

that there is a prohibition on earned income, and I guess line sitters would fit that test, as we have seen the last number of hours.

Good morning. Today, we are, in fact, examining a staff discussion draft of the Digital Transition Act of 2005, and if the only goal

of the staff discussion draft was simply to promote discussion, then

based on the number of witnesses in attendance at today’s hearing,

I would say that the staff has certainly succeeded. But of course,

the goal of the draft is much more profound than that. After many

hearings over the years, multiple DTV round tables, numerous

FCC proceedings, billions of dollars invested by both consumers in

various industries and digital technology and services, the goal of

this draft was to help crystallize the subcommittee’s position on a

myriad of issues in this debate, so that we can, in fact, actually put

2

a bill together, move it through the legislative process in the coming weeks, and get it enacted into law as expeditiously as possible.

At its core, the draft would set December 31, 2008 as the hard

date for the end of the transition. This, along with the draft’s comprehensive consumer education provisions, will best ensure that

consumers, public safety, and all affected industry players can adequately plan and complete the transition as seamlessly as possible.

The draft contains many other important elements, and I look

forward to the input of the members on both sides of the aisle, and

our witnesses, on those provisions. I want to commend somebody

that is on his way back from the House floor, my chairman, Chairman Barton, for his leadership, his stewardship and commitment

in getting us to where we are today.

I want to tip my hat, also, to good friends, Ranking Members

Dingell and Markey, for the many hours of bipartisan and good

faith negotiations, constructive all, which they have invested into

this process thus far, and I look forward to continuing those negotiations with them and all members of this subcommittee, in the

coming days and weeks, to achieve what I hope will be a broad, bipartisan consensus.

Failure to move or transition to a date certain, a digital world

would be just that, a failure. Failure for the broadcasters, who have

each invested millions of dollars to convert, failure for the manufacturers who have been encouraged to produce the sets, failure for

those consumers expecting new advances and better quality to improve their lives, whether in new devices and technology or simply

public safety. And failure for the taxpayers, expecting more than

$10 billion for the sale of the analog spectrum. It would be a major

setback. The stakes are high, but consumers will all benefit as we

fully enter the digital age.

I am confident that at the end of the day, we will have a DTV

bill that will deliver something of real value to American consumers throughout the Nation, and I will yield for an opening

statement to my friend and colleague from Washington State, Mr.

Inslee.

[The prepared statement of Hon. Fred Upton follows:]

PREPARED STATEMENT OF HON. FRED UPTON, CHAIRMAN, SUBCOMMITTEE ON

TELECOMMUNICATIONS AND THE INTERNET

Good morning. Today we are examining a staff discussion draft of the Digital

Transition Act of 2005. If the only goal of the staff discussion draft was simply to

promote discussion, then—based on the number of witnesses and the attendance at

today’s hearing—I would say that the staff has succeeded.

But, of course, the goal of the draft is much more profound than that. After many

hearings, multiple DTV roundtables, numerous FCC proceedings, billions of dollars

invested by both consumers and various industries in digital technology and services—the goal of the draft is to help crystallize this Subcommittee’s positions on the

myriad issues in this debate so that we can, in fact, actually put a bill together,

move it through the legislative process in the coming weeks, and get it enacted into

law as expeditiously as possible.

At its core, the draft would set December 31, 2008 as the hard date for the end

of the transition. This, along with the draft’s comprehensive consumer education

provisions, will best ensure that consumers, public safety, and all affected industry

players can adequately plan and complete the transition as seamlessly as possible.

The draft contains many other important elements, and I look forward to the input

of the Members and our witnesses on them.

I want to commend Chairman Barton for his leadership, stewardship, and commitment in getting us to where we are today. I also want to tip my hat to my good

3

friends, Ranking Members Dingell and Markey, for the many hours of bipartisan,

good faith negotiations which they have invested into this process thus far; and I

look forward to continuing those negotiations with them—and all Members of this

Subcommittee—in the coming days and weeks to achieve, what I hope will be, a

broad, bipartisan consensus.

Failure to move a transition to a date-certain, a digital world would be just that,

a failure. Failure for the broadcasters who have each invested millions of dollars to

convert. Failure for the manufacturers who have been encouraged to produce the

sets. Failure for those consumers expecting new advances and better quality to improve their lives, whether in new devices and technology or public safety. And failure for the taxpayers expecting more than $10 billion for the sale of the analog spectrum. This would be a major setback.

The stakes are high, but consumers will all benefit as we fully enter the digital

age. I am confident that at the end of the day, we will have a DTV bill that will

deliver something of real value to American consumers throughout the nation.

Mr. INSLEE. Thank you. Let me make a couple of small points

and maybe a larger one.

The first point, on the broadcast flag issue that I think needs

some discussion. This recent court decision could result in less digital broadcast content being made available to consumers, and as

a result, this could actually slow the acquisition of digital television

transition, and I hope Congress will work with all interested parties to examine the pending broadcast flag issues and provide the

FCC with appropriate authority, and these powers must be limited,

however, explicitly, not to slow or meddle with technological innovation.

Second point, I hope that we preserve unlicensed spectrum. WiFi

has shown incredible scope and breadth and success, and I hope

that we find a way to do that. But the third point that I wanted—

that I suspect I will not be alone in making is the failure of at least

the draft to address the issue of easing this transition. It seems to

me that there is a new high tech principle that has been discovered, which is that you don’t—there are certain things you don’t do.

You don’t tug on Superman’s cape, you don’t spit into the wind, you

don’t pull the mask from the Lone Ranger. You don’t take people’s

television away without dealing with a subsidy issue effectively.

And we have a lot of work to do in this regard.

Now, I think if we do not provide Americans who are affected by

this transition, we not only may not have a bill, ultimately, and we

must have a bill, and the quicker, the better, but we will find a rebellion that makes the Whiskey Rebellion look like sort of a tea

party, and maybe the Boston Tea Party.

We need to have a system that recognizes a principle that the

first claim on auctioned spectrum of Americans should not be

bridges in our respective districts, or deficit reduction, or tax cuts,

but subsidizing the acquisition of costs to pay for this transition

that Americans are going to experience. And I think that I heard

one of my colleagues suggest that if the bill passed on Tuesday, we

would all be impeached on Wednesday. That would lead—I may be

offering an amendment to say that the transition will actually take

place 6 months after the retirement of the last person on the committee. But I would like a little earlier date.

And I would hope that we would look for a direction to this bill

as we work through this, have an earlier date and a larger subsidy,

recognizing that the Americans who will be inconvenienced financially by this, all Americans, not just those of certain income

groups, will have assistance for this, because those are the people

4

of all Americans that ought to have the first claim on the auction,

and it is very clear that this auction will generate sufficient funds

to accomplish that goal. If you do the math, I think we will find

the good news is there will be a large pot of money available to accomplish this end, and I think that we need to look at this as a

universal service for people who are inconvenienced by this financially, not just one based on means testing. I think a means testing

approach to this would not only be a difficult in its application, but

will miss the fact that a person who earns $50,000 a year who has

this rug pulled out from under them on their television set will be

just as angry as a person who earns $7,000 a year, and that is an

anger that the U.S. Congress should not allow to fester. And I really believe this is an issue that is bigger than just this sort of digital

TV transition. It is one that can get enough Americans angry at

the Federal Government that it can affect their willingness to pay

taxes, their willingness to look at democracy as a fair place where

people are treated fairly.

I don’t think we should understate the need to get this job done

and done right, and thank goodness that we are going to have

money available to do it. So I hope that, Mr. Chair, we are going

to look for a way to get that, make sure the Americans who have

to pay this are the ones who have first claim on this, and to the

last dollar, and we find the best way to design a system to do that.

Thank you.

Mr. UPTON. Mr. Bass.

Mr. BASS. Thank you, Mr. Chairman, and I appreciate your allowing me to speak early on in this process, since I am sitting over

here in Siberia for a reason. I have to preside over the military

quality appropriations bill, which actually has already started, and

so—but this is a very important hearing for me, and I wanted to

be here just to give our witnesses today the benefit of a couple of

observations.

First, I sure would like to see the final product, a bipartisan

product, and I know the Members of Congress on both sides of the

aisle have been working on this issue. We are not there yet, but

we ought to keep the discussions underway. It is unfortunate we

are not there yet. I also feel that a plan to implement subsidies is

going to be difficult, complicated, and potentially unworkable, and

I believe that the bill itself, by moving the date forward to December 31, 2008, and adding to it provisions that will provide mechanisms to warn consumers about what is pending will lessen the—

considerably, the surprise that we will all want to avoid when the

actual conversion occurs.

Absent being able to pass a bill with subsidies, or that has subsidies, I would be interested in the observations of our witnesses

as to what kind of thought—what thoughts they might have on

how we might create further incentives to get the industry itself to

go through the conversion prior to December 31, 2008, so that we—

even lessen the shock—what could we do legislatively on a policy

level that would make that conversion occur sooner, without backing right up to the deadline? This is a great opportunity to begin

this discussion with this discussion draft, and I look forward to

working with all the parties involved in this very complicated but

very important national issue.

5

Thank you, Mr. Chairman.

Mr. UPTON. I would recognize the ranking member of the subcommittee, Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

Today’s hearing will focus upon draft legislation affecting digital

television issued by the Republican committee staff. After several

weeks of discussions involving Chairman Barton, Chairman Upton,

Ranking Member Dingell, and myself, no agreement was reached

on a consensus blueprint for the digital television era. We did, however, agree upon several items.

We agreed, for instance, on the desirability of bringing the digital

television transition to a timely conclusion, and the setting of a

date certain for the cessation of analog television broadcasting. We

agreed upon the need to do so in order to assist public safety entities in obtaining much-needed cleared frequencies for their vital

public safety mission, and to free up frequencies for other wireless

uses, such as broadband wireless services.

We also agreed on the need for an effective consumer education

campaign that includes public service announcements, consumer

disclosure, and informational outreach, so that consumers are fully

aware of the changes being wrought by this digital TV transition.

Notwithstanding our general accord on these issues, several

areas remain without resolution. These areas include public interest obligations and multicast must-carry issues, the policies for

down-converting digital broadcast signals on cable systems from

analog form, addressing spectrum-related and competition-related

issues, and the principles for treating consumers fairly when the

government renders their analog TVs inoperable.

These areas of disagreement, while not insurmountable, are

nonetheless significant. Constraining our ability to reach agreement is the fact that this legislation is intended to become part of

the budget process, because of the revenue raising potential of the

auctions of the frequencies the broadcasters relinquish. Many of us

have criticized the fact, over several Congresses, and on both sides

of the aisle, that unrelated budget priorities poison our ability to

enact sound telecommunications policies. In the current instance,

the implications of allowing budget policy to trump telecommunications policy are not academic. They could affect literally millions

of American families. This is because when the date certain arise,

on New Year’s Day 2009, to turn off the analog TV signal, the Federal budget will still be in the red, even as consumer TVs go black.

The core of any digital TV bill we approve should ensure that all

affected consumers have some government backed remedy to restore the signals the government itself is ordering turned off.

Even today, across the country, Americans will be walking into

retail outlets and buying analog only televisions. If there is no plan

for such consumers, then consumers will be rightly angered that

they must bear that costs, that $50 or $60 or $75, perhaps, to restore the TV pictures the government is shutting off per TV. Think

about it. It would be as if the government turned off your phone

or your computer, but offered to turn it back on if you sent in $50

or $60 or $75. What are we going to do for the American consumer,

for the families who will be tuning in, expecting to watch a New

Year’s Day College Bowl in 2009, when the government reaches

6

into their homes and turns off the set. How will we respond to

these consumers?

A digital TV tax will not go over very well with consumers, and

the fact is that it is totally unnecessary, since the auction is expected to raise at least $10 billion. There are upwards estimates

of $30 billion. There is more than enough money to make all affected consumers whole who are unfairly blacked out by this policy

imposed from the top down. It is unacceptable that we have no

plan to restore service to televisions that the Congress will render

as inoperable, moreover, a plan which simply helps a few consumers, but leaves the vast majority with no remedy is not only

challenging to implement, it is also unjust to the tens of millions

of consumers who spent hard-earned money to buy a television set

that they thought would work for decades.

So if you are one of the millions of consumers who has an analog

TV clicker in one hand, you had better have your other hand on

your wallet, because the government is coming for both, and we

need to pass legislation that ensures that the consumer is protected. I hope that in the course of this process, we have the opportunity to rectify the omissions and shortcomings in this draft, because I think it is critical for every American family that we do so.

I thank you for holding this hearing, Mr. Chairman.

Mr. UPTON. Recognize Chairman Barton for an opening statement.

Chairman BARTON. Thank you, Mr. Chairman, and I want to

apologize to our panelists. Mr. Upton likes to have one panel, and

since we have so many of you, we have a very big one panel hearing, so we do—especially Mr. Pitsch, who will have to listen for an

hour before he gets to give his 5 minutes of wisdom. Save the best

for last, so to speak, maybe?

Anyway, thank you all for being here. This is a legislative hearing on a draft proposal. It doesn’t have a bill number, because Mr.

Upton and myself have been in serious negotiations with Mr. Dingell and Mr. Markey, and those have been very productive and cordial negotiations, that we could not reach agreement on some of the

finer points of the proposed bill, and I have a little thing called reconciliation staring me in the face, which is not something that my

friends on the minority side have to be as concerned about as those

of us on the majority. So we wanted to go ahead and introduce a

bill to begin the public discussion, and that is what this bill is. But

it is an evolving document. We are not trying to say this is what

the legislation is going to be, but hopefully, we are setting some parameters.

There is really only one principle that is not on the table, and

that is that this date certain is going to become a date uncertain.

I think the big failure in the current law is that the uncertainty,

the December 21, 2006, or when 85 percent of a particular market,

that or, in my opinion, is a fatal flaw, and if we don’t eliminate

that or, I am not sure this country is ever going to get the digital

transition. So I would prefer that the date certain be December 31,

2006, but in discussions with Mr. Dingell and Mr. Markey, and in

listening to stakeholders, it became apparent to me and Mr. Upton

that we needed to give some more time, so we have extended that

date in the draft 2 years, to December 31, 2008. I don’t see that

7

that is going to change, so I would have to say that date is probably frozen, but we will certainly listen on that point.

There are some things that are not in the draft discussion. We

have no subsidy, and obviously, we had discussed a subsidy. I myself would support a limited subsidy for low income households,

means tested, at a reasonable cost to the Treasury. That is something that we will hear a lot of testimony on, and there will be a

lot of negotiations on. The bill before us does not have a must-carry

obligation. Obviously, in the analog world, we have must-carry, so

that is something that would be worthy of discussion. Should there

be must-carry, and if so, is it multicast must-carry? Is there a public interest component to any must-carry? We have our friends from

the cable industry here. There is obviously going to be some discussion about down conversion at the head end, and we are interested

to hear what our friends in the cable industry say about that.

So this is a beginning of a process. You know, we do want to

produce a bill. We would like to do it at subcommittee, and then

full committee, go through regular order, so that all members on

the subcommittee and the full committee can have their input, pass

the bill out, and then my intention at this point in time would be

to use the bill that comes out of committee as part of our reconciliation package that we send to the Budget Committee in September,

so that it would become law at the end of the year.

So we look forward to working together with all the stakeholders

that are here today, perhaps some that were not able to testify, and

the members on both sides of the aisle, so that at the appropriate

time, we modify the bill and move forward in a bipartisan fashion.

With that, Mr. Chairman, I yield back. I thank you for your leadership on this. We couldn’t have a better person chairing this particular hearing, and your knowledge on this issue is going to be

very, very helpful, as we move toward a resolution of some of the

outstanding issues.

[The prepared statement of Hon. Joe Barton follows:]

PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY

AND COMMERCE

Thank you, Mr. Chairman, for holding this legislative hearing on the DTV harddeadline staff discussion draft. As I have made clear, I believe the 85-percent penetration test in current law is delaying the DTV transition, making it harder for industry and consumers to prepare for the end of analog broadcasts, and preventing

use of the spectrum for critical public safety and wireless broadband purposes. I

think a hard deadline creates the certainty we need to resolve these issues.

While I prefer a December 31, 2006 hard deadline, I have listened to industry and

my colleagues, and I am willing to wait until December 31, 2008, if it will make

my colleagues less anxious about completing the consumer education and regulatory

steps needed to achieve as smooth a transition as possible.

I have also said, in the context of a December 31, 2006 hard date, that I am willing to provide one, $50 rebate toward a digital-to-analog converter-box for each exclusively analog, over-the-air, low-income home. The need for a subsidy diminishes,

however, if we move the hard date to December 31, 2008. By all accounts, the cost

of digital-to-analog converter boxes will have more time to drop. The tuner mandate

will also have more time to increase the number of digital, over-the-air tuners in

consumers’ homes, especially if we accelerate the tuner mandate deadline.

The labeling and consumer education provisions in the bill also will ensure that

consumers understand their options, and understand that they will have more time

to decide whether to buy a digital television or a converter box, or to sign up for

cable or satellite service. Consumers also will have more time to save. If I start putting aside just 30 cents per week, I’ll save more than $50 by the time a December

8

31, 2008 hard deadline rolls around. I’ve got a lot of television sets, so I’m going

to take my own advice and start saving now.

But I am also here to listen. You all have before you a staff discussion draft. Tell

me what you think works. Tell me how you think we can make it better. Chairman

Upton and I intend to move a hard-deadline bill expeditiously. I hope we can build

consensus toward bipartisan legislation.

I look forward to the testimony of our witnesses. I thank them for appearing, and

yield back.

Mr. UPTON. I am just sure you want to hear when I praised you

up and down as well, but I will make sure you get a copy of it for

your district work period reading, and the same I said for Mr. Markey and Mr. Dingell. Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman, for holding

this hearing.

I am pleased that we are addressing the long-awaited tangible

steps toward next generation television viewing. I am anxious to

hear from our witnesses today, so therefore, I am going to be brief.

America is lagging behind in technological advances, and I am

confident that the digital TV transition will lead to improved hardware, better delivery, and more choices for consumers.

Echoing many of my subcommittee’s colleagues’ sentiments, I feel

that it is crucial for us to address the concerns of those who will

be adversely affected by this transition, and we must be aware of

their fears. I am certain that the subcommittee will perform the

proper due diligence going forward, and I plan to raise our issues

with my constituents in order to hear their thoughts. I was pleased

to read about the educational initiatives proposed in the draft, and

I look forward to working with the subcommittee on crafting a bill

that leaves no stone unturned and no household left behind.

Let me consider all of the options as we deliberate further toward a comprehensive and fair bill. One issue that I would like to

stress today is the overwhelming need for more spectrum by the

law enforcement community. September 11, 2001 was a terrible

day in the history of this country, and it was especially awful for

Brooklyn. Mr. Chairman, I hope that as we move this bill forward,

we emphasize the need for additional spectrum allocation to our

cops, firefighters, and other first responders who desperately need

it. We owe them everything, and this is a perfect way to continue

repaying them for all they do for us.

Finally, another critical issue that needs to be addressed to ensure the success of the DTV transition is the protection of the free

over the air digital broadcast content from unauthorized redistributions. Recently, the Federal Communications Commission addressed this issue in a broadcast flag ruling. Unfortunately, the

United States Court of Appeals of the D.C. Circuit struck down this

rule.

Congress needs to pass legislation as soon as possible to give the

FCC the necessary authority to implement the broadcast flag rule,

and I would encourage the ranking member and the chairman to

include in the markup free and unauthorized distribution of content is detrimental to a large number of New Yorkers and other

American citizens, and we should work to protect all aspects of intellectual property and the jobs and innovations that results from

it.

9

So Mr. Chairman, I look forward to working very closely with

you as we continue to develop this proposal, because I think that

it is important that we make certain that we don’t leave anybody

behind.

Thank you so much. I yield back.

Mr. UPTON. Thank you. Mr. Terry.

Mr. TERRY. Thank you. I will, too, try and be brief. I just want

to say that I appreciate this draft that you have supplied or helped

draft here. I think the date is absolutely the right date. It is far

enough out that the FCC can provide the rules and regulations for

the auction, et cetera, that have a seamless transition at least from

their aspect, far enough out that we can educate the consumer. We

move up the time in here for the dual tuner in the TV sets.

Consumer electronic folks, I’d like to hear how you feel about

that. I think that is a necessary component to this. To me, I think

the one issue that is the most difficult to wrestle with is the subsidy issue, and I am open to some sort of subsidy. I have said at

several of our hearings, though, I do think it needs to be limited

to those folks that are the most affected by this transition, i.e., low

income antenna users. And that we may have a response to those

folks in particular. Therefore, a subsidy that is means-tested that

helps those that are most in need is appropriate. Perhaps we can

team up with the FCC and the State PSC’s, PUC’s on the lifeline,

and use that as the mechanism or trigger mechanism, something

that maybe we can explore here today.

So I just want to want to say I appreciate the hard work that

has gone into this draft, and I appreciate all of our witnesses here

today that will help us come up with the next draft. I yield back.

Mr. UPTON. Mr. Boucher.

Mr. BOUCHER. Thank you very much, Mr. Chairman. I want to

commend both you and Chairman Barton for the thoughtful work

that you have undertaken on this matter. I particularly appreciate

your inclusion of our side of the aisle in the work that you have

put forward to date, and I encourage you to wait for a markup on

the bill until we have a bipartisan agreement on all of the elements, including the size and delivery mechanism of the converter

box subsidy.

In many respects, the draft bill moves in the right direction. For

example, it has a more realistic date for analog spectrum surrender

of December 31, 2008, allowing sufficient time for the manufacture

and the distribution to television set owners of digital to analog

converter boxes. The bill also addresses the need for cable operators to continue to make analog feeds available, so that analog set

owners in cabled households can continue to use their analog television sets. Some further modifications of that particular provision

may well be in order. And the bill appropriately imposes further requirements that new TV sets contain digital tuners, but the draft

bill does not contain a means of holding harmless the owners of the

73 million analog television sets that are over-the-air dependent.

Without regard to income, these individuals should receive a free

converter box. Restricting free boxes to low income individuals is

unfair. It would also result, I believe, in a massive political backlash.

10

No one is going to be pleased if the Congress imposes a cost of $50 per television set on individuals of whatever means. And we

don’t have to take that step. A full $50 subsidy for each of the 73

million analog TV sets dependent on over-the-air signals would cost

approximately $3.7 billion. The real cost would be somewhat less,

as people decide to discard their older analog sets and purchase

newer digital sets instead. But even at the $3.7 billion figure, the

subsidy is clearly affordable. The latest estimate is that the analog

spectrum auction will produce $28 billion. This committee’s reconciliation obligation of $4.7 billion and the full subsidy of $3.7 billion would still leave a significant net contribution to the U.S.

Treasury. Even the CBO estimate of $10 billion from the sale of

the spectrum leaves ample room for both reconciliation and the full

subsidy to the owners of all over-the-air dependent analog television sets.

So, Mr. Chairman, my advice is don’t anger millions of Americans needlessly. There is no reason to be stingy with regard to this

subsidy. Provide a full subsidy for the converter boxes, and all of

these problems can be avoided. And then, we can report this bill

with what will approach unanimous opinion from this subcommittee.

Mr. Chairman, I thank you for the work you have done to date,

and I look forward to working with you in further steps of this

process, and I yield back.

Mr. UPTON. Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman, and like my colleagues,

let me congratulate you for this hearing, and also Chairman Barton

and the ranking member, Mr. Markey, for what they are doing. I

have great respect for my colleague, Mr. Boucher. I am not convinced the subsidy is absolutely necessary. If all the consumers

knew about this requirement, $50, that is $0.14 a day, they would

have to save for 1 year. If they knew about it today, and they saved

over the next 3 years, that would be $0.035. The $3.7 billion to me

is a lot of money, and I have some concern about setting up a government subsidy program, when we could have on the screens, notification at least 2 years out, that the analog set will not be able

to take the digital, and you need to transition. So I am not sure

that is—should be a key element of passing this bill is to have a

large subsidy for the consumers. And I say that, knowing well that

I have a Congressional district where there are parts of it that are

quite rural. There is 40,000 of my constituents have the analog

televisions, so they would be, obviously, affected. But in the end,

I think a subsidy, if we give sufficient notice, is probably not necessary, and so I am hoping, Mr. Chairman, that we can work

through this.

I do have another concern, and that is the must-carry that we

passed for analog TV in the 1992 Cable Act. I think we need to continue to find a way to strike the proper balance between cable and

broadcasters, and use, of course, every technological tool that is

available to promote broadcast independence and localism. There

has been some sort of compromise to help these entities have a

place in the digital landscape.

In an ideal world, there would be a private and free negotiation

between the interested parties, and I am hoping, Mr. Chairman, we

11

can do that, without some type of Constitutional question involved.

I am also interested to learn whether the down conversion provision in the draft provides some sort of compromise. Although I understand both broadcasters, small broadcasters, and cable have

some serious objection. I believe in the free negotiation of these

parties, and so I am hopeful that during the continuing discussions

and markup that we can work through this.

We have a lot of witnesses here, so, Mr. Chairman, with that, I

yield back the balance of time, and commend you for this hearing.

[The prepared statement of Hon. Cliff Stearns follows:]

PREPARED STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF FLORIDA

Thank you Mr. Chairman for holding this hearing today on the DTV staff discussion draft.

I commend you and Chairman Barton for bringing us to this point and everyone

who helped work on the staff discussion draft that is the topic before us today, This

is just a starting point, we have a ways to go but I hope that we can get where

we’re going in a timely fashion.

No one ever said that the transition to digital would be easy. We’ve had at least

ten hearings on this issue since 2001, and we’ve heard from broadcasters, cable operators, consumer groups and retailers on the various challenges everyone will face.

There will be sacrifice and some uncertainty involved, but I think most everyone

agrees that the transition offers its own reward: enhanced public safety services,

new advanced wireless services for millions of Americans, auctioning of the spectrum, and of course vastly improved television viewing.

That’s why it’s imperative that we use this hearing, and what I’m sure will be

more hearings to come, to work together and to make the digital transition a reality.

I believe that there are several highly useful provisions in the draft, particularly

the parts about consumer education and accelerating the DTV tuner mandates.

Hopefully these provisions and the certainty of a hard deadline will help Americans

recognize the fact that this transition is indeed going to happen. There are still, at

last count, about 15 million households who have only analog over-the-air sets, and

that could be left in the dark even with the extended hard deadline. By one count,

this includes approximately 40,000 of my own constituents.

Another concern of mine is that my rural and diverse district depends on local

broadcast programming for news and information, weather, sports and public affairs

programming. These broadcasters provide a valuable service, which is why I voted

for ‘‘must carry’’ for analog TV in the 1992 Cable Act.

We should continue to try to find a way to strike the proper balance between cable

and broadcasters and use every technological tool at our disposal in order to promote broadcast independence and localism. There has to be some sort of compromise

to help these entities have a place in the digital television landscape.

In an ideal world, there would be private and free negotiations between the interested parties—why aren’t these agreements being worked out so that the government doesn’t have to act?

I am also interested to learn whether the ‘‘downconversion’’ provision in the draft

provides some sort of compromise, although I understand both small broadcasters

and cable have serious objections.

These are my main concerns about the transition, and of course my colleagues

have their own questions. I guess that’s why we have ten witnesses here today, to

help us answer these questions.

I might also mention the broadcast flag issue, an issue that I have long supported

and that seems especially relevant in the aftermath of the recent Appeals Court

case. I see that such a provision is not included in this draft, and I understand that

it may not make the final version, but this is an issue that we this subcommittee

may want to take a look at, separately, after we take care of more prominent issues.

So with that, Mr. Chairman, I would yield back the balance of my time and ask

for unanimous consent to put the rest of my statement in the record.

Mr. UPTON. Thank you. Mr. Wynn.

Mr. WYNN. Thank you, Mr. Chairman, for holding this very important hearing on how to best facilitate the transition to digital

television.

12

I would like to first welcome Steve Souder from my district, who

is here to explain the impact that this transition will have on public safety. Mr. Souder’s comments are extremely important, because

districts like mine that are high target areas for terrorist attacks

desperately need the extra spectrum to adequately serve their constituents.

Additionally, since most individuals now turn first to their televisions in time of crisis, it is particularly important that we ensure

that television sets do not go dark. This discussion draft is a good

start to expedite the digital television transition. I support the hard

deadline and the provisions that require public safety announcements on broadcast TV, notification in cable bills, the public education program by the FCC, and labeling on analog-only TVs, although I believe the language should be more consumer friendly.

However, the draft obviously does not include provisions on the

critical question of subsidizing those who are adversely affected by

the bill. The draft does not begin to address how to best subsidize

those individuals who, by no fault of their own, have bought and

continue to buy analog-only TV sets that will not work after the

transition. I believe that Congress should, at the very least, support the more than 21 million homes that solely rely on over-theair television to ensure that their televisions do not go dark.

I know this is critical. I think there are several approaches that

we could consider in this regard, but I think it is without question

a case in which government is imposing a burden on consumers,

and government has a responsibility to alleviate at least some of

that burden. Thank you, Mr. Chairman, again for allowing us to

have this discussion. Thank you for the draft, and thank you for

holding this hearing.

Mr. UPTON. Mr. Radanovich.

Mr. RADANOVICH. Thank you, Mr. Chairman. I will be brief, but

just want to say thank you for the work that you have put on this

draft legislation, and I appreciate the process that you are laying

out, so that we can have a collaborative effect on putting a bill, I

think, that works best for the consumers and the industries. I appreciate the fact that it has been laid out that way, and I appreciate the work of Chairman Barton on this as well. Thank you.

Mr. UPTON. Mr. Gordon.

Mr. GORDON. I ask that my remarks be made a part of the

record, and move on.

Mr. UPTON. Mr. Rush, extra 3 minutes for Mr. Gordon.

Mr. RUSH. Thank you, Mr. Chairman. I wish I could be as gracious as my colleague from Tennessee, but I have to—a couple

things I want to say.

First of all, Mr. Chairman, I want to let you know how much I

appreciate both you, the ranking member, and also, the ranking

member, the chairman and the ranking member of the full committee, for the work that you have done on this particular bill.

In this draft version of the—of this bill takes a step in the right

direction, and I am extremely pleased that the draft includes a consumer education component provision, and I want to thank you and

also the others who I have mentioned previously for your work on

including this consumer education component provision.

13

As I stated many times at our hearing, warning labels should be

required on analog-only sets, so as to alert consumers to the limited use of their television sets, and for that, I thank you, again,

you, for providing that provision. However, Mr. Chairman, I am

disappointed that the bill does not include a subsidy for some 21

percent of the population that will be disenfranchised, because they

rely solely on analog over-the-air broadcasts, and cannot afford to

buy set top boxes. That said, I am confident that we will have a

subsidy program in the final draft of this legislation, or else the

legislation, in my opinion, would be DOA, dead on arrival.

The question for discussion is not simply whether we would have

a subsidy, but who would qualify for the subsidy, and what form

will the subsidy take. For example, are we talking about a rebate,

a voucher, or a government tax credit? Whatever form of subsidy

we choose, we must ensure that low income households are, indeed,

covered. As for the other provisions in the draft, I am concerned

that the auction of spectrum would not be fair and balanced. As

you know, the broadcasters will have to give back at least one third

of their frequencies, and there are many interested entities clamoring for these beachfront frequencies. I would hope that this committee will ensure that these spectrums are available to public interest groups and economically disadvantaged small business entities.

Before I end my statement, I want to—last comment, I want to

remind this subcommittee that this legislation is one of the most

important pieces of telecom legislation that we will work in, and it

has the potential to be disastrous if it is not done right. One thing

I have learned as a politician is that you do not mess with America’s car or America’s TV. Let us face it. We live in a society where

the American person is more versed on who won American Idol

than who is their Member of Congress, and I believe that if this

transition, digital transition is done wrong, some of our brightly lit

Congressional careers will suddenly go dark.

Thank you, Mr. Chairman. I yield back the balance of my time.

Mr. UPTON. We look forward to making it the Rush Bill.

Mr. RUSH. Only if it is good.

Mr. UPTON. Mr. Walden.

Mr. WALDEN. Mr. Chairman, I will yield in exchange for the additional 3 minutes of questioning.

Mr. UPTON. Ms. Cubin.

Ms. CUBIN. Thank you, Mr. Chairman, and I will be very brief.

I would like to associate myself with the concerns that have been

expressed here today about people having to pay for their own TV

set boxes.

I can tell you for sure single moms and senior citizens have more

pressing needs. I don’t—I think even if you aren’t at the poverty

level or near it, that forcing people to spend extra money for their

television set just isn’t a good way to go. I am also concerned very

much that when this spectrum auction occurs, that the geographic

areas that are covered by the auction will be beneficial to rural

America. For example, if Wyoming, Colorado, and Utah are all auctioned together, then where will the investment go. It will go to

Denver and it will go to Salt Lake, and how far behind will WyoVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 21643.TXT HCOM1 PsN: HCOM1
14

ming be? So I think that those, the division has to be very clear,

so that rural America isn’t disadvantaged once again.

I will close my remarks with that. I look forward to the testimony, and I thank everyone for being here today.

Mr. UPTON. Ms. Eshoo.

Ms. ESHOO. Thank you, Mr. Chairman, for holding this hearing,

and welcome to all of our witnesses, and I am just about on that

side of the table, we are so close this time. So I am glad we have

a table long enough to fit you all in.

I am pleased to see that we are making some tangible progress

toward completing the digital television transition, which in my

view, and I have expressed this many times, has really dragged on

for far too long. I am eager to work with the chairman and members of the committee to accelerate the process, so that we can deliver more innovative programming and services to consumers, and

free up valuable spectrum for other purposes.

I think the staff discussion draft is a start, but I think that there

is obviously more work to be done. The omission of a subsidy program for analog converters, and I think that this has been mentioned by several members of the committee, is a glaring omission,

and this is something that we can and we should do, for a whole

of variety of reasons that I am not going to go into now.

I would also like to pursue an earlier date. I started out by saying this has dragged on for a very long time, and I think that there

is evidence emerging that we can accelerate the process without

disenfranchising consumers, and without exacerbating our budget

problems. I also think we have to devote greater attention to the

spectrum auction process, which has really largely been ignored.

Why? Because I think it presents such an enormous opportunity for

our country. The analog spectrum which will become available can

be used for advanced communication services, such as wireless

broadband, and if it is managed properly, it really could create vigorous competition with new entrants into the high-speed Internet

access marketplace.

I think that we always have to be mindful of budget considerations, but with all due respect to the CBO, they are really not in

charge of competition, and I think if we don’t start looking after

competition in this country, innovation and competition, in a very

broad way, that we are really headed for an iceberg. When you see

where we are in terms of broadband in our country, we place something like 16th in the world. You ask people in this country if they

want to be a member of a C minus team, and they are insulted.

So I think that this committee has to take into very, very high consideration competition, and what the opportunities are for us. The

700 megahertz band offers a historic opportunity to provide the

equivalent of a third wire into the home, an alternative to telephone or cable broadband access.

Without thoughtful spectrum management policies, what I call

this new beachfront spectrum property could become the new wing

of the mega-hotels that already dominate this shoreline, and I

think that that is really where we have to focus a lot of attention.

If the bulk of the spectrum that becomes available is purchased by

the existing duopolies, we will have lost a once in a lifetime opporVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 21643.TXT HCOM1 PsN: HCOM1
15

tunity to create new competition and incentives for new entrants,

innovation, and broader service offerings.

So it is with all of this in mind, I think it is critical for this committee to establish a spectrum policy for these auctions that favors

new entrants and competitive services. How we utilize the valuable

resource made available by this extraordinary event, I think is

going to shape the telecommunications landscape for decades to

come.

So thank you for holding the hearing, Mr. Chairman, and I look

forward to the testimony and the debate that is going to ensue.

[The prepared statement of Hon. Anna Eshoo follows:]

PREPARED STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

With the impending acquisition of the two largest long-distance phone companies

by the two largest Bell operating companies, it’s clear that the telecom wars surrounding the 1996 Telecommunications Act are drawing to a close. Last year’s decision by the D.C. Circuit to remand local loop access rules back to the FCC, and the

Bush Administration’s decision not to appeal it, effectively ended the prospect of

local wireline telephone competition. The mergers are regrettable, but they are just

the final shovels of dirt on the efforts of Congress to engender local telephone competition in the ‘‘96 Act. As one leading telecom analyst said, ‘‘This is the end of

World War I—the Bells vs. AT&T and MCI. Now, World War II, among the phone,

cable, and tech companies, is about to begin.’’

Upon completion of these acquisitions, SBC and Verizon will together control

more than half of the national wireline business market. The mergers also guarantee these companies access to the large swaths of the vital Internet backbone now

controlled by AT&T and MCI. While the Bells are likely to become increasingly competitive with cable companies, that industry is also highly concentrated within regional markets, and most consumers are able to choose only a single cable provider.

Eventually, technologies such as broadband over power lines or satellite may offer

high-speed Internet access alternatives to the cable and Bell duopoly, but these

technologies are not mature and do not yet have a foothold in most markets. For

the foreseeable future, most consumers will only have two wires coming into their

homes, and these two wires will usually be the only reliable means of reaching the

Internet and advanced telecommunications services.

However, a fortuitous development in the broadcast television industry will soon

offer policymakers a unique opportunity to provide businesses and consumers additional choices for robust broadband access. In the next few years, analog television

broadcast spectrum will be available for advanced communications services such as

wireless broadband, and if properly managed could create vigorous competition and

new entrants in the high-speed Internet access marketplace. It’s essential for Congress and the FCC to develop policies that will encourage innovation, foster competition, and promote the deployment of new services.

For almost twenty years, policymakers, industry leaders, and others have developed a strategy for moving American television broadcasts from the existing analog

system to an advanced digital format. Digital television allows for better reception,

greater picture quality, and additional services for viewers. To allow for this transition, the ‘‘96 Telecom Act granted existing analog broadcast licensees spectrum for

an additional broadcast channel to provide over-the-air digital programming. The

1997 Balanced Budget Act established a deadline of December 31, 2006 for broadcasters to relinquish their existing analog channels, but this deadline was subject

to several conditions, the most important of which specifies that 85% of viewers in

the broadcaster’s market have televisions capable of receiving the digital signal.

Since the 85% requirement has proved unworkable, the House Energy & Commerce

Committee is now considering legislation that would establish a new deadline with

transitional measures to accommodate viewers that do not have digital-ready televisions.

Ensuring a smooth transition that will not disenfranchise television viewers and

will treat broadcasters, cable, and satellite providers fairly will undoubtedly prove

to be a difficult task, but Members on both sides of the aisle are committed to

achieving a swift, efficient move to digital TV. Achieving this transition will not be

easy, but decades from now it will almost certainly be no more significant than the

switch from black-and-white to color television.

16

Of far greater significance will be the manner in which we distribute the valuable

108 MHz of communications spectrum that will be relinquished by television broadcasters. This spectrum in the 700 MHz band is considered ‘‘beachfront’’ property by

telecommunications carriers because wireless signals at this frequency range pass

easily through buildings, trees, and other interference. Many policymakers are understandably preoccupied with the billions of dollars that auctions of this spectrum

are likely to bring into the U.S. Treasury to offset our massive budget deficits. Our

nation’s fiscal situation is bleak, but this doesn’t mean that we should disregard the

long-term implications of this extensive redistribution of public communications

spectrum.

The 700 MHz band offers a historic opportunity to provide the equivalent of a

‘‘third wire’’ into the home—an alternative to telephone or cable broadband access.

Many Americans will be able to access the Internet through unlicensed spectrum

and wireless community broadband services. However, the lion’s share of investment capital and innovation will likely be dedicated to services offered over licensed

spectrum controlled by commercial license holders. For most businesses and many

consumers, the certainty, service, and reliability offered by a licensed provider will

be preferable to relying on an unlicensed service.

We should be very concerned, however, that this new beachfront spectrum property doesn’t become the new wing of the mega-hotels that already dominate the

shoreline. If the bulk of the spectrum that becomes available is purchased by the

existing cable or telephone duopolies, we will have lost a once-in-a-lifetime opportunity to create new competition and incentives for new entrants, innovation, and

broader service offerings. It’s critical for Congress to establish a spectrum policy for

these auctions that favors new entrants and competitive services.

We must also keep our commitment to our country’s police, fire, and rescue workers and provide the 24 MHz of spectrum allocated to them as part of the digital

TV transition. First responders will be able to use this spectrum to employ advanced

telecommunications services and address critical interoperability and capacity

issues. We should also ensure that a portion of this spectrum is reserved for public

or ‘‘unlicensed’’ use. Already, thousands of government and non-profit organizations

provide Internet access through unlicensed portions of the spectrum through services such as community Wi-Fi. Reserving a meaningful portion of the 700 MHz band

for services such as these will facilitate innovative services and technology, and also

help advance our country toward universal broadband access.

Nearly all of our efforts in the digital television transition thus far have been

dedicated to resolving the very difficult issues necessary to move television broadcasts from analog to digital, but the transition does not end when the analog broadcast stations go dark. How we utilize the valuable resource made available by this

extraordinary event will shape the telecommunications landscape for decades to

come.

Mr. UPTON. Mr. Pickering.

Mr. PICKERING. Mr. Chairman, just real quickly, thank you for

this hearing. Thank you for your work, and the ranking member,

and Chairman Barton. I believe it is a good beginning.

My only message today is that this is going to happen. The numbers for the committee and the fact that we have reconciliation

means that no one can avoid this or escape this, and so we should

all come to the table, reach an agreement, and just realize that if

you don’t come to the table, then it is not going to go away. It will

happen, and I think that we can find an agreement with the broad

consensus of all parties, and now is the time to begin.

With that, Mr. Chairman, thank you.

Mr. UPTON. Mr. Dingell.

Mr. DINGELL. Mr. Chairman, thank you. Thank you, Mr. Chairman, for holding this hearing. The transition to digital television

is a complex undertaking. It has profound implications.

Mr. UPTON. Mr. Dingell, is your mic on?

Mr. DINGELL. I keep pushing this button, but nothing keeps happening. And worthy of careful review and consideration by this

committee.

17

As today’s witnesses will describe, there is much for this country

to gain if the transition is done correctly. But there is much to lose

if it is not. Although well intentioned, the draft legislation does not

take steps necessary to ensure a consumer friendly transition. It

raises several telecommunications policy issues of significant concern.

Including this legislation in the bipartisan reconciliation effort

causes other problems. Given the stakes involved—the television

sets that Americans depend upon every day for news, weather, and

entertainment—it is of the utmost importance that this complex

legislation receives the process that is due. We should not rush a

bill through this committee simply because of budget or other artificial pressures. It is because of the budget pressures in 1997 that

we are struggling to complete the digital transition the right way,

and why we have wasted and lost a lot of money, and seen resources poorly applied.

Sound telecommunications policy cannot be achieved when a bill

is being crafted for budget purposes, and I think that the history

I have referred to again proves this to be so. Most, if not all, of us

support a hard date to end the analog broadcasting so that we can

return this valuable spectrum for public safety and new wireless

uses, and to maximize the auction proceeds for the Treasury. I am

sure we all want, as well, to see a hard date established in a way

that will focus consumers’ attention, and complete the analog to

digital transition in as fast and least disruptive manner as possible. But we must also recognize that a hard date could have the

very opposite effect. It could prolong the transition if it is not accompanied by a proper program to educate and equip the consumers, so that they are not disenfranchised by the actions of their

government.

The Government Accountability Office estimates that almost 21

million households in America, disproportionately low income,

nonwhite and Hispanic, rely exclusively on over-the-air broadcasting for their television viewing. Millions more may subscribe to

satellite service, yet continue to receive their local stations using

over-the-air antennas. Countless others have chosen to subscribe to

cable or satellite for some television sets in their home, yet rely on

over-the-air broadcasting for other sets. All told, it is estimated

that if the government shut off analog broadcasting today, 73 million television sets would go dark.

This draft legislation does nothing to provide members of this

committee any assurance that the transition will be smooth, and

that it will be easy for millions of our constituents. This is primarily because the draft bill does not provide a well thought out

program to help affected consumers to obtain the necessary equipment for their TVs in order to continue receiving television signals.

Without such a program, the draft legislation imposes an unnecessary, and I predict, an enormously unpopular burden on millions

of Americans, who will be forced to locate and purchase converter

units at $50 to $70 per television set to keep their televisions working. I wonder how many of my colleagues will enjoy the mail and

the phone calls that come to their office when this transpires.

The proper action for this committee to take, then, would be to

agree that if we want a hard date to maximize the auction reveVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 21643.TXT HCOM1 PsN: HCOM1
18

nues, we must be prepared to protect all affected consumers. The

Congressional Budget Office estimates that the auction for the returned analog television spectrum and other provisions in this bill

should raise $10 billion. Other private sector estimates show upwards of $28 billion. We should try for the higher number for the

benefit of our taxpayers and constituents. These double digit figures deserve some serious dialog about how the committee, and

how the leadership of the committee and the Congress, especially

my Republican friends, will use that money. Will the proceeds from

selling off the public airwaves be used only to cover transition expenses imposed on ordinary citizens, or will the proceeds help to

pay for the $107 billion in new tax cuts for the well-to-do included

in the Republican budget?

In conclusion, two fundamental questions must be answered.

Why should ordinary citizens pay more because of a governmental

decision that makes their television sets obsolete? And why can’t

the proceeds from the sale of the spectrum, which is a public good,

be used to reimburse the citizens for their transition costs because

of the actions of their government, and for other important telecommunications and public safety needs?

I look forward to the testimony today, and to addressing these

and other questions as we consider the legislation. Thank you, Mr.

Chairman.

Mr. UPTON. Mr. Shimkus.

Mr. SHIMKUS. I will pass, Mr. Chairman.

Mr. UPTON. Mr. Engel.

Mr. ENGEL. Well, thank you, Mr. Chairman. Let me first say to

the 11 witnesses about to testify. Your giving testimony before this

subcommittee isn’t the most difficult thing you have to do today,

but listening to all of our opening statements certainly is.

I have long been saying that if our constituents turned their TV

sets on and find no signal on a premature date certain, we can

guarantee that our political careers will be ended on a premature

date certain as well, so I think that we have to get this right. In

that regard, I am glad that the date has been moved from December 2006 to December 2008, but there are still many questions.

As written, this bill does very little to protect consumers who are

going to be impacted. The bill provides no subsidy to the people

who rely on free, over-the-air TV. Why should they be put at a disadvantage because the Federal Government has made an industrial policy decision? The fact is, most over-the-air families are low

income, and are predominantly minority. Considering this bill is estimated to raise $10 billion for the United States, we certainly will

have the resources to help all affected Americans.

Let me also say, as a New York Member of Congress, I am disappointed that there is no flexibility in this bill for New York City.

On September 11, most of our broadcasters lost their transmitters.

They are now using the Empire State Building temporarily while

waiting for the Freedom Tower to be constructed, but that will not

be ready by the end of 2008. If broadcasters must upgrade Empire

State to meet the deadline, it will cost approximately $40 million.

Broadcasters, having spent that, will most likely stay on the Empire State Building, which is much shorter than the World Trade

Center or the Freedom Tower will be. This will cause the New York

19

media market to shrink. There must be something in the bill that

addresses this.

The bill also lacks any remedy to protect content in the digital

age. The courts have thrown out the FCC’s broadcast flag. Last

week, many of us went to see the new Star Wars film. The next

day, it was a preview. The next day, it was available on the Internet, and you could buy a DVD of it on the streets of Manhattan.

That wasn’t even broadcast. This isn’t just about movie studio or

record company profits. It is about the Nashville songwriters and

the carpenters and cameramen keeping a paycheck coming in.

The truth, I am most disappointed about this, is that this is really a budget bill, not telecom policy bill. The rush to include it in

the annual budget reconciliation bill, because it will help the Federal Government’s bottom line, is frustrating. After years of cutting

taxes and increasing spending, the budget deficit has ballooned.

Our committee has fought to keep its jurisdiction. We should not

be making massive changes to policy to cover years of bad budget

and tax policy.

Mr. Chairman, this bill needs a lot of work. I hope we will resume bipartisan talks to do so. I look forward to the testimony

today, and as always, I look forward to working with all of my colleagues. Thank you.

Mr. UPTON. I want to thank all members, and would make a

unanimous consent request that members that are not here at the

moment may be able to offer their statements as part of the record.

[Additional statements submitted for the record follows:]

PREPARED STATEMENT OF HON. PAUL GILLMOR, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

Mr. Chairman, first, I want to thank you for holding this very important hearing

and welcome the distinguished witnesses that have joined us today to discuss this

pressing issue.

As we begin taking a serious look into the matter of completely shifting from an

analog to a digital broadcast signal it will be important for us to take all viewpoints

into consideration. This will allow for a truly comprehensive piece of legislation that

once enacted into law will be unambiguous to industry members, provide certainty

to our first responders and other government programs, and—most importantly—

ensure that the American public is properly educated about the forthcoming

changes.

After reviewing the staff draft, I was pleased to see that we now had a strong

foundation from which to build a comprehensive piece of legislation. However, there

is much work to be done. In my rural Ohio district, I have many constituents still

reliant upon over-the-air broadcasts and have nothing more than a simple analog

television. To ensure that rural America and those reliant upon a fixed income—

such as our country’s over 35 million senior citizens—are not cut off from television

broadcasts, I believe that it will be necessary to have some form of a subsidy program in place to offset the cost of a set-top box converter that can cost anywhere

from $50 to $100.

As the manufacturing sector of our economy continues to fight for survival in the

world marketplace, we must not impose regulations upon those producing televisions and set-top boxes that make it more difficult and costly for them to bring

a reliable and low-cost product to market. Finally, as Co-Chairman of the Public

Broadcasting Caucus, I feel that it is incumbent upon this committee to find a way

to integrate public broadcasters, and their important resources, into any DTV Transition legislation that passes the United States Congress.

Mr. Chairman, I look forward to hearing from our panel of expert witnesses, and

to working with you, and all the members of this subcommittee, so that we might

be able to craft a comprehensive and commonsense digital transition bill.

I yield back the balance of my time.

20

PREPARED STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF ILLINOIS

Thank you Mr. Chairman for a hearing on this legislation. I support this legislation, but also feel that there are a number of issues that need to still be addressed.

I hope the Committee can try to address these issues, either in this legislation or

in other legislation to come before the Committee this year.

First, I think it is important that we find a way to make sure consumers can receive a digital signal, whether it be through a direct subsidy or some other way.

I believe there needs to be some language dealing with ‘‘multi-cast must carry’’.

I don’t think we need to go as far as giving every broadcaster 6 digital stations that

must be carried, but I do believe there is an answer out there that will allow the

must carry of some digital signals, especially those that are in the public good.

I would also hope at some point that the Committee can address the issue of ‘‘retransmission consent’’. While the cable industry should be congratulated for their

efforts to educate parents on how to control what their children view, I believe more

needs to be done. I voted against a la carte language because I think it would have

resulted in higher prices and less choice for consumers. I realize extending indecency standards to cable and DBS would not survive a legal challenge. But I believe

opening up how retransmission consent agreements are negotiated, will shed light

on this issue and allow communities to better decide what kind of content is showing in their areas.

It is also important that the Committee address the broadcast flag issue in some

way. The Courts held that the FCC did not have the authority under current law

to adopt the rule, but did NOT dispute the merits of the Broadcast Flag.

In the end, the winners in this debate need to be the public safety community

and the consumers. I believe this draft legislation starts us down that path.

PREPARED STATEMENT OF HON. MIKE FERGUSON, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEW JERSEY

I would like to congratulate Chairmen Barton and Upton for providing a solid

starting point for American consumers to make a full transition to digital television.

This discussion draft moves the transition forward significantly, most importantly

setting a definitive hard date of December 31, 2008. This date, which is fair will

provide long-needed certainty to all industries affected, and most importantly to the

American consumer.

To that effect, this draft places a premium on consumer education, placing the responsibility squarely on industry, retailers, manufacturers and government for preparing our constituents for the transition from analog to digital broadcasts. And the

hard date established will provide ample time for this Committee to implement a

thoughtful, fiscally responsible set top box subsidy program.

As we move forward, we need to ensure that consumers are not unnecessarily inconvenienced during the transition, making sure that no televisions ‘‘go dark’’ after

the transition. However, this needs to be done in a way that provides industry with

the flexibility it needs to make certain that all consumers continue to enjoy the

same programming the day after the DTV transition as the day before without displacing other valuable programming that they want.

Most importantly Mr. Chairman, this legislation sets a definitive date for making

spectrum available for our first responders. The new spectrum will help our firefighters, police officers and other first responders to achieve communications interoperability, and better respond to the safety needs of my constituents in the 7th district of New Jersey and across this nation.

One additional point I would like to make is an item not included in this draft,

but nevertheless is an important part of the digital transition—the Broadcast Flag

rule that was recently vacated on jurisdictional grounds by the DC Circuit. Ensuring that content is protected from piracy is not something we will consider today,

but is an issue our subcommittee should deal with in a timely way.

Again, thank you to Chairmen Barton and Upton for putting forward a thoughtful

proposal for the digital transition. I look forward to hearing the views of the many

witnesses present here today.

PREPARED STATEMENT OF HON. JOHN SULLIVAN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OKLAHOMA

Thank you, Chairman Upton, for calling this hearing. I look forward to hearing

from each of our witnesses today.

21

We live in an interconnected world, and this debate is further proof of the responsibilities citizens of a democracy hold to one another. While the details of this draft

may be contentious, the fact is that both Democrats and Republicans support the

existence of a hard date for broadcasters to return their analog spectrum. This has

been a goal for the industry for nearly ten years. Without a hard date, we could

very well be waiting for another ten years, or longer, to achieve this goal. The overall social goal here is to provide additional spectrum for law enforcement and to further our nation’s economy through advanced commercial services by the auction of

the returned spectrum. We must bring clarity to the marketplace so that consumers,

industry and government can plan. The public safety, technological, and economic

benefits of completing the DTV transition can wait no longer.

The flip side of this debate is the subsidy for set top boxes for those Americans

who only receive over-the-air signals. Given the government mandate of the digital

transition, Congress must respect the taxpayer’s pocketbook and enact only the

most minimal federal subsidy possible. Those who are truly in need should receive

help; those who can provide for themselves should do so.

Let us not forget the reasons why the hard date is so important. Twenty-four

megahertz of the spectrum the broadcasters return has been earmarked for public

safety use. In a post-9/11 world, this is a critically important national security goal.

Another 60 MHz will be available for auction for advanced commercial services,

such as wireless broadband. Since the U.S. is 13th worldwide in broadband deployment, this will be of great benefit to the U.S. in catching up with countries such

as Korea, Canada, Germany, Sweden, Belgium and Italy.

Again, Chairman Barton and Chairman Upton, thank you for your leadership on

this issue.

PREPARED STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Thank you, Mr. Chairman, for your work on the difficult issue of the digital television transition and for holding this hearing on a ‘‘discussion draft’’ before legislation is introduced.

This is high stakes legislation. We are talking about people’s televisions. I think

every member of Congress knows that people are passionate about their television

programming and television sets.

If we thought the public’s uproar about indecency after the Super Bowl was loud,

just imagine what will happen if Americans in 21 million households wake up on

January 1, 2009, and find they can’t watch their college bowl games because their

televisions don’t work.

I have a very rural, low-to-middle income district, and I am worried that once my

constituents hear they have to purchase set-top boxes—at $50 or more a pop—they’ll

be throwing their set top boxes at me.

Consumers didn’t ask for this transition, for these added costs, or for their televisions to be made obsolete. Unless we want those set top boxes thrown at us, Congress had better meet its obligation to consumers and make the transition as inexpensive and least burdensome to consumers as possible.

While I am encouraged by the consumer education provisions in this legislation,

I am disappointed that there is absolutely no mention of help for consumers who

get their television over-the-air. These households are more likely to be low-income

(household income below $30,000). Many of these households are in my district!

Congress can’t just tell over the air viewers to go out and get cable or satellite.

41% of over-the-air viewers can’t afford to buy cable or satellite. And many households in rural America don’t have access to cable.

The fact is that Congress has a tall order ahead of itself to even convince consumers that this transition is good thing. I know for certain that a bill that places

the financial burden of the transition, which consumers never asked for, squarely

on consumers is never going ‘‘to fly’’ with in my district.

As Members of this committee, we need to recognize the challenges we face. There

are great opportunities to be realized if and when we can meet these challenges correctly and speed the transition. Giving back the spectrum will yield great benefits

for public safety and for rural America. Wireless broadband holds great promise for

rural America. That promise is beginning to be realized in my district where wifi projects are popping up all over.

I am interested in hearing from the witnesses about ways we can best speed the

deployment of wireless broadband to rural America.

22

Important public safety opportunities are also at stake. As a former law enforcement officer, I have long held concerns about the ability of our nations’ first responders to communicate.

Public safety interoperability is critical: the inability of first responders from different agencies to talk to one another was a key factor in the deaths of at least 121

fire fighters on September 11th.

The bottom line is that today’s first responders need both more spectrum and

more money to become fully interoperable. This transition could help public safety

officials accomplish both those goals.

The opportunities are great, but the challenges are greater. We need to meet

those challenges head on, with meaningful solutions and actual dollars, if we ever

have a hope for the American public to buy-into the benefits of the transition: wireless broadband and public safety communications interoperability.

Mr. UPTON. And we are now prepared to listen to our panel, and

I did choose to have one panel, so that we would have only one

round of opening statements, and we would be able to bounce our

questions and answers off all of you, and not put some of you at

a disadvantage by not being here.

So we are joined on my far left by Mr. Rick Chessen, Chair of

the DTV Task Force, from the Federal Communications Commission; Mr. Mark Goldstein, Director of the Physical Infrastructure

Team of the Government Accountability Office, the GAO; Mr. Gary

Shapiro, President and CEO of the Consumer Electronics Association; Mr. James Yager, CEO of Barrington Broadcasting Company,

on behalf of the National Association of Broadcasters; Mr. Kyle

McSlarrow, President and CEO of National Cable & Telecommunications Association; Mr. Manuel Abud, Vice President and General

Manager of Telemundo in Los Angeles; Mr. Alan McCollough,

Chairman and CEO of Circuit City, on behalf of the Consumer

Electronics Retailers Coalition; Mr. Patrick Knorr, Vice Chairman

of Sunflower Broadband, on behalf of the American Cable Association; Mr. Steve Souder, Director of the Montgomery County, Maryland 911 Emergency Communications Center; Mr. Gene

Kimmelman, Senior Director of Public Policy from the Consumers

Union; and last but not least, Mr. Peter Pitsch, Communications

Policy Director of Intel Government Affairs, here in Washington,

DC.

