```
                                                                 
Telecommunications: Additional Federal Efforts Could Help Advance
Digital Television Transition (08-NOV-02, GAO-03-7).		 
                                                                 
The transition to broadcast digital television (DTV) will provide
new television services and the improved picture quality of "high
definition television." It will also allow some portions of the  
radiofrequency spectrum used for broadcasting to be returned for 
public safety and commercial uses. The Congress set December 2006
as the target date for completing the DTV transition and turning 
off the analog	broadcast signals. However, this date can be	 
extended if fewer than 85 percent of households in a market are  
able to receive the digital signals. GAO was asked to assess	 
issues related to the DTV transition.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-7						        
    ACCNO:   A05489						        
  TITLE:     Telecommunications: Additional Federal Efforts Could Help
Advance Digital Television Transition				 
     DATE:   11/08/2002 
  SUBJECT:   Broadcasting standards				 
	     Cable television					 
	     Television broadcasting				 
	     Digital Television 				 

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GAO-03-7

Report to the Ranking Minority Member, Subcommittee on Telecommunications
and the Internet, Committee on Energy and Commerce, House of
Representatives

United States General Accounting Office

GAO

November 2002 TELECOMMUNICATIONS Additional Federal Efforts Could Help
Advance Digital Television Transition

GAO- 03- 7

Numerous factors are impeding the progress of the DTV transition, making
it unlikely that 85 percent of households will be able to receive DTV
signals in many markets by December 2006.

* Few consumers own digital television equipment. Only about 1 percent of
television equipment sold in 2001 could receive digital signals. This is
largely because digital television sets and tuners are expensive and high
definition programming is limited.

 Many consumers are unaware of the DTV transition. In a random household
survey conducted for GAO, 40 percent of respondents had never heard about
the transition; only one in five were *very aware* of it. In addition, the
quality of information that consumers receive about DTV products at the
retail level may be inconsistent. In visits to 23 DTV retailers, GAO found
that sales staff sometimes provided inaccurate or incomplete information
about DTV equipment and programming.

 Cable and satellite digital carriage is limited. The great majority of
American households receive their television via cable or satellite.
However, cable carriage of local digital broadcast channels is very
limited. Furthermore, satellite providers currently do not carry any
markets* local digital broadcasts.

To speed the DTV transition, the Federal Communications Commission (FCC)
has required that by 2007 most new television sets be capable of receiving
digital signals over the air. Another policy option to speed the
transition would be to also require that new sets be capable of receiving
digital signals via cable. Because many more American households receive
television via cable than receive it over the air, mandating that new sets
be *digital cable- ready* could effectively speed the transition. However,
the cost to consumers of such a policy would first need to be assessed,
and outstanding issues related to the compatibility between cable systems
and DTV equipment would need to be resolved.

Currently, broadcast stations have the right to require that cable systems
in their market carry their analog signals (a right known as *must-
carry*). One policy option to facilitate the transition would be to set a
fixed date when this must- carry right would transfer from broadcasters*
analog signals to digital signals. This option might speed cable carriage
of digital broadcasts without requiring cable systems to carry both analog
and digital broadcasts simultaneously. Because such a policy could have
both advantages and disadvantages, it needs to be carefully evaluated.

TELECOMMUNICATIONS

Additional Federal Efforts Could Help Advance Digital Television
Transition

http:// www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 7 To view the full
report, including the scope and methodology, click on the link above. For
more information, contact Peter Guerrero, (202) 512- 3841 or guerrerop@
gao. gov. Highlights of GAO- 03- 7, a report to the

Honorable Edward J. Markey, Ranking Minority Member, Subcommittee on
Telecommunications and the Internet, Committee on Energy and Commerce,
House of Representatives.

November 2002

The transition to broadcast digital television (DTV) will provide new
television services and the improved picture quality of *high definition
television.* It will also allow some portions of the radiofrequency
spectrum used for broadcasting to be returned for public safety and
commercial uses. The Congress set December 2006 as the target date for
completing the DTV transition and turning off the analog broadcast
signals. However, this date can be extended if fewer than 85 percent of
households in a market are able to receive the digital signals. GAO was
asked to assess issues related to the DTV transition.

GAO recommends that FCC  explore options to raise public

awareness about the DTV transition and its implications,

 examine the costs and benefits of mandating that all new televisions be
digital cableready, and

 examine the advantages and disadvantages of setting a fixed date for
transferring must- carry rights from broadcasters* analog signals to
digital signals.

FCC noted actions it has taken and proceedings it has under way to address
the intent of these recommendations.

Page i GAO- 03- 7 Digital Television Transition Letter 1

Results in Brief 3 Background 6 Transition to DTV Will Allow the Return of
Valuable Spectrum but

Will Require Millions of Americans to Buy New Equipment 8 Consumer
Adoption of DTV Has Been Slow, Partly Because Many

Americans Are Unaware of the Transition and Are Not Well Informed about
DTV Products 15 Carriage of Digital Signals by Cable and Satellite
Operators Is

Insufficient to Help Achieve 85 Percent Threshold Quickly 20 Availability
of Digital Programming Is Increasing but Still Limited,

Possibly Due in Part to Copy Protection Concerns 27 Digital Over- the- Air
Tuners Have Been Mandated, but Digital

Cable- Ready Capability Has Not 33 Conclusions 37 Recommendations for
Executive Action 39 Agency Comments 40

Appendix I Scope and Methodology 42

Appendix II Equipment Issues Affecting the DTV Transition 44 Digital
Inputs and Copy Protection Technologies 44 Digital- to- Analog Converter
Boxes 44 Adequacy of Over- the- Air Reception 45

Appendix III Analysis of the Consumer Survey 47

Appendix IV Comments from the Federal Communications Commission 49

GAO Comments 51

Appendix V GAO Contacts and Staff Acknowledgments 52 GAO Contacts 52 Staff
Acknowledgments 52 Contents

Page ii GAO- 03- 7 Digital Television Transition Table

Table 1: Differences in Familiarity with the Digital Television Transition
on the Basis of Household Characteristics 48

Abbreviations

DMCA Digital Millennium Copyright Act DTV digital television FCC Federal
Communications Commission HD high definition NCTA National Cable &
Telecommunications Association ORC Opinion Research Corporation POD point
of deployment

Page 1 GAO- 03- 7 Digital Television Transition

November 8, 2002 The Honorable Edward J. Markey Ranking Minority Member
Subcommittee on Telecommunications

and the Internet Committee on Energy and Commerce House of Representatives

Dear Mr. Markey: The transition to broadcast digital television (DTV)
offers the promise of more programming options, interactive services, and
the high- resolution picture quality provided by *high definition
television.* It also will allow some of the valuable radiofrequency
spectrum now used for broadcasting to be made available for other uses. 1
To help realize this transition, the Congress and the Federal
Communications Commission (FCC) have established requirements for
television stations to broadcast digital signals. In an April 2002 report,
we discussed the progress that stations are making in rolling out these
digital broadcasts. 2 Although the provision of digital broadcast signals
is progressing, many other things must happen before the transition can be
successfully completed. These include the adoption of DTV equipment by
consumers, cable carriage of digital broadcast channels, and the
availability and provision of digital programming.

As FCC Chairman Michael Powell has noted, at the heart of the DTV
transition lies a classic chicken- and- egg problem. Until more consumers
have purchased digital television sets, there is little incentive for
networks to provide and cable systems to carry more digital programming.
Yet without much digital programming available, consumers have little
incentive to purchase digital television sets. In April 2002, the Chairman
issued a proposal for industry actions to speed the DTV transition. The

1 The radiofrequency spectrum is the part of the natural spectrum of
electromagnetic radiation lying between the frequency limits of 9
kilohertz and 300 gigahertz. It is the medium that makes possible wireless
communications, including cellular and paging services, radio and
television broadcasting, radar, and satellite- based services.

2 U. S. General Accounting Office, Telecommunications: Many Broadcasters
Will Not Meet May 2002 Digital Television Deadline, GAO- 02- 466
(Washington, D. C.: Apr. 23, 2002).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 7 Digital Television Transition

proposal laid out specific* though voluntary* actions that various
industries should take to provide an *immediate spur* to the DTV
transition. In addition, in August 2002, FCC established a requirement
that by July 2007 most new television sets include a tuner capable of
receiving over- the- air digital broadcasts.

The DTV transition began in 1987 when, at the request of many
broadcasters, FCC began to investigate issues related to the introduction
of advanced technologies for improvements to television picture and sound.
This process led to a study of the feasibility of transitioning from the
conventional analog broadcasting system to a digital broadcasting system.
Since that time, regulatory actions by FCC, in conjunction with direction
set out by the Congress in the Telecommunications Act of 1996 and the
Balanced Budget Act of 1997, have established the framework and timeline
for the DTV transition. During the transition, all television stations in
the United States have been provided with a second channel on which to
operate a digital broadcast in addition to the channel on which they
operate their analog broadcast. Once the transition is complete, broadcast
stations will operate solely in digital. FCC set 2006 as the target date
for the completion of the DTV transition. The Congress later codified this
date but also provided for extending the date under certain conditions.