Gentlemen, your statements have been made part of the record

in their entirety, and we would like to do is limit your remarks to

no more than 5 minutes, and I don’t know if here is a little clock

on the table. Is that on from your side? It is not on. Well, we will—

while you are speaking, we will get someone to turn it on, and Mr.

Chessen, we will start with you. Welcome.

23

STATEMENTS OF RICK CHESSEN, CHAIR, DTV TASK FORCE,

FEDERAL COMMUNICATIONS COMMISSION; MARK L. GOLDSTEIN, DIRECTOR, PHYSICAL INFRASTRUCTURE TEAM, GOVERNMENT ACCOUNTABILITY OFFICE; GARY J. SHAPIRO,

PRESIDENT AND CHIEF EXECTUIVE OFFICER, CONSUMER

ELECTRONICS ASSOCIATION; K. JAMES YAGER, CHIEF EXECUTIVE OFFICER, BARRINGTON BROADCASTING COMPANY,

LLC, ON BEHALF OF NATIONAL ASSOCIATION OF BROADCASTERS; KYLE E. MCSLARROW, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL CABLE & TELECOMMUNICATIONS ASSOCIATION; MANUEL ABUD, VICE PRESIDENT

AND GENERAL MANAGER, TELEMUNDO LOS ANGELES; W.

ALAN MCCOLLOUGH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, CIRCUIT CITY STORES, INC., ON BEHALF OF CONSUMER ELECTRONICS RETAILERS COALITION; PATRICK

KNORR, VICE CHAIRMAN, SUNFLOWER BROADBAND, ON BEHALF OF AMERICAN CABLE ASSOCIATION; STEVE SOUDER,

DIRECTOR, MONTGOMERY COUNTY, MARYLAND 911 EMERGENCY COMMUNICATIONS CENTER; GENE KIMMELMAN,

SENIOR DIRECTOR OF PUBLIC POLICY, CONSUMERS UNION;

AND PETER K. PITSCH, COMMUNICATIONS POLICY DIRECTOR, INTEL GOVERNMENT AFFAIRS

Mr. CHESSEN. Thank you. Chairman Upton, Ranking Member

Markey, and members of the subcommittee, I am pleased to be

here today.

I am the Chair of the FCC’s DTV Task Force, and have been

since its inception in October 2001. At the time, the transition was

still in its early stages and struggling to take off. Indeed, some

openly wondered whether the transition would ever happen at all.

As today’s hearing indicates, times have changed, and we are no

longer discussing whether the transition will end but when and

how it will end as quickly and smoothly as possible for the American public.

There is plenty of credit to go around. Each of the affected industries, many of whom are at this table with me today, deserve some

of the credit for bringing us to this point. They developed the business plans, invested the capital, and are bringing the benefits of

digital television to the American consumer.

The government has been working hard as well. Over the past

few years, both Congress and the FCC have demonstrated a renewed sense of urgency, doing whatever was needed to get the

transition moving. Often informal tools were used, like the industry

roundtable discussions convened by this committee that helped define and focus the issues. When necessary, the FCC used more formal regulatory tools, such as the DTV tuner mandate, rules for

plug and play television sets, and penalties for broadcasters that

failed to meet their build-out obligations.

But we still have much work to do. At the FCC, we have begun

the extremely complicated task of developing a Final Table of DTV

channel allotments. That process is currently scheduled to be completed by mid 2007. We are also working on, among other things,

digital must-carry rules for cable and satellite providers, overseeing

deadlines for the DTV tuner mandate, and for broadcasters to build

24

out to full power, and assisting low power and TV translator stations in their own transition to digital.

Even with much to do, it is not too early to begin planning for

the end of the transition. The more certainty we can provide, and

the sooner we can provide it, the smoother the eventual switchover

will be for consumers and industry alike, and the more efficiently

public safety officials and advanced wireless service providers will

be able to make use of the reclaimed broadcast spectrum.

At the FCC, we stand ready to assist in any way we can. The

draft legislation is another important step in addressing some of

the outstanding issues before us, particularly on the issues of setting a hard date, and educating the public about how to prepare

itself for the switchover. We look forward to working with this committee as we continue to make progress toward bringing the DTV

transition to a speedy and successful conclusion, and I would be

happy to answer any questions you might have.

Thank you.

[The prepared statement of Rick Chessen follows:]

PREPARED STATEMENT OF RICK CHESSEN, CHAIR, DTV TASK FORCE, FEDERAL

COMMUNICATIONS COMMISSION

Chairman Upton, Ranking Member Markey, and members of the Subcommittee,

I am pleased to appear before you today as you consider potential changes to the

statutory framework for the digital television transition.

My name is Rick Chessen. I am Chair of the FCC’s DTV Task Force, and have

been since its inception in October 2001. At the time, the transition was still in its

early stages, and struggling to take off. Indeed, some openly wondered whether the

transition would ever happen at all.

As today’s hearing indicates, times have changed. We’re no longer discussing

whether the transition will end but when and how to end the transition as quickly

and smoothly as possible for the American public.

There is plenty of credit to go around. Each of the affected industries—broadcasters, cable and satellite operators, content providers, consumer electronics manufacturers and retailers—deserve some credit for bringing us to this point. They developed the business plans, invested the capital, and are bringing the benefits of

digital television to American consumers.

Government deserves some of the credit as well. Over the past few years, both

Congress and the FCC have demonstrated a renewed sense of urgency, doing whatever was needed to get the transition moving. Often informal tools were used, like

the industry roundtable discussions convened by this Committee that helped define

and focus the issues. When necessary, the FCC used more formal regulatory tools,

such as the DTV tuner mandate, rules for ‘‘plug and play’’ television sets, and penalties for broadcasters that failed to meet their build-out obligations.

But we still have much work to do. My statement will outline some of the steps

that the FCC has taken to further the transition, as well as provide a status update

on several of the pending proceedings

FIRST DTV PERIODIC REVIEW

One of the first major actions the Commission took after formation of the DTV

Task Force was to reconsider some decisions made in the First DTV Periodic Review. These ‘‘mid-course adjustments’’ were necessary in order to maximize the

number of DTV stations on the air and to provide incentives for consumers to purchase DTV equipment. In that Reconsideration Order, adopted November 8, 2001,

the Commission permitted stations to initially build lower-powered—and less expensive—DTV facilities, while retaining the right to expand coverage as the transition

progressed. The Commission deferred replication and/or maximization requirements

on stations, and also deferred requirements regarding the channel election process.

However, the Commission declined to modify the deadlines for stations to be on the

air with a digital signal, and refused to issue a blanket extension of remaining DTV

construction deadlines. The result was that many more commercial and non-commercial stations were on the air with a digital signal (whether it was at licensed

facilities or pursuant to a special temporary authority) by the May 1, 2002 and May

25

1, 2003 deadlines, respectively. From there, the number of stations on the air has

continued to grow. As of April 7, 2005, 1,497 (or 87%) of the TV stations (both commercial and noncommercial) were on-the-air either with licensed DTV facilities or

with special temporary authority.

SECOND DTV PERIODIC REVIEW

The Commission adopted the Second DTV Periodic Review Report and Order on

August 4, 2004. Among other things, the Order: (1) established firm deadlines for

digital stations to increase their power levels to either replicate or maximize their

service areas, or lose the interference protection for those unserved areas; (2) required PSIP information in digital broadcast signals in order to promote closed captioning, v-chip, channel numbering and other functionality; and (3) established a

channel election process that will result in a Final DTV Table of Allotments.

CHANNEL ELECTION PROCESS

On February 10, 2005, nearly all TV broadcasters filed an election for their channel preference for final DTV operations. In this first round of elections, most stations chose to operate on their existing DTV channel. Several hundred chose to operate on their existing NTSC channel. Fifty stations chose to defer their decision to

the second round of elections. Twenty stations did not participate because both of

their allotments were out of the ‘‘core’’ DTV spectrum (i.e. TV channels 2—51).

These stations will elect in the second round as well.

The Commission’s goal is to complete the required interference analysis of these

first round elections and issue tentative channel designations by the end of this

summer, and have the second round of elections in the fall. Round three elections

would occur in early 2006, with a Notice of Proposed Rulemaking proposing a new

DTV Table of Allotments by August 2006.

The channel election process is a complex undertaking involving not only domestic

interference analysis for all stations, but also requires international coordination for

those stations in the Northern and Southern border zones. At this point, the FCC’s

International Bureau currently is working on existing international coordination

issues. There likely will be additional coordination necessary for a number of stations in the border zones that elected to retain their NTSC channels or those that

elected to participate in round two elections, as well as the border zone stations that

have both allotments out of core. It is anticipated that international coordination for

those stations will begin as soon as the FCC’s Media Bureau has cleared them domestically and issued tentative channel designations.

DIGITAL CARRIAGE ISSUES

One of the most important issues regarding the DTV transition is how over-theair broadcast stations are carried on multichannel video program distributors

(‘‘MVPDs’’). A substantial majority of television households in most markets subscribe to either cable or satellite service. Thus, resolving the carriage issues will

help facilitate the overall transition. The Commission recently issued a decision regarding dual carriage and multicast carriage issues as they relate to cable operators. In that decision, the Commission determined that the record did not support

establishing either dual carriage obligations during the transition or multicast carriage requirements on cable operators. Several Petitions for Reconsideration were

filed after the release of the Report and Order. The Commission still needs to address several issues related to cable carriage, including what constitutes material

degradation of the broadcaster’s signal. Additionally, the Commission is still considering how to define the digital carriage obligations for satellite carriers.

LOW POWER TELEVISION, TV TRANSLATORS, AND CLASS A STATIONS

There are approximately 2,100 LPTV stations and 4,700 TV translators operating

in analog today. These LPTV stations and translators are secondary services to fullpower stations and other primary services. Thus, these types of stations, which do

not operate on channels in an allotment table, can continue operating as long as

they do not cause interference to full-power stations or other primary service operations.

The first step in the digital transition for analog TV translator and LPTV stations

was taken in the adoption of the LPTV Digital Order on September 9, 2004. In that

Order, the Commission outlined the existing options for translator stations to make

the transition. As option one, any station on any channel may ‘‘flashcut’’ to digital

on its analog channel at any time without waiting for the full power elections. Further, stations proposing to ‘‘flashcut’’ on channels 63, 64, 68, or 69 (the public safety

26

channels) must secure a ‘‘coordinated use’’ agreement with state and regional public

safety representatives. By law, however, stations operating on channels 60-69 must

vacate these channels by the end of the full service transition, and find another

channel to operate on.

As option two, any station licensee or permittee may apply for a digital ‘‘companion’’ channel in a window to be opened in the future, but may not apply for a

companion channel in the 60-69 channel band. Any station proposing digital operations on channels 52-69 must notify potentially affected 700 MHz commercial wireless and public safety licensees before filing their application.

There are approximately 600 Class A stations with enhanced spectrum rights. In

an earlier proceeding that created the Class A service, these stations were permitted

to ‘‘flashcut’’ to digital. They will also be eligible to apply for a digital companion

channel.

The Commission has recognized that it may not be possible for many of these low

power stations to find companion channels until the end of the full-power transition,

and thus, that the transition for these stations may extend beyond the end date for

the full-power transition. The final transition date of low power stations will be considered in the Commission’s Third DTV Periodic Review.

DTV TUNER MANDATE

On August 8, 2002, the Commission adopted an Order that required digital TV

tuners to be included in nearly all new TV sets by July 1, 2007. The Commission’s

mandate, and its authority under the 1962 All Channel Receiver Act, was upheld

by the Court of Appeals for the D.C. Circuit.

The mandate required that all TV receivers with screen sizes greater than 13

inches and all television receiving equipment such as video cassette recorders

(VCRs) and digital versatile disk (DVD) players/recorders, have DTV reception capability as of July 1, 2007. The mandate adopted a phased-in schedule, starting with

the largest sets in an effort to minimize the costs for equipment manufacturers and

consumers. Currently, the FCC has a pending Notice of Proposed Rule Making seeking comment on whether to modify the schedule and is poised to take action in this

proceeding in the near term.

CABLE ‘‘PLUG AND PLAY’’ RULES

On September 10, 2003, the Commission adopted rules for ‘‘one-way’’ digital ‘‘plug

and play’’ cable compatibility. The rules enable consumers to purchase DTV sets

that allow them to receive on-way cable programming without the need for a settop box. Consumers must obtain a security card from their local cable operator to

be inserted in the TV set to view scrambled programming. Currently, industry negotiations are on-going regarding ‘‘two-way’’/interactive plug and play receivers.

BROADCAST FLAG

On November 4, 2003, the Commission adopted the redistribution control mechanism known as the ‘‘broadcast flag.’’ The goal was to foster the digital transition by

preventing mass redistribution of broadcast content over platforms like the Internet,

while ensuring that consumers’ ability to make copies of such content was not affected. If broadcast content could not be protected from mass redistribution over the

Internet, the FCC recognized that high-value digital content would migrate to distribution systems like cable and satellite, where it could be protected. However, the

FCC’s decision was overturned by the Court of Appeals for the D.C. Circuit on May

6, 2005. The court determined that the Commission lacked the statutory authority

to impose the regulations.

CHILDREN’S PROGRAMMING OBLIGATIONS

On September 9, 2004, the Commission adopted rules regarding broadcasters’

children’s programming obligations in the digital world. Among other things, the

Order addresses how the current three-hour children’s core educational programming processing guideline should apply to a DTV broadcaster that chooses to

multicast. The Order increases the amount of the core programming guideline proportionally to the increase in free video programming offered by the broadcaster on

multicast channels. The revised guideline provides flexibility to broadcasters that

multicast by permitting them the choice whether to air core programming on a single or multiple channels, provided that at least three hours per week are shown on

their main channel. The new guidelines will become effective after a one year phasein period. The Order also applies the same commercial time limits placed on digital

27

children’s television programming that exist for analog children’s television programming.

CONSUMER EDUCATION

The FCC’s Consumer and Governmental Affairs Bureau is actively engaged in a

consumer outreach campaign designed to educate the public on the digital television

transition. The Commission has established a special webpage (www.dtv.gov) that

provides detailed information on the transition itself, including a Tip Sheet that was

designed in coordination with the Consumer Electronics Association (‘‘CEA’’) and

Consumer Electronics Retailers Coalition (‘‘CERC’’). Several major retailers are

making this tip sheet available in their stores and on their web sites. The Bureau

will continue to do outreach to all segments of the population to help ensure that

the public is aware of the digital transition and how to prepare themselves for the

end of analog broadcasting.

It is not too early to begin planning for the end of the transition. The more certainty we can provide—and the sooner we can provide it—the smoother the eventual

switch-over will be for consumers and industry alike, and the more efficiently public

safety officials and advanced wireless service providers will be able to make use of

the reclaimed broadcast spectrum.

At the FCC, we stand ready to assist in any way we can. The draft legislation

is another important step in addressing some of the outstanding issues before us,

particularly on the issues of setting a hard date and educating the public about how

to prepare itself for the switch-over. We look forward to working with this Committee as we continue to make progress toward bringing the DTV transition to a

speedy and successful conclusion. I am happy to answer any questions you may

have.

Mr. UPTON. Wow. Two and a half minutes. And that is with the

clock not working. Maybe we should do this more often.

Mr. Goldstein.

STATEMENT OF MARK L. GOLDSTEIN

Mr. GOLDSTEIN. Thank you, Mr. Chairman, and members of the

subcommittee.

I am pleased to be here today to report on our work on the challenges to and the options for a DTV equipment subsidy program to

accelerate the DTV transition. Because the transition’s end is, in

part, dictated by consumers’ adoption of digital television equipment, encouraging households’ purchase of this equipment could

help to speed the recapture of highly valued spectrum. While the

purchase of digital televisions is steadily increasing, it nevertheless

appears unlikely that a sufficient proportion of households will

have digital television equipment in place by the end of 2006, the

date originally set by Congress as a goal for the transition’s end.

Those households relying exclusively on over-the-air television

signals may be the most vulnerable to the loss of television service,

because they must have certain equipment in place to be able to

view digital broadcast signals, whereas cable or satellite subscribers will not necessarily need to take immediate action, depending on how the provider transmits those television signals. Some

have suggested that the government provide a subsidy to certain

households to purchase set-top boxes that can receive digital broadcast television signals and convert them into analog signals, so that

they can be displayed on existing analog television sets.

Today, we will discuss challenges to and options for administering a subsidy program for DTV equipment, examples of rebate

and voucher programs, and other efforts necessary for the completion of the DTV transition. As we developed this work, no specific

option for administering a DTV subsidy was formed, and as such,

our work focused on the possible challenges to a hypothetical proVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 21643.TXT HCOM1 PsN: HCOM1
28

gram. As in our previous work, we take no position on whether a

subsidy should be implemented or not, or whether, if a subsidy program is established, it should be implemented in any particular

way.

In summary, we found that several administrative challenges

might arise in implementing a subsidy for DTV equipment, including making determinations about which Federal entity would administer a subsidy program, whether rulemaking process would be

necessary to fully determine and stipulate how the subsidy program will be structured, who would be eligible to receive a subsidy,

what equipment would be covered, how information about the subsidy would be communicated to consumers and industry, and what

measures, if any, would be taken to limit fraud. Some of these

issues could be particularly difficult to address.

Several administrative options could be used to provide a government to help households obtain DTV equipment. The four options

for administering a DTV subsidy that we have reviewed are a refundable tax credit, government distribution of equipment, a voucher program, and a rebate program. We found that the suitability

of any of these methods depends on aspects of the subsidy’s design,

such as which entity is most appropriate to administer the subsidy,

and who would be eligible to receive the benefit. For example, if the

DTV subsidy were only available to low-income households, a

voucher might be a possible method to deliver the subsidy. Alternatively, if the subsidy is more widely available, a rebate might

provide a good delivery mechanism.

Various government programs make use of rebates or vouchers

to subsidize consumers’ purchase of equipment and products. We

reviewed three local government rebate programs and three voucher programs. For the programs we reviewed, we found differences

existed between the rebates and vouchers programs that might provide insight for development of the DTV subsidy. Regarding eligibility determinations, we observed that eligibility for the voucher

programs was specifically defined, and the benefits were targeted

to low-income individuals, whereas eligibility for the rebate programs was not based on income. Overall, however, we found that

these programs differed substantially with respect to what might

be undertaken for a DTV subsidy.

There are other aspects of the DTV transition, not related to the

implementation of a possible subsidy program, that are ongoing,

and will take time to complete, or may pose their own challenges.

For example, the channel election process, which will determine

the channel placement for each television station’s digital signal, is

ongoing. According to FCC, all stations’ final selections will not be

set until some time in 2007. Another example of an issue that may

arise, with DTV transition progresses related—relates to antennas

used to receive digital broadcast signals. While many stakeholders

we interviewed told us that antennas used for analog over-the-air

reception should work well for the digital broadcast signal, a few

stakeholders told us that reception will depend on geographic and

topographic factors, and that some people may need new antennas

or adjustment of existing antennas.

In conclusion, many aspects of a potential DTV subsidy program

need consideration, and various determinations about its design

29

1Set-top boxes that have enhanced features, such as digital video recorders and output of high

definition signals, would be more costly. 2 Viewers using such a set-top box would not actually be viewing the channels digitally, but

would be viewing the broadcasters’ digital signals after they have been downconverted to analog.

will affect the suitability of the administrative method used to deliver the subsidy. Given the importance of the DTV transition, it

appears essential for knowledgeable officials from government and

industry to work together to find the best means to address any

issues that might impede progress in completing the DTV transition, and the associated reclamation of valuable radiofrequency

spectrum.

Our work on the DTV transition continues for this committee,

and we will provide more information in a report later this year.

Mr. Chairman, this concludes my prepared statement.

[The prepared statement of Mark L. Goldstein follows:]

PREPARED STATEMENT OF MARK L. GOLDSTEIN, DIRECTOR, PHYSICAL

INFRASTRUCTURE ISSUES, UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today

to report on our work on the challenges to and the administrative options for implementing a subsidy program for consumers to purchase digital television (DTV)

equipment. As you know, the return of radiofrequency spectrum used for analog

broadcast television at the end of the DTV transition will provide many benefits to

society, such as easing the spectrum scarcity facing public safety first responders,

engendering economic growth and consumer value from spectrum redeployed to

wireless services, and affording the federal government revenues from the proceeds

of a spectrum auction. Under the law, the transition’s end is, in part, dictated by

consumers’ adoption of digital television equipment. While the purchase of digital

televisions is steadily increasing, it nevertheless appears unlikely that a sufficient

proportion of households will have digital television equipment in place by the end

of 2006—the date originally set by Congress as a goal for the transition’s end.

Households viewing television solely through the reception of over-the-air signals

must take action to ensure that they have the necessary equipment to be able to

view digital broadcast signals before the transition occurs and analog broadcast signals are shut off. If they do not take such action, they will lose television service.

Consequently, the DTV transition imposes costs on some American households, assuming those households purchase equipment capable of receiving digital television

signals to avoid the loss of television service. In February we reported to this Subcommittee that of the roughly 21 million households in the United States that rely

exclusively on over-the-air television, nearly half have incomes under $30,000. Cable

and satellite subscribers might also, at some point, need to upgrade their equipment—and thus incur costs related to the DTV transition—in order to be able to

continue to receive broadcasters’ digital signals through their subscription providers.

In order to spur households’ adoption of the digital equipment necessary for the

transition, some have suggested that the government provide a subsidy to certain

households to purchase a device, known as a set-top box, that can receive digital

broadcast television signals and convert them into analog signals so that they can

be displayed on existing analog television sets. This device—which several manufacturers have stated could sell for as little as $50 1 once they are produced in high

volume—would enable the household to view digital broadcast signals without purchasing a digital television set.2 To the extent a subsidy facilitates the DTV transition, it might be advantageous for several reasons, such as (1) promoting a more

rapid reclamation of valuable radiofrequency spectrum for other uses, which could

spur economic growth and improve public safety, (2) possibly increasing government

revenues from spectrum auctions by ensuring that companies that bid on spectrum

can more quickly and with greater assuredness claim unencumbered spectrum, and

(3) minimizing any loss in television service that households might suffer because

they have not yet obtained necessary equipment for receiving digital broadcasts. At

the same time, policymakers might consider these benefits in relation to other contexts in which policy decisions of the federal government have imposed costs and

burdens on Americans without compensation. We believe while it is difficult to

measure the specific benefits and costs of undertaking a specific DTV subsidy program, it is also difficult to evaluate the suitability of subsidizing the costs imposed

30

by this particular government policy relative to other policies that have also imposed costs on citizens.

While there may be other policy options to spur the DTV transition, my testimony

today only will focus on the use of a DTV equipment subsidy program. In particular,

I will discuss the challenges to and several administrative options for a possible subsidy program. As we developed this work, no specific option for administering a DTV

subsidy was formed, and as such, our work focused on the possible challenges to

a hypothetical program. As in our previous work, we take no position on whether

a subsidy should be implemented or not, or whether, if a subsidy program is established, it should be implemented in any particular way.

In February we testified before this Subcommittee and provided estimates of the

cost of a subsidy for set-top boxes using data on household television characteristics

and expected set-top box costs. Today we will discuss (1) some challenges to administering a subsidy program for DTV equipment, (2) some administrative options for

implementing a DTV subsidy, (3) examples of government programs that make use

of rebates and vouchers to provide subsidies, and (4) some other efforts necessary

for the completion of the DTV transition. In addition to information provided in this

testimony, we will provide a more detailed study on these and other issues related

to the DTV transition for the Committee later this year.

To address the issues we will discuss today, we interviewed federal and state government officials who have experience in providing assistance to individuals or

households through various subsidy programs. The agencies we contacted include

the Department of the Treasury, the Department of Agriculture’s Food and Nutrition Service, the Department of Health and Human Services, and state social service agencies from Alabama, Illinois, Maryland, and Texas. These states were chosen

to represent varied demographic and geographic characteristics. We also spoke with

companies in several key industry segments including nine electronics manufacturers, four electronics retailers, and a rebate fulfillment house (a company that processes rebates for manufacturers and retailers). Additionally, we interviewed a rebate

and retail promotion expert, an academic who has studied consumer rebate redemption behavior, and representatives from the Promotion Marketing Association. We

also contacted a company that provides identification and credential verification

services. For general information about the DTV transition, we spoke with seven

broadcasters, three cable and satellite companies, and five television station owners.

We also had several meetings with Federal Communications Commission (FCC)

staff and various industry trade groups, such as the National Cable & Telecommunications Association, the Satellite Broadcasting and Communications Association, the

Consumer Electronics Association, the National Association of Broadcasters, and the

American Cable Association. We obtained information on government programs that

used rebates or vouchers from program administrators and other sources. We contacted the National Telecommunications and Information Administration (NTIA) to

ask questions about their views on the administration of a DTV subsidy program,

but an agency official stated that they had no official comment.

We conducted our work from August 2004 to May 2005 in accordance with generally accepted government auditing standards. We discussed this testimony with

FCC officials to obtain their comments. FCC provided technical corrections that we

incorporated where appropriate.

In summary:

• We found that several administrative challenges might arise in implementing

a subsidy for DTV equipment. Key issues we identified include challenges related

to making determinations about (1) which federal entity would administer a subsidy

program, (2) whether a rulemaking process would be necessary to fully determine

and stipulate how the subsidy program will be structured, (3) who would be eligible

to receive a subsidy, (4) what equipment would be covered, (5) how information

about the subsidy would be communicated to consumers and industry, and (6) what

measures, if any, would be taken to limit fraud. Some of these issues could be particularly difficult to address. For example:

• If the subsidy were only available to low-income households, a possible method

of identifying these households would be to use receipt of some other low-income assistance—such as food stamps—to identify those eligible for the DTV subsidy. A

drawback to this approach, however, is that agencies overseeing such programs may

not be allowed to release lists of their recipients to others. If the subsidy is only

provided to households that rely exclusively on over-the-air television, the identification of these households may be difficult because no list of such households exists,

and information on the inverse—those households that subscribe to cable or satellite

service—is dispersed across hundreds of providers in the country, and these providers may also face limitations on the release of their subscribers’ lists to others.

31

• Another key challenge would be to make sure that eligible recipients understand that a subsidy is available to them, how they can obtain it, which equipment

the subsidy can be used for, and where they can obtain the equipment. Effectively

communicating this information would likely first require that information about

the broader DTV transition is effectively communicated to the public. Three years

ago we found that many Americans did not have an awareness of the DTV transition. Recently, the Consumer Electronics Association reported that knowledge of

DTV is increasing. Our interviews with several retailers and manufacturers, indicated, however, that while consumers are more familiar with the concept of highdefinition television, many are still confused or unaware that at some point in the

future analog television will cease operation and analog televisions sets will not be

able to receive digital over-the-air television signals.

• Several administrative options could be used to provide a government subsidy

to help households obtain DTV equipment. The four options for administering a

DTV subsidy that we reviewed are a refundable tax credit, government distribution

of equipment, a voucher program, and a rebate program. We found that the suitability of any of these methods depends on aspects of the subsidy’s design, such as

which entity is most appropriate to administer the subsidy and who would be eligible to receive the benefit. For example, if the DTV subsidy were only available to

low-income households, a voucher might be a possible method to deliver the subsidy.

Alternatively, if the subsidy is more widely available, a rebate might be a good delivery mechanism.

• Various government programs make use of rebates or vouchers to subsidize consumers’ purchase of products. We reviewed three local government rebate programs

that provide incentives for furthering environmental policy goals and three voucher

programs, including one state program that subsidizes equipment for deaf and hard

of hearing individuals and two federal programs that provide assistance to needy

households to purchase food. For the programs we reviewed, we found differences

existed between the rebates and vouchers programs that might provide insight for

the development of DTV subsidy. Regarding eligibility determinations, we observed

that eligibility for the voucher programs was specifically defined and the benefits

were targeted to low-income individuals, whereas eligibility for the rebate programs

was not based on income. Overall, however, we found these programs differed with

respect to what might be undertaken for a DTV subsidy. Further, choosing not to

participate in any of the programs we reviewed would not cause a household to lose

any existing service or functionality. In contrast, if a household relying exclusively

on over-the-air television chose not to take advantage of a DTV subsidy for which

it is qualified, and then did not obtain the necessary equipment to receive broadcast

digital signals, the household would lose access to broadcast television signals when

the transition occurs.

• If a subsidy program is implemented, it will pose many challenges for the implementing agency and industry. However, there are other aspects of the DTV transition not related to the implementation of possible subsidy program that are ongoing and will take time to complete or may pose their own challenges. For example,

the channel election process, which will determine the channel placement for each

television station’s digital signal, is ongoing. Because a proposed rulemaking will

follow the end of this selection process (scheduled to be completed in August 2006),

all stations’ final selections will not be set until sometime in 2007, according to an

FCC official. Another example of an issue that may arise as the DTV transition progresses relates to antennas used to receive digital broadcast signals. While many

stakeholders we interviewed told us that antennas used for analog over-the-air reception should work well for the digital broadcast signal, a few stakeholders (including an antenna manufacturer, a broadcaster, and a retailer) told us that reception

will depend on geographic and topographic factors and that some people may need

new antennas or adjustment of existing antennas.

BACKGROUND

The United States is currently undergoing a transition from analog to digital

broadcast television. With traditional analog technology, pictures and sounds are

converted into ‘‘waveform’’ electrical signals for transmission through the radiofrequency spectrum, while digital technology converts these pictures and sounds into

a stream of digits consisting of zeros and ones for transmission. Digital transmission

of television signals provides several advantages compared to analog transmission,

such as enabling better quality picture and sound reception as well as using the radiofrequency spectrum more efficiently than analog transmission.

A primary goal of the DTV transition is for the federal government to reclaim

spectrum that broadcasters currently use to provide analog television signals. The

32

3 In addition to the 24 MHz that is allocated to public safety, another 24 MHz has already

been auctioned. 4The Department of Heath and Human Services administers a number of programs, including

Temporary Assistance for Needy Families. The Food and Nutrition Service also administers various programs, including the nation’s Food Stamp Program and the Special Supplemental Nutrition Program for Women, Infants, and Children, better known as WIC.

radiofrequency spectrum is a medium that enables many forms of wireless communications, such as mobile telephone, paging, broadcast television and radio, private

radio systems, and satellite services. Because of the virtual explosion of wireless applications in recent years, there is considerable concern that future spectrum

needs—both for commercial as well as for varied government purposes—will not be

met. The spectrum that will be cleared at the end of the DTV transition is considered highly valuable spectrum—sometimes called ‘‘beachfront spectrum’’—because of

its particular technical properties. In all, the DTV transition will clear 108 MHz of

spectrum—a fairly significant amount. In the Balanced Budget Act of 1997, the Congress directed FCC to reallocate 24 MHz of the reclaimed spectrum to public safety

uses. Since the terrorist attacks of September 11, 2001, there has been a greater

sense of urgency to free spectrum for public safety purposes. The remaining returned spectrum will be auctioned for use in advanced wireless services, such as

wireless high-speed Internet access.3

To implement the DTV transition, television stations must provide a digital signal, which requires them to upgrade their transmission facilities, such as transmission lines, antennas, and digital transmitters and encoders. Depending on each

individual station’s tower configuration, the digital conversion may require new towers or upgrades to existing towers. Most television stations throughout the country

are now providing a digital broadcast signal in addition to their analog signal. After

2006, the transition will end in each market—that is, analog broadcast signals will

no longer be provided—when at least 85 percent of households in a given market

have the ability to receive digital broadcast signals.

SEVERAL CHALLENGES MIGHT ARISE THAT REQUIRE CONSIDERATION IN ADMINISTERING

A SUBSIDY PROGRAM FOR DTV EQUIPMENT

During the course of our review, we identified several administrative challenges

to implementing a subsidy for DTV equipment. For example, prior to implementing

a subsidy program, various determinations need to be made, including (1) which federal entity will administer a subsidy program, (2) whether a rulemaking process is

necessary to fully determine and stipulate how the subsidy program will be structured, (3) who will be eligible to receive a subsidy, (4) what equipment will be covered, (5) how information about the subsidy will be communicated to consumers and

industry, and (6) what measures, if any, will be taken to limit fraud.

It is Unclear What Entity Would Be Best Suited to Administer the Subsidy Program

One challenge to the DTV subsidy that we identified is determining which entity

should administer the subsidy program. An industry representative told us that the

implementing agency should have some level of telecommunications expertise in

order to be able to set appropriate standards for the equipment being subsidized and

to effectively educate consumers about the DTV transition. In our opinion, policymakers might also consider if the entity has experience administering a household

assistance program.

Based on our discussions with government officials, it appears that no single entity has the combined technical knowledge and subsidy administration expertise that

might be necessary to successfully implement a DTV subsidy. For example, while

FCC and NTIA have telecommunications knowledge and are responsible for managing the use of the radiofrequency spectrum, neither has experience administering

a federal subsidy program of this kind. We asked these agencies about their ability,

based on their experience, to administer a DTV subsidy. NTIA had no official comment. FCC officials told us they believe the Commission could have some role, such

as defining which equipment would be eligible for the subsidy, but did not believe

FCC was best suited to administer the entire subsidy program. Further, an FCC

official said it might be advantageous for the administering entity to leverage the

expertise of state government agencies to assist with delivering the subsidy to lowincome households.

We also asked two agencies that have experience administering federal assistance

programs, the Department of Health and Human Services and the Department of

Agriculture’s Food and Nutrition Service, about their ability to implement a DTV

subsidy.4 Although these agencies have experience with subsidy programs, they do

not have expertise in telecommunications. Officials from the Department of Health

33

5The Lifeline program, created in 1985, provides a discount on local telephone bills for certain

low-income customers so that basic local phone service is more affordable. 6The Office of Management and Budget does not review rules of independent regulatory agencies, such as FCC.

and Human Services told us the agency would not be well suited to administer a

DTV subsidy because their programs, such as Temporary Assistance for Needy Families, are narrowly defined—a household must have children to be eligible for Temporary Assistance for Needy Families—and would not offer broad enough coverage

for a DTV subsidy. Similarly, officials from the Food and Nutrition Service said they

did not believe their agency would be the best entity to administer the subsidy.

However, after we asked whether the state agencies that administer food stamps

could provide a DTV subsidy to their recipients, Food and Nutrition Service officials

said that this might be possible under certain conditions, but that an agreement

would most likely have to be reached with each state and, in their view, the states

should be paid for the costs they incur in doing so.

When we contacted four state heath and human services agencies that administer

various assistance programs on behalf of the federal government, such as food

stamps, all four indicated that it might be possible for the states to provide the DTV

subsidy to the low-income individuals who already receive assistance from one or

more programs they administer. However, they told us there would be costs associated with implementing a subsidy program, such as staff time, programming costs,

postage, and envelopes. One state we contacted estimated that it would cost approximately $552,000 to mail vouchers to the approximately 1.5 million households

that receive food stamps, Medicaid, and Temporary Assistance for Needy Families

within the state. However, two states told us that if the program ran over a period

of time it would be difficult to track which households already received the DTV

subsidy as people go on and off of assistance over time, so some households could

receive duplicate benefits. Further, three of the four states told us that such a program would be burdensome on their limited staff resources.

Implementing a Subsidy Program May Require a Rulemaking Process

A rulemaking process might be required to implement a DTV subsidy, and if so,

this would likely have implications for how quickly a subsidy program could be established. While legislation could broadly define the parameters of the subsidy program and may even prescribe specific elements of the programs’ structure and administration, it is not uncommon for a federal agency to determine that a rulemaking process is necessary to more fully detail how a program will be implemented. Through a rulemaking, the agency would finalize the rules of the program

that were not specifically addressed in the legislation. FCC told us that if the legislation is very specific a rulemaking process may not be necessary for a DTV subsidy.

However, FCC did note that rulemakings have been used in the past after legislation enacted new programs. For example, rulemaking processes have been undertaken several times to make adjustments to the Lifeline Assistance Program since

it was established in 1985.5

The rulemaking process generally takes time because it requires a wide range of

procedural, consultative, and analytical actions on the part the agencies. Sometimes

agencies take years to develop final rules. Among other things, the rulemaking process generally requires agencies to (1) publish a notice of proposed rulemaking in the

Federal Register; (2) allow interested parties an opportunity to participate in the

rulemaking process by providing written data, views, or arguments; (3) review the

comments received and make any changes to the rule that it believes are necessary

to respond to those comments; and (4) publish the final rule at least 30 days before

it becomes effective. Further, the Office of Management and Budget reviews significant proposed and final rules initiated by executive branch agencies other than

independent regulatory agencies before those rules are published in the Federal

Register.6 A former official from the Department of Health and Human Services told

us that industry participants, interest groups, or other stakeholders can challenge

a proposed rulemaking, which can delay the process further. He said that in order

to avoid such challenges, it is essential to have the key stakeholders involved early

in the process. That is, if the key stakeholders have the opportunity to provide input

prior to the development of the rulemaking and are satisfied that their concerns are

addressed, they will be less likely to file a challenge to the proposed rulemaking.

Eligibility Criteria Pose Challenges to the Administration of a DTV Subsidy Program

Determining who would be eligible to receive the subsidy could present an administrative challenge to developing a subsidy program. If the government decides not

to provide a DTV subsidy to all households, it would need to establish criteria to

34

7 Consumers can receive assistance if they participate in Medicaid, the Food Stamp Program,

Supplemental Security Income, Federal Public Housing Assistance (Section 8), the Low Income

Home Energy Assistance Program, the National School Lunch Program’s free lunch program,

or Temporary Assistance for Needy Families. 8For satellite subscribers, we are referring to those that subscribe to a direct broadcast satellite (DBS) service, such as DIRECTV or DISH Network. 9 47 U.S.C. §§338(i) and 551.

determine who is eligible. For example, a means test could be imposed to restrict

eligibility to low-income households determined to be in financial need of the subsidy. The subsidy could also be limited to only those households relying on over-theair television signals, on the grounds that these households are likely to be the most

adversely affected by the DTV transition.

Eligibility for Low-Income Households: If it is determined that a DTV subsidy will

only be made available to low-income households, a means test of some kind would

need to be used to identify the appropriate target households. Officials from the Department of Health and Human Services told us that using the income-based eligibility criteria of existing social service programs to define eligibility for a DTV subsidy program would be the most efficient way to employ a means test. That is, by

using the receipt of an existing program benefit that is means tested, a new program could be effectively implemented without developing a means test specifically

for that program. However, we were also told that one of the drawbacks to using

these existing programs is that not all who are eligible for any particular program

actually choose to apply for and receive benefits. This would mean that by only providing a DTV subsidy to those already receiving other assistance, some people who

would be eligible for the subsidy based on their underlying income would not qualify

for the subsidy because they have chosen not to receive another form of assistance.

Officials from the Food and Nutrition Service told us that for the Food Stamp Program, approximately 54 percent of those who would be eligible for the program receive the benefit nationwide. It was thus suggested to us that if recipient lists from

social assistance programs were used in developing eligibility determinations for a

DTV subsidy, it might be beneficial to use more than one program. By combining

the participants of several programs, a DTV subsidy for low-income households

would target a higher percentage of needy households than if only one program was

used to establish eligibility. For example, FCC told us that the Lifeline Assistance

Program uses receipt of any of seven social assistance programs, including food

stamps and Medicaid, as an eligibility requirement.7

Privacy concerns could, however, be a limitation of using existing social welfare

programs to develop eligibility for a DTV subsidy because the agencies administering these programs may be prohibited from providing the list of recipients to

any outside entity. Under current law for example, food stamp recipient information

might not be available to other federal agencies or to any private party or outside

entity that might be involved in the administering the subsidy. Another limitation

in using these data is that there is continuous change in recipient rolls because of

people entering and leaving the program. Those implementing a DTV subsidy program would need to take into account the volatility of recipient rolls in deciding how

this information could be used.

Eligibility for Over-the-Air Households: Some stakeholders we contacted indicated

that a DTV subsidy should be focused on or limited to only those households that

rely exclusively on over-the-air television. Because no list of these households exists,

limiting a subsidy in this manner will require determining who the over-the-air

households are—a task that could pose administrative challenges. One possible approach to identifying over-the-air households is to first identify cable and satellite 8

subscribers. A combined list of all cable and satellite subscribers could be used as

a mechanism to check whether those applying for a DTV subsidy are not qualified

for the subsidy.

The process of combining cable and satellite subscriber information into a comprehensive list could be a highly challenging task. First, cable industry officials we

interviewed expressed concern over providing their subscriber lists to a government

agency or another entity. Cable officials told us that under current law, they could

not turn over subscriber information to the government without prior permission

from subscribers unless they were under a court order.9 Cable industry officials also

told us that any change in current legislation would need to include liability protection for cable and satellite companies because their subscriber lists—which include

personal information provided to these companies from subscribers—would be outside their control. An industry official said that even more stringent safeguards

would need to be in place if the information were provided to an outside entity—

such as a contractor—rather than to a government agency. One cable company offiVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6621 21643.TXT HCOM1 PsN: HCOM1
35

cial stated that even if the law were changed to allow the company to provide its

subscriber lists, it would be placed in the awkward situation of having to inform

their subscribers that their names were provided to the government to help administer a subsidy that the cable subscribers are not eligible to receive. The cable company official also stated that subscribers would be sensitive to their information

being used in this manner, especially in light of recent security issues related to personal information.

A second challenge to developing a national list of all cable and satellite subscribers is the difficulty of merging this information across all cable and satellite

companies. Currently, there are over 1,100 cable and satellite companies operating

throughout the country, with a total of nearly 90 million subscribers. Information

from these companies, which is maintained in various formats, would have to be collected and combined into a comprehensive list of subscribers. Cable industry officials

stated that the process of merging and maintaining a list of nearly 90 million subscribers would not be an easy undertaking. For example, one cable industry official

estimated that the process of working through all the technical logistics for establishing a list could take 6 to 12 months. Additionally, cable industry officials stated

that there is significant ‘‘churn’’ (i.e., the number of people moving on and off subscriber lists) in the industry. For example, one cable company official stated that

churn can be as high as 10 percent of subscribers from month to month. Another

cable industry official told us that a significant level of resources would be needed

to keep such a combined subscriber list up to date.

Another possible, albeit difficult, way to determine who the over-the-air households are would be to send queries to cable and satellite providers to ask if particular people who have applied for the DTV subsidy are, in fact, already subscribing to cable or satellite. For cable customers, a database would need to be developed to direct the queries to the applicable provider. According to FCC, the Commission maintains a master data base with information on all franchised cable

areas—of which there are over 30,000. The most identifiable geographic information

in that database is the name of county where each cable franchise is located. If an

applicant for the DTV subsidy provided a county of residence, a query could be sent

to all the franchised cable areas in that county. However, an FCC official told us

that in many counties there are multiple cable franchises operating. Moreover, the

FCC official stated that even though there is a contact name for each franchise area,

in many cases, the contact was someone at a corporate headquarters of the cable

company. Thus, we believe that to contact the local cable franchise directly, the

database would need to be further developed to include information—perhaps an email address at the local franchise level—to which the query could be sent. This

process could be time consuming for both the entity processing the subsidy applications and the cable providers. On the satellite side, we believe querying the satellite

providers might not be too difficult because there are only two primary providers.

However, people may object to their personal information being sent to the satellite

providers as well as the cable providers in their area. Another option might be to

use information maintained by companies that perform subscriber billing for cable

and satellite companies. We were told that about six large billing companies provide

billing services for a substantial majority of the cable and satellite companies. Representatives from a company that provides identification and credential verification

services told us they could verify that individuals applying for a DTV subsidy do

not subscribe to a cable or satellite service by checking the applicant’s address

against the addresses maintained by the cable and satellite providers’ billing companies. To protect the privacy of subsidy applicants, the identification and verification

services company told us such queries should be based on an individual’s address

rather than name or Social Security number. Company officials also told us that it

would likely take a few months to develop this checking process.

Congress and Implementing Agency Must Determine What Specific Equipment

Would Be Subsidized

One of the administrative elements of a subsidy program that would likely need

to be determined is exactly what equipment will be subsidized. In making this determination, policymakers might consider both policy issues as well as issues related

to the ability of the program to be implemented and managed.

From a policy perspective, several of the manufacturers and retailers we contacted

told us that they believe it would be most beneficial to consumers if the program

did not put highly specific limits on the type of equipment they could buy with the

subsidy. In particular, some stakeholders generally believed that eligible consumers

should not only be allowed to apply the subsidy toward a basic set-top box, but

should also be allowed to apply that amount toward enhanced set-top boxes (those

with upgraded features or functions) or digital televisions capable of receiving and

36

10See GAO, Telecommunications: Additional Federal Efforts Could Help Advance Digital Television Transition, GAO037 (Washington, D.C.: Nov. 8, 2002).

displaying digital broadcast signals. Several stakeholders noted that any product

that enables consumers to receive digital broadcast signals does the job of ensuring

that there is no loss in television service when the transition occurs. Moreover, some

said a wide application of the subsidy provides consumers the most choice and promotes the adoption of digital television. An opposing view is that a subsidy should

only be designed to ensure that there is no loss of television service when the DTV

transition is completed, and therefore the subsidy should only be applicable to a settop box.

From the perspective of administering the program, determining what items the

subsidy can be applied towards is critical for communicating to manufacturers, retailers, and consumers a key parameter of the program. Some stakeholders noted

that either the Congress or the administering agency would need to identify the

products that would be subsidized so that manufacturers produce the appropriate

equipment. If the intent is to subsidize only simple set-top boxes, FCC officials told

us that the subsidy would cover boxes that have only analog outputs. If the Congress or the implementing agency determines that the subsidy will be more broadly

applicable, the particular parameters of the program would need to be communicated to the manufacturing industry so that their business plans can proceed.

There would also likely be some process by which specific items meeting the parameters of the subsidy program are approved and flagged as eligible for the subsidy. Manufacturers need certainty about what items are approved for the subsidy

if they are to place a rebate coupon on or inside of the equipment boxes, along with

any related information. Specific identification of subsidized items will also be important for retailers as they make inventory decisions and train staff about how to

guide consumers’ purchasing decisions. Also, if retailers are asked to play a part in

the administration of the program, such as by accepting vouchers or printing rebate

coupons at the time of sale, it will be critical for them to have validation of items

that are eligible for the subsidy. And, clearly, consumers need to understand which

items they can purchase using the subsidy.

Some industry representatives we contacted also expressed concern about the

interface between industry and the government in the design of the subsidy program. In particular, industry representatives said that the government should work

with industry as the subsidy program is developed to ensure that the program is

designed in a manner that will provide incentives for manufacturers and retailers

to participate. Additionally, some companies noted that the government would need

to provide industry with information on the expected scope of the program in order

to avoid shortages of equipment at retail. In general, some companies told us that

industry should be involved in the development of the program to help ensure that

it is designed and implemented efficiently.

A Successful Subsidy Program Will Require an Effective Information Campaign

about the DTV Transition and Subsidy

To successfully implement a DTV subsidy program, eligible recipients will need

to understand that a subsidy is available, how to obtain it, which equipment the

subsidy can be used for, and where they can obtain the equipment. Thus the agency

responsible for implementing the program would need to undertake a communication campaign. At the same time, it could be difficult to provide information about

the parameters of the subsidy program if there is not a general understanding about

the broader DTV transition. As such, it appears that an information campaign regarding the availability of a subsidy for DTV equipment might need to be coordinated with a more general information campaign about the transition and its ramifications for American households.

Three years ago we found that many Americans did not have significant awareness of the DTV transition, and we recommended that FCC explore options to raise

public awareness about the transition and the impact it will have on consumers.10

Since that time, FCC and industry have undertaken efforts to better inform the

public about the transition. In March of this year, the Consumer Electronics Association, an association of electronics manufacturers, reported that consumers’ understanding of digital television has improved. This association surveyed individuals

and found that, compared to past years, there has been an increase in consumer

familiarity and understanding of DTV, as well as an increase in the likelihood of

over-the-air households to take action to avoid losing television service.

Based on our interviews with several stakeholders, it appears that despite these

findings many consumers—particularly those who may be the most affected by the

transition—may still be unaware or confused about the DTV transition. Several of

37

the company representatives with whom we spoke told us that while consumers are

more familiar with the concept of high-definition television, they are still unaware

or confused about other aspects of the DTV transition. Some told us that few consumers understand that at some point analog television will cease operation and

analog television sets will be unable to receive digital over-the-air signals. We were

told that it is especially difficult to provide consumers with a better understanding

of this in the absence of a hard transition date. Additionally, some populations

might be difficult to reach because English may not be their primary language or

because they only receive television over-the-air and have no business relationship

with a subscription television provider that would likely provide them with information about the transition.

Minimizing Fraud Might Be a Consideration in the Development of a Subsidy Program

Depending on how a subsidy program is structured and implemented, there may

be opportunities for people to defraud the government. For example, one official familiar with government subsidy programs noted that if everyone were eligible for

the subsidy, the opportunities for fraud would decline. For this reason, the more restrictive the eligibility requirements, the greater may be the chances for fraud. In

terms of reducing fraud, those familiar with rebates noted that the more requirements for rebate redemption—that is, the more documentation the consumer must

provide to redeem the rebate—the fewer problems with fraud there are likely to be.

However, we were also told that increased requirements would tend to reduce the

number of people who attempt to redeem the rebate. An additional consideration regarding fraud is the cost of fraud mitigation. A former official from the Department

of Health and Human Services told us that while minimizing fraud should be considered in developing a subsidy program, the cost-effectiveness of these efforts

should also be measured. For example, we were told that administering systems to

mitigate and prevent fraud may be costly and may not be worthwhile, especially if

the value of the subsidy is low.

A Variety of Options Exist for Administering a DTV Subsidy, Each with Unique

Challenges

While a government subsidy for consumers to purchase DTV equipment could be

administered in several ways, each of the subsidy options we examined had advantages and disadvantages. Following is a description of and stakeholders’ views on

four DTV subsidy options: a refundable tax credit, government distribution of equipment, a voucher program, and a rebate program. As we noted above, we take no

position on whether a subsidy should be implemented, or whether, if a subsidy program is established, it should be implemented in any particular way.

Refundable Tax Credit Program: One method that could be used to administer a

subsidy program for DTV equipment would be a refundable tax credit, administered

as part of the federal individual income tax. A refundable tax credit could be designed to provide qualifying taxpayers a refund greater than the amount of their

tax liability before credits. Based on the manner in which tax credits work, we believe that a tax credit for DTV equipment would likely be structured such that consumers purchase an eligible set-top box, maintain required information on their purchase, and seek reimbursement for all or some portion of the cost from the federal

government for the equipment when they file their federal income taxes. Based on

discussions with an official from the Department of the Treasury, it does not appear

that this method would be well suited for a DTV subsidy. The Treasury official told

us that considerable administrative burdens would be imposed on the Internal Revenue Service (IRS) to administer a refundable tax credit for a one-time subsidy. This

official noted that implementation of a new tax credit would require the IRS to

change tax forms, as well as instructions, for the years that the program would be

in operation. Changing tax forms imposes administrative costs, particularly if tax

laws are changed after forms have been developed for a given tax year. Additionally,

he noted that IRS Form 1040 is currently completely full, so that any new credit

could require the form to be lengthened from two pages to three pages, which would

be costly and burdensome. The official also noted that the availability of the tax

credit may cause some individuals who otherwise would not file a tax form to do

so, which would increase IRS administrative burdens. The Treasury official also

noted that there could be compliance problems with a tax credit approach. Because

of the small amount of the credit—likely about $50—it would not be cost-effective

for the IRS to assign resources to check compliance, thus it would be very difficult

to minimize fraudulent use of the credit. In fact, IRS has had difficulty assuring

compliance for a refundable tax credit. In particular, for the Earned Income Tax

Credit, IRS estimated that roughly 30 percent of the dollars claimed was erroneous.

38

11State agencies we contacted suggested that mailing a paper voucher to recipients would be

the least difficult and most effective way of distributing a voucher for a potential DTV subsidy.

While food stamp benefits are provided to recipients electronically (through an Electronic Benefit Transfer (EBT) card), the state agencies told us it would be costly and time-consuming to

add the DTV subsidy to these electronic cards.

We heard from stakeholders that a tax credit for DTV equipment might not be

the most helpful to low-income Americans because individuals would have to purchase the equipment with their own money and file—possibly many months later—

for a tax refund. Also, we were told some low-income Americans do not file tax returns. We believe the additional costs and burdens for such individuals to file taxes

for the purpose of obtaining a tax credit may exceed the value of the credit.

Government Distribution: With government distribution, the government provides

certain goods for needy citizens. One example of government distribution is the

Emergency Food Assistance Program whereby the government provides food, such

as dried fruit, non-fat dry milk, and peanut butter, to states for distribution to selected local agencies—usually food banks—which, in turn, distribute the food to

soup kitchens and food pantries that serve the public directly.

For the DTV transition, the government could directly provide the necessary

equipment to individuals, but we found there would be a number of challenges to

implementing and administering such a program, and, based on discussions with

state social service agencies, it appears that this would be an unwieldy way to administer a DTV subsidy. One challenge would be finding locations for distributing

the equipment. We heard from several officials whose state agencies administer benefit programs that using local social services offices as a distribution point would

not be feasible. These officials cited the lack of space and staff resources to store,

secure, and distribute equipment as reasons why local offices could not be used to

administer such a program. Further, stakeholders told us that government distribution does not take advantage of existing retail supply chains that already move

large quantities of goods to stores throughout the country.

While a government distribution program would not require households to pay for

equipment in advance of receiving the subsidy, which would be beneficial to lowincome households, the program could present other challenges to those eligible to

participate. For example, stakeholders we interviewed told us that a distribution

program limits consumers’ choices and provides no mechanism for consumers to obtain support if the equipment does not work properly. Additionally, officials from

one state agency told us that people obtaining equipment at local offices would have

to wait in long lines, which could be problematic for those with physical limitations,

such as the disabled and the elderly.

Voucher Program: Another mechanism to subsidize DTV equipment could be

through a voucher program. A voucher—which is a coupon or electronic benefit card,

similar to a credit card, which provides purchasing power for a restricted set of

goods or services—could be provided to households that qualify for a DTV subsidy.

The federal government has used vouchers to provide a variety of assistance to

households, such as food stamps and housing subsidies. Also, vouchers have been

used on a limited basis to provide benefits to consumers for the changeover of certain technology. For example, the Colorado Department of Human Services provided

a voucher to individuals who qualified as hard of hearing to purchase text telephones and other specialized telecommunications equipment.

For a DTV equipment subsidy using a voucher system, various administrative

steps would be necessary to design and implement an effective program. After decisions were made about the specific equipment to be covered, vouchers would need

to be distributed to eligible households. Several of those we contacted noted that if

the program is to be means tested, state agencies—such as those that administer

the Food Stamp Program—might be able to mail vouchers to their existing recipients.11 Additionally, with a voucher program, several administrative steps involving

the retail industry would be required. Participating retailers would have to know

how the program is structured, which specific items were covered by the subsidy,

approximately how many pieces of DTV equipment were expected to be subsidized

in a particular area, and how the mechanism for retailer reimbursement would operate.

Overall, using vouchers to administer a DTV subsidy might be beneficial for lowincome households because such households would not be required to pay for the

DTV equipment in advance and then wait to be reimbursed. However, stakeholders

told us that this type of program could create a burden on retailers because they

must determine the authenticity of the vouchers. Also, stakeholders mentioned that

it might be more challenging to include smaller and independent retailers in a subsidy program that uses vouchers.

39

Rebate Program: A rebate program could also be used to administer a DTV subsidy. Rebates generally require consumers to pay the full cost of an item at the time

of purchase and then send documentation to an address specified by the manufacturer or retailer to receive a rebate by mail. The documentation required generally

includes the original sales receipt, the UPC code from the product packaging, a rebate slip, and the customer’s name, address, and telephone number. In most cases,

this paperwork must be sent within 30 days of the purchase, and consumers generally receive their rebates up to 12 weeks later. According to the three rebate experts we interviewed, only about 30 percent of rebates are ever redeemed. While two

rebate experts said that redemption rates would likely rise with a larger rebate,

such as might be provided with a DTV subsidy, none of the three we spoke with

believed that the redemption rate would rise above 50 percent. Also we were told

that depending on the type of rebate, on average 1 percent to 20 percent of rebate

applications are rejected based on the lack of proper documentation.

Typically, a variety of decisions are made in developing a rebate program. For example, as we discussed these decisions with stakeholders, various methods of implementing a rebate were highlighted, including placing the rebate coupon inside the

equipment box, affixing it to the outside of the box, or printing a coupon at the cash

register at the time of sale. The method used would, in part, determine which entities have some administrative responsibility for the rebate program. If a DTV subsidy program were designed to have a rebate coupon placed in or on the box, it

would be the responsibility of the manufacturer to do so, while if it were designed

to have a rebate coupon generated at the cash register, the retailer would be responsible for managing this process. A consensus on the best rebate method did not

emerge from our interviews with industry experts.

One of the most difficult elements associated with using a rebate for a DTV subsidy would be applying eligibility requirements. As previously discussed, information

about over-the-air and low-income eligibility is not readily available to the rebate

fulfillment houses—which are the entities that process rebates for manufacturers

and retailers—and there are legal obstacles to the government collecting and providing that information to them. Another downside of rebates is that consumers

generally pay the full cost of an item at the time of purchase, which could create

a hardship for low-income households. Furthermore, one rebate fulfillment center

representative told us that low-income individuals are less likely to redeem rebates

than other segments of the population. Similarly, an official from a state agency told

us that based on her experience a rebate program is not a good choice if the subsidy

is supposed to target low-income individuals because many low-income individuals

are not comfortable with rebates and will not redeem them. If eligibility for the subsidy is not restricted, a rebate might provide a good delivery mechanism. A benefit

of using a rebate program for a DTV subsidy is that this method could take advantage of the relationships that already exist between retailers, manufacturers, and

the rebate fulfillment industry.