The goal is for broadcasters to cease broadcasting the analog signal by
the target date so that some of the radiofrequency spectrum needed for
analog broadcasting can be made available for other uses. However, many
believe that the transition will not be completed by the target date.

We were asked to assess issues related to the DTV transition, including
(1) the benefits and implications of turning off the analog broadcast
signals, (2) consumer awareness and adoption of DTV, (3) cable and
satellite carriage of digital signals, (4) the availability of digital
programming and the role of copy protection concerns, and (5) issues
related to DTV tuner mandates.

To meet these objectives, we interviewed representatives of companies in
several key industry segments, including broadcasters, television
producers, cable and satellite companies, and retailers and manufacturers
of DTV equipment. We also had several meetings with FCC staff and various
industry trade groups. To better understand consumer knowledge of the DTV
transition, we contracted with a survey research firm to conduct a random
household survey that asked questions designed to ascertain consumers*
level of knowledge about the DTV transition. We also visited a variety of
retail stores to obtain anecdotal information on retail

Page 3 GAO- 03- 7 Digital Television Transition

practices in marketing and selling DTV products. A more detailed
discussion of our scope and methodology is provided in appendix I.

We performed our review from May 2001 through August 2002 in accordance
with generally accepted government auditing standards.

An important benefit of completing the transition to digital television
(DTV) is to recapture portions of the radiofrequency spectrum that are
currently used for broadcast television. Some of the valuable spectrum
television broadcasters currently use to broadcast analog signals has been
reallocated for both public safety needs* such as emergency services* and
commercial services. However, under the law, television stations do not
have to return their analog channel until 85 percent of households in a
market can receive DTV signals; this is not likely to occur by the
December 2006 target date in many markets. FCC is still in the process of
determining how to interpret the statutory provisions concerning when 85
percent of households can receive DTV. However, even when it has been
determined that the 85 percent threshold has been met, questions remain
about the impact on the remaining 15 percent of the population, who would
not be able to access at least some of their local broadcast channels
until they purchased new equipment.

One impediment to the transition is that consumer sales of digital
television sets, though increasing, are still relatively small. One
barrier to sales is that digital television sets are still expensive
compared with analog television sets, but another barrier may be that many
Americans have little awareness of the DTV transition and its
implications. For example, 40 percent of respondents to a random household
survey conducted for us said they had never heard about the DTV
transition, and fewer than one in five said they were *very aware* of the
transition. In addition, the quality of information that consumers receive
about DTV products at the retail level may be inconsistent. During visits
to 23 DTV retailers in five states, we found that while much of the
information provided by DTV sales staff was correct, many staff were
uninformed about important issues, such as the ability to receive DTV over
the air and the amount of high definition content currently available.
Moreover, few of the screens displayed in the stores allowed customers to
actually view a high definition picture. The Chairman of FCC has called
upon broadcasters, cable systems, and DTV manufacturers and retailers to
do more to market and promote DTV programming and equipment to consumers.
However, at this time, FCC does not have significant initiatives of its
own under way to raise public Results in Brief

Page 4 GAO- 03- 7 Digital Television Transition

awareness about the DTV transition, apart from information that it
provides through its Web site and call center.

Cable and satellite operators are not currently planning to carry
significant numbers of local digital broadcast stations, which further
hinders the completion of the DTV transition. Because more than two-
thirds of Americans receive their television via cable, cable carriage of
DTV broadcast signals is important for facilitating the transition. Under
one provision in the law, households receiving DTV via cable (but that do
not have the equipment to receive DTV over the air) count toward the
threshold only if their cable system carries one local DTV broadcast
channel from all stations broadcasting such channels in its market.
However, because cable systems are reluctant to use scarce channel
capacity to carry a broadcast station*s digital signal, particularly if it
only duplicates what is being shown on the station*s analog signal, market
forces alone may not result in cable systems carrying all of the local
broadcasters* digital signals in a market. Direct broadcast satellite
providers, which serve about 17 percent of American television households,
are probably even less likely than cable systems to provide all local
digital broadcasts; because satellite services are national in scope,
these providers face constraints in their ability to carry local
broadcasts.

Although broadcasters have the right to demand cable carriage of their
analog broadcast channels, FCC has tentatively decided that it would be
unconstitutional to require cable systems to carry both analog and digital
channels during the transition. However, another option we have identified
is to set a *date- certain* when broadcasters would, all at once, switch
from having the right to demand carriage of their analog channels to
having the right to demand carriage of their digital channels. This policy
option could help speed the transition by requiring cable carriage of
digital broadcast signals without the need for mandatory dual carriage.
Because this option also could have certain disadvantages, it would
benefit from further study to determine its viability.

The limited availability of digital programming, possibly due in part to
concerns over copy protection, also is slowing the DTV transition. Digital
programming, particularly high definition programming, is important both
to encourage consumers to purchase digital television sets and to
encourage cable companies to carry digital broadcast signals. The amount
of digital programming has increased considerably in the past 2 years, but
it still represents only a small portion of total television programming.
Broadcast networks and cable networks vary greatly in terms of the amount
of high definition programming they are providing. The provision

Page 5 GAO- 03- 7 Digital Television Transition

of more digital content is held back by factors that include the small
number of viewers with the equipment to watch DTV; the greater cost and
complexity of filming or formatting high definition programming; and,
possibly, concerns about unauthorized copying and retransmission of
digital content provided over the air. In response to this last factor,
FCC recently initiated a rulemaking on digital broadcast copy protection
issues.

FCC*s August 2002 order requiring that most new broadcast television sets
include a tuner capable of receiving digital signals over the air raises
several issues. This DTV tuner mandate, which is being phased in over 5
years, will speed the transition by increasing the number of households
able to receive over- the- air DTV. However, there is some debate about
how much this mandate will increase the price of television sets; FCC
argues that the economies of large- scale production will keep the added
cost of these tuners relatively low. Still, because fewer than one in five
Americans actually get their primary television signal over the air,
questions have been raised about the economic efficiency of requiring an
over- the- air digital tuner in all new television sets. Moreover,
although the DTV tuner mandate will help reach the 85 percent threshold,
it will do so largely because cable and satellite households that purchase
new television sets that include the digital over- the- air tuner will
count toward the threshold even though they may not actually watch their
television over the air.

One potential option for addressing this issue would be to mandate that,
in addition to having an over- the- air tuner, new television sets also
should be digital *cable- ready.* A digital cable- ready television would
likely include a digital cable tuner as well as a security device to
handle encrypted cable programming. The marginal cost of mandating digital
cable- ready capability has not yet been studied in depth, and other
issues regarding the interoperability of cable systems with DTV equipment
are still outstanding. However, because far more American households
receive television via cable than receive it over the air, mandating
digital cable- ready capability could be an effective policy for speeding
the DTV transition if the marginal cost of doing so were found to be
reasonable and if the outstanding interoperability issues could be
settled.

To address the barriers we identified facing the DTV transition, we
recommend that the Chairman of FCC (1) explore options that FCC could take
to raise awareness among the public about the DTV transition and the
implications it will have; (2) direct the relevant FCC bureaus and offices
to examine the costs and benefits of mandating that all new televisions be
digital cable- ready, and report its recommendations regarding the actions

Page 6 GAO- 03- 7 Digital Television Transition

it believes FCC or the Congress should take; and (3) direct FCC*s Media
Bureau to examine the advantages and disadvantages of a policy to set a
date- certain to switch from full cable carriage of analog signals to full
cable carriage of digital signals.

We provided a draft of this report to FCC for comment. FCC said it agreed
that raising public awareness about the DTV transition was important, and
it noted actions by Chairman Powell and private industry to help achieve
this increased awareness. FCC also said it has been engaged in
longstanding efforts to achieve compatibility between digital television
sets and cable systems and will address this issue in a forthcoming Report
and Order. In addition, FCC said that it sought comment on a wide range of
options related to digital must- carry, including an option similar to the
one described in this report, and that FCC staff are in the process of
drafting an order on this issue.

The nation is currently undergoing a transition from analog to digital
television broadcasting. Traditional analog broadcasting uses the
radiofrequency spectrum to transmit analog signals* that is, signals in
which motion pictures and sounds have been converted into a *wave

form* electrical signal. With digital technology, the analog wave form is
converted into a stream of digits consisting of zeros and ones. For
digital television service, like analog service, broadcast stations have
been allotted 6 MHz of radiofrequency spectrum for each television
channel. However, because digital video signals can be compressed, the
spectrum can be used more efficiently, allowing much more information to
be broadcast using the same amount of spectrum.