Several Government Programs Have Employed Rebates or Vouchers to Provide Subsidies

We identified several government programs that have used or are using rebates

or vouchers to subsidize consumers’ purchase of products. While aspects of these

programs might provide insight into the establishment of a DTV subsidy, we found,

overall, that the programs we reviewed differed in many respects from what might

be undertaken for a DTV subsidy. We reviewed three rebate programs that were

implemented by local governments to provide incentives for furthering a policy goal,

such as clean air, water conservation, and the use of energy-efficient appliances. We

also reviewed three voucher programs, including one state program that subsidizes

equipment for deaf and hard of hearing citizens and two federal programs that provide assistance to needy households to purchase food. See table 1 for key information about the six programs we reviewed.

We believe some aspects of the programs’ implementation, such as the time required to develop a program and the manner in which program information was disseminated, might have relevance to the establishment of a DTV subsidy. For example, for two of the rebate programs, we learned that it took several months to develop and implement the programs, with one rebate program taking 12 months and

another taking 18 months to implement. In reviewing various other aspects of the

programs, such as eligibility determinations and what products were subsidized, we

found that differences existed between the voucher and rebate programs that might

also provide some insight for a DTV subsidy. For example, for all of the voucher

programs we reviewed, benefits were targeted to low-income individuals, and eligibility was specifically defined. In contrast, eligibility for the rebate programs not

based on income; rather, a person only had to reside in the location where the subVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 21643.TXT HCOM1 PsN: HCOM1
40

12 In the Matter of Second Periodic Review of the Commission’s Rules and Policies Affecting

the Conversion to Digital Television, MB Docket No. 03-15, Report and Order, FCC 04-192, released September 7, 2004, FCC established a multistep channel election and repacking process

through which broadcast licensees will select their ultimate DTV channel (i.e., channels 2-51).

sidy was being offered or be a water or power customer to be eligible. We also found

differences in the types of products subsidized for the rebate and voucher programs

that we reviewed. Whereas the rebates subsidized items in an effort to further a

policy goal (generally environmental protection), the voucher programs provided recipients with items for their basic needs.

Overall, however, we observed that aspects of these programs’ implementation are

dissimilar to what might be undertaken for a DTV subsidy. First, choosing not to

participate in any of the programs we reviewed would not cause a household to lose

any existing service or functionality. In contrast, if a household chose not to take

advantage of a DTV subsidy for which is was qualified, and then did not obtain the

necessary equipment to receive broadcast digital signals, the household might lose

access to broadcast television signals when the transition occurs. Additionally, none

of the rebate programs we reviewed are comparable to the size of a potential DTV

subsidy in terms of number of people served. While the national voucher programs

serve millions of households, they are unlike the DTV subsidy in that they are longestablished programs with an entire infrastructure designed to provide benefits to

recipients on a recurring monthly basis. Due to differences in the scope of the rebate

and voucher programs we reviewed and a potential DTV subsidy, it is not clear how

applicable the administrative costs of these programs are to estimating the costs of

a DTV subsidy.

Other Efforts Necessary for the Completion of the DTV Transition Are Ongoing

If a subsidy program is implemented, it will pose many challenges for the implementing agency and industry. However, there are other aspects of the DTV transition not related to the implementation of possible subsidy program that are ongoing

and will take time to complete or may pose their own challenges. For example:

• Under current FCC time frames, the final process for television stations to select

their permanent channel placement for their digital signals is ongoing. Broadcast stations began the process of choosing their final DTV channel in February

2005.12 In August 2006, FCC expects to issue a Notice of Proposed Rulemaking

that includes a tentative DTV Table of Allotments once the channel election

process is finished. FCC will seek comment on the proposed Table and then

issue an order with a Final DTV Table of Allotments, which, at a minimum,

would take several months. An FCC official told us that it would likely be sometime in 2007 before all the allotments are finalized. In order for the DTV Table

of Allotments to be finalized by the end of 2006, FCC officials told us that they

would need to shorten the channel election process time frames that they currently have in place. We were told that once stations know their final channel

assignments, they might need to make adjustments to certain equipment.

Therefore, we found that for stations that do not have certainty on their assignments until sometime in 2007, equipment modifications will be undertaken well

into that year. • Currently, a small number of television stations are not yet broadcasting digital

signals. FCC told us that issues of technical interference and the permitting

process for locating and constructing broadcast towers are the primary reasons

these stations are not yet online with a digital broadcast signal. For example,

for any station located within 200 miles of the Canadian border, coordination

and approval from the Canadian government is required, in accordance with

international treaties.

• At present, no requirements for the application of the Emergency Alert System

(EAS) apply to stations’ digital broadcast signals. FCC is now considering how

requirements will be set. An FCC official told us that rules for EAS on DTV

stations that are similar to requirements for analog stations should be developed within a few months, but additional work will look at whether there will

be expanded functionality required in the digital environment. According to

FCC, the equipment that stations will be required to purchase to meet the basic

requirements that are likely to be set before the end of 2005 is not very expensive. Because the requirements for expanded functionality are not yet set, an

FCC official told us that it is not clear what the cost of any additional equipment will be.

• Another challenge that may be posed by the DTV transition relates to antenna

reception of digital over-the-air broadcast signals. Many stakeholders said that

antennas currently used to view analog over-the-air signals will be sufficient to

41

receive DTV signals and an FCC official told us that many viewers will have

improved picture quality with digital signals. However, a few indicated that improved antenna technology may be needed for some households. An antenna

manufacturer, a broadcaster, a retailer, and other stakeholders said that the

ability to receive digital over-the-air signals is variable and contingent on each

household’s geography, among other things, and that some people may need

new antennas or adjustment of existing antennas. In particular, we were told

that adjusting the antenna to receive digital broadcast signals can be more difficult than analog signals because if the antenna is not aimed correctly, the television may not be able to display any signal. Also, while interference from trees,

buildings, and other structures can distort an analog picture, this type of interference can cause a complete loss of digital signals.

• Ensuring that households understand the transition and how they will be affected

is critical to a smooth transition. Any household that does not understand what

will occur could be adversely affected. Over-the-air households are the most

likely to be impacted by the transition because, to whatever extent cable subscribers will be affected, they will likely have support and information provided

by their subscription video providers. Based on our work, other specific populations might also be more difficult to reach with needed information about the

transition, including low-income households and those who do not speak

English as a first language. The consequences of any information gaps are serious because households could lose their access to television signals. During our

work on the transition to DTV in Berlin, Germany, we found that an extensive

information campaign was widely viewed as critical to the success of the transition.

CONCLUDING OBSERVATIONS

There are many difficult decisions and determinations that will likely be considered if a subsidy program for DTV equipment is developed. In addition, there are

unique interfaces between the challenges we identified and the administrative

method used to deliver the subsidy that will require careful consideration. For example, if such a program were developed and eligibility were limited to only lowincome individuals, it might be advantageous to leverage the infrastructure and expertise that state social service agencies have in providing assistance to needy

households. But to utilize the state agencies, the subsidy might need to be provided

in the form of a voucher because the state agencies have experience mailing information and could mail a voucher to the low-income recipients of other assistance.

In contrast, if there were no eligibility restrictions applied to the subsidy, a rebate

might be a good method for administering the subsidy because it would draw on the

existing relationships between manufacturers, retailers, and rebate fulfillment companies, all of whom have extensive knowledge and experience in developing, advertising, and implementing rebates. However, such a design might render the subsidy

less usable by low-income Americans.

The return of the spectrum for public safety and commercial purposes is a critical

goal for the United States. Implementing a subsidy program for DTV equipment

poses a variety of difficult challenges and may not be the only policy option that

could help advance the overall goal of reclaiming spectrum. Given the importance

of this transition, it seems critical for knowledgeable officials in government and in

industry to work together to find the best means to address any issues that may

impede progress in completing the DTV transition—and the associated reclamation

of valuable radiofrequency spectrum.

Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this

time.

42

43

44

45

Mr. UPTON. Thank you. Mr. Shapiro.

STATEMENT OF GARY J. SHAPIRO

Mr. SHAPIRO. Mr. Chairman, Mr. Markey, members of the subcommittee, thank you.

This committee has actually led the way, starting with you, Congressman Markey, at the first hearing a long time ago, and continued with even the consensus I heard today, in the year 2008.

That is a remarkable achievement. The fact is, the U.S. leads the

world in the DTV transition. Japan started with analog, stuttered,

had to recall the sets. Europe has not gone to HDTV. The U.S.,

through the government-industry partnership, this committee’s

oversight, the FCC, many of the industries represented in this

panel, consumer groups, we have done it right, quite frankly.

It is been a phenomenal success, and I don’t want to be Pollyanna-ish, but this is the last big step, and I hear consensus on almost every major element. What we are talking about here is some

of the details. And I would like to shed some light on that, if I may.

The reality is is that DTV is selling phenomenally. We do not need

any more government action to sell digital television sets. They are

selling fine at this point, given the fact that we have come so far.

The first 4 months of 2005, we have the greatest volume of DTV

sets ever, 2.3 million products sold. That is a 36 percent increase

in unit sales from the same time period last year. And Americans

have already invested $25 billion in DTV products. Prices are 75

percent lower than they were 5 years ago, and they are declining

by about 15 percent a year. And consumers can now choose from

200 television models that include over-the-air ATSC tuners. We

believe that 9 million DTVs with tuners will be sold this year

alone. If Congress sets a hard deadline this year, and if the FCC

acts on CEA’s petition, we expect 16.7 million DTVs with tuners

will be sold in 2006, 27 million in 2007, and 33 million in 2008.

And by 2009, we will have sold 97 million DTV tuners, and we estimate that digital over-the-air tuners will then be found in 86 percent of American homes.

Analog sales are going down radically, 36 percent next year, 53

percent in another year. And we are succeeding because consumers

are learning. We have a whole range of promotional materials that

we have done separately, with other industries, with the FCC. We

just received an award for alerting consumers. Most consumers in

the country know about HDTV. We have done a phenomenal

amount of research about this, and I think we are safe in saying

that this is a successful transition, and with a hard date set, soon,

that we could start putting labels on sets, just as you have proposed. We do need 180 days or so from the manufacturers’ perspective to get the labels, and could put them in the right place, and

we have some comments about that, on some of the technical details. But we are ready to go forward, if you set the hard date, and

that will allow us to promote even more.

Well, one of the questions is the perspective—and just to give

you some facts, the reality is that most Americans today receive

local and network broadcast signals over cable and satellite, and if

there is any doubt about that, consider the fact that something

which would have been big a few years ago, Monday Night FootVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 21643.TXT HCOM1 PsN: HCOM1
46

ball, will no longer be an over-the-air broadcast. It is only going to

be on cable and satellite. And yet, no one has said a word about

it. So of the nearly 110 million American homes with a TV set, 87

percent, and that is a hard number, 87 percent receive cable or satellite, and you can look at DirecTV, EchoStar numbers, the NCTA

numbers. We have done three surveys, as well as Nielsen has done

a survey, and many broadcasters themselves. So that 87 percent is

a very hard number. So that means that if today, we cutoff analog,

that is 13 percent of the population of 110 million households

would be denied access to a broadcast signal. Now, we asked those

people, we actually surveyed last week, and we will release the details next week, we went to those people that don’t have cable or

satellite, we asked them what would you do if the government cuts

off the analog signal? Over three quarters of them said they would

do one of three things, they would buy a 50 percent D to A transformers, they would get cable or satellite, or they would buy a new

set. Only 22 percent said they wouldn’t do anything. And as cable

and satellite penetration goes, this problem will diminish. So the

simple fact is that while an analog broadcasting cutoff is important

for our Nation, it will only have a very small impact on the viewing

habits of a very small number of people, and that is a very important population. And I appreciate the fact that you are trying to

deal with it.

We do recommend the following. The draft does require the FCC

to move up the deadline for the inclusion of over the air tuners for

13 to 24 inch sets from 2007 to 2006. That is a full year between

what our manufacturers and retailers have planned upon, and that

is nearly 2.5 years before the 2008 hard deadline. We are pretty

concerned about that, because such a requirement would severely

reduce the retail market for these sets. Now, the analog, on the

other hand, is $100 set for the most part, is just a feature. It is

a feature that is barely used. In fact, it is a feature that is not even

used in four out of five of the sets where this cable or satellite. So

your second, third, or fourth set is already hooked up to cable or

satellite, and that is what you are buying these sets for. So it is

a low market, it is in the market, but it is an important market.

The fact is, manufacturers have these sets on the planning

board, they are already starting to go. Manufacturers have an 18

to 24 month cycle for new equipment. So the accelerated mandate

is a little bit problematic, quite frankly, and it would hit lower income consumers hard.

We also ask you to look at the broadcasters’ obligation to educate

their viewers on the DTV transition. We think it is very marginal.

At this point, we have spent millions of dollars. We have a website,

we have brochures, we do road shows. We do everything to educate

the Americans about the DTV transition. To our knowledge, although local broadcasters have done a good job and networks have

done a good job, the reality is that the national organizations for

broadcasters have done almost nothing to talk about free, over-theair television, and that is what this is about. It is free, over-theair television.

So we commend you for taking it this far, and we ask you to keep

going, set that date this Congress, and get us over the finish line

here.

47

[The prepared statement of Gary J. Shapiro follows:]

PREPARED STATEMENT OF GARY J. SHAPIRO, PRESIDENT AND CEO, CONSUMER

ELECTRONICS ASSOCIATION

Mr. Chairman and Members of the Subcommittee: Thank you for inviting me to

discuss our nation’s progress in the transition to digital television (DTV), and the

steps that should be taken to conclude the transition in the most beneficial and understandable manner.

I represent the Consumer Electronics Association (CEA), the principal U.S. trade

association of the consumer electronics and information technology industries. CEA’s

2,000 members include virtually every DTV manufacturer. Our members invented

DTV, and we are thrilled by its astounding marketplace success. CEA also represents the cutting-edge information technology companies who will use the recovered analog broadcast spectrum to provide all Americans with innovative new wireless products and services.

CEA strongly supports the enactment of a hard deadline for the end of analog

broadcasting. A hard deadline will bring certainty to the DTV transition. It will provide a ‘‘win-win’’ scenario for all stakeholders, while fostering innovation and

strengthening our national security. We commend you for including a hard analog

cutoff date in this draft legislation.

DTV SALES CONTINUE TO RAPIDLY INCREASE

Our most recent sales figures show that the first four months of 2005 brought the

greatest volume of DTV sales ever recorded, with 2.3 million DTV products accounting for $2.95 billion of consumer investment. This is a remarkable 36 percent increase in unit sales from the same time period in 2004.

More than 17 million DTV products have been sold since the first HDTV sets hit

the market in the fourth quarter of 1998. Americans already have invested an astonishing $25 billion in DTV products. HDTV is the driver behind these phenomenal

sales figures, with high-definition displays and receivers representing 85 percent of

the DTV products sold to date.

Sales are being driven by the rapid price declines that are typical of our industry.

DTV prices are 75 percent lower than they were five years ago and are still declining by approximately 15 percent each year. Today there are numerous DTV options

under the $700 mark and even some expected soon for as low as $400.

Meanwhile, DTV products have spread from specialty retailers and major consumer electronics chains into warehouse clubs, mass merchants, and now discount

stores like Wal-Mart and Target.

When consumers walk into retail stores, they now enjoy an unprecedented variety

of DTV products to meet their needs and budgets. Buyers can choose from a vast

array of compelling displays from traditional CRT sets to cutting-edge new technologies like plasma, LCD, DLP, and LCoS.

Most important to the current debate is the fact that consumers now can choose

from 200 ‘‘integrated’’ models that include over-the-air ATSC tuners.

To put this in perspective, digital television has been adopted twice as quickly as

color television. While it took color television ten years to achieve 5% penetration

from introduction, digital television products are already in 16 million American

homes!

Indeed, overall revenues from digital TV now outpace those from analog TV. Television manufacturing is now a digital industry.

As impressive as those numbers sound, we are only beginning to move up the

‘‘hockey stick curve’’ of sales, especially with respect to integrated DTV sets

equipped with digital over the air (ATSC) tuners. CEA forecasts that 9 million integrated DTVs will be sold this year, 16.7 million in 2006, 27 million in 2007 and 33

million in 2008.

Including set-top boxes, by 2009 we will have sold 97 million DTV tuners, and

we estimate that over the air tuners will be found in 86 percent of American homes.

At the same time, sales of analog sets are declining precipitously. We project sales

to decline 36 percent in 2006, and an additional 53 percent in 2007. The current

tuner mandate schedule established by the FCC is working.

CEA IS THE LEADER IN DTV CONSUMER EDUCATION

The CE industry has every business incentive to educate consumers about the

qualities and features of the DTV they want to purchase. That is why CEA runs

an extraordinary educational effort to ensure that consumers are fully informed

about their DTV options.

48

Indeed, last week the National Association of Consumer Agency Administrators

(NACAA) presented CEA and the FCC with the Achievement in Consumer Education from for our joint work in informing consumers about the transition to DTV,

and helping consumers make the digital choices that are right for them.

As the primary conduit to consumers, and it is critical that retail floor staff is

properly equipped to provide accurate and easy-to-understand information.

CEA aggressively responded to this challenge and created a comprehensive DTV

retailer-training program called CEKnowHow (it can be viewed online at

www.ceknowhow.com). This program is available to all retailers over the Internet.

It equips them with the most up-to-date online training for sales associates, so that

they can effectively respond to consumer inquiries on DTV and HDTV.

CEA also designed, printed, and made available to retailers a ‘‘tip sheet’’ that explains the DTV transition and basic DTV terms and technology. In late 2004, CEA

partnered with the FCC and the Consumer Electronics Retailers Coalition (CERC)

to distribute to literally hundreds of thousands of copies of the tip sheet to consumers, retailers, and professional home theater installers.

Over the last year, CEA also visited with major consumer electronics buying

groups and talked to more than 2,000 dealers to bring them the latest information

on the DTV transition. We have collaborated with Comcast on an educational DVD

that covers DTV information ranging from basic definitions to the equipment required to receive and view HDTV content via antenna, satellite or cable delivery.

CEA also is making every effort to reach out directly to consumers. Millions of

readers across the country saw our inserts in TV Guide and Sports Illustrated magazines explaining the basics of DTV, how to get a signal, what product choices are

available, and so on. We also have showcased HDTV before hundreds of thousands

of consumers through exhibits at home design shows and trade exhibitions and

viewing parties in public venues across the nation.

CEA exposes millions of consumers to HDTV through our nationally pre-packaged

video and news releases, as well as our national CEA media tour. And our quarterly

HDTV Guide is the single most authoritative list of the DTV products and programming currently available.

Meanwhile, CEA has taken the lead in promoting consumer awareness and use

of over-the-air digital television reception. Through our AntennaWeb program, consumers can visit a website (www.antennaweb.org), enter their home address, and

find the optimal outdoor television antenna for their specific location. This site receives approximately 100,000 hits per month.

We also see it as our obligation to recognize those who are going above and beyond the call of duty in furthering the DTV transition. Every year, our Academy

of DTV Pioneers honors the best of the best in HDTV programming, reporting and

retailing. And, as it should be, every year the categories get more crowded and competitive.

This is just a sampling of CEA’s strong commitment to educating consumers and

retailers about the DTV transition.

In short, for the DTV transition, everything is moving rapidly in the right direction. Product sales continue to rise, as prices decline. The amount and variety of

HDTV programming continue to increase. Content delivery industries are increasingly jumping onto the HD bandwagon. Exciting new products are rolling into the

marketplace. Consumer and retailer education is advancing. By almost any measure, digital television is a marketplace success.

Now is the appropriate time to take the next step and bring the broadcast digital

transition to a successful conclusion, just as envisioned by this Committee when the

Congress loaned public spectrum to the broadcasters for the DTV transition a decade ago.

THE TIME FOR A HARD DEADLINE IS NOW

The 700 MHz band currently occupied by analog broadcasters is beachfront property on the spectrum landscape. The prompt recovery of this spectrum by Congress

will produce immense public interest and economic benefits while fostering innovation and protecting our national security.

First, the analog TV broadcast spectrum is ideal for advanced wireless broadband

applications. A hard date will spur innovators to develop a broad range of new wireless technologies and services. These new wireless services will offer unprecedented

access to rural and underserved areas, while creating competition that drive down

prices for all wireless consumers.

A hard date also will fundamentally change and accelerate the DTV marketplace.

With the certainty of a hard deadline, stations will know what to broadcast, manufacturers will know what to make, retailers will know what to stock, and consumers

49

will know what to buy. With the completion of the digital transition now an imminent reality, all affected industries will shift our consumer education efforts into an

even higher gear.

But the rationale for a hard date goes deeper than promoting new technologies

and broadband access. As reinforced by this month’s evacuation of the White House

and this Capitol, the gravest threat to our safety is another national calamity like

we suffered on September 11, 2001. It is now more apparent than ever that the 700

MHz band held by broadcasters is essential to the swift and effective response of

Homeland Security, police, firefighters, and other first responders.

That is why, in a recent letter to Chairman Barton, the Association of Public Safety Communications Officials implored you to set an analog broadcasting cutoff date,

stating that ‘‘the security of our homeland and the lives and property of our citizens

as well as our responders are at stake’’.

The key to unleashing these benefits is for a hard date to be set, and set now.

Fortunately, the video marketplace has now evolved to the point where an analog

cutoff can be managed to cause the most minimal consumer disruption.

THE VAST MAJORITY OF AMERICANS NOW CHOOSE CABLE OR SATELLITE TO PROVIDE

THEIR TELEVISION PROGRAMMING

Americans now have more ways to receive video programming than ever before.

The vast majority of Americans receive local and network broadcast signals via

cable and satellite (and will soon have these services available via telephone, mobile

and wireless broadband). Meanwhile, the statistics show that a small and declining

number of households rely exclusively on a free over the air broadcast signal.

If there is any doubt about this, consider the total lack of public outcry over the

recent announcement that Monday Night Football, long a staple of broadcast TV,

will soon be available only to satellite and cable households.

Of the nearly 110 million American homes with at least one TV, 68 percent receive a cable signal and 22 percent receive a DBS signal. Our research shows that

roughly 2% receive both cable and DBS. In total, approximately 87 percent of American homes will have access to cable or satellite (and thus network and local broadcast feeds).

This means that if the analog cut off occurred today, less than 13% of the population of 110 million TV households would not have access to a broadcast signal

through cable or satellite.

And this number is shrinking significantly every year. Cable and satellite penetration continues to grow by about one to two percentage points annually. What’s

more, the market research firm Sanford Bernstein has just concluded that cable and

satellite subscribers are growing 3.6 percent annually.

Further, the number of over-the-air homes will become less relevant as broadband

penetration grows. Broadcasters are increasingly providing their content through

other means including the Internet and mobile phones. Just recently, Verizon announced that a deal where it would provide NBC’s feed over its fiber network.

With respect to consumers with neither cable nor satellite, our research shows

that this population’s decision not to subscribe generally is not solely for economic

reasons. Indeed, our data shows that 52 percent choose not to subscribe for a reason

other than cost—with almost a third reporting that they do not subscribe because

they ‘‘don’t watch that much TV.’’

Those who do not subscribe to cable or satellite watch, on average 30% less television per week than cable and satellite subscribers. Nearly six of ten say television

simply is not a high priority for them. Fewer than three in ten indicate that insufficient funds play a role in their decisions not to subscribe to cable or satellite television.

Some opponents of a hard deadline raise concern about the unconnected analog

TV sets in households that subscribe to satellite or cable TV, and claim that most

of these sets are used with antennas for watching over the air analog signals. In

fact, primary viewing most often occurs on the TV that is connected to pay services.

More often, the unconnected TVs are shunted to a less used room and hooked up

with a DVD, VCR, or video game. Indeed, our research shows these sets are used

at least half the time for one of these many alternate uses. In addition, as many

cable companies no longer have a monthly charge for additional outlets, this issue

has become increasingly irrelevant for cable homes.

In households utilizing an antenna, TVs connected to the antenna are often used

for an activity other than watching broadcast television. In these households the TV

connected to an antenna is used approximately 40 percent of the time for watching

pre-recorded content, playing video games, and other non-broadcast uses.

50

At the same time, we must acknowledge that some consumers may be adversely

impacted by a hard date. That’s why we respect and understand the interest of

some members in creating a program whereby those viewers would have access to

low cost digital to analog converters. In the past, our members have testified that,

with economies of scale, converter prices will be in the fifty dollar range by the time

of the proposed cut-off date. The only development that could interfere with this

projection would be the imposition of state or national energy usage mandates on

converters, which would adversely impact converter price and availability.

By the time of a year-end 2008 cut-off—combining present adoption trends for

cable and satellite and forecasts for uptake of recently announced TV services from

telcos like Verizon and SBC, as well as the jump in purchases likely to occur with

a hard cut off date—the number of American homes that would lose their primary

video signal should be far less than 13%. The simple fact is that, while an analog

broadcasting cut-off is important for our nation, it will have only small practical impact on the viewing habits of the vast majority of Americans, and we believe the

types of education and public awareness steps included in the draft legislation can

effectively address the needs of those who wish to rely only on broadcast television.

CEA ENDORSES THE DISCUSSION DRAFT’S HARD DEADLINE, AND OFFERS SUGGESTIONS

TO BRING ABOUT A MORE EXPEDITIOUS TRANSITION

In the United States, the transition to digital television has always been envisioned as having two purposes. The first was to bring the wonders of digital and

especially high-definition TV to American consumers. The second was to capture the

public interest and economic benefits of the return of the analog spectrum.

We are now well on our way toward accomplishing the first objective and it is

appropriate that we turn our attention to the second.

CEA unequivocally endorses the Staff Draft’s establishment of December 31 2008

for the recovery of the analog spectrum. The setting of a date certain will benefit

consumers as spectrum is reallocated for purposes ranging from public safety communications to exciting new services such as wireless networking and Internet access.

The Staff Draft also contains a number of other provisions intended to help hasten the digital transition. CEA offers a number of suggestions that will help this

Committee craft legislation that will ensure the most expeditious, practical, and consumer friendly result.

Specifically, we recommend the following:

1. Tuner Mandate acceleration: The staff draft requires the FCC to move up

the deadline for the inclusion of over the air tuners in 13 to 24-inch sets from July

1 of 2007 to July 1 of 2006—a full year before the original deadline and nearly 2.5

years before the 2008 hard deadline.

We are concerned that, if implemented, such a requirement would severely reduce

the retail market for these sets.

Manufacturers need a minimum of 18 to 24 months to plan, develop and deploy

new equipment. An accelerated tuner mandate could force some manufacturers who

determine that meeting the new regulations is not feasible (and fear inability to

comply with the FCC’s regulations) to move to tunerless sets or to stop manufacturing altogether the TV models which cannot be fitted with digital tuners—which

many manufacturers are reluctant to do and which would defeat the purpose of the

tuner mandate itself.

Even if manufacturers were able to meet such a severely foreshortened production

schedule, a July 2006 date could result in cost increases that the marketplace cannot sustain. Pushing up the tuner deadline for 13 to 26 inch sets to 2006 would double the development costs for manufacturers, as well as double the price of a typical

13 inch television to consumers. If the product is rejected by lower income and other

consumers because the price exceeds their budget, it will not be carried by retailers

and, eventually, not produced by manufacturers.

The unfortunate result of accelerating the tuner mandate deadlines would be to

decrease the number of DTV tuners in the marketplace, which clearly does not serve

the transition. By contrast, the current and anticipated July 2007 date allows time

for economies of scale to fully develop. This will lessen the ‘‘sticker shock’’ for consumers, allowing these products a chance to compete against less expensive, tunerless alternatives. In sum, the current tuner mandate is working and should be left

as is. Forcing the market could have unintended consequences for consumers, manufacturers, and the DTV transition.

2. Digital Carriage and Non-Degradation: We appreciate that the Draft addresses the important issue of signal degradation, and ensuring that a digital signal

is carried under all circumstances. It is fundamental that when cable operators are

51

carrying broadcast signals digitally, they should not be allowed to reduce the sound

or picture quality. American households—most of whom are cable customers—have

invested more than $25 billion dollars in high-definition televisions. If a broadcaster

is providing HDTV programming and Dolby Digital surround sound, then that is

what HDTV owners who subscribe to cable should see and hear.

3. Television Labeling: CEA fully supports educational labels on analog televisions when paired with the certainty of a hard date. However, manufacturers will

need a minimum 120 days to include the labels or label text on the outside of the

product packaging and on or near the television itself. In order to prevent screen

damage upon removal by a consumer or retailer, consideration should be given regarding the necessity of placing the label ‘‘on the screen’’ so long as it is attached

to the product as shipped.

CEA urges that any label language should be concise or consumers may not read

or understand it. CEA and CERC recommend the following language:

‘‘This TV has only an ‘analog’ broadcast tuner so will require a converter box

after [date] to receive over-the-air broadcasts with an antenna, because of the

transition to digital broadcasting on that date. (It should continue to work as

before with cable and satellite TV systems, gaming consoles, VCRs, DVD players, and similar products.)

4. Channel allotments: CEA supports the Draft’s proposed timetable of December 31 2006 as the final date for the FCC to issue final broadcaster channel allotments, and an additional seven months to conclude any reconsideration of such allotments. We urge the Committee not to extend the reconsideration period beyond

seven months, as this could cause the final end date for analog broadcasting to slip

to 2010.

5. Broadcaster Disclosures: In light of our own aggressive consumer education

efforts, CEA has been disappointed with the paltry level of DTV consumer education

offered by the broadcasters to date, especially the almost complete lack of broadcaster-sponsored public service announcements (PSAs). We commend the Committee

for addressing this issue, and we urge that the legislation require increased broadcaster consumer education activities. Specifically, the Committee should consider

starting the required announcements at least one year before analog shut-off, and

increasing the number of ads from two per day—at least in months closest to the

analog shut-off—and imposing separate educational requirements on networks as

well as local broadcasters. This makes sense because broadcasters are the ones with

the vested interest in transitioning the remaining over-the-air viewers to digital.

Broadcastering is a powerful and effective communications medium, and it is essential that the broadcasters themselves step up and do their part to educate the nation about the transition to digital television.

CONCLUSION

Setting a realistic date certain for the end of analog broadcasting and the recovery

of the analog spectrum for new purposes is the right thing to do. It is right for consumers, it is right for innovation, and it is right for America’s national security. A

hard deadline will help foster the creation of new, high-skill jobs, and it will promote America’s technology leadership in an increasingly competitive world.

We commend the staff draft as a critical step towards bringing the broadcast DTV

transition to a successful and timely conclusion. Meanwhile we will continue our efforts to educate consumers about digital television. I pledge CEA’s continuing commitment to working with this committee and other stakeholders to ensure the most

timely and consumer friendly transition, and a prompt return of the analog broadcast spectrum.

Mr. UPTON. Thank you. Mr. Yager.

STATEMENT OF K. JAMES YAGER

Mr. YAGER. Thank you, Mr. Chairman, Mr. Markey, members of

the subcommittee. I am Jim Yager, Chief Executive Officer of Barrington Broadcasting, which owns and operates four television stations in Michigan, Illinois, and Missouri.

Today, there are nearly 1,500 local television stations on air in

digital. Let me be very clear. All broadcasters, large and small, network, non-network, want to see the DTV transition brought to a

successful conclusion. As an industry, we have consistently said

52

that this transition is, first and foremost, about consumers, your

constituents, our viewers.

Many good things can be said about the Staff Draft in this regard. For instance, labeling as soon to be obsolete the 20 million

analog-only sets that manufacturers plan to sell this year is the

right thing to do for consumers. Accelerating the FCC tuner integration deadline is a good thing, again, for consumers. Whether

discussing the benefits of DTV, talking about cable carriage, or discussing over-the-air TV sets, the central piece of the equation must

always come back to the consumer.

In that vein, let me recommend a few modifications to the Staff

Draft that would better protect consumer interests. First and foremost, protecting over the air viewers must be a priority. The GAO

has said that there are 21 million households in this country that

rely exclusively upon over-the-air reception. That is more homes

than are located in the states of Texas, Michigan, Massachusetts,

Mississippi, Nebraska, New Mexico, Oregon, Tennessee, and Wyoming combined. Under the draft’s hard date, viewers will either

lose their television service or have to pay for converter boxes, or

even worse, subscribe to pay TV, all just to keep something they

currently get for free. Many of these viewers are among society’s

most economically vulnerable demographics. Low-income senior

citizens are disproportionately dependent upon off-the-air reception. African-American households are 22 more likely to rely exclusively on over-the-air reception; 43 percent of Spanish language

only households rely solely on over-the-air television. Moreover,

when you count the second and third sets in the bedrooms and

kitchens of cable and satellite homes, there are 73 million sets in

this country that risk being rendered obsolete by a premature hard

date.

Some of this committee have recognized that turning off these

TV sets will create a firestorm of consumer outrage, and I agree.

But even setting aside the political considerations, all of us here

share an obligation to protect over-the-air television viewers. Local

television broadcasters are ready to work with you to achieve that

goal. Consumer interests should also drive the cable carriage discussion. Broadcasters commend the draft’s authors for trying to

tackle down conversion. The draft will allow cable subscribers with

digital sets to enjoy the benefits of DTV. That is good for consumers. Allowing the cable systems to down-convert, as long as

they also carry digital signals, will mean that subscribers with analog-only sets won’t be cutoff, and that is also good for consumers.

Under the current language, all must-carry stations in the market would be treated the same in terms of down conversion, and

that is good for consumers, but the draft leaves room for a scenario

in which paid TV services could essentially withhold smaller stations, religious stations, Spanish language only stations, from consumers who have not yet purchased DTV equipment. We see great

promise in this section of the draft. However, it does require modest modification, so that all stations in America, large and small,

are treated equally with regard to down conversion.

Finally, let me touch briefly on multicast cable carriage. Today,

540 local television stations are using DTV to multicast and better

serve the communities with enhanced programming options. These

53

free services are the beginning of a whole series of new offerings

that will evolve to the benefit of consumers, but only if cable does

not withhold them. Should cable operators block consumers from

receiving this programming, it will be difficult for stations to justify

the risks and costs of developing these services, and the potentials

of multicasting will not be realized.

This is not a capacity issue. Cable carriage of these stations

would occupy no more capacity than carrying a single high definition digital channel. Under the laws of physics, after all, 6 megahertz is 6 megahertz is 6 megahertz. The committee must protect

consumers by adopting a strong multicast must-carry rule.

Mr. Chairman, let me close by the draft is a good starting point.

As the committee moves forward, local broadcasters are ready to

work with you to develop the DTV policy that ends the transition,

that clears the analog spectrum, that protects the interests of overthe-air television viewers, and ultimately enhances television for

all consumers.

Thank you.

[The prepared statement of K. James Yager follows:]

PREPARED STATEMENT OF K. JAMES YAGER, CEO, BARRINGTON BROADCASTING

COMPANY ON BEHALF OF THE NATIONAL ASSOCIATION OF BROADCASTERS

Thank you, Mr. Chairman, for the opportunity to appear today before the Subcommittee to discuss the staff draft of a bill aimed at advancing the digital television transition, while helping consumers to continue to use their analog televisions. My name is K. James Yager. I am CEO of Barrington Broadcasting Company. I appear before you today on behalf of the National Association of Broadcasters,

First of all, I must say that I could not agree more with the purpose of the bill.

Advancing the DTV transition while preserving television reception for consumers,

particularly those reliant on free-over-the-air television for news, entertainment,

local information and critical emergency warnings, has long been the goal of Congress, and of us all. Crafting a plan that also helps consumers to continue to use

their analog televisions until they are ready to join the full digital television experience by purchasing a digital set will respond to consumer needs and expectations

in a forward thinking way. I support your efforts in this regard.

It is, after all, the consumer for whom the DTV transition was launched. The

American consumer, long the beneficiary of the finest television service in the

world—in fact the ‘‘envy of the world,’’ must continue to receive the best television

today’s technology can provide. The American consumer deserves the best technical

picture quality achievable, the greatest array of programming and information

choices, the most varied supplemental services and the surest emergency warning

capability. The DTV transition, long underway, will provide this to America’s populace—and for free. Consumers deserve and will demand nothing less.

Consumers deserve and will demand as well that their television reception not be

interrupted in the midst of this transition to the amazing world of digital television.

Which is why a DTV transition bill must contain provisions for continued use of

both analog and digital receivers by the vast majority of consumers while they make

the transition and buy new sets. Thus, the staff draft wisely includes provisions for

cable subscribers, the largest segment of the viewing audience, to continue to use

their analog sets after analog broadcasting ceases but at the same time have ready

access to the digital version available to their cable-subscribing neighbors who have

purchased HDTV receivers.

We are confident that, as the Subcommittee works on the draft bill, it will also

work to help free over-the-air consumers continue to watch their analog televisions

while they taste true digital television and make their plans to join the digital television revolution. In this regard, it is essential that Congress have a plan to ensure

that all households can get television reception. This plan is necessary to meet consumers expectations and prevent widespread outcry. Consumers expect their televisions to work, and they will continue to expect—and demand—this, until they are

given advance and clear information to the contrary. The staff draft already includes

provisions to give advance warning to the public. Without sufficient warnings, the

54

1 47 U.S.C. § 309(j)(14)(B).

public will rebel and will blame all in sight for newly or recently purchased sets

going dark. If, on the other hand, consumers are given lead time, adequate explanation and clear consumer information about new digitally-capable sets as well as

help equipping OTA-only households, they will embrace the digital television future

with enthusiasm and excitement rather than with dismay and outrage.

Broadcasters are ready to serve the public with brand new digital facilities and

beefed up digital signals, high definition and high quality digital versions of their

favorite shows, specials and sporting events including current and coming plans for

multicasts like Final Four basketball and zoned newscasts. We are designing new

news sets, purchasing digital cameras and seeking to exploit digital capabilities at

every turn. Cable too has readied their digital plants, expanded capacity far beyond

expectations and planned for advanced digital services. Set manufacturers have deployed increasingly cost-effective digital sets and sets at various size and price

points with glorious high definition picture capability. They are adding digital tuning capability to analog sets, extending those ‘‘second tier’’ sets’ lives beyond the

analog turn off and providing popular ‘‘cable ready’’ versions of digital sets.

The FCC has adopted measures designed to advance consumer take-up of digital

sets, such as mandatory broadcaster build-out deadlines, jaw-boned voluntary measures for broadcasters, programmers, cable and manufacturers, encouraged and approved cable/DTV inter-operability specifications (including tuners in ‘‘cable ready’’

sets) and the all-important tuner mandate. (That measure alone, once it is fully in

place, will speed consumer penetration of digital reception capability in the course

of normal replacement of televisions and do it in short order.)

Now, this Subcommittee has taken the reins and is moving boldly to advance the

digital television transition, encouraging consumers to cross the digital finish line

while preserving use of the majority of analog sets for a reasonable period and setting a deadline and measures that will provide consumers with warning, information and education. NAB applauds your efforts to grapple with critical consumer

issues, speed up the digital television transition and recover spectrum for national

security and public safety use.

We believe and hope that the Subcommittee, as it continues to work on the staff

draft will keep consumers at the forefront and meet all the goals set out for the digital transition by Congress in 1997.

Congress sought to achieve three overarching goals in the DTV transition:

(1) Bring the benefits of digital technology with its potential for more programming

options and advanced services to consumers;

(2) Avoid the loss of free television to large numbers of consumers stranded with

analog-only receivers; and

(3) Reclaim channels 52-69 to be reallocated for other purposes.1

The staff draft now before you would achieve Congress’ goal of reclaiming spectrum for re-use. It would help advance the digital transition, and hence help advance goal number one, by providing for cable carriage of digital broadcast signals,

as broadcast and without material degradation, to entice the largest segment of the

public to buy digital sets and by requiring advance warning and consumer education

and information, which should incent consumers to buy digital sets. And it would

begin to address goal number two by advancing the all-important Tuner mandate

so that all televisions 13’’ and larger sold after July 2006 will receive digital signals

and thus many OTA-only consumers will sooner have free, digital reception by normal replacement of television receivers and not be stranded by the analog cut-off.

As it is worked on by the Subcommittee the staff draft bill can and should make

clear that cable carriage of broadcasters’ digital ‘‘primary video’’ service includes the

free multicast programming services that would advance Congress’ goal number one

of bringing the benefits of digital technology with its potential for more programming options and advanced services to consumers.

And of course yet to be added to the staff draft is the missing critical piece necessary for the accomplishment of Congress’ goal number two, namely enabling OTA

consumers (over 20 million households) to continue to watch their analog televisions

after the analog cut-off until they have purchased DTV sets. This critical piece of

the puzzle that Congress has already identified (avoiding stranding OTA viewers)

will necessarily involve a plan to make digital-to-analog converters accessible to

OTA households without digital reception capability. As I have testified previously,

many of those OTA viewers are not in a position to purchase new equipment—even

a converter box. We must not disenfranchise those citizens.

We do believe that the wise step of moving up the tuner mandate suggested in

the draft will naturally equip many OTA households with digital reception. Other

55

2 National Association of Broadcasters, DTV Stations in Operation, http://www.nab.org/Newsroom/issues/digitaltv/DTVStations.asp (as of May 25, 2005). 3See www.fcc.gov/mb/video/dtvstatus.html (‘‘Commission statistics’’). 4This includes 38 with licensed full-power digital facilities and two New York City stations

with Special Temporary Authority (‘‘STA’’) currently covering a significant chunk of their service

areas and with plans to expand even more. 5See Commission statistics.

OTA consumers will have taken the plunge on their own and bought a HDTV or

digital receiver, particularly after the consumer education and warnings the bill will

require. But for a majority of OTA households, Congress must devise a solution to

avoid loss of television service and its emergency warnings to millions of OTA

households. This, the OTA viewing public will demand, and deserve. We expect the

Subcommittee will be able to fashion a converter plan that will meet the basic needs

and expectations of consumers, including those less well off financially, in the 20

million OTA-only households that they will continue to receive television service

without subscribing to a pay television service.

NAB believes that the draft bill can provide a useful framework for advancing the

digital television transition, avoiding stranding OTA households, reclaiming spectrum for re-use and meet consumers’ expectations that their existing televisions will

continue working for a reasonable time.

Before turning to each of the provisions of the draft bill in turn for more specific

comment, I would like to describe for the Subcommittee the progress broadcasters

have made in the DTV transition to date. After addressing the draft bill’s specifics,

I will lay out for the Subcommittee the challenge it faces as it seeks to grapple with

the OTA households/digital-to-analog converter issues, as well as some comments

about the converters consumers need.

BROADCASTERS ARE READY FOR THE END GAME OF THE TRANSITION

Even without the final pieces of the puzzle in place, evidence of the remarkable

progress made so far can be found everywhere, due in no small measure to broadcasters’ commitment and actions. Our industry has spent enormous sums of money

and undertaken extraordinary steps to implement the transition, and I am pleased

to report that these efforts are paying off. Broadcasters have built—and are on air

with—DTV facilities in 211 markets that include 99.69% of all U.S. TV households.2

At this point in the transition, over four-fifths—84.2%—of U.S. television households

have access to at least six free, over-the-air digital television signals, per NAB database figures. According to the FCC, nationwide, at least 1497 television stations in

211 markets are delivering free, over-the-air digital signals today.3 Currently, more

than 92 million households receive six or more DTV signals; 71 million households

receive nine or more DTV signals; and a full 30 million households receive 12 or

more DTV signals, per NAB database figures. More and more digital stations are

overcoming their unique obstacles and going on air almost daily. The digital transition is working and moving ahead quickly, and any claims to the contrary are simply untrue.

In the top ten markets, covering 30% of U.S. households, all top four network affiliates are on-air with digital signals,4 and in markets 11-30 (24% of U.S. households), all 79 top four affiliated stations are on-air. Thus, all ABC, CBS, Fox, and

NBC affiliates in the top 30 markets, representing 53.5% of all U.S. households, are

on air with DTV. Even smaller stations in these markets and stations in smaller

markets are making terrific progress, with at least 1378 out of a total 1603 stations

currently on air in digital,5 despite the far fewer resources of these stations. In fact,

many firms have been forced to mortgage their stations to afford the equipment

needed to implement the transition, and without any immediate prospect of revenues to offset these huge investments.

On the programming side, both networks and local stations are providing an extraordinary amount of high-quality DTV and HDTV programming, as well as a

growing number of valuable multicast channels, to entice viewers to join the digital

television transition and purchase DTV sets. For example, the four top networks

currently offer virtually all their prime time programming in HDTV, along with

high-profile specials and sporting events like the Academy Awards and the

Grammy’s, the Masters, and playoff games in all the major professional sports

leagues. The WB network also is offering ten or more prime time programs in HD.

And this continues to grow.

Local stations are also doing more all the time to supplement the network HDTV

and multicast fare, despite the enormous cost for full local HD production facilities.

Examples of local HDTV programming abound. Stations that have begun to produce

and broadcast their daily local newscasts in HD include WRAL-TV (Raleigh, NC),

56

KOMO-TV (Seattle, WA), KUSA-TV (Denver, CO), WUSA-TV (Washington, D.C.),

and WJW-TV (Cleveland, OH). HD broadcasts of local special events are numerous,

like KTLA’s (Los Angeles, CA) broadcast of the Rose Parade in a commercial-free

HD broadcast that was simulcast in Spanish and closed captioned and distributed

on many Tribune and other stations. Raycon Media this summer will roll-out a new

24-hour TV music video channel on 30 of its stations, which includes coverage of

local music artists and local concerts. NBC Universal has signed up enough affiliates for its Weather Plus digital channel to reach 60% of the U.S. Gray Television

and UPN are partnering to expand DTV program options.

All of these developments demonstrate that broadcasters are more anxious than

anyone to get the transition over and done with. Broadcasters have no interest in

shouldering the enormous costs of operating dual facilities any longer than absolutely necessary to avoid disruption to consumers. Building a second transmitter,

and then maintaining and powering two transmitters for any period of time is extremely expensive, especially since there will be no opportunity to recover much of

these costs. Similarly, any need to repair or replace analog equipment now is little

more than wasted resources. Indeed, by the time the transition is over, broadcasters

will spend between $10 and $16 billion to fully convert to digital, and we simply

cannot afford to strand this investment, or accept any further delays in our ability

to provide new digital services to recoup at least some of this investment.

STAFF DRAFT—SECTION BY SECTION DISCUSSION

Sec. 3 Analog Spectrum Recovery: Hard Deadline

The 85 percent DTV penetration test contained in Congress’ 1997 Balanced Budget Act, which would be replaced with a hard deadline in the draft bill, was devised

to protect the vast majority of consumers from an early end to the DTV transition

and the need to replace hundreds of millions of televisions overnight. It would allow

consumers to trade-out their analog sets and upgrade to digital sets over time, and

in the normal course of replacing televisions. With the hard deadline in the staff

draft, consumers will face the prospect of replacing at least their main television

sooner than they may have expected.

We believe, however, that other provisions of the draft bill, namely advancing the

Tuner mandate and permitting cable downconversion of digital broadcast signals to

analog for cable subscribers (who would still receive digital broadcast signals as

broadcast), ameliorate much of this concern. We expect that there will be further

discussion within the Subcommittee as to whether the specific date in the staff draft

is the optimal hard cut-off deadline. And, of course, the major unresolved issue is

provision in the bill for OTA households to continue to receive television service

after the analog cut-off.

One of Congress’ objectives when it authorized the transition to digital beginning

in 1996 was to strengthen the over-the-air broadcasting system. A premature end

to analog broadcasting before consumers are ready may have the opposite effect of

reducing the audience of local stations and thus reducing their ability to provide attractive programming and local public service. If consumers are driven to cable and

satellite programming, that would increase those monopoly providers’ power and

frustrate Congress’ goal of improving local broadcasting. This then, continued preservation of free local broadcasting, is another reason that the Subcommittee should

make provision for converters for OTA-only households without digital reception capability, including some solution for the less well-off.

The provision of Sec. 3 of the staff draft that directs the FCC to make final DTV

channel assignments within the core by December 2006 and conclude any reconsideration of these assignments by July 31, 2007 appears reasonable, given the FCC’s

current DTV channel assignment plan, and necessary to stations’ ability to construct

and move to new digital facilities before the analog cut-off. There may however be

appeals of final channel assignments that would complicate completing final construction for some stations and consumers. This is all the more reason for the Commission to continue its diligent work to accommodate the channel changes needed

by many stations.

We are pleased to see in Sec. 3 of the draft bill six month ‘‘status reports’’ by the

Commission on progress in completing Canadian and Mexican coordination of outstanding DTV channel assignments. This coordination, of course, is necessary for all

stations to complete DTV facilities construction and be on-air before analog broadcasting is to cease.

NAB notes that, once the channel repacking plan is complete, the FCC must turn

to the issue of channels within the core and licenses for digital translators. These

‘‘repeaters’’ of full power stations provide critical television service to thousands in

rural and mountainous areas, which must be preserved in the digital switch-over.

57

6 ‘‘Assessment of the Impact of DTV on the Cost of Consumer Television Receivers,’’ Final Report to MSTV and NAB, Arthur D. Little, Inc., September 10, 2001. 7See NAB/MSTV/ALTV Petition for Reconsideration and Clarification, FCC CS Docket No. 98-

120, filed April 25, 2001; Petition for Reconsideration of the National Association of Broadcasters and the Association for Maximum Service Television, Inc., FCC CS Docket No. 98-120,

filed April 21, 2005.

We urge the Subcommittee to consult with the FCC as to the most efficient way

to protect translator service in light of this newly developing DTV transition plan.

Sec. 5. Consumer Education Regarding Analog Televisions

NAB agrees that consumer education about the coming end of analog broadcasting

and the need for converters and warnings on analog sets and in-store displays alerting consumers to the limited useful life of these sets is important for consumers and

important to the transition. Promotion and education for consumers about DTV can

encourage consumers to purchase DTVs, thereby reducing the number of households

needing converters to continue receiving television service. NAB in fact urged provision of these measures in our February 2005 testimony to this Subcommittee. We

agree that the Commission should undertake a substantial public outreach program

for consumers, and that the various industry parties should participate in alerting

consumers to the end of analog broadcasting.

NAB supports the provision in Sec. 5 directing the FCC to preserve and expedite

the all-important Tuner mandate schedule. This provision, once fully effectuated,

will, on its own, result in sizeable numbers of households becoming digital capable,

by dint of consumer replacement of analog televisions in the normal course. Extrapolating from the conclusions of an A.D. Little, Inc. report prepared for NAB and

MSTV and submitted to the FCC on the cost of adding DTV reception capability to

television sets and timeline scenarios for achieving 85% digital penetration,6 we estimate that the tuner mandate alone could result in reaching 85% digital penetration

by 2009. This powerful provision can reduce the number of digitally-incapable

households and thus the number of households needing converters.

NAB supports expediting the turner schedule as the staff draft does, but we suggest that a provision be added to similarly advance the ‘‘cable ready’’ tuner schedule,

which mirrors the tuner mandate.

Sec. 6 Digital-to-Analog Conversion and Tiering

The draft bill provision permitting cable operators to downconvert digital broadcast signals to analog at the headend (or in subscribers’ homes) for delivery to cable

households with analog sets, coupled as it is with mandatory provision of the primary video of the digital signal to subscribers’ homes, seeks to achieve the purposes

of advancing the (true) DTV transition for cable consumers (enticing them to buy

DTV sets), not obsoleting the tens of millions of analog sets connected to cable systems and providing digital broadcast service to cable subscribers with DTV sets.

This provision addresses the fundamental flaw of the DTV transition plan previously discussed by the former Chief of the FCC’s Media Bureau. The Media Bureau plan allowed only for downconversion and thus would have thwarted the many

benefits that undegraded digital service would deliver to cable consumers. We urge

the Subcommittee to carefully consider the language of the staff draft to ensure that

it achieves the objective of ensuring carriage for all stations.

This provision should also make clear that carriage of the digital ‘‘primary video’’

includes all free broadcast programming, as the Cable Act must carry provision intended.7 Cable carriage of all multicast digital programming will accomplish for the

65% plus of consumers who are cable subscribers the goal number one of Congress

for the DTV transition: bringing the benefits of digital technology with its potential

for more programming options and advanced service to consumers. The opportunity

for new universal free services was one of the key reasons that Congress authorized

the DTV transition, and it is simple economics that the consumer appeal of the

HDTV/multicast mix will help drive purchase of digital sets, to the benefit of the

consumer. This tremendous consumer benefit, redounding as it will to the benefit

and strengthening of the free over-the-air television service as the Cable Act intended, would come at scant cost to cable systems, with their vast complement of

cable channel capacity.

Cable operators can no longer claim channel-locked capacity. The enormous

growth in cable carrying capacity has been revealed by data submitted by the cable

operators themselves, in response to a formal survey request by the Commission.

58

8Merrill Weiss Group, Analysis of Cable Operator Responses to FCC Survey of Cable MSOs,

Attachment A to the Reply Comments of NAB/MSTV/ALTV, CS Docket No. 98-120 (filed Aug.

16, 2001)(‘‘Weiss Study’’). 9Weiss Study at 15.

10 Id. at 12.

NAB/MSTV/ALTV retained the Merrill Weiss Group to summarize and analyze this

data.8 Some specific conclusions of the Weiss Report are:

• Overall bandwidth delivered to the average subscriber increases from 622 MHz

to 752.2 MHz over the period from yearend 1999 to yearend 2003.

• Subscribers receiving 750 MHz or greater total bandwidth service increase

from 56.1 to 86 percent over the period of the survey.

• Calculations show a capacity range of 261.8 to 295.7 total program services

to the average subscriber at yearend 2003, with capacity continuing to increase as cable completes upgrades currently underway.

• Calculations show a capacity range of 298.7 to 399.9 total program services

to the 86 percent of subscribers receiving 750 MHz or more total bandwidth

service at yearend 2003.

Cable parties agree the problem is that innovative and diverse program offerings

as well as new advanced non-video services would be squeezed out by DTV must

carry. But as seen in the Weiss Report, in 2003 the average cable subscriber will

have delivered to it 725.2 MHz of bandwidth, with somewhere between 261.8 to

295.7 total program services, in addition to a full allocation of channels for nonvideo services.

The Weiss Report also includes a chart utilizing the new cable data that shows

that the relative burden of carrying both DTV and NTSC signals will be less than

the initial must carry burden (13.42 percent for analog commercial stations in 1993

and 8.43 percent for both DTV and NTSC at yearend 2003).9 In addition to the explosion in cable capacity, this is also due to the fact that two digital broadcast television signals can be carried on one six MHz channel.10 In short, cable cannot properly argue that capacity constraints preclude temporary inclusion of all broadcast

signals.

The provision in this section of the draft bill that authorizes the FCC to sunset

this ‘‘carry-one-carry-all’’ requirement after five years, depending on penetration of

digital capability further limits the miniscule burden on cable operators. Moreover,

this sunset feature of the provision limits the small burden on cable to achievement

of the benefits of downconversion to consumers, to the transition and to the free

local television service.

This provision gives cable consumers the opportunity to trade out their analog

sets and upgrade to DTV in a more normal course and thus avoids consumer frustration and outcry.

The Need for a Converter Solution for OTA Households

NAB has recognized that, while the DTV transition was designed to afford consumers the opportunity to trade out their analog receivers for digital sets on their

own timetable, the transition must come to a conclusion at some reasonable point.

Nonetheless, we remain convinced that any transition plan must protect OTA consumers from the loss of television service and preserves local broadcast service for

all cable subscribers. We also believe that consumers will demand a cost-effective

solution for analog OTA sets in all homes. We thus believe that the staff draft

should include an accommodation for OTA only households and present a solution

for analog OTA sets in general. The numbers of sets and consumers at issue here

speak for themselves and for the expected public reaction if some real solutions are

not included in the Subcommittee DTV plan.

At the time of the conversion to all digital, consumers in 20.5 million households

that rely solely on over-the-air (‘‘OTA’’) broadcast television will lose all television

service if they have not procured digital television-capable receivers or converters.

This situation has the sure signs of significant disruption, and the Subcommittee

is wise to begin to plan for that time, in order to minimize disruption.

NAB believes that protecting consumer’s access to their favorite television programming and channels, as well as to news, information and emergency alerts, will

be critical to a successful conclusion to our digital television transition. We must not

forget that there are millions of unwired television sets in cable and satellite homes

as well. Approximately 18.3 million MVPD households have one or more television

sets that rely solely on over-the-air television reception. There are today approxiVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 21643.TXT HCOM1 PsN: HCOM1
59

11 NAB appends hereto, as Attachment A, a series of charts constructed for the FCC’s proceeding inquiring about options for minimizing the disruption to consumers when the switchover to digital broadcasting occurs. See Public Notice, MB Docket No. 04-210, DA 04-1497, May

27, 2004. In that proceeding, the FCC asked for quantitative data on viewers and receivers. See

also Comments and Reply Comments of the National Association of Broadcasters and the Association for Maximum Service Television, Inc. in that docket. The estimates used in this testimony are from Attachment A. 12 Comments of the Consumer Electronics Association, FCC MB Docket No. 04-210, August 11,

2004 (‘‘CEA’’) at 4. 13 Comments of Entravision Holdings, LLC, FCC MB Docket No. 04-210, August 11, 2004, at

2. 14See Census Bureau says 1.3 million more slipped into poverty last year; health care coverage

also drops, CNN Money (Aug. 26, 2004), available at http://money.cnn.com/2004/08/26/news/economy/povertylsurvey.

mately 280.5 million analog sets in use.11 Consumers may not readily dispose of

these sets, even if they have purchased a new digital television receiver.

Congress must take the steps necessary to protect OTA sets from obsolescence.

Clearly, the free, universal OTA broadcast service must be preserved and the 20.5

million households that rely on it must be protected against loss of television service.

Many OTA households will likely have purchased DTV-capable receivers by the

time analog broadcasting ends. But for the remaining OTA households (and for analog sets in all households), there must be a solution, or rather, a series of solutions.

One measure already included in the draft bill is promotion and education about

DTV, to encourage consumers to purchase DTVs. A near term measure, also included in the draft bill, is to require warning labels on analog-only sets, alerting

consumers to the limited useful life of these sets.