As a result, digital broadcasting provides greater flexibility in terms of
the type of television content that can be provided. Most notably, digital
broadcasting makes it easier to offer high definition (HD) television. HD
television provides roughly twice as many lines of resolution, creating a
television picture that is much sharper than traditional analog television
pictures. HD television can also provide CD- quality sound and is in

*widescreen* format, with display screen ratios similar to a movie
theater. With digital broadcasting, 6 MHz of spectrum can be used for at
least one channel of HD programming, or it can be subdivided to allow the
simultaneous transmission of as many as six separate TV programs of lower
quality standard definition television, a concept known as

*multicasting.* A broadcast station can also provide *datacasting** using
digital signals to transmit text or data, such as stock quotes or
electronic newspapers. *Broadcast stations,* also known as *broadcasters,*
are local Background

Page 7 GAO- 03- 7 Digital Television Transition

operations that transmit signals over the air from the station*s
transmission tower to the antennas of television sets. Broadcast stations
may get their programming content through an affiliation with a

*broadcast network* (such as ABC, NBC, or PBS) or a station may be an
independent broadcaster. Most stations also produce some of their own
content, such as local news programming.

More than four- fifths of American households do not receive their primary
television service over the air via their television set*s antenna.
Instead, they pay a fee to a subscription television service, such as a
cable or satellite service. A *cable system* is a company that runs a
localized network of cable lines to deliver television signals to
subscribers. Some cable systems are individually owned, while others are
owned by companies that own and operate more than one cable system. Direct
broadcast satellite is a nationally distributed service that transmits
programming from orbiting satellites to a customer*s satellite dish. Cable
systems carry all of their markets* local analog broadcast stations, while
satellite services carry local broadcast stations in select markets.
*Cable

networks* (such as CNN or MTV) produce or acquire television programming
that is delivered to cable systems and satellite operators.

Like broadcasters, cable television systems are also transitioning to
digital, although they are under no government mandate to do so. Many
cable operators have added *digital tiers* to their programming offerings.
Satellite systems have always transmitted their signals in digital. Both
cable and satellite systems primarily use digital technology as a way of
increasing the number of channels they can offer. References in this
report to the *DTV transition* refer to the transition by local broadcast
stations to the use of digital broadcast signals; it does not refer to the
way that cable or satellite systems transmit their signals.

For the DTV transition to be completed, and analog broadcasting to end,
two major things need to happen: (1) television stations must broadcast a
digital signal and (2) consumers must be able to view that signal. By May
1, 2002, all full- power commercial television stations across America
were to have begun airing a DTV signal. As of October 17, 2002, however,
only about 43 percent of these stations were broadcasting digitally; the
remainder had filed for extensions with FCC. By May 1, 2003, all public
broadcast stations also are to be broadcasting a DTV signal.

For a household to see local digital broadcast signals via cable or
satellite service, the household must have the necessary equipment, and
its cable or satellite service must also carry local digital signals. For
consumers to

Page 8 GAO- 03- 7 Digital Television Transition

see the digital signal over the air via an antenna, they must either have
a digital- to- analog converter box that will allow them to watch digital
signals on their existing analog set, or they must own a digital
television set that includes a tuner capable of receiving and processing a
digital signal. 3 To speed the DTV transition, FCC adopted in August 2002
a requirement that most new television sets must include an over- the- air
tuner that receives digital broadcast signals. FCC set various deadlines
for manufacturers to include DTV tuners in new television sets, with all
sets over 13 inches required to include the tuners by July 1, 2007.

One important goal of the DTV transition is to recapture portions of the
radiofrequency spectrum currently used for analog broadcasting so this
spectrum can be used for public safety needs and auctioned to private
companies. Under the law, the spectrum is due to be reclaimed by December
2006, but this date can be extended if less than 85 percent of households
in a given market can receive the DTV signal. FCC is still in the process
of determining how to interpret the statutory provisions concerning when
the 85 percent threshold has been met. Even when 85 percent of households
can receive DTV, concerns remain about the impact on the remaining 15
percent of the population, who would not be able to access some or all
broadcast channels until they purchased new equipment.

An important motivation for completing the DTV transition is to recapture
parts of the broadcast spectrum. One goal is to free up portions of the
broadcast spectrum that have been reallocated for public safety needs,
such as communications by local police and fire departments. The Public
Safety Wireless Advisory Committee, in a 1996 report to the FCC, said that
an additional 97.5 MHz of spectrum would be needed for public safety
communications uses by 2010. In the Balanced Budget Act of 1997, the
Congress directed FCC to reallocate 24 MHz of the spectrum to be reclaimed
from broadcasters to public safety uses. After the terrorist attacks of
September 11, 2001, the Chairman of FCC said that freeing up spectrum for
public safety uses has become an even higher priority.

3 There are different types of digital tuners, depending on whether the
digital signal is being received over the air, via cable service, or via
direct broadcast satellite service. Transition to DTV Will

Allow the Return of Valuable Spectrum but Will Require Millions of
Americans to Buy New Equipment

Recapture of Broadcast Spectrum Is an Important Goal of the DTV Transition

Page 9 GAO- 03- 7 Digital Television Transition

In addition, the vast expansion of wireless technologies in recent years
by mobile telephone, broadband Internet, and wireless companies, has
greatly increased these industries* demand for portions of the
radiofrequency spectrum currently used for television broadcasting. This
demand arises not only because of the general scarcity of spectrum, but
also because the spectrum used for broadcasting has qualities that make it
ideal for the provision of many wireless mobile services.

The Balanced Budget Act of 1997 directed FCC to auction certain portions
of the spectrum freed up by the DTV transition according to certain
timelines. The Congressional Budget Office has raised concerns that early
auction timing could devalue the spectrum because bidders would have to
wait years before being able to use the spectrum. The Auction Reform Act
of 2002 4 modified the statutory deadlines set by the Balanced Budget Act
and gave FCC increased flexibility in determining when to complete
auctions for the remainder of the spectrum. 5 The Auction Reform Act noted
that delay in the return of portions of the spectrum used for broadcasting
reduces both the amount of money that auctions are likely to produce and
the probability that the spectrum will be purchased by the entities that
will put it to its most productive use.

FCC established 2006 as the target date for completing the DTV transition,
and this was later codified by Congress in the Balanced Budget Act of
1997. By December 31, 2006, the goal is for broadcasters no longer to
broadcast the analog television signal, and for the spectrum that they
vacate to be returned so that it can be made fully available for other
uses. However, because the Congress was concerned about leaving
substantial numbers of households without the ability to access broadcast
television signals, the law specifically provided for extensions in
certain circumstances. Under the statute, FCC must grant extensions to
requesting stations in a television market where it finds that one of the
following three conditions exists:

4 P. L. 107- 195, 116 Stat. 715 (2002). 5 Various proposals have been made
that broadcasters pay a fee for their use of the broadcasting spectrum
until they return their analog channels. Although such a policy may have
its advantages and disadvantages, it is unclear what its impact would be
on the DTV transition. More than likely, all broadcast stations will be
transmitting a digital signal by 2006, and most of the other factors
affecting the transition* such as cable carriage and consumer adoption of
DTV equipment* are largely outside of the broadcast industry*s control.
Date When DTV Transition

Will Be Completed and Spectrum Returned Is Uncertain

Page 10 GAO- 03- 7 Digital Television Transition

1. at least one television station affiliated with the four largest
national networks (ABC, CBS, Fox, or NBC) is not broadcasting a DTV
signal;

2. the technology to convert a digital signal for use on an analog
television set is not generally available; or

3. fewer than 85 percent of television households in the television market
has the ability to receive DTV* a television household would not count as
receiving DTV if it (a) did not subscribe to a *multichannel video
programming distributor* (such as a cable or satellite service) that
carries a digital broadcast channel from each broadcaster in that market
and (b) did not have a television receiver or a digital- to- analog
converter capable of receiving digital broadcast signals. 6

How FCC interprets the third provision* sometimes referred to as the *85

percent rule** has important implications for when the broadcast spectrum
can be returned. Several aspects of this provision are still to be
determined. For example:

6 The Balanced Budget Act of 1997 amended the Communications Act of 1934
by adding Section 309( j)( 14), which provides:

*( 14) AUCTION OF RECAPTURED BROADCAST TELEVISION SPECTRUM. * *( A)
LIMITATIONS ON TERMS OF TERRESTRIAL TELEVISION BROADCAST LICENSES* A
television broadcast license that authorizes analog television service may
not be renewed to authorize such service for a period that extends beyond
December 31, 2006.

*( B) EXTENSION* The Commission shall extend the date described in
subparagraph (A) for any station that requests such extension in any
television market if the Commission finds that*

*( i) one or more of the stations in such market that are licensed to or
affiliated with one of the four largest national television networks are
not broadcasting a digital television service signal, and the Commission
finds that each such station has exercised due diligence and satisfies the
conditions for an extension of the Commission*s applicable construction
deadlines for digital television service in that market;

*( ii) digital- to- analog converter technology is not generally available
in such market; or

*( iii) in any market in which an extension is not available under clause
(i) or (ii), 15 percent or more of the television households in such
market*

*( I) do not subscribe to a multichannel video programming distributor (as
defined in section 602) that carries one of the digital television service
programming channels of each of the television stations broadcasting such
a channel in such market; and

*( II) do not have either*

*( a) at least one television receiver capable of receiving the digital
television service signals of the television stations licensed in such
market; or

*( b) at least one television receiver of analog television signals
equipped with digitalto- analog converter technology capable of receiving
the digital television service signals of the television stations licensed
in such market.*

Page 11 GAO- 03- 7 Digital Television Transition

 Defining a *market*: It has not yet been established what constitutes a
television market under the statute. FCC officials told us that they have
not yet determined what market definition to use, and that this would
likely be established in a formal proceeding.

 Counting cable subscribers: For a household to count as receiving DTV
via cable, its cable service must carry at least one digital programming
channel from each broadcaster in its market. But it is not yet clear
whether a household subscribing to such a service counts if it does not
have the equipment necessary to actually view that programming (i. e., it
does not have a digital television set or set- top converter box).

 Method of measurement: It is not yet clear what method would be used to
actually measure how many households in a market can receive DTV signals.
Some information may be available from cable and satellite providers, but
it is uncertain how FCC will determine how many households in a market
have the equipment to receive DTV over the air.

In a January 2001 notice of proposed rulemaking that focused on cable
carriage of DTV signals, FCC included a section seeking comment on how to
count DTV households for the purpose of reaching the 85 percent threshold.
7 FCC has not yet issued a ruling on this notice, and FCC officials told
us that few of the comments received touched on the 85 percent rule. The
officials also noted that because DTV penetration is still very low,
clarifying the 85 percent rule does not need to be addressed immediately.
We asked FCC in a letter for its interpretation of the statute regarding
how cable subscribers will count. In a return letter, FCC said that it has
not yet adopted a definitive interpretation of that provision of the
statute, but that it may initiate a proceeding in the near future that
focuses on soliciting public comment on the issue. 8

The first and second provisions of the statute cited above* that major
network affiliates broadcast the digital signal and that technology be
available to allow the signal to be converted for use on an analog
television set* are not likely to be an obstacle to the transition.
However, there was a consensus among most industry experts we spoke with
that the third provision* the 85 percent rule* will probably not be met in
most

7 In the Matter of Carriage of Digital Television Broadcast Signals, CS
Docket No. 98- 120,

First Report and Order and Further Notice of Proposed Rulemaking, FCC 01-
22 (released Jan. 23, 2001) at paragraph 117.

8 Letter from W. Kenneth Ferree, Media Bureau Chief, FCC, to Alan Belkin,
Assistant General Counsel, U. S. General Accounting Office (Aug. 5, 2002).

Page 12 GAO- 03- 7 Digital Television Transition

markets by 2006. To reach 85 percent penetration of DTV signals, a series
of interrelated changes need to occur, many of which are largely driven by
the market. These changes include the availability of more digital
programming, increased carriage of digital signals by cable companies, and
increased consumer purchases of DTV receivers or converter boxes. As
discussed throughout this report, serious roadblocks still remain to
achieving each of these changes.

The DTV transition will impose some cost, either directly or indirectly,
on all television viewers. To be able to receive DTV signals, a household
must take one of several actions. It either must (1) purchase a television
set that includes a tuner capable of receiving digital broadcast signals,
(2) purchase a converter box that captures the digital broadcast signal
and converts it to a format that can be shown on an analog television set,
or (3) subscribe to a cable or satellite provider that is carrying the
broadcast stations* digital signals as well as have the equipment
necessary to receive that provider*s digital signals. 9 All of these
options involve some financial cost related to DTV equipment* and digital
television sets and tuners are currently relatively expensive. Although
the price of these technologies is expected to drop dramatically as more
units are produced, the cost still may be a burden to many households,
particularly low- income households.

Once the 85 percent threshold has been met in a market and the analog
signals are turned off, the remaining 15 percent of households will no
longer be able to receive some or all broadcast channels. Households that
were receiving their television solely over the air, and had not yet
purchased a digital television set or converter box, would lose all
television service. These households would need to purchase a new
television set or converter box to resume their access to broadcast
television. Households that were subscribing to cable or satellite would,
depending on their circumstances, need to get the necessary equipment to
view their cable or satellite services* digital signals or purchase an
overthe- air digital tuner (if they did not have one already) to continue
to receive the local broadcast channels not being provided by their cable
or satellite service. Nationwide, 15 percent of American television
households represents nearly 16 million households, consisting of about

9 This assumes that cable providers do not downgrade the broadcasters*
digital signals to analog before transmitting them to subscribers. If this
were done, cable subscribers would not need new equipment but would also
not receive most of the benefits of DTV, such as high definition. DTV
Transition Will

Require Millions of American Households to Buy Additional Equipment to
Continue to Access Broadcast Stations

Page 13 GAO- 03- 7 Digital Television Transition

40 million people, who would lose access to at least some of their local
broadcast channels until they purchased additional equipment.

In addition, many households that are able to receive all DTV signals via
their cable system will still face some loss of television service. Many
households that have cable or satellite service also have one or more
additional television sets that are not hooked up to this service. Any
such sets that do not contain an over- the- air digital tuner will no
longer function without the purchase and installation of a set- top
converter box once analog service ends. Overall, approximately 81 million
television sets in 42 million American homes currently receive their
television signal solely over the air, according to Consumer Electronics
Association estimates.

Policy- makers will likely find it unpalatable to disenfranchise a large
number of American households from the ability to receive broadcast
television signals. The importance that many Americans attach to having
television access was illustrated a few years ago in a series of lawsuits
involving several broadcasters and a satellite video distribution company
named PrimeTime 24. 10 As a result of court rulings, the satellite
distributor was ordered to stop providing certain broadcast signals to
about 2 million satellite subscribers. This potential loss of service
engendered an enormous amount of correspondence from affected satellite
subscribers to Members of Congress, resulting in considerable pressure for
a solution before the signals were to be shut off. The PrimeTime 24 case
is not a perfect analogy to the DTV transition: that case had the
potential to completely turn off certain television signals to certain
consumers, whereas at the completion of the DTV transition, households can
choose to maintain their television service by purchasing additional
equipment. But the PrimeTime 24 case does serve to illustrate how the
public may react to any disruption in their television service. As with
the PrimeTime 24 case, political pressure will likely develop among those
American

10 Several broadcast television stations sued a satellite video
distributor for copyright infringement for providing certain broadcast
signals to some households. Specifically, broadcasters charged that
PrimeTime 24 was illegally providing broadcast signals from

*distant* markets to viewers who were close enough to the local broadcast
towers in their own markets to adequately receive the stations* signal
through an over- the- air antenna. Two courts ruled against PrimeTime 24
and required that it cease distribution of distant station signals to
about 2 million households. The case was ultimately resolved when the
Congress passed the Satellite Home Viewer Improvement Act of 1999, which
allowed (1) direct broadcast satellite providers to include local
broadcast signals as part of their programming packages and (2) some of
the households specifically affected by the PrimeTime 24 case to continue
receiving distant broadcast signals.

Page 14 GAO- 03- 7 Digital Television Transition

households faced with an impending loss of television service due to
termination of the analog signals.

Many other countries also are wrestling with how to complete their DTV
transition without stranding substantial numbers of consumers who have not
yet adopted DTV equipment when the analog signals are shut off. For
example:

 The government of the United Kingdom has said that its broadcasters will
turn off the analog signals when at least 95 percent of households can
receive the digital signals. In addition, United Kingdom officials have
noted that their decision about a turn- off date will also factor in the
affordability of DTV equipment. 11

 The Canadian government*s recent policy statement on DTV states that

*consumers will be able to upgrade their equipment at their own pace and
convenience* and that the transition will be *market- driven.* Canadian
officials told us that industry interests opposed any strict deadlines for
turning off analog signals.

 In setting the date for turning off analog signals, the Japanese
government factored in the average life cycle of a television set in Japan
(8 years) and the expected cost of digital television sets after the
economies of mass production are realized. On the basis of that analysis,
government officials told us that consumer adoption of digital television
sets will be sufficient to turn off the analog signals without serious
adverse effect to consumers by 2011.

11 Officials told us that converter boxes that convert broadcasters*
digital signals to analog for display on a traditional television set are
currently selling for about the equivalent of $150. The DTV transition in
the United Kingdom generally involves less expensive equipment than in the
United States because the transition in the United Kingdom is to a
digital, but not high definition, platform.

Page 15 GAO- 03- 7 Digital Television Transition

In a telephone survey of 1, 000 randomly selected American households, we
found that many people have little understanding of the DTV transition and
its implications. In addition, consumer electronics sales data suggest
that consumers have not been purchasing digital television sets at a pace
rapid enough to make it likely that 85 percent market penetration will be
reached by the end of 2006. When we posed as consumers during visits to 23
DTV retailers, we found that much of the information provided by sales
staff about DTV equipment was correct. However, many staff were uninformed
about important issues and few of the screen displays in the stores
allowed consumers to actually view a high definition picture.

More than 98 percent of American homes have a television set and the
average number of televisions per home is 2.5. Moreover, television has
become an important part of American life; it is how we share news,
entertainment, and public safety information. In addition, the Congress
has repeatedly noted the importance of maintaining the nation*s free,
overthe- air system of local broadcasting, which provides local news and
community programming.