The needed key to avoiding disenfranchising large numbers of consumers and to

mitigating the disruption for consumers with analog sets, will be making digital-toanalog converters widely available at a reasonable price. Without the widespread

availability of low cost digital-to-analog down-converters, Congress risks

disenfranchising millions of viewers and rendering useless the analog sets they rely

on and, in many cases, just recently bought. Not only is the OTA analog set population enormous (73 million) and the number of OTA-only homes huge (20.3 million

households), as I have previously testified, the importance of OTA service cannot be

overstated in terms of the OTA viewing public’s reliance on the free, over-the-air

service for news and information and emergency alerts.

To evaluate the stake the public has in this transition (and to assess the damage

that various proposals affecting the digital transition may inflict on the public), Congress must take into account three components of the public interest served by overthe-air television. The first component is the 18.9 percent of viewers that rely solely

on over-the-air service, whether because they cannot afford to subscribe to cable or

DBS, because cable or DBS service is not available to them or does not provide local

broadcast signals, or because they believe in the universal availability of free, overthe-air broadcast service. The second component is the owners of the 28 million of

television sets in MVPD homes that are OTA-only analog sets. The third component

consists of all viewers, because all viewers rely on over-the-air service in times of

weather, terrorist or other emergencies when cable or satellite service may not be

available and because broadcast television service provides an effective competitive

check on cable and DBS services in terms of price, service, and diversity.

Many of the 18.9 percent of U.S. households that receive television service solely

over the air do so by choice, not because economics dictates it. For example, a survey conducted by the Consumer Electronics Association found that ‘‘[l]ess than 30

percent [of households that have chosen not to subscribe to cable or DBS] indicate

that insufficient funds play a role in their decision not to subscribe.’’ 12 Many Spanish-speaking viewers choose not to subscribe to cable or DBS because these services

offer primarily English-language programming.13

But there are also a large number of viewers who cannot afford pay television.

Twelve percent of American households fall below the poverty line.14 They should

not be forced by government policy into paying subscriber fees that only escalate

over time and that they can’t afford. They deserve as an option—the preferred and

responsible option—a vibrant, over-the-air service that provides the benefits of new

digital technologies.

Over-the-air viewers have important, well thought out and legitimate reasons for

relying on over-the-air reception, e.g., they believe in the value of free, over-the-air

television; they do not want to be locked into the ever-increasing costs of pay television service; they view primarily alternative-language programming; they have additional sets that are not hooked up to cable or satellite, among others. They feel

60

15 ‘‘Assessment of the Impact of DTV on the Cost of Consumer Television Receivers,’’ Final Report to MSTV and NAB, Arthur D. Little, Inc., September 10, 2001. 16 ‘‘Motorola Broadband CTO to Speak Before House Subcommittee on Telecommunications

Regarding DTV Transition,’’ Motorola press release, July 21, 2004. 17 Comments of LG Electronics filed in FCC MB Docket, 04-210, August 11, 2004 at 3.

well-served by the locally-oriented and public interest programming they receive

over the air and do not see the need nor do they want to be pushed to ever more

expensive pay television services. Because broadcast television is universally available and is the only service used by millions of Americans, Congress should ensure

that these viewers are not shut out or marginalized, but continue to have the option

to rely on over-the-air reception and still receive meaningful local broadcast service.

To preserve this access and mitigate the disruption for consumers with analog

sets, digital-to-analog converters must be widely available at a reasonable price. In

this regard, it is important to keep in mind not only the cost of such converters,

but the capabilities of those converters. At a minimum, digital converters should be

capable of receiving all digital broadcast formats, both HD and SD, on any VHF or

UHF broadcast channel, and provide connection to an existing analog TV receiver

via a channel 3 (or 4) RF interface. Thus, in conjunction with any analog receiver,

the digital converter box should be able to receive, render and display usable pictures and sound from high definition as well as standard definition broadcasts, but

would not be required to render pictures and sound at more than standard definition quality.

In order not to disenfranchise current OTA-only television viewers, digital converter boxes should be designed so as to maximize the likelihood that they will work

with digital broadcast signals in the same receiving configuration (same antenna,

location, etc.) as used for current analog NTSC reception. Thus, the digital converters should be able to receive and display signals under the most challenging receiving conditions, including low signal level, severe multipath and adjacent channel

interference conditions. While marginal NTSC pictures are often comprehensible

and accepted by TV viewers, the digital ‘‘cliff effect’’ cleanly separates digital TV

viewers into those with watchable pictures and those without pictures at all. Thus,

because viewers with poor digital reception would be essentially eliminated as television viewers, allowing less than excellent RF receiver performance in digital converters may sacrifice much of the broadcast-only viewing audience when analog

transmissions cease.

Current DTV converters are available from about $200 and up, although none are

presently available with SD-only outputs. Like all other electronic components, the

manufacturing cost of a digital converter box is closely related to the manufacturing

volume. NAB and MSTV previously studied the cost of adding DTV capability to television receivers as well as the likely cost of set top boxes.15 The Arthur D. Little

study noted that by the year 2006 digital converter boxes could be expected to sell

at retail for under $200, with a manufacturing cost near $100, composed mostly of

the fixed recurring costs of manufacturing (a physical box with a TV tuner, power

supply, cabinet, remote control, switches, knobs, jacks, etc.) and only slightly impacted by the cost of the integrated circuits required to receive and process digital

broadcasts.

Motorola’s 2004 testimony before this Subcommittee 16 that a digital converter box with a retail price of $67 is possible in 2007 would indicate that further price reductions from large volume production are possible. Similarly, LG Electronics indicated

in FCC filings last summer that the retail price of a simple digital-to-analog converter box could be under $100 by late 2005, assuming production volumes in the

millions of units and that they believe that digital-analog TV converter prices may

be as low as $50 by 2008, assuming industry-wide demand of tens of millions of

units by then.17

CONCLUSION

NAB stands ready to work with the Subcommittee as it continues to refine the

draft bill on the DTV transition that is the subject of this hearing. We believe that

the DTV transition is progressing and the full effect of the tuner mandate coupled

with the growing awareness of DTV’s amazing improvement to television viewing

will move the transition across the finish line in the next few years. But we appreciate the Subcommittee’s desire to bring a certain end to the transition and its efforts to date to accomplish that goal. Our abiding belief in the necessity to preserve

television service for OTA households without digital capability and the wisdom of

devising a cost-effective solution for all OTA analog sets leads us to urge the Subcommittee to focus on this critical remaining piece for its plan to conclude the DTV

transition.

61

62

63

64

65

66

67

68

Mr. UPTON. Thank you. Mr. McSlarrow.

STATEMENT OF KYLE E. MCSLARROW

Mr. MCSLARROW. Thank you, Mr. Chairman, Congressman Markey, and members of the subcommittee. I am Kyle McSlarrow,

President and CEO of the National Cable & Telecommunications

Association.

As our industry has explained in prior testimony, the cable industry has not taken a position on establishing a hard date by

which the broadcasters must relinquish their analog spectrum.

Nonetheless, we recognize the importance that you and other members of this committee place on making the spectrum available for

public safety and homeland security purposes, as well as for new

commercial uses.

The cable industry is ready, willing, and able to work with you

to achieve these important policy goals, and we applaud your leadership and hard work to make them happen. Accelerating the digital transition means that broadcasters will be transmitting in digital format, even though the vast majority of televisions still have

analog tuners. NCTA estimates that just in the homes of cable subscribers, there are 134 million analog television sets, including digital subscribers who have one or more analog sets without a digital

box. With such a large number of analog sets still in use, the cable

industry’s first priority is ensuring that our consumers suffer the

least amount of disruption to their television service.

We believe the cable industry can best assist the digital transition by guaranteeing that our customers can, on the first day of

digital only broadcasts, continue to watch their favorite stations on

their existing televisions without having to buy any new equipment

or subscribe to any new service. Congress can accomplish this goal

by giving cable operators the flexibility to down-convert digital

must-carry signals to analog format at the head end, and to carry

some of those down-converted signals in lieu of the digital version.

We recognize that this is not a perfect solution. Some customers

with digital video equipment on the first day of the digital only era

might not be able to watch some must-carry stations in digital format, but once a decision has been made to switch exclusively to

digital signals, broadcast signals, at a time when most households

are analog, there are no perfect solutions.

We believe our proposal minimizes costs and inconvenience to

consumers and allows you, as policymakers, not to have to worry

about disrupting anyone who is a cable customer, and to do so at

no cost to the government. Today, we offer analog to our analog

customers, digital to our digital customers, increasingly the opportunity to watch a growing number of channels in high definition.

In addition, many of our operators have already announced their

own plans to simulcast many analog channels in digital.

Consequently, what is true today will still be true the day after

the transition, under our proposal. The bottom line, Mr. Chairman,

is that cable customers would notice no change from the day before

the transition to the day after, and in the meantime, increasing

numbers of our subscribers will continue to switch to digital services, and many of them will become high definition subscribers.

69

1 Eleventh Annual Report to Congress on the Status of Competition in the Market for the Delivery of Video Programming, FCC-05-13, released February 2, 2005.

By contrast, Mr. Chairman, as you know, we don’t think the staff

discussion draft strikes the right balance, and in particular, we

have major concerns that what is, in effect, a dual carriage mandate will harm the very consumers and customers that we all care

about in this room, and we recognize that it is a discussion draft,

and we appreciate the willingness that you and the other members

of the committee have exhibited to work with us, and we look forward to working with you to make this bill even better.

Thank you, Mr. Chairman.

[The prepared statement of Kyle E. McSlarrow follows:]

PREPARED STATEMENT OF KYLE MCSLARROW, PRESIDENT AND CEO, NATIONAL

CABLE & TELECOMMUNICATIONS ASSOCIATION

INTRODUCTION

Mr. Chairman, Congressman Markey, members of the subcommittee, my name is

Kyle McSlarrow. I am the President and CEO of the National Cable & Telecommunications Association and it is a privilege to appear before you today. NCTA

is the principal trade association for the cable television industry in the United

States. It represents cable operators serving more than 90 percent of the nation’s

66 million cable television households and more than 200 cable program networks,

as well as equipment suppliers and providers of ancillary services to the cable industry.

I appreciate your invitation to testify today about the staff’s draft bill to expedite

the transition to digital broadcasting. As our industry has explained in prior testimony, the cable industry has not taken a position on establishing a ‘‘hard date’’ by

which broadcasters must relinquish their analog spectrum. Nonetheless, we recognize the importance that you and other members of this committee place on making

this spectrum available for public safety and homeland security purposes, as well

as for new commercial uses. The cable industry is ready, willing, and able to work

with you to achieve these important policy goals, and we applaud your leadership

and hard work to make them happen.

OVERVIEW OF THE STAFF DRAFT

Accelerating the digital transition means that broadcasters will be transmitting

only in digital format even though the vast majority of televisions still have analogonly tuners. There are currently 110 million television households in the United

States, and the FCC estimates that at least 15 percent of them (17 million) rely exclusively on analog, over-the-air broadcast transmissions to get their TV.1 Moreover,

NCTA estimates that—just in the homes of cable subscribers—there are 134 million

analog television sets that are not equipped to receive digital transmissions or are

not connected to a digital-to-analog set-top box (including digital subscribers who

have one or more analog sets without a digital box).

With such a large number of analog sets still in use, the cable industry’s first priority is ensuring that our customers suffer the least amount of disruption to their

television service. We believe the cable industry can best assist the digital transition

by guaranteeing that our customers can—on the first day of digital-only broadcasts—continue to watch their favorite stations on their existing televisions without

having to buy any new equipment or subscribe to any new service. Congress can

accomplish this goal by giving cable operators the flexibility to down-convert digital

must carry signals to analog format at the headend and to carry some of those

down-converted signals in lieu of the digital versions.

We recognize this is not a perfect solution: some customers with digital video

equipment on the first day of the digital-only era might not be able to watch a very

few must carry stations in digital format—as is the case today. But once a decision

has been made to switch exclusively to digital broadcast signals at a time when

most households are analog, there are no perfect solutions. We believe our proposal

minimizes costs and inconvenience to consumers, and allows you as policy-makers

not to have to worry about disrupting anyone who is a cable customer—and to do

so at no cost to the government.

70

What does this mean for cable customers? It means their viewing choices and

preferences will not be disrupted. Today, we offer analog to our analog customers,

analog and digital to our digital customers, and increasingly the opportunity for customers with high definition sets to watch a growing number of channels in high definition. In addition, many of our operators have already announced their own plans

to simulcast analog channels in digital. Consequently, what is true today will still

be true the day after the transition under our proposal. The bottom line, Mr. Chairman, is that cable customers will notice no change from the day before the transition to the day after. In the meantime, increasing numbers of our subscribers will

continue to switch to digital services, and many of them will become high definition

subscribers.

The alternatives to our proposal are far less palatable.

In particular, the staff draft that has been circulated for discussion today fails to

strike an appropriate balance. Instead of allowing cable operators to carry down-converted analog signals in lieu of the digital signals transmitted by must carry broadcasters, the staff draft would require operators to carry every must carry broadcaster’s digital signal in digital format. While the staff draft would allow cable operators to carry down-converted analog signals in addition to the digital signals, an

operator who chose to carry one must carry broadcast station’s down-converted signal would be required to carry the down-converted signals of all must carry broadcasters as well as all their digital signals.

This provision would provide cable operators with two options, each of which is

worse for consumers than the status quo and worse than the option of allowing carriage of down-converted signals in lieu of digital signals. Cable operators would have

to choose between (1) carrying all must carry stations only in the digital format in

which they are broadcast, or (2) ‘‘dual carriage’’ of all must carry stations in both

digital and down-converted analog format.

If cable operators were to carry must carry stations only in digital format, those

stations would disappear from the viewable channel lineups of the majority of cable

subscribers. Only those with digital sets or digital set-top boxes would be able to

view the signals. Indeed, even the majority of customers who subscribe to digital

tiers (and therefore have digital set-top boxes) would be unable to view the digital

signals of must carry broadcasters if those broadcasters were broadcasting in highdefinition, since the set-top boxes of most digital tier subscribers who do not have

high definition television sets are not capable of converting high definition signals

for viewing on analog sets.

It is hard to imagine any reason for requiring operators to carry broadcasters’ digital standard definition signals instead of down-converted analog versions of those

signals. Any difference in the picture quality between a standard definition digital

signal and a down-converted analog version of that signal would surely be outweighed by the fact that only customers with digital sets and set-top boxes could

view the digital signals. It is equally hard to imagine any reason for requiring operators to carry must carry broadcasters’ high definition signals instead of down-converted versions of those signals, since an even smaller number of customers—only

those with high definition sets and high definition set-top boxes—could watch the

broadcasters’ programming.

Yet this last scenario—with the fewest number of consumers able to watch digital

programming—is the likely outcome if the only other option for cable operators is

to dual carry a broadcaster’s signal in digital and down-converted analog format—

or, even worse, to dual carry every broadcaster’s signal as outlined in the staff draft.

Dual carriage of every must carry broadcaster’s high definition signal and its downconverted analog signal would impose an untenable burden on cable operators and

programmers. By preempting an excessive amount of capacity on cable systems, it

would interfere with the ability of cable operators to offer the broadest array of programming as well as new and innovative digital services to consumers. It would be

especially unfair to non-broadcast program networks, which have no guarantee of

carriage of their programming in analog or digital format—much less in both.

Today, while broadcasters are still transmitting both analog and digital signals,

cable operators may fulfill their must carry obligations by carrying a broadcaster’s

analog signal for viewing by all customers while also allowing operators to carry—

in addition—those digital signals that provide additional compelling benefits to customers with high definition sets or digital set-top boxes. This approach has provided

broadcasters with incentives to offer compelling digital content in order to gain additional carriage of their digital signals. It has also enabled cable operators and program networks to deploy digital services that best meet the needs and interests of

cable customers. Finally, it has ensured continued availability of a must carry

broadcaster’s primary video programming to the widest cable audience without reVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6621 21643.TXT HCOM1 PsN: HCOM1
71

2 In return for deregulation, the cable industry promised Congress and American consumers

that it would provide: (1) facilities-based competition to the telephone companies, and (2) a

whole new generation of advanced information and video services—both of which we have done. 3The cable industry is rapidly rolling out high definition programming. As of January 1, 2005,

cable companies had launched high definition television service on systems passing 92 million

homes. At least one cable operator in all of the top 100 markets now offers HDTV, and HD over

cable is available in 184 of the 210 U.S. television markets. 4 Cinemax HDTV, Comcast SportsNet HD, Discovery HD Theater, ESPN HD, ESPN2 HD,

HBO HDTV, HDNet, HDNet Movies, INHD, INHD2, MSG Networks in HD, NBA TV, NFL HD,

Showtime HD, STARZ! HD, The Movie Channel HD, TNT HD, and Universal HD. 5 In 2002, the cable industry was the first to embrace FCC Chairman Powell’s call for voluntary industry action to speed the digital television transition. As of January 1, 2005, cable

operators voluntarily carried 504 digital broadcast signals—a 66 percent increase over the 304

stations carried in December 2003. 6On January 31, 2005, NCTA reached agreement with the Association of Public Television

Stations (APTS) to ensure that the digital programming offered by local public TV stations is

carried on cable systems serving the vast majority of cable subscribers across the nation. The

boards of NCTA, APTS, and PBS ratified the agreement on February 4, 2005.

quiring cable customers to purchase digital television sets or set-top boxes in order

to view that primary video stream.

If Congress decides that the analog spectrum needs to be returned before most

television viewers are equipped to receive digital signals, it can ensure that these

positive developments continue without disruption or significant costs—at least to

cable customers, if not to over-the-air viewers. To do so, however, we urge you to

revise the approach taken in the staff draft with respect to must carry and downconversion. Instead of permitting operators to carry down-converted signals in addition to mandated carriage of the digital signals transmitted by must carry broadcasters, one needs simply to permit carriage of down-converted signals in lieu of the

digital signals, while giving operators the discretion to carry both the down-converted and digital versions of the signal.

CABLE IS LEADING THE BROADER NATIONAL TRANSITION TO DIGITAL

In the United States, the broadcasters’ transition from analog to digital is only

a small part of the larger digital transition that is occurring in every area of our

nation’s economy. Since 1996, when Congress enabled cable’s investment in new

technology and programming by substantially reducing regulation, cable operators

have completely rebuilt their facilities.2 With an investment of more than $95 billion, operators have replaced coaxial cable with fiber and installed new digital

equipment in homes and system headends, thus enabling the transmission of voice,

video, and Internet services in digital format. As a result, cable customers are already enjoying a full complement of digital programming and advanced information

services independently of the broadcasters’ slower conversion to digital.

For example, cable customers can purchase digital programming tiers that include

a diverse array of video networks and commercial-free music channels. Digital customers also have access to video-on-demand programming, digital video recording,

and electronic program guides. These features allow programs to be viewed at the

customer’s convenience and at a time of the customer’s choosing. They also allow

cable subscribers to block access to programming they do not want their children

or households to see. All of cable’s digital services can be enjoyed by consumers with

analog sets who use digital set-top boxes that convert digital signals to analog. More

innovative, interactive video services are on the way, in addition to the Internet and

digital telephone services that are already attracting large numbers of customers.

Cable customers with HDTV sets have even more options.3 They can receive a

wide selection of programming transmitted in high definition, including 18 HD cable

networks that transmit much of their programming in high definition.4 In addition,

cable operators are now voluntarily carrying the digital channels of a substantial

number of over-the-air broadcast stations in addition to those stations’ analog signals (either through retransmission consent agreements with individual commercial

stations 5 or voluntary initiatives such as cable’s recent carriage agreement with

public television stations.6) Note that cable’s contractual agreement with public television stations was reached through private negotiations—not federal legislation or

FCC regulations.

CABLE’S CARRIAGE OF BROADCAST SIGNALS

The vast majority of cable customers have analog television sets, and most of

those sets—as in over-the-air households—are not equipped with digital set-top

72

7There are approximately 172 million television sets in the 66 million cable households across

the country. 26 million cable homes subscribe to digital service, but not all digital households

have digital boxes on all their TVs. This means that there are approximately 28 million analog

TVs in digital homes that will require boxes after the transition. If one adds these 28 million

sets to the approximately 106 million analog TVs in homes with only analog cable service (41

million), there are a total of around 134 million analog TV sets in cable homes that will require

digital boxes in order to get digital service. The cost of deploying 134 million set-top boxes is

$9 billion for a simple $67 digital-to-analog box and $29 billion for a $200 interactive digital

cable box. 8 In re Carriage of Digital Television Broadcast Signals, First Report and Order and Further

Notice of Proposed Rulemaking, 16 FCC Rcd. 2598, 2629 (2001) (emphasis added).

boxes.7 Today, cable operators provide the analog signals of virtually all local television stations, which can be viewed by all customers—those with and without digital boxes, and those with and without digital television sets. In addition, operators

also provide the digital signals of some, but not all, broadcast stations—in particular, those stations that provide compelling digital programming that is likely to

enhance the value of cable service for the small but growing number of customers

with high definition sets.

Cable’s current carriage practices are wholly consistent with what both the marketplace and the ‘‘must carry’’ rules dictate. Existing law requires cable operators

to carry the analog signals of all ‘‘must carry’’ broadcast stations during the digital

transition, while making carriage of the digital signals optional and subject to ‘‘retransmission consent’’ agreements with broadcasters. The FCC has recognized that

requiring ‘‘dual carriage’’ of the analog and digital signals of all must carry stations—regardless of whether the digital programming is valuable to the few cable

households capable of viewing it on their sets—would do nothing to further the purposes of the must carry requirements or the digital transition while unduly burdening the First Amendment rights of cable operators and programmers.

This sensible balance, which serves the interests of must carry broadcasters, cable

operators, cable programmers, and cable customers, can be preserved even after

broadcasters stop transmitting analog channels. To do so, Congress should allow

cable operators to ‘‘down-convert’’ the digital signals of must carry broadcasters to

analog at the headend and provide the primary video programming stream of those

down-converted signals to cable homes in lieu of the primary digital video stream.

This will ensure that all cable households can receive the programming provided by

those must carry broadcasters without having to purchase digital television sets or

digital set-top boxes.

Households with HDTV sets would, of course, continue to watch the increasing

number of HD channels that exist now, but in some instances would watch a small

number of must carry channels in analog even if the broadcaster were transmitting

in high definition. I would note that cable operators could still choose to provide the

digital signal in addition to the down-converted analog signal if the digital version

were uniquely compelling and attractive to customers with digital and HDTV equipment.

Current law requires cable operators to carry must carry signals without ‘‘material degradation.’’ The FCC has interpreted this to mean that—after the transition

when broadcasters are transmitting only a digital signal—‘‘a broadcast signal delivered in HDTV must be carried in HDTV.’’ 8 This ‘‘no material degradation’’ requirement makes sense if—as is the case under current law—the transition to digitalonly broadcasting does not occur until most households are equipped to receive digital signals on their television sets. If Congress is going to impose a ‘‘hard date’’ that

occurs before most consumers have digital sets or set-top boxes, however, then it

should also permit carriage of down-converted must carry signals in lieu of the digital signals in order to ensure a seamless transition for consumers.

CONCLUSION

Mr. Chairman, there is much to commend in the staff draft, and there is obviously

much more that needs to be done with regard to the issue of providing converters

for analog TV sets after the transition. We are grateful for the opportunities we

have had to discuss these issues with you, and we want to continue working with

you and other members of this committee on our shared goal of ensuring that the

maximum number of consumers continue to have access to the same digital programming after the transition that they currently enjoy during the transition.

I would be pleased to answer any questions you might have.

Mr. UPTON. Mr. Abud.

73

STATEMENT OF MANUEL ABUD

Mr. ABUD. Mr. Chairman, Congressman Markey, and members of

the subcommittee. My name is Manuel Abud, and I am the Vice

President and General Manager of KVEA, Channel 52,

Telemundo’s station in Los Angeles. And I thank you for the opportunity to testify today on behalf of Telemundo regarding the Digital

Television Transition Act of 2005 Staff Draft.

My appearance before you today is not simply as a Telemundo

executive or as a broadcaster. I am also testifying in my capacity

as a member of the Hispanic community. My community is dependent on Spanish language over-the-air broadcasting as their primary

source of news and local information. My station alone does 19.5

hours per week of local Spanish language news to serve our viewers.

Forty-three percent of Spanish-speaking households watch overthe-air television exclusively. Moreover, digital television technology has failed to make significant inroads into the Hispanic

community. If Congress produces DTV legislation that fails to extend the benefits of DTV to all consumers, Spanish language television viewers will be disproportionately harmed.

The Staff Draft attempts to strike an important balance between

the need to bring the digital television transition to a close while

protecting the overwhelming majority of consumers who still only

have analog television sets. Telemundo supports a hard date for

ending analog broadcasts. The December 31, 2008 deadline in the

Staff Draft is more realistic than earlier dates. We support the

Staff Draft’s receiver and retailer labeling requirements, as well as

the requirements that cable operators must carry broadcast stations on their basic tier of service after analog broadcasting ceases.

Unfortunately, there are several critical omissions from the Staff

Draft. I urge this committee to address these omissions before the

bill is formally introduced.

First, the Staff Draft fails to require cable operators to carry

multicast programming services from Spanish language broadcasters. Failure to include multicast carriage denies important benefits of DTV for the viewer, such as unprecedented amounts of new

and innovative locally originated or community-oriented programming, as well as increased local news and political coverage, weather reporting, and critical public safety information. Failure to require multicast must-carry will hinder the development of new programming choices available to over-the-air and cable consumers

alike, and inhibit broadcasters’ ability to hold down cable rates by

offering competitive programming alternatives to cable.

Without having assurances that the Spanish language audience

will have access to multicast programming channels, we cannot

create business models with which to fund this initiative.

Second, the Staff Draft fails to include transition assistance to

consumers exclusively relying on over-the-air broadcasts, who will

need to acquire a digital-to-analog converter box when analog

broadcast ceases. Television is a lifeline for many Americans. We

cannot permit television screens to go black in the homes of poor

people or older Americans who are most dependent on broadcast

television.

74

Finally, the Staff Draft’s down-conversion provisions threaten to

eliminate access to Spanish language broadcast signals for analog

cable subscribers. Under the Draft, a cable operator would be permitted to discriminate in favor of major broadcast stations in

choosing to provide an analog feed. Nearly all Telemundo stations

are must-carry stations. This makes us unacceptably vulnerable to

being shut off from our analog cable viewers, unless cable operators

decide to give all analog cable subscribers a set-top box. Don’t bet

on that. To correct this problem, the Staff Draft should be modified

to require that if one digital broadcast signal is down-converted, all

local digital broadcast signals should be down-converted.

Cable industry leaders have repeatedly stated that they do not

want to disrupt analog cable subscribers as the DTV conversion occurs. All we are saying here, to quote President Reagan, is ‘‘Trust,

but verify.’’ I appreciate the opportunity to appear before you today

and share with you concerns of Spanish speaking Americans who

have much to gain but also much to lose in this transition.

[The prepared statement of Manuel Abud follows:]

PREPARED STATEMENT OF MANUEL ABUD, VICE PRESIDENT, GENERAL MANAGER, KVEA-TV, CHANNEL 52, ON BEHALF OF TELEMUNDO

Mr. Chairman, Congressman Markey, and Members of the Subcommittee, my

name is Manuel Abud, and I am the Vice President and General Manager of KVEATV, Channel 52, Telemundo’s station in Los Angeles, California. I thank you for the

opportunity to testify today on behalf of Telemundo regarding the Digital Television

Transition Act of 2005 Staff Draft.

My appearance before you today is not simply as a Telemundo executive or even

a broadcaster. I am also testifying in my capacity as a member of the HispanicAmerican community, and as a Spanish language speaker. Many members of my

community speak Spanish as their primary language, and are dependent on Spanish

language over-the-air broadcasting as their primary source of news and local information. We are the ‘‘go to’’ source for news and information for the Spanish speaking community. The work of this Committee ultimately will determine to what extent Spanish language television viewers continue to have critical access to free

over-the-air Spanish language television in the digital era.

Households where Spanish is the primary language are far more likely to rely on

over-the-air television than other households. Nationally, 43 percent of households

where Spanish is the primary language spoken watch over-the-air television exclusively. At the same time, analysis of the consumer market reveals that digital television technology has failed to make significant inroads into the Hispanic community. Nielsen data indicates that the use of DTV receivers in Hispanic households

nationally is the lowest among all consumer groups. As a result, if Congress fails

to produce a final DTV transition plan that focuses on extending the benefits of

DTV to all consumers, Spanish language television viewers will be subject to a disproportionate share of the resulting harm. In short, we really need the Congress to

get the DTV transition right.

In plain terms, getting it right means ensuring that Spanish-speaking consumers

have access to the revolutionary benefits that digital television offers, especially

High Definition television programming and multicasting. It also means that our

audiences are not disenfranchised, whether they rely on over-the-air broadcasting,

cable, or satellite for their television. The disruption and cost accompanying the

DTV transition must be kept to a minimum.

The Staff Draft

Tested against these core principles, there is much to commend in the Staff Draft.

There also is room for substantial improvement as the legislative process moves forward.

The Staff Draft reflects a sincere effort to strike an important balance between

the need to bring the digital television transition to a close while protecting the

overwhelming majority of consumers who still only have analog television sets.

Telemundo supports a hard cut-off date for ending analog broadcasts. The December

31, 2008 date in the Staff Draft provides more time than previous public discussion

suggested might be the case, which will help ease the burden of the transition on

75

consumers. Similarly, the receiver and retailer labeling requirements included in

the Staff Draft are critical for improving consumer education about digital television

and DTV products, as well as publicizing the impending shut off of analog television. The Staff Draft requires cable operators to retransmit High Definition broadcast programming sent by a broadcast station electing must carry in the same format—High Definition—to its cable subscribers. Moreover, digital broadcast signals

must be carried on the basic tier of cable service. Both provisions are good for consumers because they ensure receipt of one of the principal benefits of DTV technology—the glorious video and audio quality of High Definition—at basic cable

rates.

Unfortunately, there are several critical omissions from the Staff Draft that have

the net effect of denying a principal benefit of digital television technology to

Telemundo and its audience, your constituents, and also pose a serious threat of

disenfranchising Spanish-speaking viewers across America. I urge this Committee

to address these omissions before the final bill is introduced.

First, the Staff Draft fails to require cable operators’ carriage of Spanish language

broadcasters’ multicast programming services. Failure to include multicast carriage

as part of digital must-carry will deny one of the most important benefits of DTV

to Spanish language television viewers and will hinder the development of new programming choices available to over-the-air and cable consumers alike.

Second, the bill fails to include transition assistance to consumers who only watch

television over-the-air, and may ultimately lose access to all television in the absence of a subsidy to finance the cost of purchasing a digital-to-analog converter box.

Television is a lifeline for many Americans. We cannot permit television screens to

go black in the homes of poor people who are in many ways the most dependent

on broadcast television.

Finally, the bill’s down-conversion provisions do not go far enough. If a cable operator chooses not to provide an analog feed of any must carry station’s broadcast programming, a Spanish speaking analog cable subscriber likely will be left without access to Spanish language broadcast signals unless they make substantial expenditures for set-top boxes or new digital television receivers. Since the vast majority

of Spanish-speaking cable subscribers own analog television sets, not digital receivers, they will be injured disproportionately.

Cable Carriage of Multicast Programming Is Essential

Digital television enables broadcasters to offer four or more programming channels in place of their one analog channel. Multicasting, as this is known, enables

broadcasters to offer a competitive alternative to cable programming that should

help keep cable rates down. Multicasting also allows broadcasters to serve their

local communities better than ever before by providing multiple streams of locallyproduced or community-oriented programs, including but not limited to: ‘‘hyperlocal’’ news, covering smaller parts of large metropolitan areas, programming that

covers local political issues and candidates; newscasts that serve specific segments

of the local market; local events, including school and amateur sports activities; and

local weather, traffic, and emergency information.

In this time of heightened alert against terrorism, local broadcast stations are the

first providers of emergency news and information to the public concerning not only

actual or potential terror threats to public safety, but also local emergency incidents

such as chemical spills, dangerous storms, floods, escaped prisoners, and similar incidents of urgent import. Multicast channels permit the rapid dissemination of such

information in much greater detail by enabling stations to target information for

particular communities on particular streams.

Beyond emergency or local information, the increasingly diverse character of

American society makes the availability of Spanish language local television programming critically important in permitting Spanish language speaking residents

to become better integrated into and function more effectively in the communities

in which they reside. Multicasting increases the ability of broadcast stations to

transmit Spanish language programming to Spanish speaking populations within

their service area. Absent a meaningful must-carry requirement that includes

multicast carriage, this digital dividend will be sacrificed.

Telemundo and other broadcasters cannot avail themselves of the powerful benefits of multicasting in the marketplace absent cable carriage of multicast programming channels, which is not required by the Staff Draft. Broadcast television in any

language is advertiser supported, and our ability to attract advertising dollars is directly tied to the number of viewers we have the opportunity to attract to our programming. The majority of all television viewers watch broadcast television via

cable or satellite, and if those services do not carry multicast programming services

76

the overwhelming majority of television viewers will not have the opportunity to see

them.

As a result, the fundamental basis upon which must-carry has been traditionally

supported by Congress—the preservation of free over-the-air television—is critical

in the context of multicasting. Absent congressional support for multicast mustcarry, Telemundo and other Spanish language broadcasters will have no economic

model upon which to rely to offer Spanish language viewers new and innovative

multicast programming services. As Congress is requiring millions of consumers to

invest in new digital equipment in order to watch television, it will simultaneously

be depriving them of one of the most important benefits they will receive for their

purchases. Failure to include multicast must carry in a final DTV transition bill

strikes at the core of the critical balance between reward and risk upon which the

success of the DTV transition rests.

A Subsidy Is Needed for Consumers To Purchase Digital-to-Analog Converters

The Staff Draft is notable for not including a subsidy program for households relying exclusively on over-the-air broadcasting to support the purchase of digital-toanalog converter boxes. While Telemundo is not suggesting any particular concept,

Telemundo does support the inclusion of a consumer assistance program in this legislation to ensure that households exclusively reliant on over-the-air broadcasting

are not literally left in the dark once analog television is shut off. As I previously

noted, failure to include a consumer assistance program in the bill will have a disproportionate impact on Spanish language households who are not currently purchasing DTV products and will be hit hardest on December 31, 2008. A subsidy program to defray the costs of a digital-to-analog converter box is a necessity in any

mandated end to the digital television transition.

The ‘‘Carry One, Carry All’’ Downconversion Requirement Should Apply to All

Broadcast Signals, Not Just Those of Must Carry Stations

Finally, the Staff Draft’s attempt to prevent disenfranchisement of analog cable

subscribers is a good start but needs to do more for cable consumers. Under the

Staff Draft, if a cable operator voluntarily downconverts a must carry broadcast station’s digital broadcast signal into analog format, it must provide an analog feed of

all other must carry stations. The problem arises, however, if the cable operator

chooses only to provide an analog feed of very strong broadcast stations which have

elected retransmission consent rather than must carry. In that situation, the cable

operator is under absolutely no obligation to provide an analog feed of any must

carry stations. Nearly all Telemundo stations are carried pursuant to must carry.

We are unacceptably vulnerable to losing our analog cable subscribers unless cable

operators decide to give all analog cable subscribers a set top box. Don’t bet on that.

To correct this vulnerability of our analog cable viewers to disenfranchisement, the

Staff Draft’s ‘‘carry one, carry all’’ down-conversion requirement should be modified

to be true to its term: if a cable operator downconverts any one broadcast signal

to analog, regardless of whether that signal is carried pursuant to a retransmission

consent agreement or must carry, it should be required to downconvert all other

broadcast signals.

Cable industry leaders have repeatedly stated that they do not want to disrupt

analog cable subscribers as the DTV conversion occurs. All we are saying, to quote

President Reagan, is: ‘‘Trust, but verify.’’

I appreciate the opportunity to appear before you today, and share with you concerns of Spanish speaking Americans who have much to gain but also much to lose

in the digital television transition. I stand ready to work with each Member of this

Committee to ensure that final digital television transition legislation serves the interests of our Nation and of all television viewers.

Mr. UPTON. Thank you. Mr. McCollough.

STATEMENT OF W. ALAN MCCOLLOUGH

Mr. MCCOLLOUGH. Chairman Upton, Ranking Member Markey,

members of the committee, I do appreciate the opportunity to be

here to testify today. Circuit City and the other members of the

Consumer Electronics Retail Coalition applaud the efforts of this

committee and the subcommittee to definitively and meaningfully

drive the digital transition to conclusion.

I begin my remarks with what I would consider three sort of

basic retail truths. First, retailers can only prosper when we give

77

customers products they want at prices they are willing to pay.

Supply and demand continues to work in the market when left.

Second, customers are smart people, and able to make intelligent

decisions. We learn that day in and day out in our stores. And

third, retailers make a lot more profit when a customer chooses

higher priced, more fully featured product than when they buy

entry level product, which is often sold at or near our acquisition

cost.

It has been suggested by some that there is some sort of a vast

consumer electronics retail conspiracy out there to prevent customers from buying better sets, and to insist that they continue to

buy low margin, inexpensive sets that will help us lose more

money. Obviously, it is entirely in our interest to sell the best product that we can, and to make such an assertion, I am not sure how

folks would do that with a straight face. But if you would take a

minute, indulge me for a minute.

Imagine what a sales transaction with full information would

look like today, and I will use a customer who I will refer to, since

there is none here, as a Mr. Jones, who has come in on an advertisement for a 13 inch TV, and we would say yes, Mr. Jones, you

can choose between the 13 inch analog TV in our advertisement for

$69 or you can get one which also has a digital over-the-air tuner

for only $149. I must warn you, however, that if you choose the

lower priced set, it may no longer be capable of receiving over-theair signals at some point in the future, although at this point, we

are not certain of when that point will be. What does happen—

when that does happen, you will be able to a buy a converter box

and continue to receive over-the-air signals, that is, unless you are

one of the 85 percent who are receiving signals via cable or satellite

already, and it doesn’t matter to you in that case. Well, Mr. Jones

says well, why am I—why is that happening? Why is this one going

to be useless, and why am I going to have to pay twice as much

for this other one. We will correctly say, because Congress has

mandated that we—that the broadcasters change from analog to

digital, and if you are the customer in that case, what do you think

will happen? One of two letters will get written. They will write to

me, and say you are baiting and switching. You were trying to sell

me better product, and trying to disparage low end product. Or

they will write to you, and want to know why you have doubled the

cost of their television set.

It was interesting in the earlier comments by the members, people are wondering about what happens when the transition date

happens. What cards and letters will you get then? The transition

date will start, the cards and letters will start coming the day you

mandate digital tuners, and start doubling the price of entry level

television sets. And the folks it will affect are the folks who can afford it least from the first day.

So if you want to get the transition momentum going, and I

think without having to drag customers kicking and screaming

along the way, you have to start with a date by which the transition will be unequivocally 100 percent complete. We will do that,

if you will set such a date, and it becomes law, that same day, I

will make the call and start putting signs up in stores, start changing our Internet, doing everything we can to tell the customers

78

when we know the day. Until that day, the transaction will look

like the one I described, about some uncertain day in the future

that we know not when it will be, and just further confuse the

issue.

I believe setting a hard date will result in a very substantial,

though possibly short-lived market for converter boxes that receive

a digital signal from an antenna, and deliver a standard analog

broadcast-type signal to good old Channel 3 or Channel 4. Setting

a hard date will indeed strand some customers who rely on analog

broadcasting now, and we have no objection in principle to the government subsidizing the purchase of products that receive digital

broadcasts, or even simply giving away converter boxes.

In my written testimony, I discuss some of the potential difficulties and complications of any subsidy program, and the hard dates

that you will have in trying to make this fair to everybody. All we

ask is you avoid solutions that work on paper but don’t get the real

world test.

One level in the Staff Draft that we believe is more of a paper

solution than a real one is the tuner mandate. That requires phasein of—a phase-in requirement where every TV with an analog

broadcast tuner also has to have a digital broadcast tuner, whether

or not the customer wants it or needs it. When you try to mandate

supply in this way, supply and demand in this way, you are always

going to get unintended, typically bad, consequences.

The first unintended consequence has been the effect of a socalled 50 percent rule, that for every product manufactured with

only an analog tuner, you have to also sell one with a digital tuner

as well. Since well over 50 percent of the customers don’t need or

want broadcast tuners, you will quickly have a supply imbalance,

as most customers will make the entirely rational decision for them

to buy the less expensive set, or buy one with no tuner at all. We

will start selling a few monitors, and that way, we won’t have a

tuner discussion.

The Staff Draft has a provision that would not allow the FCC to

address this situation by moving to an earlier 100 percent rule for

mid-sized TVs, again unfortunate if some 27 inch TVs now sell for

as little as $180, and according to recent statements by semiconductor manufacturers, we have seen a 2006 DTV tuner could add

$80 to $100 to a set. Again, the laws of supply and demand will

prevail here. Folks will go for the less expensive sets.

Even more difficult is the staff’s provision to move up the mandate for a 13 inch color TV set, for it now sells as little as I pointed

out, $69. These products often tend to be bought out of necessity,

in many cases, on layaway programs, by people who can’t afford to

pay more.

In summary, Mr. Chairman, you have absolutely identified the

right lever to get the DTV transition moving. Set a hard, unambiguous date by which analog broadcasts must once and for all cease.

I believe that any of the ideas advanced in the draft, of all the

ideas advanced in the draft, only this, along with an appropriate

subsidy provision, is essential to move forward.

[The prepared statement of W. Alan McCollough follows:]

79

PREPARED STATEMENT OF W. ALAN MCCOLLOUGH, CHAIRMAN AND CHIEF EXECUTIVE

OFFICER, CIRCUIT CITY STORES, INC.

I am pleased to be here today on behalf of the Consumer Electronics Retailers Coalition (‘‘CERC’’) to discuss the digital television transition, and the draft legislation

prepared by Chairman Upton’s staff. Consumer electronics retailers have been involved in the transition to digital techniques since 1985, when they helped introduce

the digital audio Compact Disc. We agree that, two decades later, it is high time

to complete this transition. The single most effective thing that you can do is to set

a clear, definite, unconditional date for the cessation of analog broadcasts. On behalf

of CERC I applaud this Committee for taking the initiative to do precisely this, and

pledge our support to making this happen. Once you take this key step, the marketplace can and should be the main driver for helping all the other pieces fall into

place. Setting a firm date, and then relying primarily on the marketplace, is the

best way to avoid the costs of the transition from being put on our customers who

are least able to bear them.

CERC includes, in addition to Circuit City, specialist retailers Best Buy,

RadioShack, and Tweeter, and general retailers Target and Wal-Mart. The three

major retail associations—the North American Retail Dealers Association, the National Retail Federation, and the Retail Industry Leaders Association, are also members.

As Len Roberts of RadioShack discussed with this Subcommittee on March 10, the

fact that digital broadcasting is a final piece of the digital transition makes explaining it to consumers a rather complex proposition, because so many familiar products

and techniques are already digital. Product developers have worked to help ‘‘analog’’

and ‘‘digital’’ products work together seamlessly in consumers’ homes—so we cannot

truthfully tell consumers that ‘‘analog’’ products will stop working on any particular

date, because for most purposes, for most consumers, they will continue to work just

fine. CERC and its members have been pleased to work with the majority and minority staffs on these complex issues.

DECEMBER 31, 2008 CESSATION OF ANALOG TELEVISION BROADCASTS

CERC has long favored a ‘‘hard’’ and unconditional date for moving exclusively

to digital terrestrial broadcasts. In light of the complex budgetary and other factors

involved, we have not presumed to tell the Congress what that date should be. The

key factor, from our perspective, is that the date be reliable and unconditional, so

that if we tell consumers that analog terrestrial broadcasting via an antenna will

not be delivered after that date, it will be a truthful statement. We do not want

to be in the position of telling customers to buy or not to buy products based on

inaccurate or unverifiable information.

Once the transition date is clearly and reliably set, we and our vendors can start

advising consumers that, on a specific future date, they will need to rely on alternatives to receiving analog signals from an antenna. Speaking for Circuit City, we

would expect to begin this education process as soon as Congress sets the date—

whether or not we have been legally mandated to do so.

TEXT AND PLACEMENT OF LABEL FOR TV RECEIVERS LACKING DIGITAL TUNERS

CERC members have continually updated their consumer information, in our

product displays, advertising, and websites, to explain to consumers the sometimes

dizzying array of choices in this transitional environment. (A list of some of the

product / interface / service choices that consumers face was contained in Len Roberts’ March 10 written testimony to this Subcommittee.) We have also worked with

the FCC on its Digital Transition program. The CERC website, and those of my

company and some other CERC members, contain the ‘‘DTV Tip Sheet’’ that we

jointly developed with the Consumer Electronics Association (‘‘CEA’’) and the FCC.

We also are engaged, at the FCC’s request, in distributing hundreds of thousands

of these DTV Tip Sheets to our retail stores. CERC also has endorsed mandatory

product labeling once a reliable Transition Date has been set. We have the following

comments on the Staff Draft’s language that provides for such a label:

Text. We think it is important that the label be as concise as possible, while not

misleading the consumer or unnecessarily driving him or her to more expensive

products. Based on our experience as retailers, we are concerned that too long a

label will not be read by many consumers. We are accustomed to making complex

‘‘forward looking statements’’ for financial reporting purposes. Our information to

consumers, however, needs to be keyed to non-specialists.

While the label text contained in the Staff Draft is accurate, in our experience

it is a bit too long to be understood at a glance. We want it to be readily understood

80

1 CERC believes that a display requirement of a label ‘‘in the vicinity’’ of the product on the

shelf is more realistic than the ‘‘adjacent to’’ language of the Staff Draft—depending on how ‘‘adjacent’’ is interpreted, this might not be possible without blocking other important information

or features of the product or of another product on display.

when placed on or near a product on a retail shelf. So, if there is to be a mandated

retail label, CERC suggests a more concise formulation that is equally accurate, but

that consumers would be more likely to read and understand:

Notice: This TV has only an ’analog’ broadcast tuner so will require

a converter box after [date] to receive over-the-air broadcasts with an

antenna, because of the transition to digital broadcasting on that date.

(It should continue to work as before with cable and satellite TV systems, gaming consoles, VCRs, DVD players, and similar products.)

Placement. CERC advised this Subcommittee on March 10 that a mandatory

product label will be appropriate once an unconditional transition date has been set.

We have suggested to your staff that the label should be packed with or affixed to

the television receiver, so a retailer would have the choice of leaving the label on

the set for shelf display, or moving it to the vicinity of the set (so as not to cover

the screen). We also suggested that the label be printed on the outside of boxes. The

Staff Draft is generally in accord with our ideas:

• We agree that the labels should be packed with the covered TV receivers, to reduce uncertainty and to avoid mistakes, at retail, about the products to which

the labels apply. To avoid screen damage upon removal by a retailer or consumer, the label should not necessarily have to be ‘‘on the screen’’ so long as

it is attached to the product as shipped. • The Staff Draft might be clarified to assure that a retailer would comply with the

requirement if it either leaves the label on the product for shelf display, or

moves this label to the vicinity1 of the point of product display. If a label is affixed to a screen, it should not necessarily have to remain there, as this could

make it difficult for consumers to compare products. • As the Staff Draft provides, the label text should also be printed on the outside

of the retail boxes for the products to which it applies, because some retailers

display TV products only in the closed boxes. Requiring that these boxes be

opened could lessen a consumer’s confidence that he or she is receiving a factory-fresh product. • We believe that Internet-based sellers (including our own sites) should have

equivalent ‘‘labeling’’ obligations at their own ‘‘point of display’’ for the product,

or, if there is no ‘‘display,’’ at the point of sale.

OBLIGATIONS ON OTHER INDUSTRIES

CERC supports the provisions that would oblige broadcasters to make consumers

aware of their digital channels and of the Transition. CERC, like CEA, has been

disappointed with the total lack of effort on the part of broadcasters to educate the

consumer about the DTV Transition. Instead, broadcasters have chosen to engage

in distorting the truth in newspaper advertisements, further confusing the public

about the transition. To say, or even to imply, that viewers would necessarily have

to buy a new TV receiver after the transition date is simply untrue. As retailers

we would like to sell everyone a new TV. We would also like to sell anyone who

buys a TV one that has a DTV tuner in it. These are more expensive products and

we love to sell them. As retailers in perhaps the most competitive market on earth,

however, we must sell consumers what they want and what they need. And we must

be honest about how these products will and will not serve consumers in the future.

For our own public education efforts, the key factor is being able to give consumers a clear, reliable date, as of which we can tell them that feature X will no

longer work, but feature Y will. Broadcasters already are airing their digital channels, but not at full power. They are not conspicuously promoting these channels.

It is in our interest to sell products with DTV tuners, but we need help from the

broadcasters in interesting our customers in buying them.

PROVISIONS RE ‘‘TUNER MANDATE‘‘

CERC understands the desire to get more DTV tuners into consumers’ hands. We

also deal every day, however, with the harsh laws of supply and demand. Thus far,

under the FCC’s ‘‘Tuner Mandate’’ regime, our experience has been that a government mandate trying to force all shoppers to buy features that many or most do

not in fact need can be counterproductive to the success of the Transition. We therefore caution against trying, in this legislation, to use a government mandate rather

than the ‘‘hard date’’ itself as the main instrument for influencing supply and deVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6621 21643.TXT HCOM1 PsN: HCOM1
81

2 A ‘‘Television Receiver’’ is a product having an off-air broadcast tuner and antenna terminals. The Tuner Mandate requires only that products with analog off-air tuners must have digital off-air tuners as well. A consumer display product, such as a PC monitor, may have a variety of interfaces to accept both analog and digital television signals from cable, satellite, or other

set-top boxes, yet lack any off-air tuner, so it is not a ‘‘Television Receiver.’’ 3See Zoran May 16, 2005 ex parte letter in FCC Docket No. 05-24.

mand. In particular, we are concerned about the potential marketplace effects of

some of the Draft’s provisions:

• They will likely drive the market toward products with no off-air tuners at all;

• They will deny useful products to those consumers least able to afford television

receivers; and

• They seem inconsistent with, and detract from, the Draft’s provisions that recognize cable headend conversion to analog transmission as meeting Transition requirements.

The FCC’s Tuner Mandate has proved a fragile instrument for driving the television receiver market toward the inclusion of DTV tuners. We have found the mandate to equip 50 percent of all displays of 36 inches and above with digital tuners

to be counterproductive. By rationing the ultimate supply of products without such

tuners, it has encouraged retailers to secure their supplies by ordering these products up front, and to await price cuts on the products that contain tuners, because

manufacturers will be required to sell these whether or not there is a demand for

them. Such demand will be limited because, while many consumers may need or

want terrestrial tuners in their displays, most of our customers are cable and satellite subscribers who might not need or want to pay for a broadcast tuner.

Even the requirement that 100 percent of a size category of television receivers

must include DTV tuners can have only limited impact on consumer choices, because not all video display products are ‘‘television receivers.’’ 2 In an era in which

more than 85 percent of households are connected to cable or satellite, the hard fact

is that most consumer displays for video programming do not need to be ‘‘television

receivers’’—that is, the displays meet consumer needs without relying on any TV

tuner, analog or digital, because they receive their programming from a cable, satellite, or other set-top box over non-broadcast interfaces.

Faced with these facts, and with their experience to date under the Commission’s

mandate, CERC and the CEA jointly petitioned the Commission for adjustments in

its regulations, in order to align them to the extent possible with demand and product cycles. For the ‘‘midsize’’ TV size category, CEA and CERC recommended that

the Commission drop its counterproductive 50 percent rule, but advance the effective date of its 100 percent rule, from July 1, 2006 to March 1, 2006. We firmly believe that this proposal would advance the DTV Transition by allowing us to better

align the Commission’s mandates with supply and demand. Accordingly, we think

that the provision in the Staff Draft—that would not allow the FCC to adjust its

Mandate dates in this size category so as to eliminate the counterproductive 50 percent rule—would result in fewer, rather than more, DTV tuners being distributed

to consumers.

We are also very concerned about, and strongly oppose, a new proposal in the

Staff Draft, which would move the Mandate date for televisions with screen sizes

of 13 through 24 inches up by a year. This proposal would damage both the transition and the least affluent portion of the viewing public.

• First, these sets are very severely affected by price considerations. A consumer

who buys a $79 13 inch color television is generally moved by necessity, more

than by a search for the most compelling experience. CERC’s general retail

members have noted that many of these sets are bought on layaway, by customers who do not have bank accounts. Even semiconductor maker Zoran,

which has no retail experience and has made predictions based on assumptions

that are at best aggressive and at worst unrealistic, admits that adding a DTV

tuner on the Staff Draft’s timeframe would increase the cost of such a product

by ‘‘around $80—$100 depending on the brand and model.’’ 3 Having the price

of a $79 color TV go to $179 by July 1, 2006 would eviscerate the low end of

this product category, punishing the consumers who are least able to afford television receivers.

• If small TVs become too expensive for their market, the only alternative would

be product lines of ‘‘receivers’’ with no off-air tuners at all. We have seen this

class of ‘‘monitor’’ product emerge already in the large-screen category, even

though the DTV tuner is a much smaller component of the cost of a large-screen

82

4We had hoped that prospective inclusion of the ‘‘CableCARD’’ feature, which can be inexpensively added to products with DTV tuners, would heighten their appeal to consumers, but unfortunately these products are not being promoted by the cable industry, and issues have been

raised as to their technical support. Of the approximately one million such TV receivers sold

to date, only about 40,000 are being served by CableCARDS. 5For example, if subsidized converter products contain outputs other than the familiar ‘‘RF’’

(channel 3 or 4) coaxial output, they would be useful for enabling many pure ‘‘monitor’’ products

to receive off-air signals, even though these products have not been relied upon for analog reception. This could expand and prolong the demand for subsidized products, causing the Congress

to consider a time and household limitation as to the availability of subsidized products. We prefer to sell multifunction products, but Congress might have a narrower goal. 6There are potential regulatory hurdles, as well. For example, California recently established

an energy standard of 8 watts in standby mode for converter boxes. If such state provisions are

not pre-empted in the subsidy law they could impede acquisition of products or increase costs.

television. A 22 inch LCD display with no tuner, for example, could be an alternative for a consumer who relies on a cable or satellite set-top box anyway.4

• Driving analog tuners out of inexpensive televisions seems especially counterproductive in light of the Staff Draft’s expectation that cable operators will convert DTV broadcasts to analog broadcast transmissions at their headends, so

that consumers with analog tuner TVs will be served. If TV sets do not have

analog tuners, there is no point in converting signals to analog at cable

headends. And ‘‘basic cable’’ customers who rely on analog tuners to tune these

channels will be sorely surprised when their sets have no place to plug in the

cable. • The Congress, concerned as it is about consumers who must bear the costs of the

transition, needs to confront the fact that a low-end TV with only an analog

tuner may be the only affordable option for some consumers. To drive these sets

out of the market prematurely, by advancing Tuner Mandate dates that double

the prices of such sets, is to place the burden of the Transition on those who

are least able to afford it.

CERC has not asked that the existing Tuner Mandate dates for 13 inch receivers

be pushed back. But we think it would be contrary to the legislation’s purposes, and

very unfair to low income consumers, to try to move them up.

CONSUMER SUBSIDIES

While the Staff Draft does not address consumer subsidies, CERC is aware that

this is an issue under lively discussion. CERC has not presumed to tell the Congress

whether there should be such a subsidy or who should be eligible to receive it, but

we do have concerns over how a subsidy might be applied or administered. Our core

concerns are these:

• Ideally, any subsidy should apply to any product, for sale to consumers, with an

ATSC (digital off-air) tuner and an antenna terminal. Consumers should have

a choice as to which sort of products will serve their marketplace needs. Consumer choice is the best driver of lower prices. However, if the Congress feels

constrained, for budgetary purposes, as to the time and scope of the subsidy,

it may want to go in the opposite direction, and severely limit the capabilities

of products that are eligible for subsidy.5

• While various subsidy figures have been floated, Congress should not attempt to

fix the prices of real-world products based on the funds available for a subsidy.

There are too many variables, including large differences in the projections of

costs two years hence, and of the number of households and sets for which there

is a demand.6

• We believe that any subsidy should flow directly from the government to eligible

consumers. Retailers’ role in the process should be limited to doing what we do

best: providing the best product that fits the consumer’s needs and desires. • CERC would have severe concerns over a subsidy program that would require retailers to advance the subsidy amount to consumers, and to attempt to recover

it from the government: • Any retailer reimbursement program that would require retailers to carry

receivables on our books would need to be a direct obligation of the U.S. government for each sale of a specified product, payable within 60 days of claim

and subject to suit for nonpayment.

• Even so, imponderable questions would abound: How to prevent false

claims? Would all retailers, no matter how large or small, be audited regularly by the government? How to apply the program to Internet-based merchants; how to find them to audit the bona fides of their claims for reimbursement? CERC members are concerned that the opportunities for abuse presented by such a reimbursement program—as to which internal accounting

83

7 CERC would oppose both retailer eligibility requirements and attempts to set or pre-define

the retail price of products. Retailers should be reimbursed for their transaction and shipping

costs, including the direct and indirect costs of audits—but at present these seem imponderable.

data would be the only evidence of actual sales—would lead either to loss of

credibility for all claims, or to government and retail auditing costs that are

dramatically out of scale to the amounts being claimed. Would eligibility requirements for retailers be imposed? Would attempts be made to artificially

set or define retail prices for particular products? Would adequate provision

be made for the expenses imposed on retailers? 7

Several CERC members have been interviewed by, and voiced their views and

concerns to, the U.S. Government Accountability Office. CERC can well understand

why subsidy issues have proved vexing and controversial. We must caution that difficulties should not be purportedly ‘‘solved’’ via unrealistic assumptions with respect

to how programs might operate.

On behalf of Circuit City and the other members of CERC, I appreciate your invitation to appear today, Mr. Chairman. We will continue to work with the Committee

and with the FCC in your effort to add terrestrial broadcasting to those industries

that have successfully completed the digital transition.

Mr. UPTON. Thank you. Mr. Knorr.

STATEMENT OF PATRICK KNORR

Mr. KNORR. Thank you, Mr. Chairman and members of the subcommittee. My name is Patrick Knorr, and I am General Manager

of Sunflower Broadband, an independent cable business based in

Lawrence, Kansas, currently serving 35,000 customers. My company provides cable television, digital cable, high-speed Internet,

local phone service, digital video recorders, and other advanced

services in eight smaller systems and rural areas throughout

northeast Kansas.