The DTV transition will greatly change how television is received in the
United States; every household will need to make choices about what type
of equipment or service to purchase to continue to receive television
programming. However, it appears that relatively few Americans are
familiar with the DTV transition and what it entails. To gauge consumer
understanding of the DTV transition, we contracted with a survey research
firm to conduct a telephone survey of 1,000 randomly selected American
households. The consumers were asked questions that were designed to
ascertain their level of familiarity with and knowledge about the DTV
transition.

Overall, we found that many people have a low level of understanding of
the DTV transition and its implications. For example:

 Forty percent of respondents said they had never heard about the
transition to digital broadcast television, and another 43 percent said
they were only *somewhat aware* of the transition. Fewer than one in five
said they were *very aware.* Consumer Adoption

of DTV Has Been Slow, Partly Because Many Americans Are Unaware of the
Transition and Are Not Well Informed about DTV Products

Knowledge about the DTV Transition Is Limited

Page 16 GAO- 03- 7 Digital Television Transition

 Nearly half of respondents said they were not familiar at all with the
difference between an analog television set and a digital, high definition
television set. Only 14 percent were *very familiar* with the difference
between the two products. 12

 Sixty- eight percent of respondents did not know that most television
sets currently in use will require a converter box to continue to receive
overthe- air broadcasts when the transition is complete.

We also found some differences in the characteristics of people who were
more likely to know about the transition versus those who were less likely
to know. For example, we found that men were considerably more likely to
know about the transition than women, and those who were collegeeducated
were more knowledgeable than those without advanced education. Also, we
found some evidence that respondents who received television over the air
were less likely than cable or satellite subscribers to know about the
transition to DTV. (See app. III for more detailed information about the
survey results.)

This lack of familiarity about the DTV transition among American consumers
could be problematic. If consumers are unfamiliar with DTV* particularly
with benefits such as high definition television* they are less likely to
purchase digital television sets. Yet, if few consumers purchase digital
television sets, producers have little incentive to provide much digital
content and cable systems have little incentive to carry the digital
signal. Thus, consumer awareness of the transition* and subsequent
consumer adoption of DTV equipment* is a key element in facilitating the
transition.

Chairman Powell*s April 2002 proposal for voluntary industry actions to
speed the DTV transition suggested several actions that sought to increase
consumer awareness. The Chairman called on broadcast stations to use their
analog channel to promote the content on their digital channel. He also
called on cable systems to market their DTV products and programming on
the air and in customers* monthly bills. In addition, he asked DTV
equipment manufacturers and retailers to market broadcast,

12 It is possible that respondents overreported their familiarity with the
difference between analog and digital television sets. For example, we
also asked respondents whether they currently own a digital, high
definition television set. Nine percent said they did, even though the
Consumer Electronics Association estimates that only 1 percent of
households owned such a set at the time the survey was conducted.
Consumers may be confusing a digital television service (such as digital
cable or satellite) with a digital television set.

Page 17 GAO- 03- 7 Digital Television Transition

cable, and satellite DTV options to consumers at the point- of- sale. In
response to this proposal, the 10 largest cable operators said they would
do more to advertise and market their value- added DTV programming, and
consumer electronics makers said they would use point- of- sale promotions
and a national public awareness campaign to promote DTV set- top boxes. In
addition, in January 2002, the broadcast and consumer electronics
industries formed a joint initiative to increase awareness and
understanding of DTV through promotional activities in select cities.

FCC itself has not undertaken any significant activities to raise public
awareness about the DTV transition and its implications. An FCC official
told us that the agency provides information about DTV in several places
on its Web site and through the call center of its Consumer & Governmental
Affairs Bureau. However, although the Powell plan addresses actions that
industry should take, FCC has no specific initiatives of its own under way
regarding public education on DTV or the transition. FCC officials told us
that the bulk of consumer education that is related to DTV will likely be
provided by the private sector, such as through advertisements and point-
of- sale discussions, rather than by the government. However, because DTV
sales and programming are still relatively limited, consumer electronics
makers and other industries may not have sufficient market incentives to
provide a high- profile DTV marketing campaign in the short term. Because
the public will accrue some of the benefits from recovering portions of
the broadcast spectrum, a publicly funded information campaign may be
justified if it would hasten the end of the DTV transition.

Although sales of digital television sets have been increasing steadily,
the overall level of adoption remains low. Sales have grown from
approximately 14,000 units in 1998 to approximately 1.5 million units in
2001, according to the Consumer Electronics Association. 13 However,
despite this sales growth, in 2001 digital television units still
represented less than 5 percent of the 28 million television sets sold in
the United States. Moreover, the majority of these units were DTV
monitors, which lacked a DTV tuner that can receive DTV signals. Sales of
television sets

13 Digital television *units* include digital television monitors,
integrated digital television sets (monitors that also include a digital
tuner), and stand- alone set- top boxes that serve as digital tuners.
Sales figures cited here represent factory- to- dealer sales, rather than
sales to consumers. Because they include products still in inventory in
retail stores, actual consumer sales may be lower. Quality of Information

That DTV Retailers Provide to Consumers Varies

Page 18 GAO- 03- 7 Digital Television Transition

that included a tuner capable of receiving digital broadcast signals, when
combined with sales of set- top DTV tuners, still represented less than 1
percent of all television sets sold. Sales of digital television sets with
DTV tuners will increase due to FCC*s recent requirement that all new sets
include a DTV tuner, but this requirement is being phased in, with
virtually all new televisions to have a DTV tuner by 2007.

There also are roughly an additional 250 million existing television sets
in the United States, nearly all of them analog. Because the average life
span of a television set is about 10 years, large numbers of households
will have analog television sets for the foreseeable future. As a result,
even the DTV tuner mandate* which affects only new television sets* is
unlikely to result in 85 percent DTV market penetration by the end of
2006, or several years thereafter.

Perhaps the most significant barrier to greater consumer adoption of DTV
equipment is its cost. In 2001, the average price of a digital television
set was more than $1,800. Still, digital television set prices have
steadily dropped in the past few years. Whereas the average price for a
digital television set was more than $3,000 in 1998, by mid- 2002 some
units were available for as little as $1, 000, according to the Consumer
Electronics Association.

Many analysts believe that many more consumers would be willing to
purchase DTV equipment if they were more familiar with DTV and had more
exposure to high definition television*s picture and sound. For many
consumers, retail sales outlets provide the best opportunity for viewing
and learning about DTV products. To gather anecdotal information on
consumers* experiences at DTV retail outlets, we visited 23 consumer
electronics stores in California, Maryland, Massachusetts, Nevada, and
Virginia. We visited each store as a consumer *shopping* for DTV products
and asked several standard questions to a member of the store*s sales
staff.

The accuracy of the information provided by the sales staff with whom we
spoke was mixed. Nearly all of the staff were correctly able to explain
the

*platforms* available for receiving digital and HD channels (i. e., over
the air, cable, and satellite). They also were generally accurate in
explaining what equipment would be needed to receive digital signals. In
addition, most staff had some knowledge about which channels and programs
were available in high definition.

Page 19 GAO- 03- 7 Digital Television Transition

However, there was also a fair amount of inaccurate information provided.
Overall, 18 of the 23 sales staff provided inaccurate information about at
least one significant aspect regarding DTV. For example:

 Eight of the 23 sales staff significantly overstated the amount of HD
content currently available. For instance, 1 said that all cable channels
are in HD; a few incorrectly said that Fox and WB were currently
broadcasting in HD.

 Four of the staff incorrectly said local broadcasters in their market
were not broadcasting a digital signal.

 Four of the staff told us DTV is not available over the air at all.
Other staff misstated what equipment would be needed to receive DTV over
the air.

In addition, we noted that the majority of stores we visited were not
showing an actual high definition picture on the high definition
television sets being displayed on the showroom floor. Instead, many
stores showed prerecorded movies or non- HD satellite programming. Sales
of DTV products may be slowed because many consumers have never actually
experienced true high definition television, with its superior audio and
video qualities.

In addition to visiting individual retail stores, we also interviewed
executives at the corporate offices of four major retailers of DTV
products. They acknowledged that there is a lot of confusion among
consumers about DTV equipment due to the complexities involved. Because
digital television sets represent a tremendous growth opportunity for
consumer electronics retailers, they said they are eager to ensure that
their stores provide consumers with exposure to DTV, including high
definition, and that their sales staff are highly knowledgeable about DTV
products. Some companies told us that they provide their floor staff with
specialized training on DTV, and that they are using innovative methods,
such as online training tools, to do so.

Page 20 GAO- 03- 7 Digital Television Transition

On the basis of current plans for digital carriage by cable and satellite
companies, it appears unlikely that many households will have access to
all of their local digital channels via cable or satellite by December
2006. FCC has tentatively decided against mandating that cable systems
carry analog and digital channels simultaneously during the transition. In
lieu of dual carriage, however, another option we have identified is to
set a *datecertain*

when cable systems would, all at once, switch from carrying analog
channels to carrying digital channels.

Because more than two- thirds of Americans receive their primary
television service via cable, cable carriage of digital broadcast signals
is an important element in encouraging consumer adoption of digital
television sets and in encouraging producers, networks, and broadcasters
to provide more original digital and HD programming. Without carriage of
the digital broadcast signals by their carrier, cable customers* even
those who own digital television sets* are unable to watch via cable the
digital channel provided by most local broadcast stations in large cities.
14 Presently, for a cable customer to watch local digital broadcast
stations in digital format over a cable system, several factors must be in
place: that customer must (1) own a DTV monitor; (2) live in a market with
stations that are broadcasting digitally; (3) subscribe to a cable system
that has chosen to carry those local digital broadcast signals; and (4)
get from the cable system a special set- top box and the necessary cable
subscription package needed to view HDTV. 15

Currently, most cable companies do not offer their customers local digital
broadcast signals. As of August 2002, only 3 of the 10 largest cable
companies* Time Warner, Comcast, and Cox, which together serve more than
25 million cable customers* carried local digital broadcast stations in
some of their markets. In his April 2002 proposal for voluntary industry
action, the FCC Chairman called on cable systems with at least 750 MHz
channel capacity to carry up to five channels that provide substantial HD

14 Cable customers with digital television sets and a digital tuner can
still receive DTV signals over the air. However, few consumers have such a
tuner, and those who do must switch back and forth between cable and
antenna reception to receive local digital broadcasts.

15 Cable systems offer different subscription packages or *tiers.* The
basic tier typically consists, at a minimum, of local analog broadcast
signals, while an expanded tier includes additional cable network
channels. In the past several years, cable systems have been offering a
*digital cable* tier, which can have 100 or more channels. Carriage of
Digital

Signals by Cable and Satellite Operators Is Insufficient to Help Achieve
85 Percent Threshold Quickly

Cable Carriage of Digital Signals Is Limited

Page 21 GAO- 03- 7 Digital Television Transition

programming or other value- added digital programming during at least 50
percent of their prime- time schedule by January 1, 2003. The nation*s top
10 cable companies have all agreed to do so in the top 100 markets.
However, these five channels may include a mix of both local digital
broadcast channels and national cable networks that provide HD
programming. As a result, it is unclear how much cable carriage there will
be of digital local broadcast channels in the near future. These companies
also have agreed to provide consumers who request them with set- top boxes
that include digital inputs and can display HD.

We spoke with representatives from 5 large companies that own multiple
cable systems and 10 broadcast stations, and we reviewed comments
submitted by the cable industry in FCC proceedings. We asked the
representatives about the incentives and disincentives that cable systems
face in choosing to carry local digital broadcast channels as well as to
carry high definition channels provided by national cable networks. Cable
companies said they are willing in some cases to carry local digital
broadcast stations, but they are reluctant to use their limited channel
capacity to provide a local digital signal that (1) very few consumers are
able to watch and (2) often merely duplicates what appears on the
broadcaster*s analog channel. The cable companies said they are far more
likely to carry a station*s digital signal if it offers *compelling*
content that is in demand by their customers. In particular, they said
they are most interested in carrying digital channels that offer
substantial amounts of high definition programming, as opposed to standard
definition digital or multicasting.

Cable companies also told us that their most important incentive for
providing more digital carriage is competition with direct broadcast
satellite. Satellite service has rapidly increased its market share: it
grew from about 7 percent of television households in 1999 to more than 17
percent by mid- 2002. The two major national satellite companies generally
do not provide local digital broadcast channels, but they do offer their
customers several high definition cable networks, such as HBO HD and
Discovery HD Theater. Cable companies told us that they want to increase
the amount of digital programming they offer* including local digital
broadcasts* to stay competitive with satellite.

Some cable systems would have great difficulty carrying digital signals
even if they wanted to do so. Many smaller cable systems have not
installed fiber optic cable lines or made other upgrades to their cable
network that allow for the carriage of digital signals. As a result, these

Page 22 GAO- 03- 7 Digital Television Transition

systems are highly limited in their channel capacity and are unable to
carry local digital broadcast channels in a digital format.

As previously discussed, the analog broadcast signals are not likely to be
turned off after December 2006 unless 85 percent of households in a given
market can receive DTV. More than two- thirds of American households
subscribe to cable television, and thus cable carriage of DTV signals may
play a large role in determining when that 85 percent threshold has been
reached. The law says that households receiving DTV via cable count toward
the 85 percent threshold only when their cable system carries a digital
broadcast channel from all stations broadcasting digitally in their
television market. Yet, while most large cable companies are planning to
provide a digital broadcast channels from some broadcast stations in many
markets, none currently plan to carry a digital broadcast channel from all
digital broadcast stations. As a result, it appears highly unlikely that
cable carriage of local digital broadcast signals will be sufficient to
substantially contribute to reaching an 85 percent market penetration by
2006. To some extent, this problem is mitigated by FCC*s recent DTV tuner
mandate. In the future, as cable customers purchase new television sets
that contain a DTV tuner, they will be able to receive digital signals
over the air even if their cable system is not carrying those signals.
However, this will require some cable households to take actions that many
are resistant to: install a rooftop or set- top antenna and switch back
and forth between cable service and over- the- air reception to access
local digital channels not carried on their cable system.

As of mid- 2002, about 17 percent of American television households
subscribed to direct broadcast satellite service, and subscribership has
been increasing rapidly in recent years. 16 The two primary satellite
television services available in the United States are DirecTV and
EchoStar*s DISH Network. All satellite subscribers need a satellite dish
and a satellite receiver, but subscribers who want to access HD
programming via their service are given a special dish and receiver that
can process HD signals.

16 Companies that provide television delivery for a fee (as opposed to
free, over- the- air television) are known as *multichannel video
programming distributors.* In addition to cable and direct broadcast
satellite, which are by far the most common, these distributors include
multichannel multipoint distribution systems (wireless cable), local
multipoint distribution systems, satellite master antenna television, and
open video systems. Cable Carriage Is Unlikely

to Be Sufficient to Help Reach the 85 Percent Threshold by December 2006

Direct Broadcast Satellite Providers Offer No Local Digital Channels

Page 23 GAO- 03- 7 Digital Television Transition

DirecTV and DISH each offers subscribers the option of receiving their
local analog broadcast channels in about 45 television markets. However,
neither service offers any local digital broadcast channels in any market.
17 Both satellite providers do, however, offer several options for HD
programming from cable or satellite networks. For example, both providers
offer HBO HD and Showtime HD, while DirecTV also offers HDNet, and DISH
also offers Discovery HD Theater.

Because satellite is a national service, it faces inherent constraints in
providing local broadcast channels: carrying a local channel in a few
markets uses the same channel capacity as carrying one cable network to
customers nationwide. Representatives of the two satellite services have
said it is therefore not feasible for them to carry local digital channels
and analog channels at the same time on a widespread scale. Lack of local
digital carriage during the transition by satellite providers may increase
the difficulty of reaching the necessary 85 percent DTV penetration
threshold in many markets, particularly if satellite service continues to
grow in market share.

This problem is somewhat mitigated by the fact that satellite equipment
can be adapted fairly easily to have the additional capability of
receiving local digital channels through an over- the- air antenna. DISH
already offers subscribers equipment that serves the dual purpose of
receiving and decoding both satellite signals (which can include HD) and
over- the- air broadcast signals (which can include both analog and
digital). The overthe- air antenna automatically picks up the signal when
the television is tuned to a local broadcast channel, and the satellite
dish picks up the signal when the television is tuned to other channels.

Under the Cable Television Consumer Protection and Competition Act of
1992, local commercial broadcast stations have the right to require that
cable systems in their market carry their analog signal. Once the DTV
transition is complete, and analog broadcasting ends, this right, commonly
known as *must- carry,* will transfer to broadcasters* digital signals.
Most stations, including the great majority of those affiliated with a
major broadcasting network, do not need to invoke *must- carry* because
cable

17 DISH allows subscribers under certain circumstances to access the
digital signal of CBS*s New York or Los Angeles affiliate. However, this
option is not available to subscribers in the New York or Los Angeles
markets, and thus no DISH subscribers receive local digital broadcasts in
their own market location. FCC Has Tentatively

Decided Against Mandatory Dual Cable Carriage

Page 24 GAO- 03- 7 Digital Television Transition

systems desire to carry them. These stations sign what is called a

*retransmission consent agreement* with the cable system, which lays out
the terms under which the cable system will carry the station.

Currently, these must- carry rules apply only to broadcasters* analog
channels. 18 In July 1998, FCC initiated a proceeding on DTV cable
carriage, which included a discussion of whether must- carry rules should
be modified so that they apply both to a station*s analog channel and its
digital channel during the DTV transition. 19 , 20 In the proceeding,
broadcasters argued that few cable systems currently offer local digital
broadcast channels, which means that cable customers have little incentive
to purchase digital television sets. With few viewers owning digital
television sets, networks have little incentive to provide more valueadded
digital programming, such as HDTV. This completes a circle: with few
consumers owning digital television sets, and little digital programming
available, few cable systems have any incentive to carry local digital
signals. Broadcasters have argued that mandating cable carriage of both
analog signals and digital signals, often known as *dual

must- carry,* would break this circle and greatly improve the speed with
which 85 percent DTV market penetration is reached.