I am also the vice chairman of the American Cable Association,

with systems in every State represented on this committee. I believe you stand at an historic moment, when we shift from the antiquated policies of the analog world to the exciting and enticing future that the digital revolution can provide. The DTV Transition

Act takes an important step in the right direction.

As you consider how best to address the transition to digital television, I believe there are two separate, but intertwined issues that

you must balance. First, in rural America, the primary challenge

of making the transition work is a unique and inescapable truth

that the transition will cost money that small communities and

systems simply do not have.

The second is that the value of television is the content that

flows over its signal and not just its picture quality. Technologically, dual carriage presents significant problems for small operators. Most small systems will be unable to comply, because their

systems cannot carry all those signals due to lack of capacity. The

alternative option provided in the bill, solely carrying the primary

digital signal, which in most cases is an HD signal, would force

every customer in the market to have a costly HD tuner for every

single TV in their house. This could cost over $1,000 for every subscriber in a cable system, which rural America cannot afford. ACA

members support the ability to down-convert digital signals to analog without the obligation for dual carriage, a concept this committee has discussed.

Additionally, many rural systems will suffer the digital cliff effect, where today’s analog signal would reach the head end, but the

84

digital signal will not. Congress can solve this problem by making

satellite delivered, local into local signals available to operators on

a nondiscriminatory basis. The price of not addressing this issue is

that many consumers in compliant systems will find themselves

still staring at blank TV screens.

As for our concerns about the rules that govern content, ACA

members are seeing early signs that broadcasters are using the latest round of retransmission consent negotiations to extract cash

payments. We estimate that broadcasters will leverage retransmission consent rules to extract an additional $1 billion from consumers served just by ACA members for the privilege of receiving

free over-the-air signals, increasing their bills by $2 to $5 per

month. I believe the intent of retransmission consent was to assist

with localism, not to promote profiteering. The situation occurs for

many reasons, most importantly, network non-duplication and syndicated exclusivity allow broadcasters to block cable operators from

obtaining competing signals, eliminating any chance for a free market to emerge.

There are solutions to this dilemma. One, maintaining broadcast

exclusivity for stations that elect must-carry, or that do not seek

additional consideration for retransmission consent. Two, eliminate

exclusivity when a broadcaster elects retransmission consent and

chooses to seek additional consideration for carriage. Three, prohibit any party, including a network, from preventing a broadcast

station from granting retransmission consent. Four, to codify the

retransmission consent conditions imposed on the Fox/News Corp/

DirecTV merger to apply to all retransmission consent agreements.

In summary, the retransmission consent and broadcast exclusivity regulations have been used by networks and stations to raise

rates and force unwanted programming onto consumers. This must

stop, but it won’t unless Congress acts.

Finally, I would encourage you to pierce the programming veil of

secrecy by authorizing the FCC to obtain specific programming contracts and rate information, in order to develop a programming

price index. This PPI would be a very simple, yet effective, way to

gauge how programming rates rise or fall, while still protecting

proprietary elements of the individual contracts.

Mr. Chairman, this committee stands today at the threshold of

the new digital world, but the challenges are many, and the risks

are great. Clearly, rural America and its service providers have

unique financial and geographical challenges to face while making

this conversion. Additionally, outdated regulatory structures that

raise rates and force programming on your constituents must be

abandoned. I hope you will be able to address both of these problems, and I appreciate the opportunity to testify on ACA’s views in

this matter.

Thank you.

[The prepared statement of Patrick Knorr follows:]

PREPARED STATEMENT OF PATRICK KNORR, GENERAL MANAGER—SUNFLOWER

BROADBAND ON BEHALF OF AMERICAN CABLE ASSOCIATION

INTRODUCTION

Thank you, Mr. Chairman and members of the subcommittee.

85

My name is Patrick Knorr, and I am General Manager of Sunflower Broadband,

an independent cable business based in Lawrence, Kansas, currently serving 35,000

customers. My company provides cable television, digital cable, high-speed internet,

local phone service, digital video recorders and other advanced services in eight

smaller systems and rural areas throughout Northeast Kansas.

I am also the vice chairman of the American Cable Association. ACA represents

nearly 1,100 smaller and medium-sized independent cable businesses. These companies do one thing—serve our customers, who are found in areas the bigger entities

don’t serve. ACA members don’t own programming or content; nor are they run by

the large media companies. Collectively, ACA members serve nearly 8 million customers, mostly in smaller markets. Our members serve customers in every state and

in nearly every congressional district, particularly those of this Committee.

I believe you stand at an historic moment, when we shift from the 1970s-era policies of the analog world to the exciting and enticing future that the digital revolution can provide. All of us here today want our constituents and customers to receive the best in advanced, high-speed, digital services. The DTV Transition Act

takes an important step in the right direction. But at the same time, all of us here

today want to ensure that no one is left behind as we actually move from analog

to digital.

As we look today at specific legislative proposals concerning the transition to digital television, there are two realities this Committee must take into account.

The first reality is that the transition to digital television is both a question of

technology and of public policy—a reality recognized by the existence of this hearing

and the very necessity of a DTV bill. Many very important and relevant public policy issues exist today concerning the digital pipe and the content that flows through

it. Issues such as ‘‘rising cable and satellite rates,’’ ‘‘media consolidation,’’ ‘‘indecency,’’ ‘‘retransmission consent abuse,’’ ‘‘family programming tiers’’ and the ‘‘Digital

Divide,’’ cannot be viewed as separate from the DTV transition. In fact, these policy

issues are the central focus of your constituents and our customers. Moving a limited DTV bill will only postpone and exacerbate marketplace, media, programming,

and pricing problems that already exist back home in your districts. The transition

from analog to digital, and the underlying need for legislation to facilitate that shift,

provides you with the first appropriate opportunity to address these germane issues

in a comprehensive manner and I encourage you to take advantage of this moment.

Digital platforms can provide consumers with a wondrous world of new and valuable programming. But if you allow the old rules to stay in place, it will just be

more of the same. To move forward on just one technological aspect of the digital

revolution without moving forward on the broader issues would be the equivalent

of putting a fancy new engine in a rusty old car, thus severely limiting how far and

how fast you can really go. To provide consumers with the greatest benefit, it is imperative that you break with the past and recognize that some old ideas no longer

serve the greater good.

I strongly urge this Committee to seize this moment to restore the balance of

power between programmers, operators, media consortiums and broadcasters. In

short, it’s time to recalibrate for the digital world so that each is subject to the creative power of competitive market forces and to the consumers they serve.

Moving on to the second reality, provisions in the DTV Transition Act that require

dual carriage of broadcast signals will threaten ACA’s members very survival and

ability to provide advanced services such as high-speed internet, VOIP, and VOD.

Unless the specific financial realities of smaller, independent providers are addressed

in this bill, consumers and communities across America will lose access to signals

and services they rely on today. In fact, what worries me is that without efforts to

help these systems make the transition, many of the small businesses that provide

video and broadband services in rural America will cease to exist and the digital divide will actually grow.

Out in the smaller communities ACA members serve from Illinois to Nebraska to

Oregon to Mississippi, it is our core video business that allows us to finance and

provide the high-speed services, including digital television, which everyone wants

in order to bridge the Digital Divide. It is independent cable companies like mine

that provide broadband services to small towns throughout the country. Satellite

providers, telephone giants or major cable companies—unlike ACA’s members—are

not rushing to serve these communities and I can appreciate why. Large companies

will never come rushing into these communities because of the cost and difficulty

of providing service in rural America. The headlines you read about in the media

are about new services and suites of services offered to larger communities. If ACA

members’ video service cannot survive, I can assure you we will not be around to

offer the cable modem services these communities need and the DTV services this

Committee wants. In short, video programming is not ‘‘just’’ about programming

86

choices and rates, but it is also the foundation upon which advanced services, including DTV, are built.

As a result, there are four fundamental and specific changes that must be made

if your goal is to provide the greatest diversity of video, DTV and advanced services

and to ensure that all consumers—even in smaller markets and rural areas—have

access to them.

The four changes are:

1. Ensure that consumers in smaller markets and rural areas are not left behind

in the digital transition. Take into account and address the unique financial,

technical and operational requirements of those companies that will be providing DTV service in rural America.

2. Update and change the current retransmission consent rules to help remedy the

imbalance of power caused by media consolidation.

3. Correct rules that allow for abusive behavior because of media consolidation and

control of content.

4. Make access to quality local-into-local television signals available.

What needs to be changed and why:

1. Ensure that consumers in smaller markets and rural areas are not leftbehind

in the digital transition. Take into account and address the unique financial, technical and operational requirements of those companies that will be providing DTV

service in rural America.

What the DTV Transition Act would require:

Section 6 of The DTV Transition Act Staff Draft would require cable operators to

carry the primary digital signal of all broadcast stations, but gives the cable operator the choice to also simultaneously downconvert certain commercial and educational stations to analog and carry both digital and analog signals all on the

broadcast basic tier. From the perspective of the independent cable operators serving rural America today, this is a Hobson’s Choice—no choice at all—for the following reasons:

Dual Carriage. Independent cable operators in smaller markets and rural areas

cannot afford the transition and equipment costs to transmit solely digital signals.

They will need to downconvert digital signals to analog so that their subscribers in

smaller markets and rural America will have a signal to receive. If dual carriage

is the only option, most small systems will be unable to comply due to the fact that

the limitations of their systems will prevent them from carrying those signals (as

the actual carrying capacity of the pipe into the home will be too small). In addition,

the cost of just carrying the digital signal for most ACA members would be over

$1,000 per subscriber. That’s a cost that many operators cannot recover nor absorb.

Additionally, such a solution would force every customer in my market to have a

HD tuner for every TV in the house. In short, the requirement in the Staff Draft

for dual carriage of both the digital and analog signal will impose significant additional unrecoverable cost and siphon off precious bandwidth used today to offer advanced communications services like high-speed Internet, VOIP and VOD, to name

a few.

Hard Deadline. The DTV transition Act imposes a hard deadline of December

31, 2008 when all analog transmission by broadcast stations must cease. The ‘‘hard

deadline’’ for the digital transition will impact disproportionately ACA members in

rural America and their subscribers in at least two ways:

• Some ACA members in remote areas are subject to the ‘‘digital cliff’’ effect. When

broadcasters turn off their analog signal these members will be unable to pick

up any signal to retransmit to their subscribers due to the technical characteristics of the digital signal. If a cable operator cannot pick up the digital signal,

its subscribers are even less likely to be able to pick up the signal off-air signal

with a home antenna.

• Cable subscribers in rural areas are less able to afford digital receivers or converters than subscribers in urban areas.

Retransmission consent. As previously discussed, some broadcasters are already using their DTV signal as a lever to impose more tying demands and higher

fees for retransmission consent on cable operators. When a broadcaster prevents a

smaller operator from carrying broadcast DTV stations by requiring the operator to

carry unspecified multicast or tied programming, or by demanding exorbitant fees,

this behavior slows the DTV transition. The bill must address these problems to ensure the increased bandwidth available in the digital world will not just become increased opportunity for more unwanted programming and higher rates to be leveraged down to consumers in rural America.

87

Digital-to-analog conversion. ACA members support the concept of allowing

the digital-to-analog conversion that this committee has considered. Such a decision

would allow smaller systems to minimize the disruption to their consumers and

would ensure our continued viability. Unfortunately, the current provisions in Section 6 of the staff draft are not a practical option. First, it will again require consumers to purchase new equipment. Second, it places an insurmountable economic

burden on operators by forcing them to replace their networks. (See Exhibit 3) The

simplest solution would be to give operators the flexibility to downconvert digital

signals at the head-end without the dual carry obligation.

The stark reality is that ACA members, without changes to the draft that reflects

their unique circumstances, face extinction. This means that consumers served by

ACA members in most of the districts represented on this Committee will lose their

provider and all of the advanced services these companies provide.

Some may say that the loss in the marketplace of certain providers like ACA

members is simply a function of survival of the fittest. We would argue that rural

America deserves competition in the video marketplace just like the rest of the

country. They also deserve to experience the advanced services that bigger entities

are rushing to provide in more populated and profitable areas. The reality is that

in the rural markets ACA members companies serve and operate, larger cable television providers will not fill in the service gaps if ACA members are forced to exit

their business.

Solutions to ensure no consumer, community or provider are left behind in the DTV

transition:

• Provide the ability to downconvert digital signals to analog without the obligation

for dual carriage;

• Assist independent cable operators to upgrade facilities to avoid the digital cliff

effect and to be able to receive and transmit DTV signals to their consumers;

• Allow waivers of the carry-one-carry-all requirement to ease the burden on smaller operators;

• Make adjustments to retransmission consent rules and exclusivity regulations.

ACA and its members understand and support the need for the Committee to

move swiftly to recapture analog spectrum for other noble purposes. However, we

strongly caution the Committee to compare the pursuit of such purposes with the

potential of leaving consumers and providers in smaller markets and rural America

out in the cold with no choices, no signals and lost services. We hope to work with

the Committee to develop a DTV transition bill that will recognize the unique circumstances faced by providers and consumers in smaller markets and rural areas

so that the DTV transition will take place in positive ways for all consumers, not

just those located in populated areas.

2. Current retransmission consent rules must be updated to help remedy the imbalance of power caused by media consolidation

• The current retransmission consent and broadcast exclusivity laws and regulations limit consumer choice and impede independent cable operators’ ability to

compete in smaller markets and rural America by permitting distant media conglomerates to charge monopoly prices for programming. This situation must not

be carried forward into the post-DTV world.

The current laws and regulations allow broadcasters to combine retransmission

consent and market exclusivity into a monopolistic hammer. Both of these rules

were created to preserve local broadcasting, but now large media companies use

those rules to hold localism hostage to increase profits and gain wide distribution

for niche programming like SoapNet and more recently LOGO, a gay-themed

Viacom Network. These same practices that were used with analog broadcasting are

already being applied to the digital world, accelerating the problem.

Across America our association is seeing early signs that broadcasters are using

this leverage to lean excessively on independent cable operators to extract cash. Individually the independent cable systems that are our members usually represent less

than a fraction of 1% of any given DMA and have no leverage in negotiations with

broadcasters. However, collectively our ACA members serve 8% of all television

households and most of rural America. We estimate that this year broadcasters will

leverage retransmission consent rules to extract an additional $1 billion from consumers served by ACA members for the ‘‘privilege’’ to receive free over-the-air signals.

The average increase in basic cable rates as a result could well be $2-$5 per subscriber per month! Remember, for the consumer, they will not experience any improvement in service nor receive any new programming in spite of paying this increase.

88

And broadcasters don’t only demand cash for the right to carry their local television stations. Some members of the largest media conglomerates even require our

cable companies to carry affiliated satellite programming in local systems and even

in systems outside of the member’s local broadcast market. In this way, ownership

of a broadcast license is used to force carriage of, and payment for, affiliated programming by consumers who do not even receive the broadcast signal at issue.

These forced carriage requirements are also responsible for forcing on some of the

most objectionable and indecent content on television today, such as SpikeTV, F/X

and Soap Net, among many others.

Unless this Committee addresses these issues, imposed broadcaster cost, price increases and forced content will continue unabated in the digital world. In fact, increased bandwidth will only add fuel to this fire. Large media companies are using

the free spectrum licenses granted by the government for local broadcasting to pad

margins and to leverage often questionable nationally delivered content. How those

licenses are used is fundamentally part of Congress’s obligation in managing the

transition of licenses from analog to digital. Congress created the retransmission consent laws in 1992 to protect localism and must change them in 2005 to protect it

from the unforeseen consequences of media consolidation in a new digital world.

Broadcasters and programmers get away with these abuses today because the

pricing of retransmission consent does not occur in a competitive market. Under the

current regulatory scheme, media conglomerates and major affiliate groups are free

to demand monopoly ‘‘prices’’ for retransmission consent while blocking access to

readily available lower cost substitutes.

They do so by two methods:

• First, the network non-duplication and syndicated exclusivity laws and regulations allow broadcasters to block cable operators from cable-casting network and

syndicated programming carried by stations outside of the broadcaster’s protected zone. In other words, the conglomerate-owned station makes itself the

only game in town and can charge the cable operator a monopoly ‘‘price’’ for its

must-have network programming. The cable operator needs this programming

to compete. So your constituents end up paying monopoly prices.

• Second, the media conglomerates require network affiliates to sign contracts that

prevent the affiliate from selling their programming to a cable operator in a different market. Again, the conglomerate-owned and operated stations are the

only game in town.

In these situations, the cable companies’ only defense is to refuse to carry the programming. This has virtually no effect on the media conglomerates, but it prevents

your constituents from receiving must-have network programming and local news.

This result directly conflicts with the historic goals and intent of the retransmission

consent and broadcast exclusivity rules, which were to promote consumer choice and

localism.

There are ready solutions to this dilemma. When a broadcaster seeks a ‘‘price’’ for

retransmission consent, give independent, smaller and medium-sized cable companies the ability to shop for lower cost network programming for their customers.

Accordingly, in our March 2, 2005, Petition for Rulemaking to the FCC, ACA proposed the following adjustments to the FCC’s retransmission consent and broadcast

exclusivity regulations:

• One: Maintain broadcast exclusivity for stations that elect must-carry or that do

not seek additional consideration for retransmission consent. This ensures

must-carry remains the primary option for programmers and ensures ‘‘localism.’’

• Two: Eliminate exclusivity when a broadcaster elects retransmission consent and

seeks additional consideration for carriage. If the programmer decides to forego

their must-carry rights in the hopes of putting together a business deal with

an operator, allow the operator to negotiate freely without having their hands

tied.

• Three: Prohibit any party, including a network, from preventing a broadcast station from granting retransmission consent.

On March 17, 2005, the FCC released ACA’s petition for comments. By opening

ACA’s petition for public comment, the FCC has acknowledged that the current retransmission consent and broadcast exclusivity scheme requires further scrutiny. Before codifying a new regulatory regime for digital television, carrying all the baggage

from the analog world with it, Congress should ask similar questions and make the

important decision to update current law to rebalance the role of programmers and

providers.

Congress, too, should revisit the retransmission consent laws to correct the imbalance caused by the substantial media ownership concentration that has taken place

since 1992. One solution is to codify the retransmission consent conditions imposed

89

on Fox/News Corp./DirecTV to apply across the retransmission consent process. The

three key components of those conditions include: (i) a streamlined arbitration process; (ii) the ability to carry a signal pending dispute resolution; and (iii) special conditions for smaller cable companies.

In summary, the retransmission consent and broadcast exclusivity regulations

have been used by the networks and stations to raise rates and to force unwanted

programming onto consumers. This must stop, but it won’t unless Congress acts. If

a station wants to be carried, it can elect must-carry. If a station wants to charge

for retransmission consent, let a true competitive marketplace establish the price.

3. Correct rules that allow for abusive behavior because of media consolidation and

control of content.

What most consumers do not understand is that my independent company and

ACA member companies must purchase most of their programming wholesale from

just four media conglomerates, referred to here as the ‘‘Big Four’’—Disney/ABC,

Viacom/CBS, News Corp./DirecTV/Fox, and General Electric/NBC. All of these companies have at their core one of the top four national broadcast networks. In dealing

with the Big Four, all ACA members continually face contractual restrictions that

eliminate local cable companies’ flexibility to package and distribute programming

the way our customers would like it. Instead, programming cartels, headquartered

thousands of miles away, decide what they think is ‘‘valuable’’ content and what our

customers and local communities see. On a basic level the digital transition is a fundamental paradigm shift that could be very disruptive for consumers. Addressing

these abuses is an opportunity for congress to (1) provide tangible benefits to consumers; (2) fulfill the true promise of the digital transition by providing more choice

and control to consumers; and, (3) to make a consolidated media more accountable

to people they serve.

To fix this situation, Congress must update and reform the rules so that:

a. Local providers of all forms and customers have more choice and flexibility in how programming channels are priced and packaged, including the

ability to sell programming channels on a theme-based tier if necessary;

b. Tying through retransmission consent must end. Today, the media giants

hold local broadcast signals hostage with monopolistic cash-for-carriage demands or demands for carriage of affiliated media-giant programming, which

was never the intention of Congress when granting this power; c. The programming pricing gap between the biggest and smallest providers is closed to ensure that customers and local providers in smaller markets are not subsidizing large companies and subscribers in urban America;

and,

d. The programming media giants must disclose, at least to Congress and

the FCC, what they are charging local providers, ending the strict confidentiality and non-disclosure dictated by the media giants. Confidentiality and

non-disclosure mean lack of accountability of the media giants.

Let me explain.

Forced Cost and Channels

For nearly all of the 50 most distributed channels (see Exhibit 1), the Big Four

contractually obligate my company and all ACA members to distribute the programming to all basic or expanded basic customers regardless of whether we think that

makes sense for our community. These same contracts also mandate carriage of less

desirable channels in exchange for the rights to distribute desirable programming.

A small cable company that violated these carriage requirements would be subject

to legal action by the media conglomerates, and for ACA’s members, this is a very

real threat.

These carriage restrictions prohibit ACA members from offering more customized

channel offerings that may reflect the interests and values of our specific community. Thus, any interest we may have in offering a family tier as the basic tier to

our constituencies is made virtually impossible due to the corporate decisions made

by the Big 4 and the terms and conditions they impose on our companies.

More Forced Cost and Channels Through Retransmission Consent

As previously discussed, retransmission consent has morphed from its original intent to provide another means to impose additional cost and channel carriage obligations. As a result, nearly all customers have to purchase basic or expanded basic

packages filled with channels owned by the Big Four (See Exhibit 2).

Forced Carriage Eliminates Diverse Programming Channels.

The programming practices of certain Big Four members have also restricted the

ability of some ACA members to launch and continue to carry independent, niche,

90

minority, religious and ethnic programming. The main problem: requirements to

carry Big Four affiliated programming on expanded basic eliminate ‘‘shelf space’’

where the cable provider could offer independent programming.

If new independent programmers are to provide outlets for this type of programming to reach consumers, you must ensure that they are not subject to the handcuffs current programming practices place upon them.

Local Flexibility is Needed.

In order to give consumers more flexibility and better value, changes in current

wholesale programming practices and market conditions are needed for all providers. Operators must be given more flexibility to tailor channel offerings that work

best in their own local marketplaces.

As I have stated, the Big Four condition access to popular programming on a

range of distribution obligations and additional carriage requirements. These restrictions and obligations eliminate flexibility to offer more customized channel

packages in local markets.

It’s important to point out that neither my company nor any ACA member controls the content that’s on today’s programming channels. That content—decent or

not—is controlled by the media conglomerates that contractually and legally prevent

us from changing or preempting any questionable or indecent content.

However, if my company and other ACA members had more flexibility to package

these channels with the involvement of our customers, current indecency concerns

raised by both Congress and the FCC could also be addressed.

Price discrimination against smaller cable companies makes matters worse.

The wholesale price differentials between what a smaller cable company pays in

rural America compared to larger providers in urban America have little to do with

differences in cost, and much to do with disparities in market power. These differences are not economically cost-justified and could easily be replicated in the IP

world as smaller entrants are treated to the same treatment our members face.

Price discrimination against independent, smaller and medium-sized cable companies and their customers is clearly anti-competitive conduct on the part of the Big

Four—they offer a lower price to one competitor and force another other competitor

to pay a 30-55% higher price FOR THE SAME PROGRAMMING. In this way,

smaller cable systems and their customers actually subsidize the programming costs

of larger urban distributors and consumers. This sad reality should not carryover

with the digital transition.

In order to give consumers in smaller markets and rural areas more choice and

better value, media conglomerates must be required to eliminate non-cost-based

price discrimination against independent, smaller and medium-sized cable operators

and customers in rural America.

With less wholesale price discrimination, ACA members could offer their customers better value and stop subsidizing programming costs of large distributors.

Basis For Legislative and Regulatory Action

Congress has the legal and constitutional foundation to impose content neutral

regulation on wholesale programming transactions. The program access laws provide the model and the vehicle, and those laws have withstood First Amendment

scrutiny. This hearing provides the Committee with a key opportunity to help determine the important governmental interests that are being harmed by current programming practices.

Furthermore, based in large part on the FCC’s actions in the DirecTV-News Corp.

merger, there is precedent for Congress and the FCC to address the legal and policy

concerns raised by the current programming and retransmission consent practices

of the media conglomerates. The FCC’s analysis and conclusions in the News Corp.

Order persuasively establish the market power wielded by owners of ‘‘must have’’

satellite programming and broadcast channels and how that market power can be

used to harm consumers. That analysis applies with equal force to other media conglomerates besides News Corp.

Pierce the Programming Veil of Secrecy—End Non-Disclosure and Confidentiality.

Most programming contracts are subject to strict confidentiality and nondisclosure

obligations, and my company and ACA members are very concerned about legal retaliation by certain Big Four programmers for violating this confidentiality. Ask me

what I have to pay to receive a given channel and I cannot tell you due to terms

and conditions the conglomerates insist upon. Why does this confidentiality and

non-disclosure exist? Who does it benefit? Consumers, Congress, the FCC? I don’t

91

think so. Why is this information so secret when much of the infrastructure the

media giants benefit from derives from licenses and frequencies granted by the government?

Congress should obtain specific programming contracts and rate information directly from the programmers, either by agreement or under the Committee’s subpoena power. That information should then be compiled, at a minimum, to develop

a Programming Pricing Index (PPI). The PPI would be a simple yet effective way

to gauge how programming rates rise or fall while still protecting the rates, terms,

and conditions of the individual contract. By authorizing the FCC to collect this information in a manner that protects the unique details of individual agreements,

I cannot see who could object.

Armed with this information, Congress and the FCC would finally be able to

gauge whether rising cable rates are due to rising programming prices as we have

claimed or whether cable operators have simply used that argument as a ruse. A

PPI would finally help everyone get to the bottom of the problems behind higher

cable and satellite rates. We at ACA are so convinced that this type of information

will aid you in your deliberations that we challenge our colleagues in the programming marketplace to work with us and this Committee to craft a process for the

collection of that data.

In short, without disclosure, there is no accountability. The digital transition is

about how to manage broadcasting in America and is an opportunity to make things

fundamentally better for consumers.

4. Make Access To Quality Local-Into-Local Television Signals Available.

In the previous section, I outlined the enormous technical, financial and operational challenges facing independent cable in smaller markets and rural areas to

accomplish the DTV transition. While we are committed to making the transition

work, it will be no small feat to make this transition happen in ACA members’ marketplaces without putting the many advanced services we now provide at great risk.

Another important reality about digital signals is that they will not likely have

the same distribution range as the analog signals they replace. One way to help

solve this problem is to grant cable access to local-into-local television signals already being delivered by direct broadcast satellite (DBS) companies.

The digital spectrum assigned will not have the same propagation qualities as

many of the analog signals they replace. As a result, while most metropolitan cable

operators and DBS will have access to improved digital signals, some rural cable

operators will find they no longer can receive any usable signal at all. This is what

refered to as the digital cliff. In local-into-local markets, DBS can deliver clear local

broadcast signals regardless of distance from transmitters. ACA members and their

buying representative, the National Cable Television Cooperative in Lenexa, Kansas, have asked both DirecTV and EchoStar for the right to buy and pay for access

to DBS’ local-into-local signals where a good quality signal is not available over-theair. However, the DBS duopoly refuses to allow rural cable systems to receive these

DBS-delivered broadcast signals, even though DBS now sells the same signals to

private cable operators, satellite master antenna system owners, and several Bell

companies.

Ironically, DBS now refuses to grant access to its programming, despite the favored regulatory treatment it received to have access to cable programming. The

ability to receive local broadcast signals was the reason Congress enacted the Satellite Home Viewer Improvement Act in 1999, which Congress recently reauthorized

through SHVERA. But SHVERA does nothing to solve the local signal problem for

rural cable operators and customers.

Congress can solve this problem by revising the retransmission consent laws as follows:

In markets where a satellite carrier delivers local-into-local signals, that satellite carrier shall make those signals available to MVPDs of all types on nondiscriminatory prices, terms and conditions where the MVPD has the consent of

the broadcaster to retransmit the signal.

ACA’s recommended revisions to the laws and regulations governing retransmission transmission consent and broadcast exclusivity are modest. But they will

advance the widespread dissemination of good quality local broadcast signals to

your constituents and will address the serious competitive imbalance currently hurting small market and rural cable systems. Carrying this restrictive situation into

the DTV world would further compound this mistake. All video vendors must be

able to have access to quality signals if they are going to be viable competitors within in the DTV marketplace.

92

CONCLUSION

This Committee stands today at the threshold of the new digital world, but it is

also a precipice. The challenges are many and the risks are great.

This legislation provides you with the power to determine whether to recognize

that rural America and its service providers have unique financial and geographic

challenges to face while making this conversation. Additionally, at the same time,

you have the opportunity to repudiate outdated regulatory structures that raise

rates and force programming on your constituents while replacing it by injecting

market-based solutions. I hope you will be able to address both halves to this problem and appreciate the opportunity to testify on ACA’s views on these matters.

Mr. UPTON. Thank you. Mr. Souder.

STATEMENT OF STEVE SOUDER

Mr. SOUDER. Good afternoon, Chairman Upton, Ranking Member

Markey, and members of the subcommittee, and especially Representative Wynn, from my home country and district. Thank you.

My name is Steve Souder, and I am the Director of the Montgomery County, Maryland 911 Emergency Communications Center.

I previously served as the administrator of the Arlington County,

Virginia 911 Public Safety Emergency Communications Center,

where I served on September 11, 2001, and was one of the many

public safety communications leaders called upon to address the

terrorist attack on the Pentagon.

I want to thank you, Mr. Chairman, for scheduling this hearing,

and for focusing on the communications needs of the Nation’s first

responders. It is an honor to be here with you today and support

your mission to clear needed spectrum for first responders by ending the DTV transition as soon as possible. It is important that we

set aside and close the date on December 31, 2006, as soon as possible, because every year that we wait is another year too late.

You concurred with the 9/11 Commission in last year’s intelligence reform legislation that dedicated spectrum must be made

available to our Nation’s police officers, firefighters, emergency

medical technicians, to enable them to carry out their critical mission. The spectrum referred to in the 9/11 Report is in the 700

megahertz band. Public safety identified the need for this spectrum

eight long years ago. Ironically, and on September 11, 1996, a report by the Public Safety Wireless Advisory Committee. That report rather eerily indicated that the 24 megahertz of spectrum

under consideration today should be available within 5 years. As

we all know now, exactly 5 years to the day was the deadly day

that the terrorists attacked our soil, which gave rise to the 9/11

Commission, which again urged that these frequencies be made

available to public safety.

The events of September 11, 2001 have brought much attention

to the manner in which the terrorist attacks on the Pentagon was

responded to by local law and fire rescue personnel that were indeed the first responders, and how interoperability was achieved at

that event. Today, technology exists to improve the quality and effectiveness of public safety communications operations. But public

safety must have access to the 700 megahertz spectrum by the end

of 2006 to deploy interoperable voice and advanced data technology

as early as possible, in order to benefit from that technology.

In 1997, this committee and the FCC recognized the need to allocate spectrum in the 700 megahertz band for mission-critical State

93

and local public safety communications. This allocated spectrum

continues to be used for analog TV and needs to be cleared. In reality, there is no hard date for ending the DTV transition, leaving

public safety and the deployment of vital technology in limbo. Until

this problem is addressed, 5 percent of the country’s TV stations

block improved public safety communications for over 50 percent of

the Nation’s population.

Finally, I strongly concur with the statement made by the Association of Public Safety Communications Officials, the Congressional Fire Services Institute, the International Association of Police Chiefs, the International Association of Fire Chiefs, the Major

Cities Chiefs Association, the Major Counties Sheriffs Association,

the National Association of Counties, the National League of Cities,

and the National Sheriffs Association, in a letter they sent to the

committee on May 5, 2005.

In that letter, Public Safety strongly challenged the letter that

the National Association of Broadcasters had sent to the committee

on March 4, 2005, which said that the broadcasting remains a primary first responder during times of crisis. Members of the committee, law enforcement officers, firefighters, and emergency medical providers, and communications dispatchers and call-takers are

the Nation’s first responders, not the NAB.

In closing, Mr. Chairman, making the public safety spectrum

available nationwide by the start of 2007 will not happen without

the committee’s leadership. We again urge the Congress to fulfill

the promise made in last year’s Intelligence Reform and Terrorism

Prevention Act. Please adopt legislation this year that provides

public safety with early date certain access to 700 megahertz spectrum that we desperately need for the security of our homeland,

our hometowns, and the citizens you represent are at stake.

Thank you very much.

[The prepared statement of Steve Souder follows:]

PREPARED STATEMENT OF STEVE SOUDER, DIRECTOR, MONTGOMERY COUNTY

MARYLAND 911 EMERGENCY COMMUNICATIONS CENTER

Good morning Chairman Upton, Ranking Member Markey and Members of the

Subcommittee. It is a pleasure to appear before you. You have both been great

champions for First Responder communications capabilities.

Thank you for holding today’s hearing on the need to expeditiously end the digital

television transition. The transition must be concluded as soon as possible and with

a hard date. Indeed, every year we wait is another year to late for America’s first

responders and their access to critical communications capabilities in the reclaimed

spectrum once television broadcasters follow the plan and finally migrate to digital

services.

I also want to thank Chairman Barton for powerfully changing the terms of the

DTV debate and Ranking Member Dingell who has also committed to setting a hard

transition date which will enhance the safety and security of our citizens. It is no

longer a question of will the DTV transition ever occur—but when will Congress

make it happen. On behalf of the public safety community, I urge you to conclusively end the transition as promptly as possible.

My name is Steve Souder, and I am the Director of the Montgomery County,

Maryland 9-1-1 Emergency Communications Center. In 1982, I was assigned to the

District of Columbia Fire Department Communications Center and subsequently became the Administrator of the Arlington County, Virginia 9-1-1 Public Safety Emergency Communications Center, where I served on September 11, 2001 and was one

of the public safety communications leaders called upon to address the terrorist attack on the Pentagon.

Our people at the Montgomery County 9-1-1 Center, like communications officers

across the country, are the most unsung of the unsung heroes, yet heroes they are

94

in every respect. They operate behind the scenes in emergency communications centers which are in many ways similar to NASA’s Mission Control Center, both in the

sophistication of the technology utilized and in the critical nature of the mission performed.

Montgomery County opened a new Emergency Communications Center in July of

2003 and completely updated its emergency communications systems. The entire

ECC staff had to change the way they had done business for 15 years and adjust

to many new types of equipment and procedures, including: a new radio system;

Computer Aided Dispatch system; Automatic Vehicle Location system; Automatic

Vehicle Routing Recommendation system; Mobile Data Terminal system; and, a Geographic Information (mapping) System. Public safety communications capabilities,

nationwide, must continually advance to the cutting edge and increasingly must become mobile as our first responders go about the business of protecting the public,

their property and themselves at times we all recognize to be dangerous.

Preventing or Responding to Emergencies Requires Mobile Public Safety

Communications Tools and Spectrum

The events of September 11, 2001 brought much attention to the manner in which

the terrorist attack on the Pentagon was responded to by First Responders and how

we communicated with each other. The preparations that allowed for seamless and

effective radio communications among the initial local area Fire-Rescue-Emergency

Medical Service and Law Enforcement agency response on that fateful day were necessitated by a tragic event that had occurred twenty years prior and less then ′

mile from the Pentagon. That event was the crash of Air Florida Flight 90 onto the

14th Street Bridge and into the Potomac River after taking off from Washington National Airport on January 13, 1982 during a severe snowstorm.

That crash highlighted the concern public safety agencies had been expressing for

many years concerning the lack of interoperable radio systems and the lack of adequate spectrum on which to effectively communicate. As a result of that event, local

area public safety communications personnel pledged themselves to, within their

ability, correct or at least improve this situation. My testimony today is a continuation of that duty to seek to improve communications capabilities for my fellow public safety officers as we seek to carry out our vital mission to protect others. I thank

you for this opportunity.

As you know, the report of the National Commission on Terrorist Attacks Upon

the United States also highlighted the critical need of the public safety community

to have access to radio spectrum for mission critical communications.

The 9/11 Commission Report

The Report by the 9/11 Commission reviewed how emergency responders communicated or, in many cases, were unable to communicate, during the tragic events of

September 11, 2001. Absent proper resources, communications capabilities can become overwhelmed and less effective. Proper resources include radios that can interoperate among agencies and spectrum to ensure sufficient system capacity. The 9/

11 Commission recognized this and recommended that Congress pass legislation to

provide access to spectrum for public safety.

The spectrum referred to in the 9/11 Report is in the 700 MHz band and is

squarely at the heart of the DTV transition debate—without ending the transition

this spectrum will never be utilizable by First Responders nationwide. Indeed, public safety identified the need for this spectrum more than eight years ago in a September 11, 1996 report by the Public Safety Wireless Advisory Committee (PSWAC).

That report indicated that the 24 MHz, which I am discussing with you today,

should be available within 5 years. As we all know five years—to the day—from the

issuance of that public safety study, the terrorists attacked America. The attacks

led to the 9/11 Commission which again, urged that these frequencies be made

available to public safety. Let’s commit to not having another repeat. This 9/11 Commission recommendation has not yet been enacted by the Congress, and public safety respectfully asks that you swiftly do so.

After the PSWAC report was published, Congress acted quickly and allocated the

spectrum to public safety in 1997. However, eight years later, television stations operating on channels 62, 63, 64, 65, 67, 68 and 69 prevent public safety access in

most major urban areas where the demand for spectrum is the greatest. The reason

is the continued use of the spectrum for analog broadcast television services—and

there is not a date certain as to when the spectrum will be fully transferred to public safety’s use. The communications needs of public safety are too important to

allow this uncertainty to continue.

As you know, current law sets December 31, 2006 as the date for clearing television from the band. However, this is not a firm date. Broadcasters do not have

95

to clear out until 85% of the households in their markets have the capability to receive digital TV—they have the ability to enjoy virtually unlimited extensions of this

deadline based on this loophole. So, there is no ‘‘hard date’’ when the transition will

end and the spectrum will really be accessible to public safety everywhere. I urge

this Committee not to ignore the recommendation of the 9/11 Commission that legislation be enacted that would clear this spectrum nationwide for public safety use

no later than year-end 2006. Indeed, on December 8, 2004 when you passed the

Intel Reform legislation, the Congress expressed its intent to pass DTV-ending legislation in 2005 and that the hard date should be as close to year-end 2006 as possible. I urge you adhere to this important mission.

First Responders Need this Spectrum for Critical Services

To serve the American people, First Responders need systems designed specifically for mission critical operations. Effective mission critical mobile communications systems are vital to our operations. Police officers, firefighters, emergency

medical personnel and their departments must exchange information in the field

that can help protect public safety officials and the citizens we serve. This information formerly was exchanged by voice. With technological advances, as public safety

entities strive to increase effectiveness against more complicated challenges we also

need the capability to reliably transmit and receive high performance data, still images and video. Increased communications requirements lead to the need for access

to more spectrum.

These channels are critical to public safety. The 700 MHz band’s proximity to existing public safety operations in the 800 MHz band allows public safety agencies

to engage in vital expansion of current 800 MHz narrowband voice and data systems for interoperability and regional coordination. Also, 700 MHz is the only dedicated spectrum allocation where public safety can implement advanced mobile wide

area systems that bring high-speed access to databases, the intranet, imaging and

video to first responders out in the field. This technology offers a whole new level

of mobile communications capabilities, which is far beyond today’s voice and low

speed data applications. For example:

a. An officer or agent could transmit video of a potential bomb, or biological weapon

and get real time counsel from an expert in another location.

b. Law enforcement could instantly send or receive a photograph of a missing or abducted child or transmit live video of footprints, fingerprints and evidence to

speed analysis and apprehension of perpetrators.

c. Firefighters could access building blueprints, hydrant locations hazardous material data and other critical information.

As you can see, the public safety applications that will be possible in the reclaimed spectrum are the very type that are too valuable for our safety and security

to remain in the on-deck circle indefinitely.

I urge the Committee not to be deterred from sticking as close as possible to the

December 31, 2006 goal because spectrum auction revenue timing projections for the

reclaimed frequencies might make it more expedient to draw the transition further

out into the future. In my view, the cost of not making the transition happen as

soon as possible costs the nation too much in terms of reduced preparedness. One

thing I do know from all of the experts is that dangerous people still seek to do more

harm on our soil—We just don’t know when. Another thing I know is that we should

not have to say anymore that the DTV transition will end in America—We just don’t

know when. Help First Responders to have the best fighting chance with the tools

we need. The costs of not doing so are too high.

In closing, Mr. Chairman and Members of the Committee, making this spectrum

available to support first responders as close as possible to the end of 2006 will not

happen without your commitment and leadership. I urge you to take swift action

to make higher use of this spectrum a near-term reality for law enforcement, firefighters, emergency medics, and your better-protected constituents.

Thank you.

Mr. UPTON. Exactly 5 minutes.

Mr. SOUDER. Thank you.

Mr. UPTON. Mr. Kimmelman.

STATEMENT OF GENE KIMMELMAN

Mr. KIMMELMAN. Thank you, Mr. Chairman, Congressman Markey, members of the subcommittee. On behalf of Consumers Union,

the print and online publisher of Consumer Reports, we appreciate

96

the opportunity to testify, and thank you for bringing this important issue of digital television to the legislative process.

Now, I am not going to try to scare you about how consumers are

going to react if there is a tax on their TVs, or the cost of a TV

goes up 25 or 50—you have already done enough to scare yourselves, I believe, as to what is at stake here.

I would like to step back and just ask you to look at this and

the rationale for why consumers really ought to be held harmless

in this. Who drove this process to a digital television transition?

Did you ever hear from constituents that they are dying to have

a digital television transition? I haven’t heard from it. Consumers

who want digital equipment know how to buy it, and those who can

afford to do it are doing it, and you heard they are doing it in

droves. People who want it can get digital equipment.

We know this is driven by government policy, and there is no

question about the fact. There is no reason to be ashamed that

public safety is at risk. There is no reason to be ashamed that

through auctions, you can find greater financing for important government services that the American people need, and hopefully,

you will find opportunities to expand competition and bring greater

diversity of ownership and content through media through this

process. There is nothing to be ashamed about, but it is a government-driven process. Why burden—it is not about whether some

people can afford this.

People bought a television with a legitimate expectation that it

would work, and it was sold to them at a price with virtually a

guarantee that it would get over-the-air signals. If we take that

away, that is like taking away private property. That is not an

issue as to whether you are poor or middle class or rich. In this

country, when we take away property, even for the most laudable

public purposes, we compensate people. This is about holding people harmless who, out of no fault of their own, could lose their overthe-air signals.

But don’t be too hard on yourselves. It was an important government decision, and there are important things that need to be

done, and in doing so, you have effectively created important benefits for the industries at this table, and you heard about it. They

are going to sell more equipment. Televisions that wouldn’t have

been thrown out earlier may get thrown out earlier. They are going

to sell more. Cable companies are probably going to be able to hook

up more people. That second and third set, that fourth set, people

are going to want it, because they are going to want digital TV.

Satellite as well. So when we think about whether it is a nickel,

a dime, a quarter, out of people’s pockets. Who else is benefiting

here? Broadcasters used to get one signal for their 6 megahertz.

Here, they are probably going to be able to get high definition at

least six signals over those same 6 megahertz. Enormous benefit to

them. Maybe they should be reaching into their pockets and helping out as well.

So if you can find a way to hold the industry accountable and

protect consumers, you also have enormous opportunities here with

the digital transition and a hard date. I think competition policy

is critical. We have got fewer and fewer phone companies consolidating, controlling the broadband access that every consumer needs

97

for local phone, long distance, high speed Internet. We have a few

cable companies dominating as the single alternative and prices

keep rising, and they all have a chokehold. We need more

broadband connections for consumers. We need more transmission

companies out there offering service for consumers. You have an

opportunity, by ensuring that not all the spectrum is auctioned, by

ensuring that rural interests, by ensuring that low-income interests, by ensuring that greater diversity is met, through a greater

diverse ownership, through a focusing on local opportunities

through new uses of spectrum. All of this can be done as part of

this transition.

You can set aside some spectrum. You can also look to the broadcasters. That 6 megahertz is an awful lot these days. It originally

was supposed to provide one high definition signal. It provides

much more, given the technological improvements. Should some of

that be available to community needs, to local needs, to rural

needs, to religious broadcasters? Community wireless systems are

popping up. This spectrum would be enormously valuable to bring

us greater competition and greater diversity, as the other portions

of the industry consolidate.

And it is important to also look at with the 6 megahertz, whether

we are creating a new problem of dominance in local news and information. Half the broadcast television stations in this country do

not produce and offer local news. In some instances, we have already allowed some stations to own two stations in a community.

We are talking about possibly letting them own the dominant

newspaper, and they own radio. If 6 megahertz can deliver as

much as six channels worth of programming, is there a concern

here that a few dominant broadcasters could own too much? We

urge you to look at that.

In conclusion, Mr. Chairman, we urge you, as you move forward

with legislation, to not put an undue burden on consumers, to

make sure that those who are not at fault for TVs going blank do

not have to pay to make the signals come back, and we also urge

you to ensure that there are real benefits, not just to the industries

involved, but to the consumers of these services, so that we get

more competition and we get more diversity and more diversely

owned sources of media.

Thank you.

[The prepared statement of Gene Kimmelman follows:]

PREPARED STATEMENT OF GENE KIMMELMAN, SENIOR DIRECTOR OF PUBLIC POLICY

AND ADVOCACY, CONSUMERS UNION

Consumers Union 1 and Consumer Federation of America 2 appreciate the opportunity to testify on the transition from analog to digital television. We are grateful

to Chairman Barton and members of this Subcommittee for their leadership on

these important consumer issues.

We agree, as the staff discussion draft suggests, that the transition to digital television as envisioned by the 1996 Telecommunications Act has failed, requiring additional congressional action to ensure a smooth transition and to protect American

consumers.

Setting a hard date for the conversion from analog to digital and return of the

analog spectrum may play an important role in meeting the underlying goals of the

Act. However, any legislation that this Subcommittee takes up to on the digital

transition must:

• Ensure that consumers do not bear the financial burden of the transition or suffer

from the loss of television signals they rightfully expect to receive;

98

• Promote market competition, rather than consolidation, through appropriate allocation of the 108MHz of returned spectrum to new entrants and smaller existing market players, particularly in the area of broadband wireless; • Promote unlicensed use of spectrum by both commercial and non-commercial entities in either the retained or returned spectrum to promote competition, offer

advanced communications services, and bridge the digital divide; and • Prevent further concentration of local media markets by ensuring that a portion

of the remaining 6 MHz is used to provide more news, information and entertainment from independent sources and addressing ownership restrictions for

dominant local broadcast outlets.

Although the discussion draft requires important broad-based consumer education

by retailers and manufacturers to help ease the transition, it fails to address the

four critical needs identified above. As a result, Consumers Union and Consumer

Federation of American oppose the draft in its current form. We look forward, however, to working with you to ensure that any legislation reported by the Subcommittee incorporates these core consumer provisions. We elaborate on these critical needs below.

Hold Consumers Harmless

Consumers buy televisions with the reasonable expectation that they will be able

to receive broadcast signals over the life of the set. And that life can be substantial.

Research from Consumer Reports shows that televisions are the workhorses of consumer electronics: they last for decades. Even today, as Congress focuses on a hard

digital television transition date, millions of consumers are buying new analog sets

on the assumption they will work for years to come. The digital transition turns

that assumption on its head: for consumers relying on over-the-air broadcasts, the

sets will be useless for their primary purpose. Any conversion to digital television

must ensure that this expectation will continue to be met without imposing additional costs.

The number of consumers that could be left in the dark without further congressional action is substantial. Currently, 21 million households rely solely on over-theair broadcasts. Another 16 million cable and satellite households have at least one

television that is not connected to their cable or satellite service.3 All these sets will

go dark after the transition unless consumers buy digital-to-analog converter boxes.

The costs to individual households to purchase those boxes will likewise by substantial. With estimates of their cost at between $50 and $60, the digital conversion

effectively increases the cost of television sets consumers have already purchased.

According to the Consumer Electronics Association, a 25-inch television—the most

popular set—sells on average for about $200. A $50 converter box increases the cost

of that set by 25 percent. The costs of smaller sets selling for $100 dollars would

effectively increase by 50 percent. Given that, according to the Government Accountability Office (GAO), the average over-the-air household has two televisions, the

costs are double—effectively a consumer tax of $100 or more just to facilitate a transition that benefits broadcasters, equipment makers, retailers and other industry

players.

Unless Congress makes changes to the discussion draft under consideration and

provides a full consumer subsidy, Congress will impose dramatic cost increases and

substantial inconvenience on consumers.

At the macro-level, the consumer cost of the transition is startling. GAO estimates

the cost of purchasing new converter boxes for relevant households to be as much

as $2 billion. Other estimates suggest the costs could rise to nearly $3 billion. It

is completely unacceptable for consumers to bear these costs just to be able to receive over-the-air broadcasts their sets used to provide.

Though we support provisions of the discussion draft designed to hold cable and

satellite subscribers harmless by providing for down-conversion of digital signals,

the draft, in its most serious shortcoming, omits provisions to hold harmless the 37

million households that continue to rely on over-the-air broadcasts. Congress must

establish a full consumer subsidy program for digital-to-analog converter boxes for

all over-the-air households in a manner that does not impose costs on consumers.

And cable and satellite subscribers must be certain they will receive all broadcast

channels from their service providers.

This principle is not new to this Subcommittee. The Commercial Spectrum Enhancement Act (CSEA), enacted in 2003, has been instrumental in encouraging the

development of new uses for spectrum. But that law also stipulates that auction proceeds must cover 110 percent of the costs of relocation. While the law does not apply

in this case, Congress must recognize the significant costs it will impose on consumers, and hold them harmless for policy decisions that will substantially benefit

other parties. Broadcasters, who demanded the ability to go digital in the first place,

99

incurred their costs willingly. But, according to the New American Foundation, sales

of digital-ready televisions represented just four percent of all televisions sales in

2004, suggesting public demand for digital television is insignificant. For DTV transition legislation, the Subcommittee therefore should adopt a principle similar to

that embodied in the CSEA: digital transition costs to consumers should be paid not

from their pockets but by proceeds from future spectrum auctions or by the industries that will benefit from the transition.

The digital transition may, if managed appropriately, provide significant public

benefits. But, unquestionably, it will be viewed as an abject failure by consumers

if they are forced to bear the costs of acquiring digital-to-analog converter boxes or

face the equally unpalatable alternative of losing access to over-the-air television.

Promote Market Competition

It is unacceptable to have two incredibly valuable, publicly owned blocks of spectrum—for which the broadcast industry paid nothing—remain underutilized. However, how this spectrum is allocated at auction will determine whether the U.S.

broadband market grows more concentrated or benefits from greater market competition. Cable providers and telephone companies offering DSL dominate their markets and don’t compete against each other outside of their territories. Data supplied

by the Federal Communications Commission and J.P. Morgan show that the highspeed product space is highly concentrated; in fact, it has become a cozy duopoly.

As a result of weak competition, broadband penetration in the U.S. is proceeding

at a slower rate than many other countries—the U.S. now ranks 16th in the world.

And if the merger between Sprint and Nextel is approved, just three companies

will dominate the wireless industry. The owners of two of those wireless companies—Verizon and SBC—are near-monopoly telephone companies that also dominate

local and long-distance calling throughout the United States. Other, smaller wireless companies remain minor players that lack the spectrum needed to compete and

match services over the long-term.

Congress has the important opportunity to ensure that spectrum made available

from the analog give-back will facilitate robust competition in the broadband market—providing new opportunities for smaller cell phone companies and other wireless providers to access valuable spectrum that will allow them to better serve their

customers and effectively compete in the marketplace. In addition, if portions of this

spectrum were made available for wireless community networks, consumers could

receive substantially lower broadband prices from an important competitive alternative to dominant market players.

But if rights to this valuable spectrum are available only to the dominant wireless

carriers as smaller players are priced out of the market, the auctions will only make

a badly concentrated market even less competitive—undercutting quality of service,

reducing choices and inflating prices. As the findings of the discussion draft bill indicate, newly available spectrum could be used for wireless broadband in rural and

urban communities. Even licensed options could be new alternatives to the incumbents for high-speed Internet access.

Unfortunately, despite this finding, the discussion draft remains silent on the allocation of newly available, high-quality spectrum for unlicensed use by providers of

community wireless internet services or for other purposes. This virtually ensures

the auctioning of spectrum to dominant wireless providers that already control the

bulk of this concentrated market. The Subcommittee should ensure that of the estimated 108 MHz to be returned and offered at auction, adequate spectrum is reserved for new market entrants and small existing players. Doing so will put pressure on the largest market players to compete, resulting in lower consumer prices,

higher quality, and expanded choices.

Promote Unlicensed Use of Spectrum

The findings of the draft legislation observe that the use of spectrum for wireless

broadband is an important public policy goal. Unfortunately, the draft does nothing

to advance unlicensed use of spectrum for wireless services, such as high-speed,

community wireless Internet. This flaw that must be corrected if the digital transition is to offer any significant benefit to the public.

The growth of unlicensed use of spectrum in what used to be known as ‘‘junk

bands,’’ through the application of wireless Internet technologies like Wi-Fi, is one

of the most remarkable accomplishments of the past decade. It expands the ability

of ordinary citizens to use and share the public airwaves. But the potential to further expand the ability of the people to use their airwaves is constrained by relegating unlicensed use to these ‘‘junk bands.’’

The ‘‘junk bands’’ were given this moniker precisely because the signals that can

be transmitted at these frequencies are limited—the signals do not pass through

100

walls or trees like TV signals do. And many other devices—like garage door openers,

microwaves and cordless phones—use the same space. But what is important is the

frequency on which they operate, not what kind of information they’re sending, such

as TV or Internet signals.

If the principle of sharing the spectrum in a non-interfering manner is extended

to other parts of the spectrum, the potential to deliver broadband and other communications services at lower costs will expand dramatically. Congress can and should

expand the space in which the unlicensed or noncommercial use of the airwaves is

encouraged and allowed. It can do so in three ways.

First, it should set aside a small part of the recovered analog spectrum to be dedicated for unlicensed use. A set aside of 10 percent of recovered spectrum on a nationwide basis would open a substantial space to promote unlicensed uses.

Second, it can set aside a small part of the digital spectrum, which was given to

the broadcasters on an exclusive basis and at no charge, for unlicensed use. Congress cannot ignore the fact that the digital spectrum is the largest part of the spectrum made available to private entities not subject to auction.4 With the windfall

provided to broadcasters in the 6MHz they will be allowed to retain, broadcasters

will be able to provide six or more digital channels—far more than ever anticipated

when Congress enacted the 1996 Telecommunications Act—where they previously

offered one. Instead of moving to the equivalent of six channels, the Congress can

set aside part of the digital spectrum for unlicensed use. This could be accomplished

as part of the process of assigning full power channels, which the legislation contemplates. Again, a 10 percent set aside would open a substantial space to promote

unlicensed uses.

Third, Congress should enact clear public policy that supports the non-infringing

sharing of other parts of the spectrum. In many other parts of the spectrum, frequencies remain unused during all, or part of the day. These are referred to as

‘‘white spaces.’’ They are unused because ‘‘dumb, old technology’’ cannot dynamically

move into and out of these spaces. These white spaces are particularly unnecessary

in rural areas. ‘‘Smart radio’’ technologies can use these frequencies without interfering with other uses. Under current rules and proceedings, the Federal Communications Commission has moved haltingly to expand the non-interfering uses of the

spectrum. A clear public policy promoting the non-interfering use of spectrum would

speed the process along and allow unlicensed sharing of spectrum to advance much

more rapidly.

The unlicensed use of even a small portion of newly available spectrum would provide untold public benefits. Among many, perhaps the most notable is the opportunity to support expansion of community wireless internet services, offering perhaps the first meaningful opportunity for bridging the digital divide that has confounded policy makers for more than a decade.

Address Media Ownership

At a time when concerns about competition, cost and diversity of programming

have prompted a revisiting of media ownership rules, the DTV transition could

worsen the problem in local markets. Congress should not ignore the serious implications digital transmission has on media concentration.

We have significant concern about the power provided to local news companies

that already own and control local newspapers and radio stations being provided

with the capacity to offer six or more digital channels where they previously offered

one.

Though all local broadcasters will receive the same new digital capacity, they cannot all take equal advantage of it. Only a few stations in any market currently

produce or offer local news.

A Consumers Union/Consumer Federation of America study of station ownership

between 1975 and 2000, found that the number of television station owners fell from

540 to 360 and the overall number of stations rose. But the number of TV newsrooms declined during this same period. In fact, only half of all broadcast TV stations provide news. Stations with newsrooms, particularly those affiliated with large

news conglomerates, will be better able to utilize the additional digital capacity,

dominating local news carriage, reducing diversity of news and information, and increasing the volume and impact of a single owner’s voice in the news marketplace

in their community.

In 2003, millions of Americans, a bipartisan coalition from the House, a majority

of the Senate and leaders from both parties raised concerns about media conglomerates owning two stations in most markets, or three stations in the largest ones.

Unless Congress acts to prevent it, the digital transition has the very real potential

to substantially increase the ability of a few broadcast giants to dominate local news

markets nationwide.

101

Of the 6 MHz of spectrum that will remain with broadcasters post-transition,

Congress should allocate a portion of it for exclusive use by diverse and independent

sources of local news and information. Congress should also consider adopting new

rules that specifically address the concentration of local news content providers that

the transition will facilitate.

Serving the Public Interest

In exchange for the privilege of free and exclusive use of the public airwaves,

broadcasters must serve the ‘‘public interest, convenience and necessity’’ through the

fulfillment of public interest obligations, such as the provision of educational, civic,

political and other programming. Among many shortcomings of these obligations,

however, has been the ability of the broadcasters themselves to define what constitutes programming in the public interest. In addition, compliance with overly

vague obligations is difficult both to verify and enforce. In short, these obligations

have failed to serve the public.

The FCC should hold broadcasters accountable for their public interest obligations, both now and after the DTV transition, preferably through quantifiable and

enforceable requirements. These are worthy goals and they should be met. However,

given the historical and inevitable shortcomings of these obligations, improvements

to the public interest obligation in any digital transition legislation will be insufficient to serve the public interest.

Such provisions are neither an effective nor equivalent substitute for legislative

requirements allocating spectrum to promote market competition and unlicensed

and noncommercial use or for requirements allocating a portion of retained spectrum for independent local news, information, or entertainment programming.

There is little debate that, to date, the obligations of broadcasters have failed the

public interest. In order to serve it, Congress must address the critical competitive,

diversity and ownership concentration issues we have raised in our testimony

through the effective, equitable and appropriate allocation of one of the most valuable publicly owned resources—radio spectrum. If Congress takes these steps, it will

provide far more meaningful public benefits than any improvement to public interest obligations can offer.

Summary

As we said in our testimony on this issue in 2002, ‘‘Consumers will not thank

Congress for digital television if it also means they have Congress to thank for higher prices and inconvenience when they buy new TVs and new computers, or integrate their home entertainment systems.’’ That statement remains true today.

Digital television is a positive technology that has the potential to benefit consumers and the public as a whole. But it must be rolled out in accordance with competitive market principles in a manner that serves the public interest.

We look forward to working with the Subcommittee in stimulating a rapid transition to digital television broadcasting and to craft legislation that will resolve these

important issues for both consumers and affected industries. But the burden and

costs of the digital transition should properly rest on the broadcast, cable and satellite television providers, not on consumers.

Endnotes

1 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws

of the state of New York to Provide consumers with information, education and counsel about

good, services, health and personal finance, and to initiate and cooperate with individual and

group efforts to maintain and enhance the quality of life for consumers. Consumers Union’s income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union’s own

product testing, Consumer Reports with more than—5 million paid circulation, regularly, carries

articles on health, product safety, marketplace economics and legislative, judicial and regulatory

actions which affect consumer welfare. Consumers Union’s publications carry no advertising and

receive no commercial support. 2The Consumer Federation of America is the nation’s largest consumer advocacy group, composed of over 280 state and local affiliates representing consumer, senior, citizen, low-income,

labor, farm, public power an cooperative organizations, with more than 50 million individual

members. 3Digital Broadcast Television Transition: Estimated Cost of Supporting Set-top Boxes to Help

Advance the DTV Transition. February 17, 2005, Government Accountability Office, GAO-05-

258T4 Certain parts of the spectrum have been set aside or assigned for public governmental uses,

like defense, safety and education, and not subject to auction. The original cellular licenses were

also given as a gift to licensees.

Mr. UPTON. Thank you. Mr. Pitsch. You knew this moment

would come.

102

Mr. PITSCH. I did. I did. I can’t see the signal, though, so I want

to be respectful of your rules, Mr. Chairman.

Mr. UPTON. Yes, yes.

STATEMENT OF PETER K. PITSCH

Mr. PITSCH. Thank you, Mr. Chairman, Mr. Markey, and members of the subcommittee. I am Intel’s global spectrum and communications policy director. Intel is the world’s largest semiconductor

manufacturer.

Prior to joining Intel 7 years ago, I worked on telecommunications policy at the FCC, and in private practice, I have been

doing these issues now for nearly 24 years.

It is an honor to appear before this subcommittee to testify on

the discussion draft. I want to, today, focus on two topics, the larger societal benefits from setting a date certain, and the particular

benefits from freeing up the 700 megahertz for WiMAX and other

wireless broadband technologies, particularly in rural areas.

This subcommittee has already heard much testimony on the

benefits and costs of this proposal. This morning, I want to focus

on some new information and analysis that I think is relevant to

the debate. Coleman Bazelon, an economist formerly with the CBO

and now with the Analysis Group, on behalf of Intel recently analyzed the auction and consumer benefit and many other issues. We

will be sharing this study with you next week, when it is finalized.

I just want to give you a few key conclusions this morning.

Many people have argued that the auction revenues would be

lower, because substantial amounts of additional spectrum will be

made available in the marketplace. The Bazelon study rigorously

analyzes this question, looking at the elasticity of demand for spectrum, and concludes that even accounting for this fact, the amount

of revenue generated would be substantial, on the order of $20 to

$24 billion.

The Bazelon study also estimates the consumer benefit from freeing up the 700 megahertz spectrum, or in economic parlance, the

consumer surplus. The consumer benefit intuitively here will come

from new services, more minutes, lower prices, all made possible

from the additional capacity. Applying existing analysis to the 60

megahertz at stake, the Bazelon study concludes that the benefit

to consumers would be an astounding $200 to $432 billion. In other

words, the net present value of the stream of benefits that come

from all of these additional services will be in the hundreds of billions of dollars.

Now, I would like to turn to the benefits, the particular benefits

that will come from using 700 megahertz in WiMAX or other wireless broadband services. WiMAX is a particular standard, IEEE

standard, it is a technology that we are excited about. Others are

possible. WiMAX will make it possible to improve bandwidth, make

service more generally available, radically reduce radio costs. It

will enable a third pipe in urban areas, and particularly noteworthy, it will make it possible to provide low-cost wireless

broadband in rural areas. The ability to use TV frequencies for

WiMAX and other wireless broadband technologies will accelerate

the growth, expand the reach, reduce the cost, and improve the

quality of broadband.

103

For example, because TV frequencies better penetrate walls, they

would be less dependent on line of sight transmission to outdoor

antennas. This means that consumers are going to get portability,

indoor use which facilitates self installation. Carriers would not

need to use expensive truck rolls. But even more important are the

benefits in rural areas. Based on Intel’s internal analysis, the infrastructure costs in rural areas of using 700 megahertz spectrum

would be one fourth to one fifth of what they would be using 2.5

gigahertz spectrum. The upshot is that for some rural areas, opening the TV frequencies to wireless broadband use would likely

make the difference between having a high quality wireless

broadband alternative or none at all.

In sum, the benefits to consumers, especially in rural areas and

underserved areas from freeing up this spectrum, the additional

auction proceeds, not to mention the benefits from public safety,

will be in the hundreds of billions of dollars.

Now, the transition problems are real. They are significant. They

need to be dealt with carefully. We and others in the high tech

community stand ready to deal with these problems constructively.

But I am confident that if we act with good judgment and proceed

with good faith, we can create an enormous win-win solution for all

Americans.

Thank you very much.

[The prepared statement of Peter K. Pitsch follows:]

PREPARED STATEMENT OF PETER K. PITSCH, DIRECTOR, COMMUNICATIONS POLICY, INTEL CORPORATION

INTRODUCTION

I am Peter K. Pitsch, director of Intel’s global spectrum and communications policy efforts. Intel is the world’s largest semiconductor manufacturer and a leader in

technical innovation. Intel is also a leading manufacturer of communications and

networking chips. Our mission is to accelerate the convergence of computing and

communications through silicon-based integration.

Prior to joining Intel seven years ago, I worked on telecommunications policy

issues at the FCC from 1981 to 1989 as chief of staff to Chairman Dennis Patrick

and as chief of policy and planning for Chairman Mark Fowler and in private practice from 1989 to 1998. In total I have worked on spectrum and other telecommunications policy issues for nearly 24 years.

It is an honor to appear before this Subcommittee to testify on the benefits of setting a date certain for completion of the digital television (DTV) transition. Let me

begin by saying that Intel has long recognized the great potential of DTV and has

invested significant R&D in DTV including the development of DTV tuners for PCs.

In 1998 Intel and the PBS teamed up to deliver ‘‘Frank Lloyd Wright’’—the first

digital television trial that allowed viewers to obtain Web-based content while

watching TV. Also, Intel’s experimental station KICU, broadcasting from Intel’s

headquarters in Santa Clara, was one of the first over-the-air DTV broadcasters in

the Bay area.

The staff discussion draft of the ‘‘DTV Transition Act of 2005’’ would set a date

certain of December 31, 2008 for completion of the DTV transition. In so doing it

would make an additional 700 MHz band spectrum available-60 MHz for commercial wireless broadband use and 24 MHz for public safety use. Today, I want to address two topics:

• Estimates of the larger societal benefits of setting an early date certain for completion of the DTV transition; and

• The particular benefits of freeing the 700 MHz spectrum for WiMAX and other

wireless broadband uses, especially in rural and underserved areas.

THE LARGER SOCIETAL BENEFITS OF AN EARLY DATE CERTAIN

This Subcommittee has already heard much testimony on the costs and benefits

of setting an early date certain for completion of the DTV transition. On the cost

104

side, there will be transition costs for owners of analog sets used to receive over the

air broadcast signals.

On the benefit side, there will be four substantial advantages. First, setting an

early date certain will give consumers, manufacturers, retailers, broadcasters and

all interested parties substantial advance notice and the ability to plan and minimize transition costs. Second, auction of the cleared 60 MHz of unassigned spectrum

allocated to commercial use will generate billions of dollars in auction proceeds.

Third, setting an early date certain will clear the 24 MHz of spectrum allocated to

public safety which should give ‘‘first responders’’ communications systems with

greater interoperability and new broadband capabilities. Finally, new wireless

broadband services and capacity will generate consumer benefits from the new capabilities, lower prices and additional usage made possible.

This morning I want to focus on new information and analysis relevant to this

debate that has been generated for Intel by Coleman Bazelon, an economist formerly with CBO and now at the Analysis Group. We will submit the Bazelon study

to this Subcommittee when it is finalized early next week. I would like summarize

key conclusions this forthcoming study reaches regarding auction proceeds, consumer benefits from new wireless broadband uses and the opportunity cost of the

public safety spectrum.

Auction revenues

Two independent analyses of the market value of the 60 MHz that would become

available for auction generate estimates ranging from $20 to $28 billion. Both of

these analyses are based on a review of recent auctions and transactions. The prices

generated in these ‘‘comparable sales’’ clearly factored in the previously announced

90 MHz of advanced wireless spectrum expected to be auctioned approximately a

year from now. Both analyses recognize that auctioning the 60 MHz cleared by completing the DTV transition could generate a lower average price (in dollars/MHz/

pop). They account for this downward pressure in various ways.

The Bazelon study rigorously addresses this factor by estimating the elasticity of

demand for spectrum and the increase in spectrum supply made available by completing the DTV transition. The study estimates the resulting price would be 17 percent below that predicted based on comparable sales. Importantly, even this more

conservative analysis of the market value of the spectrum made available for auction estimates the proceeds to be a substantial sum—$20 to $24 billion. By raising

more than sufficient money to fund a transition program for those households who

rely on over the air broadcast signals, these auction proceeds should make it possible to create a ‘‘win-win situation.’’

Consumer surplus

The Bazelon study also estimates the consumer benefit (or, in economic parlance,

the ‘‘consumer surplus’’) that would be generated by clearing the 700 MHz spectrum. The consumer benefit generated from making increased spectrum available is

typically many times the auction proceeds. Intuitively, these benefits come from new

services and capabilities, the additional minutes of use and the lower prices the additional spectrum will make possible. Applying existing studies of the consumer benefit from adding spectrum, the Bazelon study estimates the added consumer benefit

to be 10 to 18 times the expected auction proceeds-that is, at least $200 to $432

billion!

Public safety

Completing the DTV transition will provide significant benefits to society by allocating 24 MHz of 700 MHz spectrum to public safety. While it is difficult to estimate

the value of this additional public safety spectrum, from a public policy perspective

the foregone proceeds that this spectrum could have garnered in an auction represent the ‘‘opportunity cost’’ to the government of that spectrum. Of course, the actual benefits might be larger, but the opportunity cost provides a logical lower

bound of the value that policymakers are placing on these benefits. The Bazelon

study (again employing its estimate of the demand elasticity of spectrum) estimates

that the opportunity cost of the public safety spectrum to be $8 to $10 billion.

THE BENEFITS OF THE 700 MHZ SPECTRUM FOR WIMAX

Moore’s Law is going to revolutionize Marconi’s transmitter. In the past 30 years,

microprocessors have increased 1,000 times in speed and decreased 100 times in

cost. These phenomenal ‘‘silicon’’ improvements will produce profound effects in

radio technology. Radios will become ever smarter, more flexible and ubiquitous.

One new radio technology Intel is particularly excited about is WiMAX. Like WiFi (802.11), WiMAX is an IEEE technology (802.16) that is expected to be accepted

105

1WiMAX Press Teleconference Script, April 8, 2004.

2 76 MHz, VHF Channel 5, is the lowest channel considered in the FCC Unlicensed Operation

in the TV Broadcast Bands NPRM, and hence potentially available for wireless broadband.

Broadcast television in the US begins at 54 MHz, channel 2.

as a global standard. WiMAX is expected to be deployed for both licensed use (like

Cellular) and unlicensed (like Wi-Fi) applications. With the latest in modulation

techniques (such as OFDM) and antennae techniques (such as MIMO) WiMAX has

been architected to cost effectively deliver broadband services. It will be deployed

for Line of Sight at ranges of up to 50 kilometers and non-Line of Sight applications

at shorter ranges.

A wireless ISP using a small 802.16 installation could provide sufficient shared

data rates (up to 75 Mbps) to simultaneously support more than 60 businesses with

T-1 style connectivity and hundreds of homes with DSL-speed connectivity.1 In the

2007-2008 timeframe, WiMAX will begin to be deployed in laptops. (Intel has announced that it intends to put WiMAX radios in its chipsets by 2007-just as it has

done with Wi-Fi in its Centrino TM chipsets beginning in 2003.)

WiMAX is expected to improve bandwidth and service while radically reducing

radio costs. As a result WiMAX should dramatically spur wireless broadband deployment as a third broadband pipe augmenting DSL and Cable. WiMAX holds special promise in rural areas or developing markets where service providers have not

deployed wired infrastructure. Countries around the globe are already beginning

pre-standard trials of WiMAX.

The television spectrum would offer enormous advantages for wide area wireless

broadband services such as WiMAX. The frequencies currently available for wireless

broadband are in the 2.5, 3.5 and 5.8 GHz region. In contrast, TV channels are

much lower in frequency-from 700 MHz all the way down to 76 MHz.2

The ability to use TV frequencies would accelerate the growth, expand the reach,

reduce the cost and improve the quality of broadband wireless service. Even when

compared to the 2.5 GHz frequencies-the best alternative available to WiMAX in the

U.S.-the TV frequencies make it far more economical to serve rural areas and to

compete with wireline broadband alternatives in urban areas. For a given level of

quality to a given coverage area, the 700 MHz frequencies require fewer antennas

and use less power.

Based on Intel’s internal analysis of the advantages of 700 MHz vis a vis 2.5 GHz

frequencies, we estimate that to cover the same geographic area using 2.5 GHz frequencies would require 4 to 5 times as many base stations to achieve equal geographic area coverage, for a given air interface and bandwidth. Of course, one could

‘‘make up’’ for this loss by introducing innovative antenna enhancements or increasing the transmit power at 2.5 GHz. The former is being done in the WiMAX standard but at increased system costs. The latter-a greater than ten-fold increase in

transmit power-is not feasible. Receiving devices would have to exceed FCC power

limitations to successfully transmit back to the base station.

Also, because TV frequencies better penetrate walls, they would be less dependent

on line of sight transmission to outdoor antennas. Besides the value that consumers

could derive from portability, indoor use would also facilitate self-installation, avoid

expensive truck rolls, and make it attractive to launch market-wide marketing and

advertising campaigns. And indoor service to untethered laptops will accelerate the

integration of WiMAX radios into microprocessors thereby generating the efficiencies from Moore’s Law that I discussed earlier.

The cumulative impact of these differences on the feasibility of providing wireless

broadband service in rural areas bears emphasis. The upshot for some rural areas

is that opening the TV frequencies to wireless broadband use would likely make the

difference between a high quality wireless broadband alternative and none at all.

That is, frequencies below 1 GHz are premier beach front property. Intel believes

the allocation of these frequencies for licensed use could dramatically accelerate

broadband deployment with nationwide benefit, but with particular benefit to rural

and underserved areas.

Thank you.

Mr. UPTON. Thank you. I appreciate all of you for listening, those

in the audience as well. That is for sure. And I just want to say

that we are expecting a couple of votes momentarily, so we will

probably take about a 25 minute break, and then we will come

back for questions and answers, and then, we will have another

vote on the House floor about an hour after that or so.

106

So it gives us time to ask some questions, and at this point, we

will start 5 minutes by the members that are here in the order of

their appearance.

I want to get a little bit into the whole down-conversion of the

digital signal, and get a couple comments from all of you.

Mr. McSlarrow, you stated that ‘‘cable operators could still

choose to provide the digital signal in addition to the down-converted analog signal, if the digital signal were uniquely compelling

and attractive to consumers with digital and HD equipment.’’ How

would the cable operator make the determination about whether

the digital content is compelling or attractive? And Mr. Abud, I am

going to have you comment afterwards.

Mr. MCSLARROW. Well, it is the bottom line consideration for a

cable operator making a decision is going to be what is it that he

or she believes the customer wants. Now, that is a judgment call,

but they are probably best placed to make that judgment call.

And as you pointed out, what we are asking for, essentially, is

to allow a pace of change in the real world, as opposed to just

things that we decide by fiat, to take place where the world we

have today will be the same world that we have in terms of the

consumers the day after, even though we know it is all changing,

and of course, everybody here wants it to change to the digital

world.

And it is important to understand, in the world we have today,

cable carries 500 digital broadcast signals in addition to analog. I

think I heard the number before, there were 1,500 broadcasters. So

there are 500 broadcast digital today. In addition, you have got a

number of channels that are carrying HD content today, and that

is not even taking into account all of the cable networks who are

running things in HD.

So without a government mandate, the market is working in

such a way that because we want to serve the consumer, our customer, we are driving as much digital and HD content to them as

possible. So that is not going to change. That will be true the day

after the transition. What we want to make sure of is that they

don’t lose the analog service the day after.

Mr. UPTON. Mr. Abud.

Mr. ABUD. From our point of view, Mr. Chairman, at the end of

the day, what is important for us is that everybody on the consumer side gets the benefit of the digital transition, not only those

that subscribe to digital, but also those who subscribe to analog.

And that is why we want to have access to all the possible viewers,

and not leave it up to the cable company to decide which of the stations should be down-converted. They down-convert one of the local

stations, they should convert all of them, regardless of their retransmission consent or their must-carry status.

Mr. UPTON. Well, let me ask this, and I raised this in the hearing that we had a couple months ago, and a discussion. Mr. Wilner

was testifying for the cable industry. NAB was here as well. And

now, I have a—you know, in my household, I have got four TVs.

Two are analog and two are digital. One of my digital sets is HD.

I get the full cable package. I want to know that when we hit this

date, which we have moved back to what I think is an appropriate

date. And I absolutely stand with my chairman on 12/31/08. I want

107

to know that that Rose Bowl game with January 1, with the Michigan Wolverines and maybe Boston College, if they could get up

there, and then see how they did on recruiting. I want to make

sure that on my HD set in my living room, I am going to get the

signal that I paid for when I got that set. And I wish I had known

you before, Mr. McCollough, before I went, but I want to make sure

that only that channel is going to get it, but I—whatever else that

I watch. If I go into my kitchen where my small analog set is, that

is attached to my cable, that it is going to get all the different programs that I get today.

Mr. Knorr.

Mr. KNORR. If I may, I can address that. Sunflower Broadband

is uniquely positioned. As ACA members, we are very fortunate.

We serve a fairly large market. Our primary market is Lawrence,

Kansas. It is a fairly affluent market. In our cases, we are today

triple casting many of our broadcast signals.

Mr. UPTON. HD?

Mr. KNORR. HD, standard definition digital, and——

Mr. UPTON. Analog.

Mr. KNORR. [continuing] analog. Broadcasters don’t give us all

those signals. We have to modify—the current——

Mr. UPTON. But is this—the question is, and I am watching the

time, because every member has got a question. But I want—is the

way that we have written this in the draft discussion, does this

work, so that when we get to the transition date, whether it be a

Telemundo, or a religious broadcaster, or an NBC, which is probably going to cover the Rose Bowl that day, I mean is it going to

work, so that I am not going to get black?

Mr. KNORR. It doesn’t give—as it is written today, it does not

give cable operators the flexibility to try and provide signals that

best serve their community, which in any case, we can’t down-convert, as the bill is written, we could not down-convert an HD signal

into a standard definition digital signal, which is a hole, as it is

written today.

I think, furthermore, in small communities that aren’t as affluent as the ones we serve, I think there is a huge issue. They may

not have very many HDTV sets, and they don’t have the ability to

just choose to down-convert and focus on analog to serve those communities, or possibly addressing Mr. Abud, and you know, minority

communities, as well.

Mr. UPTON. Let me just go to Mr. Yager to respond, and then I

will—my time is expiring.

Mr. YAGER. Mr. Chairman, I do think the Staff Draft addressed

the situation you talked about, I think 2.5, almost 3 months ago,

in which I believe Mr. Wilner proposed, from the NCTA, as an

NCTA witness, I was a little confused in the explanation, but what

I understand the Staff Draft proposes is that digital signals would

be carried through, and that would be both HD and standard definition digital signals would be carried through, and that you would

have a converted, down-converted digital signal to analog, so you

would be able, on your set, on New Year’s Day, to receive both the

Rose Bowl in digital and—or high definition, as well as, if your

family wanted to watch something in analog, I mean on an analog

set, they would also get that.

108

I think that is a very important piece. As I read this Staff Draft,

that is a very important piece of the legislation.

Mr. UPTON. But does this work the way that we have written it?

Does it work?

Mr. YAGER. There is only one little caveat there, and that would

be for the small stations in large markets, who could be shut out

of only having a digital carriage only, and I think that is what Mr.

Abud is referring to. I think with very minor tweaking, that could

be corrected in the Staff Draft.

Mr. ABUD. Yeah, but the issue for us is that if one is down-converted, all should be down-converted, not only the must-carry, but

all the local broadcasters.

Mr. CHESSEN. Yes, Mr. Chairman, I think that the effect of this

would be to permit the cable system to down-convert simply the retransmission consent stations, the powerful stations, and not trip

the carry one, carry all provision. It seems like that would be the

potential scenario, so you would get carriage of, in analog, of the

more powerful network stations that negotiate retransmission consent, but the other stations, the religious, Hispanic, other smaller

stations may not be down-converted.

Mr. UPTON. And so are you saying that if—and if I have a digital

set, and I want to watch Telemundo, that it may not come through,

if the determination is——

Mr. CHESSEN. It could come through, but not on your analog.

Mr. UPTON. Yeah. The way it is written now——

Mr. YAGER. The way it is written now. The way it is written.

Mr. KNORR. And I think for rural America, the way it is written

is that it would apply to all the broadcast stations, not just the

small broadcasters like Telemundo, that it would apply to major

networks, like ABC and NBC, in a rural market, that only your HD

set will be able to receive.

Mr. SHAPIRO. Mr. Chairman, 87 percent of the products sold are

HDTV products. That wasn’t a common perception of what would

occur, but Americans said they want the highest quality. And if

you want to get the Super Bowl or any other television program

that is broadcast in HDTV on your cable set in HDTV, you have

to make that very clear in this draft.

Mr. UPTON. Okay. Thank you. My time has expired. I will yield

to Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman. I think—Mr. Dingell, I

think that you might have——

Mr. DINGELL. I am going to defer to my good friend.

Mr. MARKEY. Okay.

Mr. DINGELL. I am enjoying this.

Mr. MARKEY. I thank——

Mr. UPTON. He is a big Wolverines fan as well, I want you to

know, so he represents the great city of Ann Arbor.

Mr. MARKEY. I thank you, Mr. Chairman, very much. When, on

the 10,000th NFL game in 1997, they did a survey of the most

memorable of the 10,000 games ever played. It was not the immaculate conception—reception of—that is another thing—of Franco

Harris. It wasn’t the Snow Bowl. It wasn’t the Great Chicago Bears

team, the Bears, in 1985. The most memorable football game of all

time was when the New York Jets were playing the Oakland RaidVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00112 Fmt 6633 Sfmt 6602 21643.TXT HCOM1 PsN: HCOM1
109

ers in 1968, November 17, and at 7, after Joe Namath had just

thrown a pass to Don Maynard to take the lead, NBC switched to

Heidi. It shut down NBC. It shut down the New York telephone

company. It shut down the New York Police Department. It shut

down everything. There were two touchdowns scored in the next 20

minutes. No one quite remembers now how Heidi ended, but people

remember that NBC and CBS and ABC and all subsequent networks to never, ever shut off television sets as people are watching

football games.

As the Chairman just said, on January 1, 2009, there very well

could be millions of Americans who are looking forward to their

bowl team, and with the proliferation of bowls we have, it could be

just about every school in America that is going that day, every one

of our alma maters, even Boston College, in a bowl. And so it is

a big moment that day. We have got to make sure that every consumer has their TV. More people have, as you know, televisions

than have phones in America, which is all you got to know about

the relationship between TVs and the American public.

Now, Mr. Yager, for the last decade, I have been asking the

broadcasters, what is the public interest commitment that the

broadcasters are willing to make in order for this committee to tell

Mr. McSlarrow that he and his organization should carry your stations? What is the commitment? After 10 years, I haven’t heard

anything. Because if all it is is just a plan to make money, and

there is no public interest commitment, you know, and I don’t

mean an hour or 2 a week, but I mean a real commitment that

benefits the local community, diversity in the community, then I

am really not inclined to tell Mr. McSlarrow that he should have

to carry your stations on his cable system.

If, on the other hand, you have a plan, and you are willing to

announce it, as to how much you are willing to serve the local community with these additional channels, then I am open-minded. So

could you tell us today what the broadcasters are willing to commit

to in local public service, as a condition of Congress mandating that

they must carry those new signals.

Mr. YAGER. Well, if we are talking here about digital must-carry

of the multicast signal, that is one thing. If we are just talking

about what broadcasters are willing to commit to in terms of just

carriage, that is a different thing.

But I think all broadcasters, whether they be large or small, are

committed to serving the public interest. We have to be.

Mr. MARKEY. And how do you define that?

Mr. YAGER. What I consider the public interest is what are the

interests, needs, and kind of each individual community we serve,

and we serve very divergent communities.

Mr. MARKEY. So do you think it would be reasonable to say that

in order to mandate Mr. McSlarrow and Mr. Knorr that they must

carry your second or third, you know, multicast signal, that each

local station has to provide 3 hours or 4 hours per day of local programming, and then you can make money with the rest of the

time? Where would—where are you going to draw the line?

Mr. YAGER. That kind of one size fits all mandating the number

of hours of programming a day scares me, because that means that

110

we do in Flint-Saginaw might be the same thing you would want

us to do in Columbia——

Mr. MARKEY. Okay. But having no definition scares me.

Mr. YAGER. Well——

Mr. MARKEY. And because, you know, unfortunately, there are

too many people who, you know, if you kick them in the heart, you

are going to break your toe, in the broadcasting industry.

So how do we make sure that those people—you have been in it

your whole life, Mr. Yager, but you know, there has been—some

new people have arrived in the industry, that don’t come totally out

of the broadcasting industry background. So how do we ensure—

what is the minimum?

Mr. YAGER. I think you really ensure it by licenses who, if they

are going to operate in a local community, have to serve the public

interest if they are going to survive economically.

Mr. MARKEY. Okay. So how do we mandate that?

Mr. YAGER. Well, that is where I think we get to—I am not sure

how you mandate that. We have a station in Flint-Saginaw that I

am considering very seriously right now of doing a channel with

the UAW-CIO. It is not a great television station, even though it

is an NBC affiliate. It is a UHF competing against two VHFs.

What can we do with that television station, competing against an

ABC O&O and a very large group operator, and another very large

group operator, and we are a very small company. What can we do

to make that station more relevant to the community we serve?

And we have spent hours so far discussing exactly how we do that.

To say that we should do 2 hours or 3 hours, that every station in

the country should do that, I think would be a mistake on the

part——

Mr. MARKEY. Okay.

Mr. YAGER. [continuing] of Congress.

Mr. MARKEY. Would you actually go to multicasting if it had to

be exclusively public interest, or exclusively local programming?

Would you even consider——

Mr. YAGER. Exclusively local programming? If we could define

exclusively local as programs——

Mr. MARKEY. No. No Seinfeld reruns, no——

Mr. YAGER. No, no. You know, informationals has been the

big——

Mr. MARKEY. Yeah. Just——

Mr. YAGER. [continuing] thing that cable——

Mr. MARKEY. If it was just local public interest, local public affairs, could you—would stations even consider——

Mr. YAGER. I think small markets would not consider that.

Mr. MARKEY. Okay.

Mr. YAGER. Because economically, they could not afford it.

Mr. MARKEY. Okay. So what we are looking for, then, Mr. Yager,

is a balance. In other words, I am open-minded to saying okay, for

you know, 15 hours a day, you can be commercial, but you got to,

you are going to have to give something back as well, because this

is a huge transition for the public, in order to move to digital, and

they have got to get something out of it in the local community, or

else Mr. McSlarrow is saying all you are doing it just putting on

a new channel that is competing with his already totally commerVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00114 Fmt 6633 Sfmt 6602 21643.TXT HCOM1 PsN: HCOM1
111

cial programming, because they really can’t do local programming.

So that becomes a challenge for us, and I am not inclined, to be

frank with you, unless it is meaningful and measurable, to support

multicast must-carry——

Mr. YAGER. Don’t you have to look at each case on a case-by-case,

each market on a case-by-case basis, rather than dictate or mandate that there be 2 hours of programming, or 3 hours of programming, produced that doesn’t—isn’t relevant to the community. And

then what do you do when you have four stations or five stations

in a market? Who is——

Mr. MARKEY. Let me ask you this.

Mr. YAGER. Yeah.

Mr. MARKEY. Is there any broadcaster in America that you don’t

think can do more with the extra channels to serve their local community? Do you think there is any broadcaster that can’t——

Mr. YAGER. No. I——

Mr. MARKEY. Okay.

Mr. YAGER. We could all do more.

Mr. MARKEY. All right. So there—so we start there. So now we

begin with that as the basis, and now, Mr. Yager, I would appreciate it if you could begin with your organization to then propose

to us what that minimum standard is, if you agree that everyone

can do it. What is it? Because I do think we can really move forward to mandate on other industries these dictates until we know

what we are getting for the public, especially the local community,

because that has always been the biggest promise. And we do want

to work together with you, but I would advise you not to allow the

least enthusiastic to drive—the most radical to drive the policy for

the entire organization, which in my opinion is willing to move forward to serve the local community, okay. So in many—and you

know, there is an old definition, the most radical element of any

group defines the agenda for the whole group, okay, and I have to

make sure that the whole group, ultimately, says to even that minority, you are going to have to do something.

Thank you, Mr. Chairman.

Mr. UPTON. Mr. Barton.

Chairman BARTON. Thank you. Thank you, Mr. Chairman. I appreciate, again, all our panelists being here. I have got 2 or 3 questions, and I know we don’t have a lot of time, so I am going to try

to go pretty quick here. I am going to ask Mr. Shapiro, on behalf

of the Consumer Electronics Association, if the December 31, 2008

hard date is a date that your group would find acceptable.

Mr. SHAPIRO. Absolutely, and we support it.

Chairman BARTON. Okay. I want to ask Mr. McSlarrow, on behalf of the National Cable & Telecommunications Association what

your views are on the down-conversion at the head end section of

the bill.

Mr. MCSLARROW. Mr. Chairman, we have major concerns, as currently drafted. I think the goal, which we all share, is to ensure

that all our existing customers on the day after the transition can

see the same programming without additional cost. As it is currently drafted, it is, in effect, a dual must-carry provision, and our

cable plant is full. And if something gets added on, something is

going to get dropped off, No. 1. No. 2, it is going to put us in a posiVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00115 Fmt 6633 Sfmt 6602 21643.TXT HCOM1 PsN: HCOM1
112

tion where the way it is drafted right now, it actually would give

operators the choice of just carrying the digital stream and no analog, which seems to be no choice at all, except that if you couple

that with the other provision, which is—which my colleagues have

been talking about, which is carry one, carry all, you have in effect

forced that kind of choice on system operators who need to manage

a network that actually has capacity constraints. So what we have

urged is to give us the flexibility, and we admit this is not a perfect

solution, but to give us the flexibility, knowing that we want as

many of our customers to have analog and digital, which we do

today, to make the decision at the head end whether or not we are

going to down-convert, and whether or not, in some circumstances,

because it is possible, an operator might decide to distribute settop boxes.

Chairman BARTON. Well, what——

Mr. MCSLARROW. Allow them the flexibility.

Chairman BARTON. What would your reaction be if we said okay,

but if you choose not to do the analog carriage, you, the cable operator, you have to provide free of charge, a set-top box to the analog

owner who doesn’t have digital? If we let you have that choice that

way, what would your reaction be to that?

Mr. MCSLARROW. Not positive.

Chairman BARTON. Just an idea.

Mr. MCSLARROW. Just—thanks for the offer.

Mr. UPTON. My bet is some manufacturers might like that a lot.

Chairman BARTON. Well, you know, that is why we hold these

hearings. I want to ask the gentleman who is the Chief Executive

Officer of the Circuit City stores, what your opinion on the provision in the bill before us that would move forward the deadline for

all sets sold in the United States having to have a digital tuner.

Mr. MCCOLLOUGH. My opinion is all you need to do is set a firm

date, and the market will take care of itself. The day you set the

firm date, we will begin putting signs on the shelf, changing our

Internet site, labeling televisions, and making consumers aware of

what will happen. I think if you just get out of their way, they will

make an intelligent decision.

Chairman BARTON. You know, absent that, you really don’t think

there would be some manufacturers and distributors that would

want to sell an analog set just because they would be so much less

expensive at the end?

Mr. MCCOLLOUGH. What you need to understand is we make a

lot more money when we sell a fully featured, more expensive television set. The entry-level sets, when you see us run television sets

at $69 for a 13 inch set, we are not putting profit dollars on the

bottom line. It is in our interest to sell the very best set possible.

So we don’t need artificial motivation to try. What you have is customers who are making informed decisions on what is the economic

value to them at that point. It is hard to do if you don’t know a

date certain about when the transition will be. Give us a date certain, and the market will take care of it.

Chairman BARTON. Are you okay on the December 31, 2008 date

certain?

Mr. MCCOLLOUGH. Absolutely.

113

Chairman BARTON. And that is enough time to get the distribution system and the manufacturing system and educational system

all in place, so that the market will work?

Mr. MCCOLLOUGH. That, as I say, the day that decision is made,

and that comes to be the law, we will start the process.

Chairman BARTON. Okay. Thank you, Mr. Chairman.

Mr. UPTON. Mr. Dingell.

Mr. DINGELL. Thank you, Mr. Chairman. Mr. Goldstein, I want

to go through some things I think will happen, and then I want you

to tell you me what you think. We are hearing that $500 million

or a billion dollars may be set aside from spectrum auction revenues for a rebate program to cover means-tested over-the-air

households. Now, first, somebody has to set up the program. That

is going to cost money. I don’t know how many billions or millions.

Second of all, the consumer has got to buy a converter box that

sends some type—and he has to send some type of documentation

to the program administrator. The administrator receives that form

and examines it for completeness. There is cost involved here. To

verify over-the-air eligibility, the administrator has to send the address to a data base company, who has contracted with the billing

systems of the country’s 1,100 cable and satellite operators to obtain copies of their subscribers list. There is a cost here. Now, there

would also be a cost for the cable and satellite billing systems to

coordinate with the data base company. Then the data base company verifies the address, which is not listed as cable or satellite

subscriber, and sends the answer back to the program administrator. There is a cost here. And of course, the administrator has

to receive the address and match up the consumer’s information.

Then, to verify the means test, the administrator sends the consumer’s information to the relevant entitlement program, let us say

food stamps, which is administered by the states. There is a cost

here which has to be addressed by the program again. The State

agency would then verify whether the person is participating in the

program. That would involve cost. The State agency would then

send the verification back to the program administrator. There is

a cost to the agency to send the administrator this information, and

to receive and process the administration. At this point, some time

later, the administrator would tell the Treasury Department to

mail that household one $50 check, or one check for a certain

amount. That includes cost. And if the administrator thinks he was

inappropriately—if a consumer, rather, thinks he was inappropriately denied, there would be costs involving the dispute, including

probable lawsuits. There also might be lawsuits about setting up

the program in the first place. This program is getting, I think, a

bit complicated.

Now, Mr. Goldstein, after each of these startup administrative

costs were paid out, how can you estimate how much of the $500

million would be left aside to fund converter boxes to assist the

disenfranchised families with the Nation’s transition to digital television?

Mr. GOLDSTEIN. Congressman, we don’t know how much it would

cost to administer this program, for the very reasons that you have

just talked about. We were unable to really estimate how much it

would cost. There are just so many variables at this point, and so

114

we have not done that. What we have talked about in our previous

testimony was the amount that it would cost simply if you, you

know, multiplied the number of people who needed that converter

box, say, who were over-the-air, or low-income, by the estimated

prices of the boxes. The area that you didn’t mention, one thing

that is also important note in dealing with the eligibility requirements that you have just talked about is that both of the kinds of

eligibility requirements, both whether it is over-the-air, or whether

it is the low-income kinds of eligibility, there is a good deal of

churn in both of those lists. We have been told that the cable company lists can churn as much as up to 10 percent a month, and

quite a number of people go on and off various assistance programs, you know, routinely. So it is a very difficult thing to—it is

a very challenging and complicated thing to try and do.

Mr. DINGELL. How much would that leave—well, how do we estimate how much this would leave to pay each other, each citizen,

out of this fund which we are going to set aside? If we set aside

a half a million, we have all these administrative costs that have

to go on the top, how much finally goes to get to each consumer

in the public, and how much does each consumer get out of this

pocket full of money after everybody else has dipped their hand in

it?

Mr. GOLDSTEIN. As I say, I don’t know at this point, sir. We

would have to wait until there is a better framework and approach

for the bill, and then, either ourselves or CBO would have to try

and do that, but at this point, as I mentioned, the variables are

considerable.

Mr. DINGELL. Would the administrative——

Mr. GOLDSTEIN. I really can’t——

Mr. DINGELL. [continuing] costs——

Mr. GOLDSTEIN. There is no precision that we could provide.

Mr. DINGELL. [continuing] be greater than not having administrative—not having all these administrative steps?

Mr. GOLDSTEIN. The business and industry do rebates all the

time, of course. The problem is——

Mr. DINGELL. But we are——

Mr. GOLDSTEIN. [continuing] they don’t do eligibility——

Mr. DINGELL. We are setting up a huge number of administrative

steps that have to be taken. Wouldn’t it be cheaper and easier just

to say here fellows, here is your $50 bill for the—for what this is

going to cost you, and avoid all these wonderful administrative

costs that are going to be a fine, fine overhead for some deserving

bureaucrat, or administrator in some business.

Mr. GOLDSTEIN. It may be. We have not costed out any of those.

But you are right in recognizing the complexity of the program and

the costs that are endemic to it.

Mr. DINGELL. Could it be that this is awesomely complex program, or a magnificently complex program, or a splendidly complex

program?

Mr. GOLDSTEIN. I will probably leave the modifiers to you, sir,

but it is a very challenging program with a considerable complexity, which will have to be unraveled, whether it is a rebate,

whether it is a voucher, how—as long as there is eligibility requirements tied to it, it makes it more complex.

115

Mr. DINGELL. Mr. Chairman, I find this a fascinating set of questions, and I know my time has expired, so I would ask unanimous

consent that I be permitted to put—to send a letter to our friends

at the GAO, asking a series of questions on these matters, and that

the response to that be inserted in the record.

Mr. UPTON. Without objection, that will be the case, and we——

Mr. GOLDSTEIN. We would be happy to comply. Hopefully, it will

receive a timely response.

Mr. UPTON. Of course.

Mr. DINGELL. And Mr. Chairman, because of your kindness, I

would also ask that I be permitted to ask some questions of our

other witnesses today, because this does appear to be a somewhat

complex question, and I think—and I am—I just would observe

that I am contemplating putting forward an amendment which

would give the names and the telephone numbers of the sponsors

of this bill, so that they will be available for people that call when

their sets go dark.

Mr. UPTON. I remind you that it is a discussion staff draft at the

moment, so I would authorize unanimous consent that a couple of

documents be part of the record. And I would yield to Ms.

Blackburn.

Ms. BLACKBURN. Thank you, Mr. Chairman, and I thank all of

our witnesses for being here. And I want to thank the committee

chairman and the subcommittee chairman for their participation,

and the work they have put into this, and Mr. Chairman, before

I ask my questions, I do have one thing that I would like to just

say. It is on the agenda today, but I think it is an important part

of this discussion, and that is the issue with the broadcast flag, and

the concerns that we have on that, and the fact that the—the decision being vacated here in DC, and today is not the time for that,

but I hope at some point, we have a discussion on that issue, as

we move forward on this.

I want to talk a little bit about the cost on all of this, not so

much about the signals and the spectrum and all of that, but look

at the cost. And Mr. Goldstein, I want to go back and let us visit

for just a minute, if you will revisit the issue of the voucher program. And let us talk about how you see that being structured,

what you think the cost of that would be, who would administer

that program. What type bureaucracy are we talking about? If you

want to define that just a little more succinctly, please, sir.

Mr. GOLDSTEIN. Sure. I will try, ma’am. As I mentioned, we have

not costed out any of these programs, because of the variables that

we are talking about. We have not done that, and so it is not possible at this time for us to tell you. Once, as I have indicated, once

the programs have greater precision to them, either us or, more

likely, CBO will be able to do that. What we were asked by the

committee to do was simply, was to present the various challenges

that some options might provide, to give some insight.

Ms. BLACKBURN. Sir, if I may interrupt for a moment. Your

thoughts, then, are all still in theory.

Mr. GOLDSTEIN. Yes, ma’am.

Ms. BLACKBURN. Okay. All right. Great. Thank you, sir. Mr.

Knorr, let me come to you. I want to go—first, let me move to page

10 of your testimony, if I may. And let us talk a little bit—you have

116

raised the issue of the disclosure of rates, terms, conditions. And

I am interested in your thoughts on a couple of different things.

Looking at how—protecting the privacy and the sanctity of private contracts, while you are still providing legislators, regulators,

local communities, with the type of valuated data on why cable

rates continue to rise, looking at costs, and then I want you to say

a little bit more, I want your thoughts on protecting that privacy,

and then I would like for you to speak, if you will, to the programming pricing index, and you mention creating that to address the

information black hole, and I want you to explain a little bit about

how you would see that working, and why you think that would

help. So if you will speak to that, please.

Mr. KNORR. Well, I think one of the central issues that we face,

especially as a small cable operator, is that the—what—the costs

that drive cable are really hidden from consumers, and hidden from

everyone, primarily because of nondisclosure, very strict nondisclosure clauses, that are within the programming agreements that

contain the content, including retransmission agreements from

broadcasters. This really insulates the programmers that create

content from the consumers that they are supposed to be serving.

What we think is very critical is to break down that insulation,

and a first good step would be a PPI index, and that, basically,

would be reporting similar to the reporting on rates that is given

to the FCC today, that would contain the information on effective

rates for programming, all programming, so that that could be compiled and indexed, and really indexed in the same way the rates

are, and kind of provide a balanced picture to consumers and to officials on what is driving rates. We do think that that is—completely does insulate the details of the contract, which has been expressed as a concern, and provides that confidentiality. However,

ultimately, the leverage of large media companies, it may need to

go beyond that to fully paint the picture, because increasingly complex contract terms determine how customers receive their content,

whether it is retransmission consent, whether it is tying. Basically,

every opportunity, every lever at the disposal of large companies,

because it is profit-driven, is being levered against a cable operator,

to maximize distribution of content, regardless of indecency, regardless of the value of that content to consumers.

Ms. BLACKBURN. Okay. Thank you for that. My time has expired.

Thank you, Mr. Chairman.

Mr. UPTON. Ms. Eshoo.

Ms. ESHOO. Thank you, again, Mr. Chairman, for holding this

hearing, and thank you to all of the witnesses. I have three questions, two of Mr. Pitsch, and one of Mr. Yager. I think I will start

out with Mr. Yager, since you have just one.

Your organization is running what I guess I would dub ‘‘snow

job’’ ads. They are in today’s Roll Call, and seem to me to be an

attempt to somewhat frighten consumers and urge them to oppose

moves to accelerate the transition. In your testimony, you say that

broadcasters are more anxious than anyone to get the transition

over and done with. I don’t think this ad says that, but be that as

it may. Do you fully support 2008 or earlier?

117

Mr. YAGER. I think 2008 is a very, very aggressive date to set

in motion all of the things that are in this proposed legislation or

draft bill.

Ms. ESHOO. The transition date, do you support 2008? Does the

Association support that?

Mr. YAGER. I think what we support is a date that consumers

eventually will accept. To put an arbitrary date on——

Ms. ESHOO. But how are you going to do that? Are you going to

survey consumers? How——

Mr. YAGER. No. I—where we are right now is there are many elements in this draft legislation that have to come together in order

for the 2008 date to work. And——

Ms. ESHOO. Okay.

Mr. YAGER. [continuing] until they come together, I don’t——

Ms. ESHOO. I think you have given me the answer. You don’t

support it. Well, I think that fits with the ad: ‘‘Don’t give over 20

million American homes a snow job.’’ I mean, at some point, you

can’t hold on to both spectrums. I mean, you can’t have all of it forever. So we are talking about a peaceful and sensible transition

here, and at some point, I think broadcasters who are major players in this really need to decide where their advocacy lies. If you

really want to be upfront and keep holding the position that you

want to hold everything, then just say so. But we need you to help

make this very important transition for people in the country.

Mr. Pitsch, the United States is now 16th in broadband penetration, down from 4th as recently as 2001. That is a sorry position

for our country, in my view. The President has promised to deliver

ubiquitous broadband by 2007. It seems pretty farfetched, and we

really haven’t seen anything, I don’t think, on this from the Administration to move us toward the goal. What opportunities do you

think the 700 megahertz spectrum present to provide the competition and the innovation, and I spoke about this in my opening

statement, to deliver universal broadband? Let me ask my second

question, and then you can provide your answers on both.

In 2001, the NTIA reported that relocation costs for moving the

military from spectrum needed for third generation wireless systems was upwards of $2 billion. We also subsidized, as you know,

Nextel’s move from public safety spectrum with replacement spectrum worth hundreds of millions of dollars. Is there any reason we

should not also be subsidizing television viewers that will be displaced as a result of this transition? I think that the committee and

the Congress have already set this pattern, and established where

it is really necessary, and it is a high priority to do so.

So would you comment or answer both of my questions? Thank

you.

Mr. PITSCH. Yes. First, as to——

Ms. ESHOO. Yes to both? Okay, thank you. Teasing.

Mr. PITSCH. As to the value of the 700 megahertz frequencies,

the propagation characteristics are such that we estimate, in rural

areas in particular, and suburban areas, that the infrastructure

costs at 700 megahertz would be one-fourth or one-fifth of what

they would be at, say, 2.5 gigahertz, another alternative for wireless broadband today.

118

So this may be one of the most important things Congress can

do to promote wireless broadband, particularly in rural areas and

underserved areas. I think it would also hold the potential for creating competition. Intel and other companies want to embed this

type of technology in our laptops and PDAs, and so on, dramatically reducing device costs. That could be very valuable.

Briefly, on the defense issue, I think you make a very valid point.

When the Congress decided to move the defense frequencies to

higher valued uses, it recognized that it could create a win-win situation by giving them new equipment. If the auction revenues are

greater, I think a similar approach could be used here. I think we

are not in the—we have not gotten into what the right structure

for the subsidy program could be. I think, on the other side, one

could legitimately say that many of the benefits from wireless

broadband and laptop improvements and so on will go to higher income consumers. So we prepared—we are prepared to be constructive. I think you raise a valid point.

Ms. ESHOO. Thank you, Mr. Chairman.

Mr. UPTON. And we are—the House floor, you all heard the buzzers and beepers go on. We are like in the worst of all worlds right

now. We have two votes on the House floor, so we are going to have

to adjourn for those two votes, and then we are going to come back

immediately after that, so I would guess we will take about a 20

minute intermission. Restrooms are on either end of the hallway,

men’s and women’s. We will take about a 20 minute break. We are

going to come back. Mr. Walden is next, and we will be able to do

him, and maybe one other before, then, we get called again for two

votes, and then we will have an hour before the last vote of the

day. So that is—we will be back in about 20 minutes.

[Brief recess.]

Mr. UPTON. Going to get started. Is that vote over on the floor?

Again, votes are going to be called here on the floor, two votes in

10 minutes. So we will just—I know there are long lines in those

restrooms. Souder. If you could just shut that outer door, and Mr.

Souder will be here for a moment. Mr. Walden.

Mr. WALDEN. I believe I get 8 minutes, Mr. Chairman. Thank

you very much, Mr. Chairman. Again, I appreciate your hearing

and our panel of witnesses today, and I went without an opening

statement, because I wanted to get into the Q&A, but I can’t help

but make a few comments as I move toward that point.

As I listened to some of my colleagues talk about the need for

every household in America, regardless of income, to get a converter for every television in America, I am struck by the phrase

that we need a converter box for the rich, so we put up with tax

cuts for the rich, and now we are going to hear about converter

boxes for the rich, and it—amazing that Warren Buffett just

bought the electrical utility that serves my State and most of the

West, and yet I am going to get to buy him a converter box, because he can’t afford it, and I am sort of amazed by all that nonsense.

I want to go to GAO. And I want to tell me, because I am a journalism major, not a math major, what it is going to cost if you have

unlimited, no restriction on providing set-top converter boxes to 73

million people at $50 apiece.

119

Mr. GOLDSTEIN. Just for the boxes themselves, and not the administration of them, that is about $3.5 billion or $3.7 billion.

Mr. WALDEN. Good, $3.5 billion. I mean, the math is pretty——

Mr. GOLDSTEIN. I was a journalism major, too.

Mr. WALDEN. Oh. Well, congratulations. Maybe the Ducks will

get to the Rose Bowl again some day. That is where I went. Well,

yeah. We will deal with that one later.

Mr. McSlarrow, I want to ask a clarifying question. You said, I

believe, in your comments, I think to one of us here, that we would

see a channel for channel offset. In other words, if you had multichannel must-carry of some sort, there would be—basically would

be—if you put on that channel your cable folks are at complete capacity and you have to take a channel off. Is that really what you

testified to?

Mr. MCSLARROW. Sort of. And then let me—I appreciate the opportunity to clarify. What I am saying is—let me just take one example, a real world example.

Mr. WALDEN. Sure.

Mr. MCSLARROW. Cox in Northern Virginia.

Mr. WALDEN. Right.

Mr. MCSLARROW. It is actually a very robust plant. It is an 860

megahertz plant.

Mr. WALDEN. Okay.

Mr. MCSLARROW. So it is a pretty good pipe, 134 channels, every

single one of them is full.

Mr. WALDEN. So there is no bandwidth capacity left.

Mr. MCSLARROW. Not at this time. Although we are, and this is

why I think your question is a good one, we are obviously working

on technologies, digital compression.

Mr. WALDEN. Right, right.

Mr. MCSLARROW. I mean, there are lots of things that are happening to squeeze more out of the bandwidth, but—and we are trying to bring on more advanced services, more speed for the high

speed Internet service, and so all I am saying is you can’t keep

layering on all these requirements——

Mr. WALDEN. But that——

Mr. MCSLARROW. [continuing] without bursting the seams. And

so yes, there will be operators, and probably my colleague over

here, with the smaller operators, who clearly will not——

Mr. WALDEN. Right.

Mr. MCSLARROW. [continuing] be able to deal with this.

Mr. WALDEN. But not every system in America——

Mr. MCSLARROW. Not every system, no.

Mr. WALDEN. [continuing] will be channel for channel.

Mr. MCSLARROW. Not every system, no.

Mr. WALDEN. Okay. Mr. Yager, my colleague from California

made the comment about broadcasters holding onto analog and digital. Can you talk to me about the kind of revenues you are generating as a result of having both the analog signal and the digital

signal?

Mr. YAGER. I wish I could talk to you about the analog revenues.

Unfortunately——

Mr. WALDEN. Or the digital revenues.

120

Mr. YAGER. The digital revenues. Unfortunately, I can’t, because

I am not aware of any small market, mid-sized market television

station in the country that is generating any revenues at all right

now off of their digital signal. As a matter of fact, we have costs

involved in transmitting a digital signal.

Mr. WALDEN. And is there anybody else at this table, other than

maybe CEA, but—that has expended as much to comply with Congress’ 1997 act on DTV than broadcasters?

Mr. YAGER. No.

Mr. WALDEN. And I confess, I am a broadcaster, and broadcast

for 38 years, we have nothing to do with TV, so I really don’t have

a dog——

Mr. YAGER. And the estimate is that broadcasters have spent

someplace between $10 and $16 billion to convert to digital, and to

the best of my knowledge, the return on that is de minimis.

Mr. WALDEN. Do you know any broadcasters that seek to be able

to run two sets of transmitters, one digital and one analog, forever?

Mr. YAGER. No. I know of none that want to, or wouldn’t love to

see the end of the transition come as soon as possible.

Mr. WALDEN. All right. I want to go to our FCC witness, who is

so far away, I cannot see your name, Mr. Chessen. And my question is a real life one. Okay. I am sitting in my hometown. I look

across at a mountain in Washington called Underwood, where

there are the translators for the local community television whatever it is, that does the translators for the Portland stations. I pick

those up off air analog today. What happens when the over-the-air

main channel analog goes away? How are those translators, how do

they continue to provide service in an analog environment or convert to a digital environment?

Mr. CHESSEN. Last fall, we came up with rules for translators to

transition to digital. We recognized they did not have a digital television transition laid out for them like the full power broadcasters.

Mr. WALDEN. Right.

Mr. CHESSEN. So we recently adopted rules that give them a couple options. Starting probably this summer, we could give them the

opportunity to switch to digital immediately on that particular

channel, or we also are planning on opening up a filing period for

translators to file for a companion channel, so that they can have

their own transition with two channels, just like full power broadcasters. Now, we recognize that it is probably not going to be on

the same timeframe as the full power broadcasters, as you say——

Mr. WALDEN. Right. And in fact, doesn’t your own notice of rulemaking indicate that some of those allocations for the digital translators won’t be made until after the analog spectrum has been

handed back?

Mr. CHESSEN. Right. Many translators won’t be able to find that

extra second channel until the spectrum opens up, when the full

power broadcasters turn back their first channels.

Mr. WALDEN. So then tell me, in the real world, how all this is

going to work for that 15 percent that still rely on over the air

transmission of broadcast, but may indeed actually rely on those

translators. In many of these rural areas, that is really how you

get it.

121

Mr. CHESSEN. Well, at some period of time, after, again, they will

go get a second channel hopefully to broadcast in digital, and for

some period of time after the full power transition they are probably going to have to take the digital signal from the main station,

convert it to analog to send out to their analog viewers. Then they

will have their own transition time, subsequently, where they will

be broadcasting still both in analog and digital, even once the full

power broadcasters have gone all digital. And eventually, the FCC

will then reclaim one of the channels from the translator.

We haven’t set the deadline for that, but we plan on doing so in

our next review of our DTV rules.

Mr. WALDEN. Mr. Yager, how will that work?

Mr. YAGER. I am a little confused, Congressman, as to how that

would work. If we are going to have a hard date, give back date,

and we are going to continue to feed translators with an analog signal from a transmitter, I am confused as to how that would exactly

work. I don’t see how the two are compatible.

Mr. CHESSEN. There will be just a digital signal going out from

the main station.

Mr. WALDEN. Right.

Mr. CHESSEN. The translator will take that digital signal. It will

down-convert on one channel to analog, because they are still serving analog viewers, and it will pass through a digital version on another channel for digital.

Mr. WALDEN. Which hasn’t been allocated yet.

Mr. CHESSEN. Which has not yet been allocated to the translators, correct.

Mr. WALDEN. All right. But the analog translators will continue

to function for how long?

Mr. CHESSEN. We have not yet set a date. We will try to make

it as close to the overall transition as possible, but we said we

would look at that in our next periodic review. I note that the Staff

Draft sort of leaves open the possibility, by talking about full power

transition being over, but that is something that perhaps could be

clarified.

Mr. WALDEN. And you are—I am not up to when your periodic

review process would occur. What kind of timeline is that, sir?

Mr. CHESSEN. I think it is slated to begin this year.

Mr. WALDEN. Okay.

Mr. CHESSEN. We do it every 2 years, and it is slated to begin

again this year.

Mr. WALDEN. So in a 2-year cycle, you will look at this to see how

this might——

Mr. CHESSEN. To see and set——

Mr. WALDEN. Because that is an issue I hear, representing a

very rural district that is also very rugged terrain. I mean, I have

talked to some stations that have dozens of translators to fill in

just in their own market, and they are trying to deal with this.

Mr. CHESSEN. Yes, we have been working with the Translator

Association and trying to make sure that they have a legitimate

way to transition, too, because we recognize that lots of rural communities, especially out West, rely on those translators for service.

Mr. WALDEN. Yeah, and it is a big issue. I am sure my colleague

from Wyoming would——

122

Mr. CHESSEN. One other thing.

Mr. WALDEN. Yes, sir.

Mr. CHESSEN. What is not in the bill, we are required by law,

and this is sort of a caveat, we are required by the law to currently

displace all translators at the end of the full power transition on

channels 60 to 69.

Mr. WALDEN. Right.

Mr. CHESSEN. Even if, for instance, the public safety authorities

are not ready to use it in that particular rural area. That is something, though, that we don’t have the flexibility, we think, under

the statute, to permit them to continue to operate on those channels even after the full power transition, and that is something

that also, if Congress wished to clarify, could be clarified.

Mr. WALDEN. And that is channels 60 through 69?

Mr. CHESSEN. 60 to 69, we are precluded by law from

permitting——

Mr. WALDEN. Do you know how many translators might be out

there in those areas?

Mr. CHESSEN. I actually do.

Mr. WALDEN. You are prepared.

Mr. CHESSEN. There is 465 translators in 60 to 69, and there are

269 low power stations on those channels, so all of them would

have to vacate those channels at the end of the full power transition, unless the law were changed.

Mr. WALDEN. All right. And I note Mr. Engel has returned. And

I guess if I am de facto chairman, we are going to a work session.

I got a few changes. But I just—I have to follow up on something

you said, Mr. Souder, because I—is it Souder or Souder? Souder.