The cable industry has strongly opposed a dual must- carry requirement,
arguing that it would greatly limit the number of channels that cable
providers are able to offer their customers. The industry contends that
the DTV transition has been slow largely because broadcasters have failed
to provide enough original digital and HD programming; it also says that
cable systems will carry local digital broadcasts as soon as consumer
demand warrants it. In addition, the industry argues that dual must- carry
would represent a violation of its free speech rights and an unlawful

*taking* of its property. 18 During the DTV transition, a station may
invoke must- carry for its digital signal only if that station has no
analog signal and broadcasts only a digital signal. 19 Notice of Proposed
Rule Making on Carriage of Transmissions of Digital Television Broadcast
Stations, CS Docket No. 98- 120, released July 10, 1998. 20 Direct
broadcast satellite companies have a requirement somewhat analogous to
cable*s must- carry. The Satellite Home Viewer Improvement Act of 1999 (P.
L. 106- 113) allows direct broadcast satellite companies to provide local
broadcast signals, but requires in most circumstances that if they carry
any local channels in a market, they are required to carry all of that
market*s channels.

Page 25 GAO- 03- 7 Digital Television Transition

In January 2001, FCC tentatively decided that it would be unconstitutional
to require dual must- carry. FCC concluded that requiring simultaneous
carriage of both analog and digital broadcast signals appeared to burden
cable operators* First Amendment interests more than was necessary to
further a substantial government interest. FCC also issued a Further
Notice of Proposed Rulemaking to collect public comment and gather more
information before a final ruling is made on the issue. 21

Under the current legal and regulatory environment, it may be a long time
before cable carriage of broadcast DTV signals is sufficient to help
substantially contribute to the 85 percent threshold. Market forces are
unlikely to engender full dual carriage because cable systems do not want
to use scarce channel capacity to simultaneously carry two channels of
each broadcast station. At the same time, cable systems have little
incentive to switch from solely analog to solely digital carriage of local
broadcast stations until the end of the transition. The resulting
situation is something of a *catch- 22.* Once the transition is completed,
and the analog signals are turned off, all cable systems will be carrying
local broadcasters* digital signals. However, it is likely that the
transition will not be completed until 85 percent of households in a
market can receive those digital signals. Yet, because cable systems are
generally unwilling to carry the analog and digital signals
simultaneously, it is more difficult to reach that 85 percent threshold in
the first place.

Rather than wait for cable systems to carry all local broadcast digital
signals through voluntary dual carriage, one option we have identified is
for FCC to adopt rules under which a specific date is set for cable
systems to switch from full carriage of analog signals to full carriage of
digital signals. Imposing a date- certain for a cable carriage switchover
from analog to digital signals could have two specific advantages. First,
it could facilitate the transition by requiring cable carriage of digital
broadcast signals* and would do so without the need for dual carriage.
Second, cable systems and their customers would know a date- certain for
which they could plan to be ready for the switchover and have the
necessary equipment in place.

21 In the Matter of Carriage of Digital Television Broadcast Signals, CS
Docket No. 98- 120,

First Report and Order and Further Notice of Proposed Rulemaking, FCC 01-
22, released Jan. 23, 2001. Setting a Date- Certain for

Cable Switchover from Analog to Digital Carriage Might Be a Way to
Facilitate DTV Transition

Page 26 GAO- 03- 7 Digital Television Transition

Procedurally, this policy might best be carried out by setting a date when
broadcast stations* right to invoke must- carry for their stations* signal
would transfer from their analog signal to their digital signal. Because
cable systems and broadcast stations routinely renegotiate carriage
agreements every 3 years, a logical time frame for implementing this
switchover would be when these agreements are set to be renegotiated.
Those negotiations are set to be take place in 2005 and again in 2008.

A policy of a *date- certain* switchover may have drawbacks as well as
advantages. If many cable customers do not have DTV equipment by the

*date- certain,* cable systems may elect to continue to carry analog
signals as well as digital signals after the switchover date. FCC
officials told us that such a scenario could have two unintended outcomes.
First, it could create a de facto policy of dual must- carry. Second, the
policy could inadvertently harm smaller broadcast stations and their
viewers. Once the analog must- carry requirement were to end, many cable
systems might choose to continue carrying the analog signals of large
stations (which have a large market share) but not of small stations.
Thus, some smaller stations would no longer be seen by households that did
not have a set- top box or digital television set for processing digital
signals. 22

Officials at the National Cable & Telecommunications Association (NCTA)
expressed concern that equipment issues could make preparing for a
datecertain switchover an enormous and costly task. To continue to receive
local broadcast channels via cable once the switchover occurred, consumers
whose cable system was no longer providing any analog signals would
require either a digital cable- ready television set or some form of cable
set- top box. Digital cable- ready television sets are not yet available
on the market, and some consumers are resistant to using set- top boxes.
NCTA officials also said that smaller cable systems with no digital
capability at all may need some kind of exemption. These officials also
noted that a date- certain switchover policy would place much of the
burden of the DTV transition on the cable industry and its customers, even
though the DTV transition was promoted by and pertains to broadcast
television stations.

22 Although these problems could be alleviated by prohibiting cable
systems from carrying analog broadcast signals once must- carry rights
transfer from analog signals to digital signals, such a prohibition would
likely be challenged in court.

Page 27 GAO- 03- 7 Digital Television Transition

The concern expressed by NCTA officials regarding the focus of a policy on
cable subscribers is understandable. However, given that more than two-
thirds of Americans get their television via cable, and given that the DTV
tuner mandate will not take full effect for several more years, policies
targeted at cable households could be important to meeting the 85 percent
threshold in a timely fashion. NCTA officials* concern about ensuring that
consumers have the necessary equipment for a date- certain switchover is
also understandable: the rollout of DTV- compatible cable equipment will
likely be costly, cumbersome, and confusing. However, it is important to
note that for the DTV transition to occur, this rollout will occur with or
without a date- certain switchover. Setting a date- certain would simply
help to ensure that cable customers transition within a certain time
frame, but it may not necessarily increase the cost or complication of
readying cable subscribers for the transition to DTV.

DTV allows for a variety of new forms of content, including HD, and an
increased supply of true digital content is an important element in
encouraging consumer adoption and cable carriage of DTV. Both broadcast
networks and cable networks have greatly increased the amount of digital
content they provide, although this still represents a relatively small
portion of all television programming. Disincentives to the provision of
more digital content include the small market share of viewers able to
watch DTV, the cost and complexity* relative to this small market share*
of filming or formatting HD programming, and possibly concerns about
unauthorized copying and retransmission of digital content provided over
the air.

The creation and delivery of digital programming is a key element in
speeding the DTV transition. Consumers have little incentive to purchase
costly digital television sets when little digital programming is
available. Likewise, cable systems are not likely to use their limited
channel capacity to carry broadcasters* digital signals if those signals
simply duplicate what is already on the broadcasters* analog signals.

DTV allows for a number of different programming options. True digital
programming has actually been filmed in digital or has been converted from
a high- resolution format (such as 35 mm film) to a standard definition or
high definition digital format. Alternately, a broadcast station can
simply duplicate the programming shown on its analog channel by scanning
it and *converting* it to digital. FCC gave broadcasters flexibility in
determining how to use their digital signals and did not specifically
Availability of Digital

Programming Is Increasing but Still Limited, Possibly Due in Part to Copy
Protection Concerns

DTV Allows for High Definition and Other New Forms of Content

Page 28 GAO- 03- 7 Digital Television Transition

require that broadcasters provide any programming in high definition.
Indeed, many broadcasters have already said that they intend to use their
digital channel to multicast several channels of standard definition at
once, rather than to provide HD.

The camera, editing, and production equipment that most broadcast stations
and networks currently use to film and produce live programming* such as
sports or news* cannot be used for HD broadcasts, which require special
equipment. By contrast, most recorded programming, such as scheduled
dramas and situation comedies, has been shot in the past few years using
35 mm film or high- resolution videotape that can be converted into a
variety of formats. These formats can include standard definition analog,
standard definition digital, and high definition digital as well as either
a traditional aspect ratio or *widescreen.* 23

As of August 28, 2002, 460 broadcast stations in 136 markets were
broadcasting a digital channel. However, much of the programming on those
channels is not true digital content, but rather programming that has been
duplicated from a station*s analog channel and converted to a single
stream of standard definition digital. In a survey of broadcast stations
that we conducted in the fall of 2001, 24 74 percent of the stations that
had begun broadcasting a digital signal and that responded to our survey
said they were providing at least some HD content* an average of 23 hours
per week. In subsequent interviews, broadcast stations told us that the
amount of HD content they provide on their digital channel generally
depends on the programming feed provided to them by their affiliated
network. HD content (as opposed to content in standard definition digital
or merely converted from analog) is generally believed to be the most
important factor in encouraging consumer adoption and cable carriage of
DTV.

The national broadcast networks are mixed in terms of the amount of HD
programming they provide, as follows:

23 An *aspect ratio* refers to the shape of the picture on the screen. A
traditional analog television has an aspect ratio of 4: 3, meaning that
the screen is 4 units wide and 3 units high. DTV is often in a
*widescreen* format, which has an aspect ratio of 16: 9, similar to a
movie theater.