Because I—as I readily admit, I have been—I am a broadcaster,

been in a broadcast family. My dad got his ham license in 1934,

and so, I have grown up around public service in small community

radio broadcasting. I wired in the EAS in my stations. I know

about Amber Alerts, and it—I have to tell you just the way you

sort of talked about how broadcasters aren’t first responders. I

don’t disagree. You are the ones out there with the fire trucks and

the guns, and I readily appreciate that. But I would hope you

would not diminish the partnership that has existed, and your comments—I heard them that way, and I found them not exactly flattering. Because I—we work very closely with our law enforcement

and fire departments, always have, and maybe it doesn’t work that

way in the big cities, but I got to tell you, when there is an emergency, we drop our programming and we go live, and we interact,

and we tell people where the wrecks are, to avoid them. We work

with the fire departments and the police departments, and help

give guidance, and I can’t think of a time when we haven’t—and

I don’t think I am alone in that. And so, I just—I know what happened on 9/11 around here, you know. And we—you get the EAS,

and wasn’t it the FCC that told the station in New York to quit

using the EAS. And so I mean, I hope we can get over whatever

that issue is that has got your folks all twisted up.

Mr. SOUDER. I think it is the use of the term first responder.

Mr. WALDEN. Okay.

Mr. SOUDER. I think in the general public, the first responder is

viewed as those that first respond.

123

Mr. WALDEN. Yeah.

Mr. SOUDER. As opposed to some that might support us in many

ways, and no one would deny that there is a strong, and there

must be a strong partnership——

Mr. WALDEN. Yeah.

Mr. SOUDER. [continuing] between the first responder community

and the broadcast industry——

Mr. WALDEN. Right.

Mr. SOUDER. [continuing] and many others——

Mr. WALDEN. All right. All right. Okay. I know I have exhausted

my time. I think I have to go vote. I am going to turn the gavel

over to my colleague from New Hampshire.

Mr. BASS [presiding]. The Chair recognizes Mr. Engel for 5 minutes.

Mr. ENGEL. Thank you, Mr. Chairman. We are all running to

votes, from votes, and whatever. But we are all here. Mr. Chessen,

can you tell me what the FCC is doing to work—in my opening

statement, I mentioned the September 11 tragedy, and how New

York now has transmitters off the Empire State Building, which is

of lesser height than either the rebuilt World Trade Center or the

new Freedom Tower would be. What is the FCC doing to work with

New York broadcasters who have been affected by it, and are you

aware of the difficulties of staying on the Empire State Building,

and the ongoing plans for the new Freedom Tower?

Mr. CHESSEN. Yes, Congressman. We have been working with

the New York broadcasters since the very moment on September

11, we, within hours, got them special emergency temporary authority to relocate. Ever since, we have been working with them

very closely on trying to get them back on the air, and recognizing

their unique circumstances. It has often been an express exemption

to some of the other rules that we have. For instance, right now,

we have a rule that prohibits modifications to digital stations.

There is an express exception in there for the New York broadcasters affected by 9/11, and we continue to work with them as

they try to find a permanent home, and we are well aware of the

different moves they have tried to make, and the difficulties they

have had in finding a permanent home, and we will continue to do

that. But at the same time we are still trying to get as much service as possible to the New York City area, which is the No. 1 market in the country. So we are trying to recognize the unique circumstances and still make sure that we get service out there.

Mr. ENGEL. Thank you. I hope we can recognize that in the final,

ultimate passage of this legislation, and the revision of this legislation.

Mr. Yager, obviously, you remember a few years ago when some

satellite subscribers lost their distant network signals. I am sure

you do.

Mr. YAGER. I remember it very well, sir.

Mr. ENGEL. Right. That didn’t involve losing any local television

stations. Am I correct about that?

Mr. YAGER. What it involved was losing network affiliate, I mean

network stations that were being brought into local television markets, and what happened there is that, quite obviously, the satellite

companies did not have authorization under the laws of the time.

124

They were bringing in illegal signals into our markets. Congress

quite rightly told them to cease and desist bringing in illegal signals, and I think you know, and I certainly know the outcry that

created. And there were about 550,000 households that were involved in that.

Mr. ENGEL. Well, I remember members receiving so many emails

on that issue than we did for the impeachment proceeding. It was

just an incredible and, as you pointed out, so many consumers lost

their signal. I have been saying for a long time if we face such massive outrage over the loss of distant network signals, what would

the response be from 20 million consumers who might lose all of

their television service. I think that is something that we really

need to keep in mind. I am not, you know, opposed to the transition, but I think we have got to keep these things in mind.

Mr. YAGER. I couldn’t agree with you more.

Mr. ENGEL. Yes, thank you. Mr. Kimmelman, I agree with your

statement about the need to hold harmless consumers who rely on

over-the-air television. But I have to disagree with you regarding

the broadcast flag. How else would you protect a songwriter’s work,

and the jobs of cameramen and makeup artists and just anybody

in the entertainment industry? That is a concern that I have.

Mr. KIMMELMAN. Well, we share the concern that any piracy

ought to be stopped. The question is whether you change the Federal Communications Communication into a regulator of all computer electronic equipment and everything that touches it, or

whether you find a more narrow, tailored way to go after piracy.

We think the flag, as it was proposed by the FCC, was vastly

overbroad. We urge you, as you look at the issue, not to just resurrect a bad plan that would, in essence, indirectly and through the

side door, start regulating all computer equipment.

The difficulty we have from the consumer side is that piracy is

horrible, but what about plain old consumer copying of simple content for your family, for your friends. If you are going on vacation,

the broadcast flag, while attempting to protect that, was in no way

guaranteeing that consumers could make simple copies of digital

content.

Mr. ENGEL. Yes, absolutely.

Mr. CHESSEN. Correct one thing for the record. The broadcast

flag did not regulate computer equipment. It only regulated digital

television over-the-air receivers, so regular computer equipment

wouldn’t be affected. It also did not in any way restrict copying.

Consumers were free to make as many copies as they want of the

content under the regulations. The only thing it tried to prevent

was a very narrow thing, which is the mass Internet redistribution

of broadcast content, in order to permit broadcasters to compete for

content against cable and satellite, where that content could be

protected.

Mr. KIMMELMAN. What it tried to do and what it actually would

do are vastly different, I assert to you.

Mr. ENGEL. Thank you. I have no further questions, unless anyone would care to comment on any of the questions that I asked.

Mr. SHAPIRO. I would like to comment.

Mr. ENGEL. Mr. Shapiro. I thought you might.

125

Mr. SHAPIRO. Actually, but not what you probably think. I am

not going to comment on the broadcast flag. What I would like to

comment is your use of the number, and some others have used the

number 20 million disenfranchised viewers. And I think it is important that the committee get to the facts, because there are facts

here, and if the question is how many people does this affect, and

there is two types of people, those that don’t have cable or satellite,

which is by six different surveys that we have done, is 13 percent

of the 110 million American households. And then there are those

that have cable and satellite. Do they have other TV sets which

will be impacted? And only 14 percent of these people use an antenna to receive television programming on a second, third, or

fourth television in their house. So when you see these ads that

Anna Eshoo referred to, and you see these other claims, they are

grossly exaggerated. But I don’t want to diminish the fact that

there will be people, a small segment of people, who will be upset,

who may not get enough notice, and those are the ones I think you

should focus on, and there are some very creative ideas, in addition

to the rather lengthy ones that have been discussed, about ways of

having those consumers get access, and if you look at the Berlin,

Germany example, and at this point in history, Berlin is the only

area I know of that transitioned from digital, to digital, and cutoff

the analog signal. They just made these devices available, and they

were—the government authorities were amazed that so few of their

citizens took advantage and went for it, and it was not a very expensive government program.

Mr. ENGEL. Well, let me just say that I think we obviously, all

of us, want the same thing. We don’t want people inconvenienced,

and we want this transition to go smoothly. I think that—and I applaud the chairman for holding these hearings. I just think that we

need to be smart about it, and I am just very happy that we are

not rushed to it by an 2006 deadline that I have long felt was far

too premature. But I do, you know, understand what you are saying.

Mr. SHAPIRO. Thank you.

Mr. ENGEL. Thank you.

Mr. UPTON. Mr. Bass.

Mr. BASS. Thank you, Mr. Chairman, and I want—I was here at

the very beginning, as you guys well know. I went over and presided over the entire military quality appropriation bill, amendments, and everything else, and now I am back here again.

Mr. RADANOVICH. That was easier.

Mr. BASS. Yeah. And I want to apologize for having missed all

the testimony and the questions and everything else. This is a very

important hearing, and I am going to ask a few questions. I hope

I don’t repeat myself, or repeat answers, and if I do, just summarize very quickly, and again, I apologize for the situation.

Mr. Shapiro, the FCC estimates that there are 16 million households that get exclusive over-the-air reception and the GAO estimates 20 million. Do you think that the NAB’s estimate that there

are 73 million unconnected televisions, do you think that is accurate? Or which estimate do you think is closest?

Mr. SHAPIRO. Well, let us walk through the numbers. Let us

walk through the numbers. There are 110 million U.S. households

126

with a television set. Now, according to the last census, about 1.8

percent of American households don’t have a television set, and let

us agree that they are not relevant, because they won’t be

disenfranchised, because they already decided not to buy a TV. So

we are at 110 million, 68 percent of those households, according to

the NCTA, have cable service, paid for cable service. I am not even

counting pirates. These are paid for cable providers. They all are

served. There is another 22 or 23 million satellite subscribers.

Those are—this is from SEC filings from DirecTV and EchoStar.

Mr. BASS. Did you say 68 percent or 68 million?

Mr. SHAPIRO. I am sorry. I——

Mr. MCSLARROW. Sixty six million.

Mr. BASS. Sixty six million. Okay, thank you.

Mr. SHAPIRO. Sixty six million, not a percentage.

Mr. BASS. Cable.

Mr. SHAPIRO. And with cable, it is 22 or 23 million—I am sorry,

with satellite, it is 22 or 23 million. And put it together, you get

around 90 percent, but you have to subtract some people. You have

to subtract people who have both cable and satellite. And according—we have done research, we have called up people, we said do

you have cable, do you have satellite, do you have both? And our

estimate is that it is about 3 percent who have both cable and satellite. So you get to 87 percent of the American population has

cable or satellite or both. So 87 percent of 110 million homes comes

up with a number which I can’t do in my head.

Mr. BASS. Okay.

Mr. SHAPIRO. And then you go to those people, so there is two

sets of people. There is that 87 percent, and there is the 13 percent

who have no cable or satellite. The 13 percent who have no cable

or satellite, what are they doing? Well, it turns out that the 13 percent, they watch a lot less TV. Money really isn’t the issue. They

are just not interested in television, and that 13 percent has a lot

of other attributes. About half of them are already hooked up to the

Internet. Most of them have radios. Most of them have telephones.

They are not going to be that disenfranchised. And also, we asked

those 13 million, we actually went to people, we surveyed people

who have no cable, no satellite, and we asked them what would you

do if the government cutoff analog broadcasting. Twenty 2 percent

said they would buy a new TV capable of receiving DTV signals,

42 percent said they would spend $50 to buy a set-top converter,

9 percent said they would subscribe to cable or satellite, and 22

percent of that 13 percent said they would do nothing. So the 22

percent are the ones who might be really angry and write letters.

Mr. BASS. Mr. Yager, do you have any response to that?

Mr. YAGER. Well, I—we have been using GAO figures in terms

of the disserved or unserved households in this country, and when

we are talking about 20.5 million households that are—receive

over-the-air only signals, there are normally 2.3 television sets in

most households. It is very easy to get to a 40 to 45 million set

kind of universe there. Then, the rest of those households, 20 million, roughly estimated, are second, third, fourth, and fifth sets in

consumers’ homes that are not hooked to any MVT multiple distribution system. So it is very easy to get to the 73 million figure.

I am not aware of Mr. Shapiro’s figures. They are the first I have

127

heard them. I know he has used there are only 13 percent that are

over-the-air——

Mr. BASS. Well, now, Mr. Goldstein, where did you get your numbers from?

Mr. GOLDSTEIN. I knew you would come to me sooner or later.

Our numbers come from a survey that was done in 2004 by Knowledge Networks, with a 47 percent return rate. We purchased that

information in order to do the work for this committee earlier this

year. The information that we used was also purchased by NAB,

I must say that, but at the same time, we, you know, the numbers

that we have, we think, are valid. We are likely to check some of

the numbers later this year, and ask some additional questions,

but the numbers we have reported to the committee in—earlier

this year in our testimony are still the numbers that we stand by.

Mr. BASS. All right. Well——

Mr. GOLDSTEIN. So we—just to add, Mr. Shapiro and I have

agreed, actually, we are going to try and sit down in the very near

future, and see if we can come to some understanding of the

difference——

Mr. BASS. That would be really helpful.

Mr. GOLDSTEIN. [continuing] between our numbers.

Mr. BASS. That would be helpful, because—Mr. Chessen, how

about you?

Mr. CHESSEN. We are somewhere in the middle. From the 13 percent to the 19 percent, our 15 percent number is derived from commercial sources, such as Nielsen and Kagan, which this is their

business, and they get publicly available data and do surveys, and

based on that, we come out with our report every year, and right

now, the percentage that we report was 14.86 percent.

Mr. BASS. Thank you.

Mr. PITSCH. Congressman.

Mr. BASS. Yes, sir. Mr. Pitsch. Apologize.

Mr. PITSCH. Congressman Bass, in a study we just recently completed, and it will be released next week, we look at the same question, and our estimate is that there are 14 to 15 million households

that rely primarily over-the-air, so a number much lower and closer

to Mr. Shapiro’s.

Mr. SHAPIRO. You are actually lower, then. It is 12 percent is

what you are saying.

Mr. BASS. All right. Fair enough. Mr. Chairman, my time is expired. I will yield back to you.

Mr. UPTON. Mr. Inslee.

Mr. INSLEE. Thank you. I was thinking, after our opening comments this morning about this issue—and we have been using the

word subsidy about this issue—of what, if any, subsidy there is

going to be for people who experience this problem. And I was

thinking that maybe that is really the wrong word, that leads to

some not really precise thinking about this.

I really think it is an issue of compensation for a loss that the

Federal Government is taking away from consumers, and I really

think that we should start thinking about this issue as compensating citizens who are losing a working asset as a result of their

Federal Government removing access to a spectrum which they

own, by a conscious, Congressionally mandated decision. And if you

128

look at it in those terms, when you start to look at it as a compensatory issue, rather than something like an agricultural subsidy, or

a subsidy for early childhood education, or Aid to Families with Dependent Children, it really leads to a different conclusion, one

which would lead to suggest everyone ought to be having this

takings, in a sense, it almost comes close to a property right in my

view, because we were administering this public spectrum for the

public, that they relied upon when they went out and bought a television set. And when they bought that television set, they thought

that was going to be available to them as long as the grasses grow

and the wind blows, and no one suggested to them that this was

a temporary manifestation.

So I really think that we need—it is incumbent on our committee

to design a compensation system for the loss of this asset, just as

we would if this committee went in and disabled a person’s refrigerator or air conditioning set, we are disabling a working asset that

is dependent on a Federal public asset that every citizen of the

United States has a partial ownership of. And I think that is how

citizens are going to think about this, and whether it is 2 percent

or 22 percent of the 13 percent Mr. Shapiro has suggested, or some

larger number, it is going to be a large number when we start

hearing about it. In fact, I almost would suggest before we pass

this bill, maybe we should have a prototype where we have 1,000

people we do this to in each one of our districts next month, and

then we all come back 30 days from now, and we just sort of see

what happens. I think it may lead us to a more enlightened decision on what to do about this.

So assuming that the committee would go the direction where I

would like it to do it, where we would compensate people for the

loss of this asset, what is the best way to accomplish that, be it

Federal acquisition and distribution of specified technology to do

this, whether it is a voucher program, whether it is a situation like

the Berlin experience, and Mr. Shapiro, if you can provide me any

description of that, I would love to see that as well. I haven’t been

able to be here through the whole hearing, but what is your wisdom on the best way to do that? If we wanted to have the most

comprehensive system of compensating people for their loss, what

would it look like?

Mr. MCCOLLOUGH. Congressman, I think the simplest thing

would be to provide a box at no cost. I believe if you build a box

to replace the service, so there is no loss of service, essentially, you

could build a box with an ATSC tuner, a digital to analog converter, and a simple RF only output, so that there would be no use

of that box for anybody other than to receive over-the-air signals

and bring them into a TV that couldn’t receive them in digital format. But you couldn’t take it and do other things, or with high definition outs, or so forth. It would be the equivalent, in this case,

slightly better service. If you were to provide those at no cost, I

don’t think—I would think you would be surprised, as in the example Gary cited, that you won’t have a whole line of folks lined up

to get them. And if you do, fine. Then, they will have the same—

they will have, actually, slightly better service than they are getting today over-the-air.

129

Mr. INSLEE. And why do you share that view that you don’t think

many people would actually take that option?

Mr. MCCOLLOUGH. I probably have seven TVs in my house. I

have one from when I was serving in the Navy, this black and

white in my attic that is not connected to anything. I have one in

my garage that is sitting in the corner. I think, when you talk to

folks who have lots of TVs, they have lots of TVs, and many of

them aren’t used or ever turned on. I wouldn’t get out of my chair

to go pick up the free box. If I was relying heavily on it, I absolutely would go get the free box. You will find out in a hurry who

really needs one and who doesn’t. I get anxious about subsidies and

dollars passing all around. If you just say you need the box, come

get it, folks who really need it will come get one.

Mr. INSLEE. Are there economic savings to Uncle Sam doing it

that way?

Mr. MCCOLLOUGH. My guess is there will be a whole lot less

boxes given out than there would be vouchers handed out. I can’t

know that for sure. That is speculation. And it would be a pretty

straightforward process. And I do believe that would end up being

probably the lowest cost alternative to Uncle Sam.

Mr. GOLDSTEIN. Congressman, I think the question has to come

back to, and I think you are focusing on it, what is the policy you

are trying to achieve first, and that drives the kind of program, in

our opinion, based on what the research we have done. If, indeed,

you are looking to create sort of a relatively broad program that

doesn’t have eligibility restrictions to it, you are most likely to use

a fairly simple rebate kind of program. If, indeed, you wanted to

restrict it, if it was simply for people who are over-the-air, or even

more restricted, just to people who are low-income, you would more

likely use a voucher program, we found in the research that we did.

The other two options that we looked at, as we mentioned this

morning, were government distribution. We didn’t feel that, as we

looked at it, that that seemed to be the most viable based on the

kinds of interviews did. If the government itself physically distributed boxes in the way that, you know, it does various foods, to food

banks and things like that, and that the other, the—a tax, a refundable tax credit, that, too, had a lot of difficulties associated

with it, and administratively, might be more burdensome than you

would need to get out of it. You would actually be forcing some people to file taxes who don’t even file them just in order to do a—

to get a box.

Mr. INSLEE. Well, my time is up. Thank you, Mr. Chair.

Mr. UPTON. Mr. Radanovich.

Mr. RADANOVICH. Thank you, Mr. Chairman. I am—I have got

one question out of the text and then maybe another one. Mr.

Abud, you expressed concern that the Staff Draft leaves it to cable,

the discretion whether or not to convert your signals to analog.

Would you rather that we require cable operators to carry your signal in analog format in lieu of carrying them in digital format, as

Mr. McSlarrow suggests, or——

Mr. ABUD. Yeah, we would prefer to have the same treatment for

all broadcasters, for all local broadcasters. My issue is getting it to

everybody in terms of our viewers, No. 1, and No. 2, getting the

same treatment for all broadcasters, for all local broadcasters.

130

Mr. RADANOVICH. Thank you. Thank you very much. I did have

a question. I had a demonstration in my office the other day by—

I got a chance to see an analog signal with a converter box, and

what a digital—what it did by having gone through the digital converter. And I swear, when the analog signal, this was in my capitol

office, I don’t know if you guys have seen it, but when I looked at

the analog signal, it was just snow. I couldn’t see anything. And

when it was hooked on, I could—it was incredible. I mean, it was

just amazing, and I grew up in the Sierras, and we were always

on the roof twisting the antenna when we grew up, to just try to

get a signal out of Fresno, and there is a huge mountain in the

way. And just thinking about how nice that would have been to

have even at that time, but because of that, and it is remarkable,

you really should get that demonstration——

Mr. MARKEY. Let me say this, Mr. Radanovich has the No. 1

website of all 535 Members of Congress, so this is—you are listening to Caesar here on this subject.

Mr. RADANOVICH. But how does that speak to—is there some potential there to speak to a must-carry rule or something, by having

this converter on—a digital converter on an analog over-the-air signal to meet a must-carry requirement in a large, urban area? Is

it—I mean, I can’t help but think—to wonder that some people

would just be happy with an analog over-the-air that got in some

incredible digital pictures. I mean, am I out in left field on this, or

is there some potential for that, or what? How does it—could it possibly speak to a must-carry rule?

Mr. CHESSEN. I do think it goes to the point of, whether there

si a way to incentivize consumers to go out and buy these converter

boxes. And one way to do that, using a must-carry approach, is the

multicast approach. I think that there is a tie between the multicasting, possibly, and getting consumers an incentive to go out and

buy these boxes. If you look at the experience in England, they

were very successful with their over-the-air digital program and

getting people to buy these converter boxes, because there are so

many channels available. So a multicasting requirement actually,

here, could give people incentive—everybody is assuming that the

boxes are going to only be sold at the end of the transition. It is

possible they could provide consumers with an incentive, if they got

something more for their money, more than just the four or five

broadcasters that they get over the air, that they could actually go

out and buy them before, and that is one possible benefit of a

multicast requirement.

Mr. RADANOVICH. Could it speak to a must-carry rule? I

mean——

Mr. MCSLARROW. I guess, Congressman, the way I would look at

it is, right now, as you know, cable is going through a digital transition itself, with no government subsidies or government mandates, and we have gone from 6 million digital customers 5 years

ago to 26 million today, and it is accelerating, and we are providing

lots of two way digital services.

And when we get to a transition, whenever that transition takes

place, and we are faced with what do we do with the analog customers, what we are proposing is to allow us to down-convert, in

some circumstances, just for the limited number of must-carry staVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00134 Fmt 6633 Sfmt 6602 21643.TXT HCOM1 PsN: HCOM1
131

tions. In the meantime, you are exactly right. The converter boxes,

or the more elaborate boxes that some people may want, particularly if they want high definition or DVRs, or those kinds of things,

are increasingly going to penetrate the subscribership. So what you

have a universe which, you know, we have gone through the numbers ad nauseam right now, but I think we all agree, the largest

television universe is the cable customer universe, 66 million people, and what we are offering is to incur the cost themselves. It is

not going to cost the government a dime. We will take care of the

problem. No one on day one of the transition will see any difference

from the day before. In the meantime, the digital transition is taking place. And when it comes to must-carry, I guess our concern

is this. We are saying we will step up, we will do this. We are not

asking you to place an obligation on anybody else. And near as I

can tell, everybody at this table would love to place obligations on

cable or some other industry. We are not going to ask you to do

that. We will take care of it. So those 66 million people, you can

park over here, they are done, and you still have the hard nut of

the true over-the-air customers, but this is a vanishing problem,

and the further out the date will be, the more likely it is that the

transition will go easier, and you are going to have converter boxes

that are $50, perhaps $30.

Mr. RADANOVICH. Right.

Mr. MCSLARROW. It gets easier. And as you said, today, with today’s technology, people are going to want these kinds of devices,

we hope. We are kind of betting our business plan on it. And so

if we don’t do anything to layer on requirements that suddenly put

cable operators in the position of actually cutting people off from

analog, which is what we would argue the discussion draft does,

this can go pretty seamlessly.

Mr. RADANOVICH. All right. Thank you. And the only other point

I wanted to make, too, was that in the way that this bill is going

to develop, the selling of the spectrum is, I think, would generate

something in—upwards of $10 billion. I am not a big subsidy person for these boxes. I think maybe if—on a lifeline basis, they

might be reasonable, but whatever the cost of this subsidy is going

to come out of, the $10 billion, which is credited toward savings

and Medicare reform that we are doing in this same overall committee, so it is really, you know, we are kind of pitting Medicaid

savings against financing of converter boxes. So, you know, I am

interested in the idea, Charlie, but I yield back. Thanks.

Mr. UPTON. Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman. Let me pick up where

Mr. Radanovich left off, because as you know, I feel when we sell

the spectrum, on a date certain, part of that money has to go into

law enforcement, to our first responders. I mean, where you saw

with 9/11 the problems we had there, and having been law enforcement all those years, I guess I am still getting tired of when there

is a flood, in order to communicate with the jurisdiction on the

other side of the flood, you have to yell across the river, because

the radios don’t talk to each other. So interoperability is one of

these things we really have to do, and Mr. Souder, you brought it

up in your testimony, so just let me ask you a few questions, if I

may.

132

We have this date that is sort of supposed to be a hard date, and

I am sure you would not want to see that hard date slip when we

go to converting over and selling this spectrum, correct?

Mr. SOUDER. Absolutely not. The sooner, the better, for a whole

host of reasons.

Mr. STUPAK. So as you view this legislation, I am sure you want

to see something, whether it is converter boxes, whatever we do,

to do it in a way that will be consumer friendly, so we can get this

spectrum sold, and hopefully, by then, myself, Mr. Fossella, Mr.

Engel, who has a legislation, dedicate part of those proceeds to law

enforcement first responders, so they can go to interoperability. I

am sure you are interested in finding a careful and consumer

friendly way in which we can establish a hard date and carry it

through, I take it, right?

Mr. SOUDER. Absolutely so, and keep in mind that the law enforcement and public safety community are, in fact, consumers

also. And similar to the gentlemen at the table with me, my 10

neighbors for the afternoon and morning, they are 911 consumers

as well, so we do have a vested interest in both solutions.

Mr. STUPAK. And I take it you have no problem with our legislation. We have heard estimates that the broadband spectrum may

yield at least $10 to $15 million, and so far, we have heard it

should go to converter boxes, it should go to Medicare. We feel at

least part of it should go to interoperability, something this country

needs. So I take it you would be in support of our legislation to

allow public safety officials to buy, purchase communications for

interoperability?

Mr. SOUDER. Absolutely. But we have to have the spectrum to

purchase the equipment to use on it.

Mr. STUPAK. Correct. Correct. Got to have the spectrum, get the

hard date, give out the spectrum, give you the 700 megahertz, and

then get the interoperability moving. Correct?

Mr. SOUDER. Correct. Absolutely.

Mr. STUPAK. Thanks. Mr. McSlarrow, you were talking about the

66 million people that you had, and according to some facts I have

seen, or figures I have seen, there is like 134 million analog sets

just connected to cable alone. Is that about right?

Mr. MCSLARROW. That is correct, sir.

Mr. STUPAK. Okay. And you were saying you are going to take

care of the customer yourself, meaning cable is going to take care

of it. So if we do a hard date, you will be ready to go, and those

cable people will not lose anything.

Mr. MCSLARROW. Right.

Mr. STUPAK. Okay. What about the small cable systems that, you

know, serve areas like I represent in very, very rural northern

Michigan. How do they—how will they come into the picture?

Mr. MCSLARROW. Well, and we have representatives of smaller

cable systems here, but obviously, my organization also has small

systems, so I will just take a first crack, and maybe——

Mr. STUPAK. Sure.

Mr. MCSLARROW. —Patch can answer too. What we have requested from you all is that we be allowed to down-convert at the

head end, and while a set-top box subsidy or cost would be in the

billions of dollars, our estimate of that is that it is not insignificant,

133

but it is probably around $80 to $100 million, and that is spread

out over, you know, thousands of cable systems. So it is a cost, but

our view, and at least from small, medium, to large, it is a manageable cost.

Mr. STUPAK. Mr. Knorr, you want to add.

Mr. KNORR. Yes. We are on a little bit different metric than large

cable operators. The largest systems, the average capacity is

around 750 megahertz. The largest systems serve approximately

100,000 customers per head end, somewhere in that neighbors. And

our customer base, our capacity is almost half that.

Mr. STUPAK. Sure.

Mr. KNORR. Our average system size is closer to 1,000 instead of

100,000. So our head end costs are multiplied, so whereas, you

know, a head end cost for a small operator might be $100 or as

much as $1,000 per subscriber, large cable companies, it is a tenth

or a hundredth of that cost. So it is a significant burden on small

operators, even—no matter what the option is.

In addition to that, we have very, very serious concerns about

how the bill is written, because there is simply not the capacity for

dual carriage on those small systems, and as the bill is written, if

you have to carry the primary signal, that means rural systems in

extreme rural Michigan will be forced to only carry an HD signal,

which means every subscriber would need an HD receiver to receive the signal. If that is the only option, that would be a very significant expense for small cable operators and their customers, significant to the point that many operators would go out of business,

and I think it is an important point that it is not just a matter of

video competition in rural areas. It is also a matter of those companies that are providing broadband services in rural area. So it is

also a digital divide question of those cable companies, if they cease

to exist, in addition to losing video competition, those subscribers

will be losing access to broadband services.

Mr. STUPAK. So is that the main challenge you see in this legislation as drafted, the small cable operators?

Mr. KNORR. I think that is the bullet that is aimed at the head

of the small cable operators is the dual carriage requirements, and

the requirements to carry the primary video signal unmodified, I

think the options that the NCTA is proposing is very important for

small systems is the ability and the option of carrying only the

analog signals to certain constituencies. I think marketplace forces

will take care of the options. Digital signals will still be available

to these customers, if nothing else, through satellite. I mean, that

is, you know, a marketplace force that exists, and if that community has demand for digital services, to be competitive, you will

need to meet that demand.

But on the flipside, if it is a small community, there is not a lot

of HD television sets. That community may be best served by making sure the analog signals are available as cost effectively as possible.

Mr. STUPAK. Well, thank you, Mr. Chairman, and thanks to our

panel. I have been in and out all day for other hearings, but it has

been a good discussion. Thank you.

Mr. UPTON. Mr. Gonzalez.

134

Mr. GONZALEZ. Thank you very much, Mr. Chairman, and I

apologize for coming in late, and then asking a question when everybody has testified and had so many questions, but the question

is really regarding, to Mr.—is it Chessen—Mr. Chessen, and that

is, of course, I come from San Antonio. I represent half of that city.

Spanish speakers predominate, and all studies indicate that those

analog TVs happen to be located in many of the homes occupied by

my constituents who are Spanish-speaking. And the question I

have is what effort have you all made regarding the Spanish-speaking population out there, with these analog televisions, as far as

educating them on what is going to happen, taking any steps,

again, just part of the education process, and what are you doing?

Is there any kind of Spanish language component to address those

needs?

Mr. CHESSEN. We have a major comprehensive consumer education effort that we launched last fall. We have begun outreach to

all segments. Part of what we have been doing, at least segments

of it, are currently in Spanish language. I can’t say that the entire

website at this point is, but certainly elements of it are in Spanish,

and we have continued plans to keep—continue doing outreach to

all segments, and we are meeting with all sorts of constituent

groups, and speaking to different groups, and doing everything we

can within our resources and expertise to try to get the word out

there. And we are making some progress, but obviously, there is a

lot more that needs to be done.

Mr. GONZALEZ. Making reference to websites is just never going

to get out. The message doesn’t get out. Advocacy groups is a good

idea, and utilizing the many that we do have, local, State and of

national significance. So I would like to get back to your office, and

maybe talk to the individual who might be in charge of that specific part of the whole endeavor, and see who they are working

with, and maybe we can suggest some, a couple of different

thoughts on it.

Mr. CHESSEN. Absolutely.

Mr. GONZALEZ. Okay. Thank you very much, and I yield back,

Mr. Chairman.

Mr. UPTON. I am told that Mr. Markey has an additional question, and Mr. Inslee as well. Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman. You know, I remember

back in 1995, when the Republican revolution took over, and there

was a Contract with America. I don’t know if any of you remember

that, but Mr.——

Mr. UPTON. We are still waiting for your signature on it.

Mr. MARKEY. Yeah, Mr. Tauzin—well, my signature wasn’t on it.

That is the point, that there was one item that Mr.—one of the 10

commandments was the Private Property Protection Act of 1995,

and what it said was that any time any private property was reduced by government regulations, that the citizens should be compensated. Mr. Inslee called it a takings. Mr. Tauzin, in that amendment, and I can actually feel the spirit, an analog form of Mr. Tauzin in this room right now. And in fact, he led the charge against

my amendment in 1997, which would have mandated that no TV

set could be sold, beginning in 2001, that couldn’t receive a digital

signal. And so his analog spirit still lives here, but that decision,

135

back in 1997, affects what we are doing right now. If we had done

that then, we wouldn’t even be having this hearing right now. We

would have sold 180 or 200 million of these TV sets by 2008.

Mr. Kimmelman, quickly, I am going to do this very quickly. You

give me a quick answer. Wireless policy. We are kind of coming

down to only a couple of competitors in wireless. What can this

change do to help wireless broadband competition?

Mr. KIMMELMAN. It is very simple, Mr. Markey. You have got to

make sure the two dominant wireless players, Verizon Wireless

and Cingular, owned by SBC and BellSouth, don’t gobble up all the

spectrum that you want to get all the money from through the auctions. You need more players in the wireless market to have competition.

Mr. MARKEY. Okay. Thank you. Mr. McSlarrow, you heard Mr.

Abud talk about Spanish language stations. Could you respond to

the concerns which were raised by Mr. Abud, and how you think

the cable industry can respond to it?

Mr. MCSLARROW. Yeah. I have to say, and I actually tried to persuade him during the break, although I think unsuccessfully, that

we actually have interests in common here. I think the concerns

are perfectly legitimate. My only point would be we have, since we

have a customer base, and a growing customer base, with an interest in either Spanish-speaking television and programming or targeted to that audience, in delivering it.

Now, what we have to remember is the universe of programming

isn’t just Spanish-speaking broadcasts. They also have Spanishspeaking cable networks, and we have things like CTV, which is

English, but directed at a Hispanic audience, but we have Discovery en Espanol, we have History Channel en Espanol. They

don’t have must-carry rights. So my point would be why not allow

all of those programming, networks broadcast to compete in the

marketplace for carriage on a distribution platform that has some

capacity constraints.

Mr. MARKEY. Okay. Let me go back to Mr. Abud quickly.

Mr. ABUD. Quickly. The relationship that the local Spanish language television stations have with their audience is very different

than a national network. We provide them with service, and going

to your point initially about what are we going to be giving in return. We provide a lot of community services, and having additional capacity to everybody is crucial for us to keep providing

those services to the community.

Mr. MARKEY. Thank you, Mr. Abud, very much. By the way,

McCollough, my brother-in-law lives in Palo Alto. He hasn’t got the

word yet. He sent me a brand new, beautiful, 27 inch analog TV

set for Christmas. So he is a very intelligent guy. I didn’t have the

nerve to say I don’t want this. Get me a digital one. You know

what I mean? And I think a lot of people are in that situation. So

together, there is a real consumer issue there, and I appreciate

what you are saying.

Mr. MCCOLLOUGH. That is probably because he probably doesn’t

know when the transition date is.

Mr. MARKEY. He would be shocked. He would be shocked to know

that—he is a very successful lawyer out there.

136

Mr. Goldstein, final question. In your testimony, when we talk

about any eligibility requirements, such as a financial means testing or exclusively free over-the-air, it makes a consumer reimbursement fund both challenging and complex. It is not going to be easy

to figure out how to put together that fund. And if we simply sent

the FCC a set sum of money, say $500 million, and told the FCC

to take care of consumers, that amount of money would be insufficient for making all consumers whole. So the FCC would have to

limit eligibility in some way that ensured that that money was

spent best, but is there a precedent for such a one time program

that you have been able to find anywhere, where an agency was

handed a sum of money, and said, and closed their eyes, then, and

said try to do your best with it.

Mr. GOLDSTEIN. Not that we have been able to find so far. We

have looked at a variety of programs, and we have discussed some

in the testimony in the back, but they are not analogous to what

we are talking about today, really, in terms, potentially, of the

numbers of people, or in the one time approach that we are talking

about here.

Mr. MARKEY. So we are in political terra incognita here. Is

that——

Mr. GOLDSTEIN. It seems that way to us at this point, yes.

Mr. MARKEY. Yeah, this would be a challenge of unprecedented

complexity, especially since, like 43 percent, I think, of food stamp

eligible people don’t even take food stamps, you know. So no matter

what list you use, it is going to be incomplete in terms of the number of people who would potentially be qualified under a subsidy

program that only helped the people who were in the bottom, you

know, 20 or 30 percentile of income, and——

Mr. GOLDSTEIN. It would also have to be a live list, because there

is significant churning in both kinds of lists, both cable lists, if you

were going to try to pay against OTA, as well as in the various subsidy programs, that do offer food stamps and things like that.

There is plenty of people coming on and off assistance programs all

the time.

Mr. MARKEY. Okay. Thank you. Thank you, Mr. Chairman.

Mr. UPTON. Mr. Bass.

Mr. BASS. Thank you. Could you gentlemen all just answer with

a yes, no. December 31, 2008, yes, no. Just go right down the line.

Mr. CHESSEN. We will meet whatever date Congress sets for us.

Mr. BASS. That will not be acceptable from now on.

Mr. GOLDSTEIN. I would have to say yes, but obviously, there are

many challenges that remain.

Mr. SHAPIRO. Yes.

Mr. YAGER. I would say it would be very difficult. Okay.

Mr. MCSLARROW. We will be ready.

Mr. ABUD. We are ready.

Mr. MCCOLLOUGH. Yes.

Mr. KNORR. Yes, but——

Mr. BASS. Next.

Mr. SOUDER. Yes——

Mr. KIMMELMAN. By the way you are phrasing it, I would just

say no, if it costs consumers.

Mr. PITSCH. Yes. Or earlier.

137

Mr. BASS. Fair enough. One last question. Mr. Yager, are there—

is there anything we could incorporate under this bill, any provision, that would provide—I mentioned this in my opening statement, incentives to broadcasters or other parties, perhaps, to convert to digital, sole digital, nothing but digital, earlier than December 31, 2008.

Mr. YAGER. I think, if we got all of the pieces that have been outlined here today, and I heard Congressman Dingell’s kind of questioning of Mr. Goldstein about how you would put a subsidy program together, how we are going to draft this legislation, and that

it could go forward with no hitches, no problems, that we were sure

that the consumer was not going to be deprived of his over-the-air

television, broadcasters are there. We want to——

Mr. BASS. That is not what I asked. If there—I will make this—

if—is there anything we could put into the bill that would have

broadcasters say we want to convert earlier than then. We will

take the heat. We want to convert early.

Mr. YAGER. No. I think the bill is——

Mr. BASS. Nothing we can do about that——

Mr. YAGER. Where it is is very good.

Mr. BASS. It doesn’t need to be improved upon.

Mr. YAGER. Well, it could be improved upon in that one area that

we talked about in terms of the must-carry for small market stations.

Mr. BASS. Anybody else have any other comments. You don’t

have to. Because we just had a vote called. All right. Thank you

very much, Mr. Chairman.

Mr. UPTON. Mr. Inslee, do you have one more question before we

adjourn?

Mr. INSLEE. I just wondered if you think it would be good to have

a—the consumer needing a voucher for $50, or you get a voucher

for $25, but the box will block out the Michael Jackson trial, if that

is the consumer choice here. Mr. McSlarrow, could you respond to

the assertion that the Hispanic community may not be well served

by the cable industry’s down-conversion proposals. Someone has

made that suggestion, I think.

Mr. MCSLARROW. Sure. And I think it is exactly the opposite.

What we were saying is the discussion draft today actually makes

it an option for cable to offer digital only, and digital only including

Spanish-speaking broadcast stations, to a market where we all

know that most of their customers will be analog receivers. We are

the ones who are saying give us the flexibility to offer those stations, so that we can reach the entire market. That is what we

want, because they are our customers, too.

Mr. INSLEE. Thank you.

Mr. MARKEY. Mr. Chairman, if I may, and I appreciate your indulgence. Mr. Goldstein, if instead of ending it on December 31,

2008, we ended it on December 31, 2009, and another 30 or 35 million digital sets were sold in that year, how would that affect the

subsidy that was needed, and the complexity of the distribution of

a subsidy, in terms of the reduced number of people would then

feel that they were eligible or would apply?

Mr. GOLDSTEIN. I am not sure how it would affect the complexity,

if the same kind of eligibility requirements were still being utilized,

138

1Satellite Home Viewer Extension and Reauthorization Act of 2004 (‘‘SHVERA’’), Pub. L. No.

108-447, 118 Stat. 2809 (2004), § Section 204.

whether it—regardless of which kind we have talked about, whether it was over the air or whether it was low-income, but clearly,

the more——

Mr. MARKEY. Would it have a substantial impact on the amount

of money that would have to be part of the subsidy?

Mr. GOLDSTEIN. Well, certainly. If—the more TVs that are digital, the fewer converter boxes we may need to utilize, the better

off we are going to be.

Mr. MARKEY. Okay. Thank you, Mr. Chairman.

Mr. UPTON. So does that mean that it would go under $500 million?

Mr. GOLDSTEIN. I don’t know that yet.

Mr. UPTON. I just want to say, I appreciate all the many hours

by the staff on both sides. Obviously, the members’ involvement,

your preparation, your testimony. We look forward to working with

all of you as we get, for sure the right fix. I might just say to my

friend, Mr. Markey, that I don’t think Brother Barton will be very

happy if this date moves any further than it is. But I won’t tell him

that on the last vote to spoil his Memorial Day break, as we finish

up.

But again, we appreciate your testimony, we look forward to

working with you, and we will adjourn the hearing for the vote.

[Whereupon, at 3:42 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF ECHOSTAR COMMUNICATIONS CORPORATION

EchoStar Communications Corporation (‘‘EchoStar’’) thanks Chairman Upton,

Congressman Markey, and the distinguished members of the Subcommittee for inviting EchoStar to discuss the staff discussion draft of the DTV Transition Act of

2005. EchoStar operates the DISH Network Direct Broadcast Satellite (‘‘DBS’’) service, which provides hundreds of channels of digital video and other programming to

more than eleven million subscribers nationwide.

As a distributor of television programming, EchoStar has long been interested in

the nation’s transition to digital television (‘‘DTV’’) and the benefits the transition

will bring to television viewers including EchoStar’s subscribers. In the last Congress, EchoStar testified in support of the so-called ‘‘digital white area’’ proposal

that was designed to hasten the lagging DTV transition by permitting satellite TV

providers to offer DTV programming to households that are not served with a local

over-the-air digital signal. EchoStar applauds Congress’s passage of the digital

white area provision as part of the Satellite Home Viewer Extension and Reauthorization Act of 2004 last December.1 This law allows consumers, especially those in

rural areas, to receive a network DTV signal via satellite when they cannot receive

one from their local network affiliate over the air.

Congress is recognizing, however, that more may be necessary to get the transition done in an expeditious fashion. And this Subcommittee is accordingly considering today a draft bill that, while extending the transition deadline from December

31, 2006 to December 31, 2008, would make the new deadline a hard one. While

the desire to impose a hard and fast deadline for completing the DTV transition is

understandable, Congress should resist attempts by broadcasters to transfer the

cost of the transition to cable operators and satellite carriers.

EchoStar has documented elsewhere the tremendous burdens that even singlefeed DTV must-carry would mean for satellite distributors. These burdens are significantly greater than the ones for cable operators. This is due to two reasons: first,

DBS is a national service, with a finite amount of spectrum that must serve broad

geographical areas, in contrast with the local headend architecture of cable. Second,

DBS suffers from a spectrum handicap compared to digital cable systems. For these

and other reasons, EchoStar has detailed the constitutional problems that would atVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00142 Fmt 6633 Sfmt 6621 21643.TXT HCOM1 PsN: HCOM1
139

2 In the Matter of Carriage of Digital Television Broadcast Signals: Amendment to Part 76 of

the Commission’s Rules, Second Report and Order and First Order on Reconsideration, CS Docket No. 98-120, FC 05-27 (rel. Feb. 23, 2005) (‘‘FCC Digital Signal Carriage Order’’) (citing United

States v. O’Brien, 391 U.S. 367 (1968), Turner Broad. Sys., Inc. v. FCC, 512 U.S. 622 (1994)

(‘‘Turner I’’), and Turner Broad. Sys., Inc. v. FCC, 520 U.S. 180 (1997 (‘‘Turner II’’)). 3See FCC Digital Signal Carriage Order at ¶ 18 (pointing out that the focus of the governmental interest test in the Turner cases is not the economic health of broadcasting per se, but

the benefits that broadcasting provides to consumers) (citing Turner II, 520 U.S. at 222).

tend any obligation that requires a satellite TV operator to carry all stations in a

market in high definition television (‘‘HDTV’’).

But of course the so-called ‘‘multicast’’ and ‘‘dual must-carry’’ obligations would go

even farther in being inappropriate as a matter of policy and law. EchoStar is referring to any measure that would require multichannel video programming distributors (‘‘MVPDs’’) such as cable and DBS operators to shoulder the burden of carrying

a multiplicity of DTV programming streams for each local DTV broadcaster (known

as ‘‘multicasting’’), or to carry simultaneously both an analog and digital programming stream for each local broadcast station (known as ‘‘dual carriage’’).

Significantly, the Federal Communications Commission (‘‘FCC’’) in February declined to impose either a multicast or a dual carriage requirement because it found

that such requirements would not pass constitutional muster under the O’Brien,

Turner I, and Turner II criteria.2 The FCC’s order on this issue provides an illuminating discussion of why mandatory multicasting and dual carriage are ill advised.

While the staff’s draft of the DTV Transition Act got it right on the multicast

issue, it raises some concerns regarding dual carriage. There is no doubt that mandatory dual carriage would be unconstitutional. It will not further any important

governmental interest as is required by O’Brien, Turner I, and Turner II. As the

FCC found, there is no evidence that a lack of dual carriage will substantially diminish the availability or quality of broadcast signals available to over-the-air subscribers.3 Nor would dual carriage promote diversity among programming voices

since it only entails digital programming that simulcasts existing analog programming. So, even setting aside the burdens from such an obligation, the FCC has already found that there is no compelling government interest that it would advance.

Section 6 of the draft provides that a cable operator may convert a digital signal

to an analog signal so long as the cable operator continues to provide its subscribers

with the digital version of the signal. This flexibility is in fact not necessary for the

distributor. For many years, a sizable proportion of MVPD subscribers will not be

equipped with DTV sets, so allowing dual carriage for popular channels will be in

the interest of the broadcaster anyway. But, in return for this unnecessary flexibility, distributors would appear to become subject to a form of back-door dual carriage, in the guise of a modified dual carry-one-carry-all. Certainly, EchoStar does

not read this draft to impose dual carriage across the board. If a cable operator

makes the analog signal of one retransmission consent local station available to subscribers (as it must in order to provide it to its analog customer), according to

EchoStar’s reading of the law, it need not do the same for all local stations in the

same market. Nevertheless, if a cable operator makes the analog signal of one must

carry local station available to subscribers (as it must if it is to provide it to its analog customer), it must do the same for all must carry stations in the same market.

This is dual must carry. The draft further directs the FCC to adopt similar requirements for satellite television providers, which means that DBS operators such as

EchoStar would become subject to this dual carriage regime. Although DBS systems

are digital, many subscriber set-top boxes are only equipped to receive standard definition television. EchoStar might therefore be forced to dual carriage of certain popular channels to serve its subscribers. It also might be desirable to provide dual carriage of a very limited number of must carry stations. This latter plan would be

thwarted by the bandwidth burden imposed by the draft’s a dual carry-one, dual

carry-all rule. Such a regime would be misguided.

EchoStar would also like to bring to the committee’s attention a very vexing problem endemic to the entire must-carry regime. By requiring the carriage of non-local

and duplicative signals that use up spectrum that could instead be devoted to other

uses, must-carry actually diminishes the ability of satellite television to provide

local service in as many local markets as possible. ‘‘Local’’ stations that merely

broadcast a feed duplicative of a national programming network, such as affiliates

of home shopping networks, are an example of this counter-productive effect of the

must-carry regime. Carriage of such non-local and duplicative programming should

not be required as part of the must-carry regime.

140

For its part, EchoStar is preparing for and attempting to promote the DTV transition by, among other things: offering extensive HDTV packages now; purchasing

satellites, such as its recently announced intention to acquire the Rainbow 1 satellite, which will be used to provide DTV programming; implementing internal system upgrades to enable EchoStar to handle more HD programming; and rolling out

more set-top boxes with HD capability to consumers.

Congress should recognize, however, that the effectuation of the DTV transition

itself will require more spectrum for satellite television services. An HD signal requires significantly more bandwidth than the bandwidth required by a standard definition analog signal. The FCC should make additional spectrum available to direct

to home satellite service, including authorizing service to the U.S. from foreign DBS

slots.

Congress should also acknowledge the reality that DBS operators compress digital

signals in order to maximize the number of programming streams that may be carried, and confirm that such compression does not constitute ‘‘material degradation’’

under the must carry statute. Compression allows us to make the most efficient use

of valuable spectrum resources without degrading signal quality received by our

viewers. Indeed, EchoStar currently uses advanced compression techniques to deliver its current slate of high definition programming without noticeable degradation

in picture quality for its subscribers, and a key underpinning to our future plans

for transmitting high definition programming is the continued ability to use such

advanced technology. Without this technology, EchoStar will simply be unable to

offer a full slate of local broadcasters’ DTV service, and our ability to advance the

digital transition will effectively be negated. However, some broadcasters have demanded that the FCC prohibit the use of compression, equating compression with

‘‘material degradation’’ of the broadcast signal and suggesting that compression is

unnecessary. These assertions are simply wrong.

In conclusion, EchoStar applauds the Subcommittee for deliberating on measures

to effect the expeditious completion of the DTV transition. However, we urge you

not to adopt the misguided dual carry-one, dual carry-all provision in the staff discussion draft.

RESPONSE FOR THE RECORD BY RICK CHESSEN, CHAIR, DTV TASK FORCE, FEDERAL

COMMUNICATIONS COMMISSION, TO QUESTIONS OF REPRESENTATIVE BOBBY L. RUSH

Question 1: How many spectrum auctions has the FCC conducted?

Answer: The Federal Communications Commission (‘‘Commission’’) has conducted

56 spectrum auctions.

Question 2: What is the average time it takes to complete an auction?

Answer: Spectrum-based services that are subject to competitive bidding or any

other license assignment method typically require allocation and rulemaking proceedings conducted pursuant to the Administrative Procedure Act (‘‘APA’’). See 5

U.S.C. § 553. The APA mandates notice and an opportunity for public comment, to

allocate or reallocate spectrum and to establish or modify the rules for the service

to be licensed, which would include whether or not the service is subject to competitive bidding. Once the Commission establishes these rules, the time for conducting

individual auctions varies widely depending upon the complexity of each auction.

Also, the Commission has streamlined and improved its process and procedures

since the initial auctions in 1994, so an average time—from the rulemaking process

through the actual grant of the license—would not present an accurate picture of

a typical auction in recent years. For the 22 auctions that the Commission has conducted since implementing an Internet-based bidding system in 2001, the average

number of bidding days per auction has been 8-9 days (minimum = 1, maximum

= 24), and the average number of calendar days per auction has been 12 days (minimum = 1, maximum = 37). The answer to Question 7 below provides a more thorough timeline of the complete auctions process.

A complete summary of completed and scheduled auctions can be found on the

Commission’s Auctions web site at http://wireless.fcc.gov/auctions/default.htm?

job=auctions—all.

Question 3: How many licenses have been awarded through the auction process?

Answer: Bidders in the 56 auctions held to date have won 28,449 licenses. However, the Commission did not award some of these licenses because some winning

bidders defaulted before the grant of the licensee applications.

Question 4: How many of these licenses have been returned to the FCC due to

nonpayment, licensee failure to build out, or for other reasons?

Answer: Approximately 1,700 licenses of the 28,449 licenses won through the auctions process have been returned to the Commission due to nonpayment, bankruptcy

141

settlements, restructurings conducted by the Commission or failure to meet the

Commission’s build out requirements. Not all of the licenses returned to the Commission include the same amount of spectrum or entire market area originally auctioned because licensees may disaggregate and partition licenses after license grant.

Thus, for some of the licenses, only a portion of the original license won at auction

has been returned. In some cases, licenses were returned voluntarily by the licensees. After licenses are returned, the Commission can auction a new license for the

same spectrum covered by the returned license.

Question 5: How many licensees have declared bankruptcy?

Answer: Thirty licensees with auction-related installment debt have declared

bankruptcy. These licensees won licenses in the following services: 218-219 MHz

Service, Broadband and Narrowband PCS, Multimedia Distribution Service, and the

900 MHz Specialized Mobile Radio Service. Licensees in other auctioned services

have reorganized under bankruptcy (e.g., Worldcom, Teligent, Winstar, Adelphia),

but the Commission was not a creditor in those cases because the licenses won at

auction had already been paid in full.

Question 6: What has the FCC done since the NextWave case to ensure that the

Commission does not find itself in a similar situation when a licensee experiences

financial difficulty?

Answer: In 1997, before any of the court decisions in the NextWave bankruptcy

case (FCC v. NextWave Personal Communications, Inc., 537 U.S. 293 (2003)), the

Commission suspended the use of installment payments. It affirmed this decision

in 2000. This action eliminated protracted payment periods when a winning bidder

could enter bankruptcy or otherwise fail to meet its payment obligations. In addition, since the Supreme Court’s decision in the NextWave case, payment procedures

generally require the deposit of a winning bidder’s final payment 20 business days

after the close of the auction is announced. These payment procedures mitigate the

risk that the Commission will not receive the full amount of the winning bid because of bankruptcy or other reasons. The Commission’s rules do not subject broadcast auctions to this revised payment procedure, but in a Notice of Proposed Rulemaking released on June 14, 2005, the Commission proposed to change its rules to

allow for more discretion in setting post-auction payment deadlines.

Question 7: What steps are involved in an auction? Please provide me with a list

of such steps from planning to when the FCC hands over the license. Please include

an approximate timeline for each step.

Answer:

Overview of Typical Auction Timeline:

• Establishing Allocation and Service Rules—The Commission must first—conduct

a notice-and-comment rulemaking to allocate the spectrum for a particular use

(e.g., satellite, fixed, mobile, broadcasting). The Commission must also conduct

a separate—rulemaking to determine whether the service should be subject to

competitive bidding and to develop rules governing the technical operations for

the service and eligibility for licenses.

• Pre-auction preparation—Standard pre-auction procedures begin after release of

final allocation and service rules for the spectrum to be auctioned. The Commission provides prospective bidders approximately six months from the announcement of a start date to prepare for the bidding to commence. These procedures

include:

• Auction Design Comment Public Notice (‘‘PN’’)—approximately 4-6 months

before bidding start date (seeks comment on auction procedures and provides

3-4 weeks for interested parties to submit comments and reply comments);

• Auction Procedures PN—approximately 3-5 months before bidding start date;

• Bidders’ Seminar—approximately 60-75 days before bidding start date

• Short-form Auction Application (FCC Form 175) Deadline—approximately 45-

60 days before bidding start date;

• Short-form Application Status PN —approximately 10-14 days after shortform deadline;

• Upfront Payment Deadline—approximately 3-4 weeks before bidding start

date;

• Short-form Application Resubmission Deadline—approximately 3-4 weeks before bidding start date;

• Qualified Bidder PN—approximately 10-12 days before bidding start date;

• Qualified Bidders Registration—immediately after release of Qualified Bidders PN;

• Mock Auction—approximately 2-5 days before bidding start date.

The Commission uses this pre-auction process pursuant to the requirements

of Section 309(j)(3)(E) of the Communications Act (added in 1997). The

142

timeline, along with additional explanation, is posted on the Commission’s

Auctions web site at: http://wireless.fcc.gov/auctions/default.htm?job=about—

auctions&page=3

• Duration of Bidding—Length varies depending upon complexity of auction. As

noted in the answer to Question 2, the average number of bidding days since

2001 has been 8-9 days.

• Auction Closing PN—approximately 3-5 days after bidding ends.

• Post-auction payment and award of licenses—Licensing may take as little as two

months for those applications not subject to petitions to deny, designated entity

issues, tribal lands bidding credit requests, or competitive issues. Attachment

A to this document contains a summary of auctions and post-auction processing

times. Licensing steps include:

• Long-form (FCC Form 601) License Applications Deadline—approximately 10

business days after Auction Closing PN is released;

• Down payments due on winning bids—approximately 10 business days after

Auction Closing PN is released;

• Final payments due on winning bids—approximately 10 business days after

down payment deadline (as noted above in response to Question 6, broadcast

auctions have been subject to different procedures and final payments are due

10 business days following the issuance of a ‘‘Ready to Grant’’ PN after the

long-form application has been processed);

• Accepted for Filing PN—approximately 2 weeks after long-forms are filed;

• Petitions to Deny due—10 days after Accepted for Filing PN is released (with

Oppositions due five business days after a Petition to Deny and Replies due

five business days after an Opposition);

• Grant PN—approximately 20 business days after Accepted for Filing PN is

released (assuming no petitions to deny, designated entity issues, tribal lands

bidding credit requests, or competitive issues).

Question 8: At what point can the Federal government count as revenue the proceeds raised from the auction process?

Answer: Consistent with federal accounting standards, the Commission recognizes

auction revenue at the time a public notice is released announcing that the license

has been granted. The Commission transfers funds received from auctions as revenue at the end of the fiscal year in which the license is granted.

Question 9: What is the average amount of time it takes the Commission to count

as revenue proceeds raised from the auction process?

Answer: The Commission recognizes funds received from auctions as revenue at

the end of the fiscal year in which the licenses are granted. The Commission processes long-form applications for licenses won at auction and grants licenses throughout each fiscal year. For all of the licenses granted by the Commission as part of

the auctions program, 35 percent were granted within 120 days, 56 percent were

granted within 180 days, and 96 percent were granted within one year of the end

of each auction. Approximately four percent of licenses granted have taken longer

than one year. These special cases are typically due to circumstances such as Commission investigations into applicant qualifications, requests for waiver of Commission rules, petitions to deny, or delays due to tribal lands bidding credit notifications.

Question 10: What is the amount of revenue that has been generated by spectrum

auctions?

Answer: As of September 30, 2004, the total revenue raised from the Commission’s spectrum auctions is $26.8 billion. As of that date, more than $16.5 billion

in actual receipts have been deposited into the U.S. Treasury.

Question 11: How many licensees have yet to build out in their license areas?

Answer: Commission licensees that have won their spectrum through auctions

have complied with the build out rules 98 percent of the time. If construction does

not occur by deadline, the license may be terminated and re-auctioned.

It is important to note the differences in build out rules for the wide variety of

services subject to auction because the Commission adopts particular construction

rules, benchmarks, and timeframes for each different service. In terms of timing,

the Commission requires some licensees to undertake initial construction early or

mid-way through their license terms, and provide for further construction by the expiration of the first license term. Rules applicable to other services require licensees

to construct by the expiration of the first license term, and some licensees have construction permits requiring construction over a relatively short period of time. For

licenses won at auction since the inception of the auctions program, some have construction deadlines that have already passed, while others have construction deadlines occurring months or years from now.

143

Also, there are a number of rule variations defining construction. Construction requirements include population-based (i.e., a certain percentage of the population of

the licensed area must be covered), geographic-based (i.e., a certain percentage of

the geographic area of the licensed area must be covered), a substantial service requirement (which is neither a bright-line population-based nor geographic-based requirement), and in the broadcast case, the requirement to construct facilities in the

manner described in their application at a particular site.

Question 12: How has the auctioning of spectrum served the public interest?

Answer: The Commission manages the auctions program pursuant to Congressional directive. Congress first authorized spectrum auctions in the Omnibus Budget

Reconciliation Act of 1993, (Pub.L. No. 103-66), amending the Communications Act

of 1934 (auction authority is codified at 47 U.S.C. § 309(j)). Congress later amended

this section of the code in the Balanced Budget Act of 1997 (Pub.L. 105-33; Aug.

5 1997) to expand and extend the Commission’s auction authority. Legislative history indicates that Congress sees this program as an important option for licensing

a limited national resource.

The auctioning of spectrum has led to the ubiquitous rollout of spectrum to licensees that have a financial stake in the rapid delivery of new services. This method

of assigning spectrum is more efficient and less time consuming than past licensing

regimes such as comparative hearings where licensing decisions sometimes took

years to resolve. The Commission’s ability to license spectrum quickly and efficiently

spurs competition, leads to the development of new technologies, and aids in the

growth of the telecommunications sector.

In addition, auctions serve the public interest goal of transparency and objectivity

in government processes—the Commission publishes precise bidding procedures and

each bidder begins the process knowing that the highest bid will result in a license.

Finally, spectrum auctions return a portion of the value of the public spectrum resource to the United States Treasury. To date, auctioning spectrum has raised more

than $26 billion.

Question 13: Has the auction process resulted in the spectrum being used in the

most productive way?

Answer: This past September, the Commission adopted its Ninth Annual Report

and Analysis of Competitive Market Conditions with Respect to Commercial Mobile

Services, an annual report required by the Omnibus Budget Reconciliation Act of

1993. The information in this annual report demonstrates the impact of the auctions

process. By the end of 2003, there were approximately 161 million mobile telephone

subscribers, up from 16 million for year end 1993. At the same time, the average

revenue per minute, a proxy for price per minute, dramatically decreased over that

time from $0.44 in 1993, to $0.29 in 1998 and to $0.09 at year end 2003. In addition,

the monthly minutes of use by mobile telephone users dramatically increased from

119 minutes in 1993, to 185 minutes 1998 and 507 minutes in 2003.

Question 14: What is the FCC doing to ensure that spectrum is being used in the

most efficient manner?

Answer: The Commission uses several mechanisms for ensuring that spectrum is

used in the most efficient manner. In circumstances where competitive bidding for

spectrum licenses is required, the Commission has designed its competitive bidding

mechanisms and service rules to serve several public interest objectives, including,

but not limited to, the efficient and intensive use of the public spectrum resource.

The Commission seeks to assure that licensed spectrum is put to its highest and

best use based largely on the demands of the market and available technology. Licensees that have paid full value for spectrum licenses at auction or in the secondary market have every incentive to make the most efficient use of the spectrum,

consistent with the particular rules of each service, the capabilities of existing technology, and the physical characteristics of the authorized frequencies being used.

In other radio services that have not been subject to competitive bidding (e.g., private land mobile, public safety, and international satellite services), the Commission

has adopted specific service and technical rules and licensing procedures that enhance efficient use. These rules are designed to ensure timely construction of facilities and to provide licensees with adequate spectrum for their stated purposes or

pursuant to regional planning. They also achieve efficiency by, for example, mandating narrowband or other spectrally efficient technologies that use less spectrum.

Flexible secondary market policies also allow licenses in certain services to be

freely transferred to other qualified entities under new streamlined procedures. In

satellite and broadcast services, the Commission determines the specific amount of

spectrum to allocate for the stated purposes imposes strict construction milestones

and imposes financial qualifications or bonding requirements. In authorizing the use

of unlicensed devices in many frequency bands, the Commission’s Part 15 rules enVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00147 Fmt 6633 Sfmt 6621 21643.TXT HCOM1 PsN: HCOM1
144

sure that many low power devices can effectively share the spectrum without causing harmful interference to each other or licensed uses.

Question 15: Would greater flexibility in the FCC’s authority to issue licenses result in greater diversity of license holders?

Answer: The Commission’s current authority under Section 309(j) of the Communications Act provides discretion to achieve the statutory objectives put in place in

1993 to promote economic opportunity, avoid excessive concentration of licenses and

to disseminate licenses among a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority

groups and women.

As noted below in response to question 18, the Commission has promoted participation in auctions by women, minorities and small businesses through the offer of

bidding credits to small entities and new entrants and the designation of small geographic license areas.

Question 16: Does the FCC want to see the auction process reauthorized? If so,

what improvements does the FCC think should be made to the auction program?

Answer: The decision to reauthorize the auctions process is a policy decision

squarely within the purview of Congress. The Commission’s experience over the last

12 years demonstrates that the auctions process is a speedy, efficient mechanism

for deploying spectrum. Auctions have assigned quickly licenses to the parties that

value them most highly and facilitated efficient aggregation of spectrum, which has

encouraged rapid deployment of service and permitted increased competition among

service providers. The auctions process has proved to be a fair, objective, open, and

transparent process that, as of September 30, 2004, has resulted in the recognition

of $26.8 billion to the U.S. government.

If auction authority terminates in 2007, as currently provided by statute, the

Commission would lose an important tool for resolving mutually exclusive applications and recovering a portion of the value of the spectrum for the public.

The current statutory framework governing auctions has permitted the program

to evolve and successfully meet new challenges since the inception of the program.

The flexible nature of the current statutory framework would allow the Commission

to adapt the auctions program to technological and industry changes.

Question 17: How many women, minorities, and small businesses have been

awarded licenses through the auction process?

Answer: The Commission has not required applicants to report statistics on these

issues since the Supreme Court’s decision in Adarand Constructors, Inc. v. Pen ̃a, 515 U.S. 200 (1995) (‘‘Adarand’’) (holding that all racial classifications, imposed by

federal, state, or local governmental actor, must be analyzed by a reviewing court

under strict scrutiny).

During the pre-Adarand period, the Commission held four auctions in which it offered 733 licenses. In all, there were 64 minority-owned bidders that won 200 licenses, 73 women-owned bidders that won 292 licenses, and 16 bidders owned by

minority women that won 59 licenses. There were also 171 small businesses that

won 578 licenses. During the post-Adarand period, the Commission has conducted

52 auctions, through which 27,716 licenses were sold. The Commission’s FCC Form

175 short-form application requests that applicants voluntarily report whether they

are minority- or women-owned. Based on voluntary self-reporting, in the 52 auctions

conducted since Adarand, there have been 115 women-owned bidders that won 846

licenses, 122 minority-owned bidders that won 832 licenses, and 35 bidders owned

by minority women that won 258 licenses. There have also been 1,094 small businesses that won 15,428 licenses.

Question 18: What is the FCC doing to ensure that women, minorities and small

businesses are able to successfully participate in the auction process?

Answer: The Commission employs a number of measures to promote the successful participation of women, minorities and small businesses in the auctions process.

These measures include the following:

• Bidding credits: The Commission offers bidding credits to small businesses in

most of its auctions (or to ‘‘new entrants’’ in auctions for broadcast construction

permits). • Band plans and geographic license areas: The Commission adopts different band

plans and geographic license areas for different wireless services. The Commission frequently considers and adopts relatively small spectrum blocks and geographic license areas so that smaller entities need not bid on licenses for more

spectrum or larger geographic areas than their business plans require.

• Available tools and support: The Commission’s bidding system is a user-friendly

Internet based bidding system (specifically designed for novice bidders). The

Commission also makes available dedicated staff to address the specific needs

of small bidders by telephone, fax, e-mail, or Internet as well as in person at

145

1 Under 2% of households are able to view over-the-air digital signals. Comments of the National Association of Broadcasters and the Association for Maximum Service Television, Inc.,

Over-the-Air Broadcast Television Viewers, FCC MB Docket No. 04-210, August 11, 2004, at Attachment A, p. 5, and Eric A. Taub, ‘‘High Maintenance TV,’’ The New York Times, June 24,

2004. Though many cable and satellite customers receive some digital broadcast signals through

their subscription services, these households do not count towards the 85% unless the video provider includes all digital broadcast channels available in their respective markets. Cable and

Continued

a free bidder seminar before each auction. Commission staff can provide stepby-step instruction regarding upcoming auctions; the auctions process; completion of auction applications; bidding procedures; and post auction processes. In

addition, the Commission conducts outreach and education initiatives directed

toward small bidders.

Question 19: Of the original C-block licenses awarded, how many of the licenses

remain in the hands of the original small business licensees?

Answer: In September of 1996, the Commission granted most of the original 493

C block licenses to 89 eligible entrepreneurs and small businesses for a ten year

term. NextWave received 63 of these licenses. The Commission’s rules prohibited

the original C block license winners from transferring their licenses to non-entrepreneurs within the first five years of the license term unless the licensee met the

build out requirements. At this time, nine years after the initial license grant, seventeen of the original 89 licensees still hold a total of 62 licenses.

Question 20: What is the FCC doing to ensure that there is true diversity of licensees in the upcoming FM auction?

Answer: FM Auction No. 62 procedures are designed to promote the broadest possible participation in the November 2005 auction for 172 vacant FM allotments. The

rules provide bidding credits of 35 and 25 percent to applicants that qualify as new

entrants with no attributable interest in any other media of mass communications

or attributable interest in no more than three mass media facilities, respectively.

During the auction, the rules require applicants to report diminishments in their

eligibility bidding credits so that those entities which qualify for new entrant bidding credits will have full and timely bidding information about their competitors.

In addition, the Commission will take the usual steps to help educate potential

bidders about auctions procedures. Commission staff will hold an auction seminar

on July 27, 2005, immediately prior to the opening of the short form filing window.

The Commission also will make available a webcast of this event for those not able

to attend. Commission staff will hold a ‘‘mock’’ auction on October 28, 2005 for

qualified bidders. As part of the outreach for this specific auction, the Commission

exhibited at the National Association of Broadcasters (NAB) Radio Show last fall

and again at the NAB National Convention this past April. The Commission also

plans to advertise in the July issues of Radio World Magazine and Radio & Television Business Report. These events and publications have a diverse, extensive audience that caters to both large and small bidders alike.

Analysis of an Accelerated Digital Television Transition

COLEMAN BAZELON, VICE PRESIDENT, ANALYSIS GROUP

MAY 31, 2005

This paper was sponsored by Intel Corporation.

I. INTRODUCTION AND SUMMARY

Television broadcasting in the United States is currently undergoing a transition

from analog to digital transmission. A shift to digital television (‘‘DTV’’) broadcasts

not only provides viewers with more and better viewing options, but it frees a portion of the spectrum used by analog broadcasts for new uses. More specifically, the

eventual end of analog broadcasts has already prompted the FCC to reorganize the

108 MHz of prime spectrum used by television channels 52 to 69. Under current

rules, however, incumbent analog broadcasters could continue to operate in this

spectrum—and thus prevent full use of the spectrum for new services—for many

years to come.

This report presents and analyzes a generic proposal (‘‘the Proposal’’) to accelerate

the DTV transition. Under current law, analog signals will not be turned off until

85% of households in a given market qualify as DTV households. Less than 2% currently do.1 At the heart of the Proposal is a plan to replace the 85% benchmark with

146

satellite systems have no obligation to carry digital broadcast signals as long as the analog signals remain. See Congressional Budget Office, Completing the Transition to Digital Television,

September 1999 (‘‘1999 CBO Report’’). 2See, e.g., Federal Communications Commission, Historical Periods in Television Technology:

1880-1929 (http://www.fcc.gov/omd/history/tv/1880-1929.html). 3See, e.g.,1999 CBO Report.

4See, Congressional Budget Office, ‘‘The Scope of High-Definition Television Market and Its

Implications for Competition,’’ CBO Staff Working Paper, July 1989. 5The spectrum of would-be channel 37 is reserved for radio astronomy.

7Telecommunications Act of 1996, S. 652, 104Congress. 8 Balanced Budget Act of 1997, H.R. 2015, 105Congress.

a firm date for ending analog broadcast signals, thus freeing the 108 MHz of spectrum, including 60 MHz that still awaits auction. To make this hard shut-off date

feasible, the Proposal includes a plan for supplying households that rely on overthe-air TV broadcasts with the converter boxes necessary for viewing digital broadcasts on analog television sets.

The Proposal will create significant value. The costs of implementing the proposal

would be modest compared to the value created. Supplying households that rely exclusively on over-the-air broadcast signals with set-top converter boxes would likely

cost no more than $1 billion.

The current market value of licenses to use the unsold 60 MHz would be $20 billion to $24 billion if the Proposal were enacted. (The net budget impact would be

less: from $16 billion to $19 billion on the low end and from $20 billion to $23 billion

on the high end.) These estimates of the spectrum’s value are dwarfed by the social

value of the Proposal, which would be an estimated $233 billion to $473 billion.

II. BACKGROUND ON THE DIGITAL TELEVISION TRANSITION

Since the first television license was issued by the Federal Radio Commission in

1928, TV stations have used analog signals—in which a moving image’s electrical

impulses are converted to radio waves—to broadcast their programming.2 In recent

years, new DTV technology has enabled broadcasters to digitize the signals before

transmitting them over radio waves.

A widespread transition to digital transmission brings with it numerous benefits.

It can bring the nation’s over-the-air TV viewers a clearer picture, a greater quantity of programming, and a variety of new services. Most significant, because DTV

broadcasts require less idle spectrum as a buffer between signals, a large section

of highly valuable bandwidth in the 700 MHz band of spectrum (‘‘the 700 MHz

Band’’) can be made available for other commercial and public safety uses. The

newly freed spectrum could be used to deliver a variety of advanced wireless services for which there is growing demand, such as wireless broadband. Consequently,

any efforts to hasten a transition to DTV will create significant value for society.

Both viewers and broadcasters require additional equipment before DTV can take

hold. Viewers who rely on over-the-air broadcasts need equipment that is capable

of receiving the digital signals, whether a TV with a built-in digital tuner or a settop converter box that enables the display of a digital signal on an analog TV set.

Broadcasters must make significant investments to upgrade their transmission facilities. Neither viewers nor broadcasters, however, have an incentive to invest without the participation of the other.3 With this fact in mind, the Federal Communications Commission (FCC) has been managing a transition to nationwide DTV broadcasting for almost 20 years.4

Currently, analog television licensees in the United States broadcast their signals

over channels numbered 2 through 69.5 Each channel corresponds to a 6 MHz block

of spectrum in the 54 MHz to 806 MHz range. The Telecommunications Act of 1996

granted an additional digital channel to each analog television licensee, requiring

that each station begin digital broadcasts while phasing out analog broadcasts.6 The

Balanced Budget Act of 1997 then specified the conditions under which a complete

transition to DTV would take place. Most important, it established that the FCC

would reclaim all analog licenses in any market in which 85% of TV households

were able to receive DTV signals at the end of 2006.6 Markets that did not reach

the 85% threshold would continue broadcasting both analog and digital signals until

the threshold was met.

According to the existing plan, once the analog broadcasts have been turned off,

the digital channels in the 700 MHz Band, channels 52 to 69, will be transferred

to the ‘‘core spectrum’’ in the 54 MHz to 698 MHz range. This can be done because

‘‘digital TV signals tolerate interference better than analog signals,’’ and thus ‘‘more

DTV stations can be fitted into less spectrum than the analog stations would ocVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00150 Fmt 6633 Sfmt 6621 21643.TXT HCOM1 PsN: HCOM1
147

8 1999 CBO Report, p. vii. 9Letter from Charles C. Townsend, Aloha Partners, L.P., to the Honorable Joe Barton, Chairman, Committee on Energy and Commerce, U.S. House of Representatives, et al., April 27, 2005.

See also Testimony of Patrick P. Gelsinger, Chief Technology Officer and Senior Vice President,

Intel Corporation, before the Committee on Commerce, Science and Transportation, U.S. Senate,

June 9, 2004. 10 Although 24 MHz of the spectrum have been auctioned to private users, some have returned

their licenses to the FCC. Only about 20 MHz remain in private hands.

cupy.’’ 8 Ending the DTV transition and clearing channels 52 to 69 would free the

entire 700 MHz Band of spectrum for valuable commercial and public safety uses.

The 700 MHz Band consists of 108 MHz of spectrum in two distinct segments:

a ‘‘lower’’ band, which consists of TV channels 52-59 (‘‘the Lower 700 MHz Band’’),

and an ‘‘upper’’ band, which consists of channels 60-69 (‘‘the Upper 700 MHz Band’’).

See Figures 1 and 2 (next page). Both possess favorable characteristics that distinguish them from other spectrum bands. Foremost among these is that radio signals

in the 700 MHz Band travel farther for a given amount of radiated energy, which

can reduce infrastructure costs by as much as half as compared to the 1.9 GHz band

or three-quarters in comparison to the 2.5 GHz band.9

As shown in Figures 1 and 2, of the 108 MHz of total spectrum, 24 MHz is assigned to public safety users, another 24 MHz has been assigned by auction,10 and

60 MHz still awaits auction. New, non-TV license holders in the 700 MHz Band are

currently free to use their spectrum, but only if they do not interfere with existing

analog television broadcasters. The broadcasters’ signals have priority over new

spectrum uses and thus encumber most of the spectrum in the 700 MHz Band.

Table 1 shows the number of existing broadcasters in the 700 MHz Band. The

broadcasters’ continued encumbrance of the spectrum greatly reduces its value.

When the FCC auctioned the C & D blocks in the Lower 700 MHz Band, for example, the licenses sold at enormous discounts to comparable spectrum license prices.

Major blocks in both bands—the A, B, and E blocks in the Lower 700 MHz Band

and the C and D blocks in the Upper 700 MHz Band—remain unassigned. The

value of this combined 60 MHz of spectrum under an accelerated transition to DTV

is the focus of this paper.

TABLE 1. TELEVISION ENCUMBRANCE BY BAND AND LICENSE TYPE

Band Digital

Licensees

Analog

Licensees

Total

Licensees

Licensees

per Channel

Lower 700 MHz .............................................................................. 59 116 175 21.9

Upper 700 MHz .............................................................................. 9 96 105 10.5

Total ............................................................................................... 68 212 280 15.6

Source: FCC TVQ TV Database, available at http://www.fcc.gov/mb/video/tvq.html.

III. A PROPOSAL TO ACCELERATE THE DTV TRANSITION

This report will evaluate a generic proposal (‘‘the Proposal’’) to accelerate the DTV

transition. The Proposal has the following key components:

• Analog stations would cease broadcasting no later than December 31, 2008.

• Households that rely exclusively on over-the-air broadcasting could be eligible to

receive a set-top converter box or other compensation tied to a set-top converter

box. Eligibility of over-the-air households could be related to income.

• Auctions for the Lower 700 MHz Band A Block, B Block, and E Block and the

Upper 700 MHz Band C Block and D Block (collectively referred to as the ‘‘Auction Bands’’) would begin no later than April 1, 2008.

• The Auction Bands would be ‘‘liberally licensed’’, meaning that licensees would be

constrained only by non-interference requirements when deciding how to use

their licenses.

IV. THE VALUE OF THE PROPOSAL

An accelerated DTV transition will increase the market value of the spectrum in

both the Lower 700 MHz Band and the Upper 700 MHz Band. It will also likely

raise additional revenues for the federal government and create significant social

value.

For purposes of this analysis, it is useful to divide the spectrum in the 700 MHz

Band into three categories: the privately held bands, the public safety bands, and

the Auction Bands. The latter refers to the 60 MHz of spectrum awaiting auction

and is the focus of the valuation analysis below.

148

11 $1.63 per MHz-Pop * 60 MHz * 296 million pops = $29 billion, but the Townsend analysis

rounds that to $30 billion. Throughout this paper, I use 296 million as the estimate of U.S. population. This is interpolated for 2005 based on the Census Bureau’s 2004 population estimate

of 293.7 million and 2010 forecast of 308.9 million. See intercensal estimates and interim projections from U.S. Census Bureau. 12 Ultimately, the Congressional Budget Office (‘‘CBO’’) will score specific legislative proposals.

The analysis in this section is only an estimate of what the CBO analysis could be.

The independent estimates reviewed in this section do not account for the cost of

the Proposal. (See Section V for estimates of the cost of the Proposal.)

A. The market value of the radio spectrum

The Proposal will enhance the value of all 108 MHz of spectrum in the 700 MHz

Band by removing the current encumbrances in that band. The degree to which the

value of a particular allocation or license is enhanced depends on the degree to

which full-power broadcast licensees currently prevent the use of the spectrum.

Two independent estimates of the market value of the Auction Bands have recently been produced. See Table 2. The first estimate, by William P. Zarakas and

Dorothy Robyn of The Brattle Group, is based directly on market comparables, including two major sales of broadband PCS (1.9 GHz) licenses in 2005 and the FCC’s

2004 valuation of rights to 10 MHz of spectrum in the 1.9 GHz band. Zarakas and

Robyn estimate that licenses for the Auction Bands would sell for $1.65 per MHzPop, or $28 billion in total. They argue that the prices paid for broadband PCS licenses in 2005 reflect the market’s expectation that a significant increase in supply

is imminent. Thus, they conclude that there is no reason to believe that the auction

of 90 MHz of Advanced Wireless Services (‘‘AWS’’) spectrum, which the FCC has

said will occur as early as June 2006, will cause the price of the 700 MHz spectrum

to drop significantly. They also argue that, to some extent, the market has anticipated the increase in supply from the 700 MHz Band, and that downward pressure

on price from the unanticipated increase likely would be offset by technical advantages of the 700 MHz Band.

The second estimate, prepared by Charles C. Townsend of Aloha Partners, L.P.,

also reviews auctions and recent transactions. This analysis concludes that the current value of the spectrum is $1.63 per MHz-Pop. The analysis further estimates

that the increased supply of spectrum expected in the next few years might reduce

prices by as much as 33%, implying that auction bids could average $1.10 per MHzPop. Townsend discounts the lower number because he believes that increased demand for spectrum based services will mitigate the effects of increased supply of

spectrum licenses. At these projected prices, the estimated revenues from the 60

MHz of the Auction Bands would be between $20 billion to $30 billion.11

TABLE 2. MARKET VALUE ESTIMATES OF 60 MHZ IN THE 700 MHZ BAND

Source Price per MHz-Pop Auction Revenues

Brattle Group ..................................................................... $1.65 ........................................ $28 Billion

Aloha Partners ................................................................... $1.10 to $1.63 ......................... $20 Billion to $29 Billion

Source: Letters from William P. Zarakas and Dorothy Robyn, The Brattle Group, and Charles C. Townsend, Aloha Partners, L.P., to the Honorable Joe Barton, Chairman, Committee on Energy and Commerce, U.S. House of Representatives, et al., May 18, 2005 and April 27, 2005,

respectively.

Supply effect. An accelerated DTV transition will increase the total amount of liberally licensed spectrum available. With a greater total supply of licensed spectrum,

the price of spectrum would be expected to fall. The Brattle Group argues that the

market has partially anticipated the increase in supply from the 700 MHz Band

(and has fully anticipated the supply effect of the planned AWS auction), and that

other factors will offset the unanticipated increase. Aloha Partners provides an estimate that takes into account the potential effect of increased supply, although that

analysis discounts the probability of that outcome and places more weight on estimates of current market valuations. Nevertheless, I take a more conservative approach and assume that the price of spectrum will fall with the increased supply

of spectrum from the 700 MHz Band.

The impact on price of an increase in the quantity of spectrum available can be

estimated by applying the concept of elasticity.12 An elasticity measures the ratio

of the percentage change in quantity to a given percentage change in price. As an

approximate example, an elasticity of demand of -3 implies that a 10% decrease in

price would induce a 30% increase in quantity demanded at that new price. Likewise, an elasticity of demand of -0.5 would imply that a 5% increase in supply would

require a decrease in price of 10% to induce enough increased demand to meet that

149

new supply. The advantage of using elasticity to characterize the relationship between price and quantity changes is that it is unit-free; elasticity does not depend

on the units used to measure price ($, £, Yen) or quantity (kHz, MHz, GHz).

I am not aware of any direct estimates of the elasticity of demand for spectrum.

Nevertheless, some existing evidence can be used to point to a reasonable value of

the elasticity of demand for spectrum. The demand should be at least as elastic as

the demand for spectrum-based services such as mobile telephony. This means that,

in general, one would expect demand for spectrum to be at least as responsive to

a change in the price of spectrum as the demand for mobile telephony would be to

a change in the price of mobile telephony. I estimate the elasticity of demand for

spectrum to be -1.2. (See Appendix.)

In this analysis, I use the elasticity measure to recover the percentage change in

price from a given change in quantity. The Proposal will increase the total supply

of liberally licensed spectrum by 78 MHz. This includes the 60 MHz of the Auction

Bands and the 18 MHz of the previously auctioned C Block and D Block in the

Lower 700 MHz Band.

The existing base of spectrum includes current allocations and expected future allocations. The expected likelihood of any future allocation depends on many factors.

In Table 3 below, I list current and future allocations and put subjective probabilities next to the future allocations. The AWS and Broadband Radio Service/Educational Broadband Service (‘‘BRS/EBS’’) allocations were well known when the

comparables used above were established, and they are expected to be useful allocations and thus have fairly high probabilities associated with them. The BRS/EBS

licenses that allow high powered operations are less likely to be useful for new services and therefore have a lower probability attached to them.

The 78 MHz of privately licensed spectrum affected by the Proposal represents a

20% increase in the supply of spectrum. This estimate is derived by dividing 78

MHz by an expected base of liberally licensed private spectrum of 390 MHz.

TABLE 3. BASE OF LIBERALLY LICENSED PRIVATE SPECTRUM

Band Name Location MHz Available Probability

PCS ......................................... 1.9 GHz ................ 120 MHz ............... Now .............................................. 1.0

Cellular ................................... 800 MHz ............... 50 MHz ................. Now .............................................. 1.0

SMR ........................................ 800 MHz/900 MHz 14 MHz+5 MHz ..... Now/Within a few years .............. 1.0

Nextel 1.9 GHz ....................... 1.9 GHz ................ 10 MHz ................. Now/Very soon ............................. 1.0

BRS/EBS-low 1 ........................ 2.5 GHz ................ 132 MHz ............... Within a few years ...................... 0.8

BRS/EBS-high 2 ...................... 2.5 GHz ................ 42 MHz ................. Within a few years ...................... 0.1

AWS ........................................ 1.7 GHz/2.1 GHz ... 90 MHz ................. Within a few years ...................... 0.9

Total MHz ............. 463 MHz ............... Total probability-weighted MHz 390 MHz

1 Includes low-powered licenses only.

2 Includes high-powered licenses only.

Sources: Congressional Budget Office, Where Do We Go From Here? The FCC Auctions and the Future of

Radio Spectrum Management, April 1997; FCC Wireless Telecommunications Bureau, Cellular Services (http://wireless.fcc.gov/

services/cellular/); FCC Wireless Telecommunications Bureau, 900 MHz SMR (http://wireless.fcc.gov/smrs/900.html); Improving Public Safety

Communications in the 800 MHz Band, Report and Order, Fifth Report and Order, Fourth Memorandum Opinion and Order, and Order, 19 FCC

Rcd 14969 (2004); FCC Wireless Telecommunications Bureau, BRS & EBS Radio Services (http://wireless.fcc.gov/services/brsebs/); Amendment

of Part 2 of the Commission’s Rules to Allocate Spectrum Below 3 MHz for Mobile and Fixed Services to Support the Introduction of New

Advanced Wireless Services, Including Third Generation Wireless Systems, Second Report and Order, 17 FCC Rcd 23193 (2002).

Using the elasticity measure of 1.2 and the quantity increase of 20% implies a

price decrease of 17%. My revised market value estimates of the 700 MHz band are

presented in Table 4. The lower estimate reported by Aloha Partners is already adjusted for the effect of increased supply and does not require a further adjustment.

TABLE 4. REVISED MARKET VALUE ESTIMATES OF 60 MHZ IN THE 700 MHZ BAND

Source Revised Price per MHz-Pop Revised Auction Revenues

Brattle Group ....................................................................... $1.37 $23 Billion

Aloha Partners ..................................................................... $1.10 to $1.35 $20 Billion to $24 Billion

B. The budgetary value of the Proposal

In the case of the 700 MHz Band, estimated auction revenues do not translate

directly into increased revenues in the federal budget. Auction design can have a

significant impact on the proportion of the value of a spectrum license that is paid

to the federal government. Throughout this analysis, I assume a well designed auction that extracts most of the value of the spectrum for the government. In any case,

150

13 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2006 to 2015,

January 2005, p. 62. 14 $15 billion/(90 MHz * 296 million pops). 15 Amendment of Part 2 of the Commission’s Rules to Allocate Spectrum Below 3 GHz for Mobile and Fixed Services to Support the Introduction of New Advanced Wireless Services, including

Third Generation Wireless Systems, Sixth Report and Order, Third Memorandum Opinion and

Order, and Fifth Memorandum Opinion and Order, 19 FCC Rcd 20720 (2004). 16 $1.10 per MHz-Pop * 90 MHz * 296 million pops = $29 billion, and $1.65 per MHz-Pop * 90 MHz * 296 million pops = $44 billion. 17 $15 billion * 0.17 = $3 billion. Alternatively, applying the Aloha Partners estimate of a potential 33% supply-induced decrease in price to the CBO baseline would imply a decrease in

revenues of $5 billion. But using that larger decrease would be consistent only with the higher

Aloha estimate for the 60 MHz of $23 billion. 18 $1.10 per MHz-Pop * 90 MHz * 296 million pops = $29 billion and $1.37 per MHz-Pop *

90 MHz * 296 million pops = $36 billion.

estimated auction receipts must be reduced to account for 1) the costs involved in

removing incumbents from the spectrum and 2) decreased revenues from auctions

already included in budget estimates.

Cost of the proposal. The Proposal is estimated to cost the federal government no

more than $1 billion. (See Section V.)

Baseline spectrum prices. Increasing the expected supply of liberally licensed private spectrum by 60 MHz will decrease the price of spectrum. This lower price will

affect the revenues expected in other auctions.

The CBO budget baseline is an estimate of all federal receipts and expenditures.

It includes all revenues from spectrum auctions expected under current law. The

CBO budget baseline provides for incidental auctions totaling less than $1 billion,

and it includes the following statement:

The auction of rights to use portions of the electromagnetic spectrum constitutes another source of offsetting receipts. Such auctions are expected to

continue until the Federal Communications Commission’s (FCC’s) authority

expires at the end of 2007. CBO assumes that the FCC will auction at least

90 megahertz of spectrum for advanced wireless services sometime in 2006

and 2007. Those auctions will bring in about $15 billion through 2015, with

the receipts being tallied in 2007 and 2008.13

Implicit in the CBO budget baseline estimate is the assumption that the auction

will net the government approximately $0.56 per MHz-Pop.14 This price associated

with this spectrum does not necessarily reflect the price that will be paid at auction.

The CBO does not specify which bands of spectrum are included in the baseline

estimate, but a likely candidate is the 90 MHz of AWS spectrum that consists of

45 MHz at 1.7 GHz paired with 45 MHz at 2.1 GHz.15

If the 90 MHz of spectrum in the CBO baseline were priced at the market values

reported in Table 2, the $1.10 per MHz-Pop to $1.65 per MHz-Pop would translate

into $29 billion to $44 billion in expected revenues under current law.16 The implied

price in the CBO baseline of $15 billion is substantially below that range of value

estimates. CBO does not make the details of its baseline public, so it is impossible

to know which other factors it includes in its estimate. One possible source of a discount could be the rules governing the clearing of federal users from the AWS band,

rules that could delay indefinitely the full availability of the band to the new licensees. Consequently, we do not know what base price of spectrum, prior to the supply

increase created by the Proposal, CBO is using for its estimate of receipts under current law.

Price impact of an increase in supply. The previous analysis of how increased supply would affect price also applies to the 90 MHz in the CBO baseline.

CBO has not estimated the impact that receipts from the sale of the Auction

Bands would have on baseline revenues. Nevertheless, the analysis of elasticities

applies equally to the implicit CBO baseline numbers. A 20% increase in spectrum

and an elasticity of 1.2 implies a 17% decrease in the price of spectrum. If the CBO

baseline is $15 billion for 90 MHz, then the decrease in those revenues associated

with the additional 60 MHz of the Auction Bands would be $3 billion.17

If the Proposal were implemented, based on the valuations reported in Table 4,

the value of the 90 MHz of spectrum would decrease to $1.10 per MHz-Pop to $1.37

per MHz-Pop, implying expected revenues of $29 billion to $36 billion.18 This is $14

billion to $21 billion more than the CBO baseline estimate for this spectrum. The

CBO is not free to increase its baseline during the legislative budget process. Therefore, the significant difference between the supply-adjusted market value of the 90

MHz and its lower estimated revenues in the baseline could justify ignoring the $3

billion adjustment to the current CBO baseline discussed above.

151

19Thomas W. Hazlett and Roberto E. Mun ̃ oz, ‘‘A Welfare Analysis of Spectrum Allocation Policies,’’ Manhattan Institute for Policy Research, June 10, 2004, p. 17. 20 18 = ($24 billion/0.05)/($27 billion). See Thomas W. Hazlett and Roberto E. Mun ̃ oz, ‘‘A Welfare Analysis of Spectrum Allocation Policies,’’ Manhattan Institute for Policy Research, June

10, 2004, p. 17.

Net budget impact. The Proposal’s net impact on the budget would be $16 billion to $20 billion. See Table 5. This includes $20 billion to $24 billion in auction revenues from the sale of the Auction Bands; $1 billion in federal costs for the Proposal;

and a possible loss of $3 billion in revenues from the 90 MHz in the budget baseline.

TABLE 5. NET BUDGET IMPACT OF THE PROPOSAL

Source Budget Gain (Loss) Low Budget Gain (Loss) High

Sale of 60 MHz Auction Band ................................................................ $20 Billion $24 Billion

Federal Costs of Converter Boxes ........................................................... ($1 Billion) ($1 Billion)

Budget Impact, No Baseline Adjustment .............................................. $19 Billion $23 Billion

Loss from 90 MHz in Budget Baseline ................................................... ($3 Billion) ($3 Billion) ]

Total ......................................................................................................... $16 Billion $20 Billion

C. The social value of the Proposal

The social value that would be created by the Proposal includes the increase in

market value of the spectrum, the increase in consumer welfare from the Proposal,

the benefits to public safety users, and, potentially, the welfare effects associated

with auction revenues that offset distortions caused by federal borrowing or taxing

activities.

Increase in market value of the spectrum. The willingness of wireless companies

to pay for spectrum sets the market value. That willingness to pay is derived from

the companies’ expected profits from spectrum-based services and is called producer

surplus. It constitutes one contribution to the social value of the spectrum.

Increase in consumer welfare. The consumer welfare generated by increased spectrum allocations is large and typically many times the producer surplus. One noted

study by Thomas Hazlett and Roberto Mun ̃ oz finds that the increase in consumer

welfare associated with a 60 MHz increase in spectrum allocated for mobile phone

use in the U.S. is $24 billion per year.19 The analysis indicates that the consumer

surplus would be almost 18 times the producer surplus associated with that spectrum.20

The Hazlett and Mun ̃ oz estimate is not directly applicable to the analysis of an

accelerated DTV transition for at least two reasons. First, it does not account for

the Proposal’s interaction with other allocations of spectrum expected in the near

future. Hazlett’s and Mun ̃ oz’s estimate may be applicable to the 60 MHz of the Auction Bands, but to be properly applied here, it also needs to account for changes in

consumer surplus associated with the 90 MHz anticipated in the CBO baseline or

the effects on the BRS/EBS allocations at 2.5 GHz. Consequently, the increase in

consumer surplus could be less than the $24 billion per year estimated by Hazlett

and Mun ̃ oz. How much less is uncertain, but Congressional testimony by Dr.

Hazlett before the U.S. Senate Commerce Committee provides an indication. In that

testimony, Dr. Hazlett reported the information in the following table:

TABLE 6. ANNUAL CONSUMER GAINS FROM INCREASED SPECTRUM AVAILABILITY

Increase in Spectrum Available for CMRS

80 MHz 140 MHz 200 MHz

Change in Consumer Surplus ............................................. $31.9 Billion $55.1 Billion $77.4 Billion

Marginal Surplus of 60 MHz .............................................. N/A $23.2 Billion $22.3 Billion

Source: Testimony of Thomas W. Hazlett before the United States Senate Commerce Committee, June 9, 2004.

The table indicates that the value of the consumer surplus from additional increments of spectrum declines, but at a fairly slow rate over the relevant range. Compare the change in consumer surplus of $23.2 billion when the total additional spectrum is increased from 80 MHz to 140 MHz with the change in consumer surplus

of $22.3 billion when the total additional spectrum is increased from 140 MHz to

200 MHz.

The Hazlett and Mun ̃ oz analysis explicitly assumes that the additional spectrum

will be allocated for Commercial Mobile Radio Services (‘‘CMRS’’). Although CMRS

152

21 A ratio of 10 to 1 is also consistent with the ratio of consumer surplus to private value noted

in Gregory L. Rosston, ‘‘The Long and Winding Road: the FCC Paves the Path with Good Intentions,’’ 27 Telecommunications Policy 501, 513 (2003). 22 In the context of a spectrum trade involving Nextel, the FCC notes the difficulty of putting

a dollar value on public safety spectrum. ‘‘We believe that no strictly economic analysis can satisfactorily resolve the ultimate question of whether interference-free public safety communications—a largely unquantifiable benefit—has a dollar value commensurate with the fair market

value of the 1.9 GHz spectrum Nextel will receive. However, we still believe such financial analyses are relevant . . .’’ Improving Public Safety Communications in the 800 MHz Band, Report

and Order, Fifth Report and Order, Fourth Memorandum Opinion and Order, and Order, 19

FCC Rcd 14969 ¶ 284 (2004). 23 $1.10 per MHz-Pop * 24 MHz * 296 million pops = $8 billion and $1.37 per MHz-Pop * 24 MHz * 296 million pops = $10 billion. If the 24 MHz were sold to private users, the impact

on price of the increased supply would be approximately an additional -4% ((24 MHz/(390 MHz

+ 60 MHz))/elasticity of -1.2). 24Michael H. Rothkopf and Coleman Bazelon, ‘‘Interlicense Competition: Spectrum Deregulation Without Confiscation or Giveaways,’’ New America Foundation, Spectrum Series Working

Paper No. 8, August 2003. 25Thomas W. Hazlett and Robert E. Mun ̃ oz, ‘‘What Really Matters in Spectrum Allocation Design,’’ AEI-Brookings Joint Center for Regulatory Studies, Working Paper 04-16, August 2004. 26 $16 billion * 0.33 = $5 billion and $20 billion * 0.33 = $7 billion.

uses may be the highest-value uses for additional allocations, the Proposal does not

restrict the Auction Bands to CMRS uses. Because the new allocations can at least

be used for CMRS, the Hazlett and Mun ̃ oz value estimates, including estimates of

consumer surplus, set a lower boundary on the estimates for even less restricted

spectrum.

Taking into account these considerations, a plausible and conservative estimate

of the range of ratios of consumer surplus to producer surplus would be between

10 to 1 and 18 to 1.21 The estimates of the value of the Auction Bands reported

in Table 5 range from $20 billion to $24 billion dollars, implying consumer surplus

increases of at least $200 billion to $432 billion.

Public safety benefits. Although it is difficult to estimate the Proposal’s impact on

the value of the public safety allocations in the 700 MHz Band, the Proposal provides significant benefit to public safety spectrum users by clearing the incumbent

broadcasters from the public safety bands. From a public policy perspective, the opportunity cost to the government of allocating 24 MHz of 700 MHz Band spectrum

to public safety is the receipts the spectrum could garner in an auction.22 In this

case, the current public safety allocation would be valued at approximately $8 billion to $10 billion.23 The total benefit of those bands could be more than the opportunity cost of the allocation, but placing a monetary value on those total benefits

is beyond the scope of this analysis.

Federal financing effects. Federal financing activities, whether through increased

taxes or increased borrowing, create distortions in the economy. Reducing federal financing activities therefore reduces economic distortions, and, holding all else equal,

increases economic activity. To the extent that auction revenues reduce the federal

government’s funding requirements, they create an added bonus of reducing distortions created by the federal government’s financing activities. The economic cost of

an additional dollar of federal spending is estimated to be about $1.33.24 Consequently, the financing dividend is typically estimated to be about one third of the

auction revenues.25 Applying this proportion to the estimated net budget receipts

would yield a financing dividend of approximately $5 billion to $7 billion.26

The social value of the Proposal. Combining the producer surplus, consumer surplus, public safety benefits, and federal financing effects leads to an estimate of the

total social value of the Proposal of $233 billion to $473 billion. See Table 7.

TABLE 7. SOCIAL BENEFITS OF THE PROPOSAL

Source

Amount (billions)

Low High

Producer surplus .................................................................................................................................. $20 $24

Consumer surplus ................................................................................................................................ $200 $432

Public safety ........................................................................................................................................ $8 $10

Federal financing effect ...................................................................................................................... $5 $7

Total ..................................................................................................................................................... $233 $473

153

27 U.S. Government Accountability Office, ‘‘Digital Broadcast Television Transition: Estimated

Cost of Supporting Set-Top Boxes to Help Advance the DTV Transition,’’ February 17, 2005

(‘‘GAO Report’’). 28The household estimate for 2006 is based on (1) the American Community Survey (ACS)

household estimate of 108.4 million for 2003 and (2) the annual growth rates implied by the

Census Bureau’s 2004 population estimate of 293.7 million and 2010 forecast of 308.9 million.

I believe that the Census Bureau’s ACS household number is a more appropriate estimate of

the total number of households than the figures reported in the oft-cited Current Population

Survey. This is because data from the larger ACS sample are adjusted to more accurately reflect

household definitions from the decennial census. 29This represents 1 minus 97.9% (the average of 98.3% television households estimated by

Deutsche Bank and 97.5% television households estimated by Wachovia). Douglas Mitchelson

and Christopher Gilbert, Deutsche Bank, ‘‘Cable/Sat Spotlight—1Q05 Preview,’’ April 27, 2005,

and Jeff Wlodarczak and Royden Summers, Wachovia Capital Markets, Reports of Demise of

DBS Greatly Exaggerated, April 14, 2005. 30This is an average of annual subscriber growth as reported by the FCC from 2001-2005.

This figure falls roughly in the middle of the range reported by other analysts. 31GAO Report and Comments of the Consumer Electronics Association, Inquiry into Over-theAir Broadcast Television Viewers, FCC MB Docket No. 04-210, August 11, 2004. 32This would include households that steal the service.

V. THE COSTS OF THE PROPOSAL

The costs of accelerating the end of the DTV transition are driven by the number

of set-top boxes distributed, the costs of those boxes, and the costs of administering

the program. The Government Accountability Office (GAO) has provided one such

cost estimate.27 Scrutiny of its analysis indicates that the GAO likely overestimated

the costs of an accelerated transition.

A. The number of set-top boxes

Crucial to determining the number of set-top boxes distributed is the number of

households that will rely on over-the-air analog television broadcasts at the end

date of the transition. These are the television households that do not subscribe to

a multi-channel video distribution system. Different estimates of the number of

over-the-air-only households are presented in Table 8.

TABLE 8. RECENT ESTIMATES OF TELEVISION HOUSEHOLD DATA

Source Date Published U.S. TV

Households

MVPD Subscribing

Households 1 OTA Households

FCC .................................................................... Feb. 2005 ............. 108.4 3 92.3 16.0

GAO .................................................................... Feb. 2005 ............. 20.8

Deutsche Bank .................................................. Apr. 2005 ............. 109.9 3 88.2 21.8

Wachovia ........................................................... Apr. 2005 ............. 110.3 97.2 13.2

Vintage Research .............................................. Feb. 2005 ............. 109.6 3 100.4 9.1

NAB .................................................................... Aug. 2004 ............ 108.4 3 87.9 20.5

CEA .................................................................... Aug. 2004 ............ 107.3 2 93.4 13.9

2006 Projected ................................................. 109.0 94.4 14.6

Data is in millions.

1 Figures indicate MVPD subscriptions net of double-subscribers when possible.

2 The Consumer Electronics Association uses 2002 Census data to determine its number of TV households.

3 These sources all use year-end 2003 or 2004 Nielsen Media Research data as a basis for their numbers of U.S. TV households.

Sources: Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, Eleventh Annual Report,

20 FCC Rcd 2755 (2005); U.S. Government Accountability Office, ‘‘Digital Broadcast Television Transition: Estimated Cost of Supporting SetTop Boxes to Help Advance the DTV Transition,’’ February 17, 2005; Douglas Mitchelson and Christopher Gilbert, Deutsche Bank, ‘‘Cable/Sat

Spotlight—1Q05 Preview,’’ April 27, 2005; Jeff Wlodarczak and Royden Summers, Wachovia Capital Markets, ‘‘Reports of Demise of DBS

Greatly Exaggerated,’’ April 14, 2005; William Kidd and Alden Mahabir, Vintage Research, ‘‘It Takes More Than the Bundle To Beat DBS,’’ February 2, 2005; Comments of the National Association of Broadcasters and the Association for Maximum Service Television, Inc., Over-the-Air

Broadcast Television Viewers, FCC MB Docket No. 04-210, August 11, 2004; Comments of the Consumer Electronics Association, Inquiry into

Over-the-Air Broadcast Television Viewers, FCC MB Docket No. 04-210, August 11, 2004.

I estimate that in 2006 there will be 14.6 million over-the-air-only television

households. This estimate is based on Census Bureau numbers of 111.4 million

households in 2006.28 This number is reduced by 2.1% to account for non-TV households, resulting in an estimate of 109.0 million television households.29 I then take

the FCC’s June 2004 estimate of Multichannel Video Program Distributor (‘‘MVPD’’)

subscribers, 92.3 million households, and make two adjustments. First, I increase

the number by 2.7% annually for the trend growth in MVPD subscribers.30 Second,

I reduce the number by 3% for the number of households that subscribe to both

cable and a Direct Broadcast Satellite service.31 Although I do not make an adjustment here, it would be appropriate to decrease the number for the households that

receive an MVPD service but are not included in reported subscriber totals.32 These

adjustments provide an estimate of television households that receive an MVPD

154

33Federal Communications Commission, ‘‘Media Bureau Staff Report Concerning Over-the-Air

Broadcast Television Viewers,’’ MB Docket No. 04-210, February 28, 2005, ¶ 10 (‘‘FCC OTA Report’’). 34GAO Report, pp. 14-15. 35 Robert Kieschnick and B.D. McCullough, ‘‘Why Do People Not Subscribe to Cable Television? A Review of the Evidence,’’ presented at the Telecommunications Policy Research Conference, October 1998, Tables 2 and 3 (as cited in 1999 CBO Report). 36 Comments of the Consumer Electronics Association, Inquiry into Over-the-Air Broadcast

Television Viewers, FCC MB Docket No. 04-210, August 11, 2004, p. 4. 37FCC OTA Report ¶ 15-16. 38FCC OTA Report ¶ 17. 39Letter from David Pederson, Vice President, Corporate Strategic Marketing, Zoran Corporation, to Mr. Alan Stillwell, Senior Associate Chief, Office of Engineering and Technology, Federal

Communications Commission, FCC ET Docket 05-24, May 16, 2005.

service of 94.4 million in 2006. The difference between that number and all television households is 14.6 million, the estimate of the number of over-the-air-only television households.

There is a well-known relationship between income and the choice not to subscribe to an MVPD.33 Income is an important reason for choosing not to subscribe:

two-thirds of non-subscribing households are within 300% of the poverty level, but

less than half of all households are within that same range.34 Income, however, is

not the only determinant. A study of household cable subscribers from 1997 found

that 22% of households that did not subscribe to cable television had a household

income of $50,000 or more.35 Another study found that only 30% of non-subscribers

cite income as a reason for not subscribing.36 The FCC also cites a lack of interest

in television and other reasons such as a lack of foreign language programming for

households’ decisions not to subscribe to a MVPD.37

B. The cost of set-top boxes

Today, a set-top converter box can be purchased for $80 to $1,000.38 Producing

several million set-top converter boxes over the course of a year or two will likely

provide sufficient economies of scale in production to allow a significant fall from

current price levels. How far they fall will depend on the total demand for the boxes

and the time allowed for their production. At least one industry participant estimates that the retail cost of set-top converter boxes could be $65 within half a year

of the first order and fall to $50 within one and a half years.39 I take this as a reasonable estimate of retail costs.

C. Administrative costs

Administrative costs are a relevant cost of the Proposal. These include the salaries, overhead costs, and expenses of administering the program. By far the greatest

expense of the program would be the costs of distributing the set-top boxes to the

eligible households. In this analysis, I assume that the boxes are sold by retailers,

and that the federal government reimburses retailers for the costs of the set-top converter boxes distributed to eligible households. This approach assumes that the distribution costs are covered in the retail price of the box.

Additional administrative costs will be incurred for processing and auditing the

reimbursement requests from retailers. Further costs may also be incurred in establishing a database of eligible households. I assume that these costs will be a small

fraction of the retail cost of a set-top box.

D. Total costs of the Proposal

I assume that the cost per set-top box will range from $50 to $65, inclusive of

administrative costs. The total cost of the proposal is the number of set-top boxes

distributed times the cost per set-top box. These estimates are presented in Table

9. Overall, the costs of the proposal would be no more than $1 billion.

TABLE 9. TOTAL COST OF PROPOSAL

Scenario # of boxes

(millions)

Cost per box including administrative costs

Total cost of the

Proposal (millions)

GAO Estimate

(millions)

200% of poverty .......................................................... 7.3 $50-$65 $365-$475 $463-$925

300% of poverty .......................................................... 9.7 $50-$65 $485-$631 $626-$1,252

All OTA only TV HHs ..................................................... 14.6 $50-$65 $730-$949 $1,042-$2,083

Source: Author’s calculations and U.S. Government Accountability Office, ‘‘Digital Broadcast Television Transition: Estimated Cost of Sup- porting Set-Top Boxes to Help Advance the DTV Transition,’’ February 17, 2005, p. 14.

155

40 Because the supply of television licenses is fixed, the increased demand is completely absorbed into an increase in the license price. 41Much of the interest was in analyzing the demand for labor to see if it was inelastic and,

thus, susceptible to union wage bargaining demands. See ‘‘Derived Demand’’ in The New Palgrave: A Dictionary of Economics, John Eatwell, et al., ed., New York: Palgrave Publishers, 1998. 42Morley Gunderson and W. Craig Riddell, Labour Market Economics, 3Ed., McGraw-Hill

Ryerson, 1993, pp. 203-206. 43This condition, known as ‘‘the importance of being unimportant,’’ is relevant only if the elasticity of demand for the final output is greater than the elasticity of substitution between the

inputs. In other words, if the demand for the final service is more sensitive to price than the

ability to substitute away from spectrum when its price increases, then derived demand is more

likely to be inelastic if ‘‘the importance of being unimportant’’ criterion holds. See Morley

Gunderson and W. Craig Riddell, Labour Market Economics, 3Ed., McGraw-Hill Ryerson, 1993,

p. 206.

APPENDIX

To understand why the elasticity of demand for spectrum should be at least as

large as the elasticity of demand for mobile telephony, first observe that the demand

for spectrum is a ‘‘derived demand.’’ It is derived from the demand for the services

that use it as an input. For example, the value of a television broadcast license is

derived from the value of a television broadcast station. If television broadcasting

becomes more profitable, for example, because of a rise in advertising rates, then

the derived demand for a television broadcast license increases.40 Likewise, the demand for licenses in the 700 MHz Band will be based on the value of the services

supplied by operators using these licenses. Consequently, the demand for spectrum

is related to the demand for spectrum-based services.

Economists have long had an interest in the elasticity of derived demand.41 Ultimately, the elasticity of a derived demand depends on the specifics of the markets

for the final good or service, the markets for other inputs, and the way the input

is used in creating the final good or service. Nevertheless, it is possible to characterize whether the derived demand is likely to be elastic or inelastic and compare

it to the elasticity of demand in the output market.

The Marshall-Hicks criteria outline the determinants of the elasticity of derived

demand.42 Applied to radio spectrum, they are:

• The availability of substitutes for spectrum (Substitutability of inputs). One determinant of the elasticity of demand for spectrum is the degree to which wireless

service providers can substitute away from spectrum when its price increases.

With current technology, companies must have some spectrum below 3 GHz to

provide mobile services. One significant advantage of wireless systems that use

cellular architecture is the ability to subdivide a cell into several smaller cells.

This increases the reuse of frequencies and therefore increases the capacity of

the wireless system. Consequently, capital—in the form of more cell sites and

supporting infrastructure—can be substituted for more spectrum to increase capacity (or used to maintain capacity with less spectrum). The more the production technology allows capital to substitute for spectrum, the more elastic the

derived demand for spectrum will be.

• The elasticity of supply of capital and other inputs into the final wireless service

(Complementary input elasticity). If the inputs other than spectrum used to

produce a wireless service have an inelastic supply—i.e., it will cost proportionately more to purchase additional supply of those inputs—then it is costly to

substitute away from spectrum and into those other inputs. Much of the capital

that can substitute for spectrum—radios, for example—is likely to be supplied

very elastically. Other capital—possibly towers—may be somewhat less elastic

in supply. Overall, as capital goods are substituted for spectrum, their price is

not likely to increase significantly. This tends to make the demand for spectrum

more elastic.

• The proportion of total costs associated with spectrum (Input costs as a portion of

total costs). The smaller the proportion of spectrum costs in providing the wireless service, the less it is necessary for the service provider to change its demand for spectrum in response to a change in the price of spectrum.43 The

smaller the portion of total costs spent on spectrum, the smaller the impact a

given percentage price change in spectrum will have on the total costs of wireless services. A smaller share, therefore, tends to make the derived demand less

elastic. Spectrum is an important component of production, but not overwhelmingly so. One rule of thumb states that spectrum costs are equal to capital costs.

If depreciation and amortization are 20% of revenues and revenues are approxiVerDate 11-MAY-2000 11:52 Sep 21, 2005 Jkt 000000 PO 00000 Frm 00159 Fmt 6633 Sfmt 6621 21643.TXT HCOM1 PsN: HCOM1
156

44See, e.g., Sprint Corporation, SEC Form 10-K/A, for the period ending December 31, 2004

(filed April 29, 2005), and Nextel Communications, Inc., SEC Form 10-K, for the period ending

December 31, 2004 (filed March 15, 2005). 45 Allan T. Ingraham and J. Gregory Sidak, ‘‘Do States Tax Wireless Services Inefficiently?

Evidence on the Price Elasticity of Demand,’’ 24 Virginia Tax Review (2004) (forthcoming). 46The elasticity of demand for wired broadband is estimated to be between -1.2 and -1.46.

Robert W. Crandall, Competition and Chaos: U.S. Telecommunications Since the 1996 Telecom

Act, Brookings Institution Press, 2005, p. 120 Demand for wireless phone service is more elastic

than demand for wired phone service. For similar reasons, the elasticity of demand for wireless

broadband services is expected to be more elastic than the elasticity of demand for wired

broadband services.

mately equal to total costs,44 then spectrum costs equal approximately one fifth

of total costs. Spectrum costs do not appear to be so small that operators are

indifferent to their level. Consequently, the portion-of-total-costs criterion does

not strongly support an inelastic demand for spectrum.

• The elasticity of demand for spectrum based services (Output demand elasticity).

The elasticity of demand for the final wireless services affects the elasticity of

demand for spectrum because it either mutes or amplifies the effect of the input

price change. As discussed below, demand for spectrum based services is elastic,

indicating an elastic demand for spectrum.

These four factors are summarized in Table A.

TABLE A. MARSHALL-HICKS CRITERIA APPLIED TO SPECTRUM

In wireless production Effect on elasticity of derived demand for spectrum

Substitutability of inputs ........................................................... Medium ................................ More elastic

Complementary input elasticity ................................................. Elastic .................................. Elastic

Input costs as a portion of total costs ..................................... Medium ................................ Not inelastic

Output demand elasticity .......................................................... Elastic .................................. Elastic

Recent elasticity estimates of mobile telephony in the US range from -1.12 to

-1.29.45 Mobile telephony is only one use of liberally licensed wireless spectrum. It

is likely that additional allocations of spectrum will be used for wireless broadband

services. Adding other potential services to the demands from the mobile phone

market increases the total demand for spectrum licenses. Any given percentage decrease in price will be met by increased demand in the mobile phone market plus

increased demand in the wireless broadband market. Demand for wireless

broadband is likely to be at least as elastic as demand for mobile phones.46 Therefore, the sum of the two demands will be at least as elastic as the demand for mobile phones alone.

I conclude that demand for spectrum is at least as elastic as the demand for spectrum-based services, and that demand for spectrum-based services is at least as

elastic as the demand for mobile phone services. Based on the average of the two

estimates of the elasticity of demand for mobile phone service in the U.S., I conclude

that the elasticity of demand for spectrum is -1.2 or greater (in absolute value).

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228