24 For a more detailed discussion of the survey results, see GAO- 02- 466.
Amount of Digital

Programming Is Increasing but Still Relatively Limited

Page 29 GAO- 03- 7 Digital Television Transition

 CBS was the first commercial network to provide substantial HD
programming. Nearly all of its scripted prime- time situation comedies and
dramas are available in HD, as are many national sports broadcasts,
certain movies, and one daytime soap opera.

 ABC began providing nearly all of its scripted prime- time programs in
HD during the 2001- 02 television season. It also provides some sports
programming in HD.

 NBC, until recently, has provided relatively little HD programming,
primarily The Tonight Show, one prime- time drama, and certain sports
broadcasts. NBC has said it will be providing several more hours- per-
week HD programming in the 2002- 03 television season.

 Fox network provides virtually no HD content. It does provide more than
two- thirds of its prime- time programming in *Fox Widescreen,* a digital,
standard definition format.

 PBS provides several programs per month in HD, mostly in the form of
special programs and series.

 WB, UPN, and PAX* the three smaller national networks* have provided
virtually no HD or other true digital content. WB has announced it will
begin providing about 5 hours per week of prime- time HD during the 200203
television season.

Among cable networks, HBO, Showtime, and Discovery each has a channel that
provides programming that is either exclusively or primarily in HD. Other
cable networks, including Madison Square Garden and A& E, have occasional
special programming in HD. HDNet shows programming that is exclusively in
HD; it is currently available only via DirecTV, although the network is
expected to offer a channel on cable systems in the near future. ESPN has
said it will begin an HD channel next year. Most other major cable
networks, including CNN and MTV, are not currently offering any HD
programming.

Chairman Powell*s proposal for voluntary industry actions to speed the DTV
transition called on the top four broadcast networks, as well as HBO and
Showtime, to provide HD or other *value- added DTV programming* during at
least 50 percent of their prime- time schedule beginning with the 2002- 03
season. We spoke with executives of four national broadcast networks,
three major television studios, three cable networks, and other industry
representatives to learn their incentives and disincentives for producing
or delivering more HD and other true digital programming. Broadcast
networks said the main disincentive to providing more HD content is the
small number of viewers currently able to watch HD. Because the market
share for HD content is small, HD programming Networks Face Incentives

and Disincentives to Providing More Digital Content

Page 30 GAO- 03- 7 Digital Television Transition

provides little in the way of significant additional revenue
opportunities. In addition, there is relatively little demand or pressure
from viewers to provide more HD content.

Networks and studios told us that in absolute terms, the cost of
converting most recorded programming* such as films, situation comedies,
and dramas* to HD is relatively low, adding perhaps $8,000 to $10,000 for
a 1- hour show. In addition, the cost of transmitting a high definition
signal to broadcast stations is not significantly higher than that of
transmitting a standard definition digital signal. However, industry
representatives noted that given the small market share for HD, in
relative terms these costs are not insignificant. In addition, the cost
and complexity of providing live programming, such as sporting events, in
HD can be substantial because of the need for separate cameras and
production facilities.

Broadcast networks that are providing HD content say they are doing so not
for any short- term profit but rather for long- term benefit. For example,
they want their programming to be available in HD when it is sold for
syndication years from now. Cable networks providing HD told us they want
to be forward- looking and provide innovative, state- of- the- art
programming that adds value and distinguishes them from other networks.

We asked officials at two major broadcast networks, NBC and Fox, why they
were providing relatively little HD content. NBC officials said that the
studios that produce some of their programming have not been able to
provide it in HD format in a timely enough manner. They also said that
conversion to HD format was costly relative to the small number of viewers
able to watch HD programming. They noted that other networks were doing
more HD in part because those networks had agreements with consumer
electronics companies to underwrite some of their HD production costs. Fox
officials said they provide the great majority of their prime- time
programming in *Fox Widescreen,* which, while not HD, provides a
widescreen aspect ratio and a better picture quality than the traditional
analog signal. In addition, they said that their standard definition
digital format allows them to provide more live programming, such as
sports, in a digital format because separate HD cameras and production
facilities are not required.

Because television advertising ultimately funds most network programming,
we spoke with three major television advertisers and reviewed the trade
literature, to assess advertising*s role in affecting network decision-
making regarding digital content. Overall, we found that advertising
revenues are not a significant driver in the DTV transition.

Page 31 GAO- 03- 7 Digital Television Transition

Almost no advertising is produced in HD. In addition, due to low
viewership, few advertisers are currently expressing special interest in
placing ads on programs shown in HD. Advertisers also told us that
networks and broadcasters are not making significant efforts to get them
excited about DTV and any possibilities it holds with regard to
advertising. However, with an eye to the future, two large advertisers
said they have actively begun exploring the possibilities of DTV
advertising to be ready when DTV becomes more widespread.

Many content providers say they are reluctant to provide high- value
digital content over the air via DTV because they are concerned about
consumers making unauthorized copies as well as redistributing the content
over the Internet. DTV raises special concerns about copy protection
primarily for two reasons. First, in the digital world, each copy is an
exact replica of the original, whereas in the analog world, each
successive copy degrades in quality. Second, digital content can be easily
and widely transmitted on the Internet, whereas analog copies must
typically be physically transferred from user to user.

In October 1998, the Digital Millennium Copyright Act (DMCA) was signed
into law. 25 The DMCA amended and updated the Copyright Act of 1976 26
with respect to the use of copyrighted works in digital contexts. Most
relevant to DTV, the DMCA makes it a crime to circumvent copyright
protection (* antipiracy*) technologies, such as encryption and
scrambling. In other words, the DMCA makes it a crime to intentionally
create hardware or software to bypass technology designed to prevent
unauthorized copying.

At the same time, the DMCA does not require that consumer electronics
manufacturers actually include in their consumer products technology to
protect against piracy of DTV broadcasts. In 1998, five consumer
electronics manufacturing companies began working together to develop a
standard for copy protection, resulting in the Digital Transmission
Content Protection technology, commonly known as *5C.* This technology is
designed to protect DTV content from unauthorized copying or
redistribution by DTV home consumers. The seven major studios that

25 P. L. 105- 304, 112 Stat. 2860 (1998). 26 17 U. S. C. S:101 et seq.

Copy Protection Concerns Are Still Being Addressed

Page 32 GAO- 03- 7 Digital Television Transition

produce television content, as well as the cable industry, have agreed
that 5C meets most of their key requirements for adequate copy protection.

However, as initially developed, 5C protects content delivered over cable
or satellite service, but not content delivered over the air. All of the
studios, as well as major broadcast networks, have expressed concern about
this, and five of the studios have refused to sign licensing agreements
using 5C technology until it covers over- the- air broadcasts. Broadcast
networks in particular are concerned that without protection for over-
the- air content on DTV, content providers will move their programming to
cable and satellite channels where copyright protection is stronger.

To address copy protection for over- the- air content, studios want the
use of a *broadcast flag,* which would identify rules for how particular
content could be used. The flag would be recognized by technology embedded
in digital television sets and other devices that receive DTV broadcast
signals. For example, the flag might signal to a copy device that the user
is allowed to make personal copies of a particular television program but
would prevent that user from distributing those copies on the Internet.
For a broadcast flag to be effective, a government mandate may be required
to prohibit electronics makers from manufacturing products that did not
follow the instructions of the flag. 27

In August 2002, FCC initiated a rulemaking exploring whether it can and
should mandate the use of a copy protection mechanism for DTV. FCC is
seeking public comment on several issues, including the need for a
broadcast flag, the appropriate implementation of various copy protection
technologies, and the extent to which FCC has jurisdiction regarding DTV
copy protection issues.

Much of the debate over copy protection centers on finding the correct
balance between the consumer*s right to view and copy material and the
intellectual property rights of copyright holders. In the 1984 Supreme

27 Another copy protection problem is what is commonly referred to as the
*analog hole.* Consumers with analog television sets can watch digital
signals using a set- top converter box that converts the signal from
digital to analog. However, this process currently strips the signal of
any copy protection, meaning it would be possible to convert the content
back into an unprotected digital form that could be illegally copied and
redistributed. A technology similar to a broadcast flag could be developed
to *plug* the analog hole, but this is still being negotiated by content
providers and consumer electronics manufacturers.

Page 33 GAO- 03- 7 Digital Television Transition

Court case Sony Corporation of America v. Universal City Studios, 28 the
court ruled that *fair use* doctrine 29 gives consumers broad latitude to
record television programs for noncommercial use in the home. The Consumer
Electronics Association argues that copy protection technologies should
not be allowed to impinge on fair use rights, which would deprive the
public of equal and fair access to information, entertainment, and
education. Content producers, represented by organizations such as the
Motion Picture Association of America, argue that mandated copy protection
is essential in the digital era if intellectual property rights are to be
preserved. Without sufficient protection, they say, content providers will
not be willing to provide high- value content via digital broadcast
television.

Copy protection issues are very important to the content and consumer
electronics industries, and the debate has been contentious. However, DTV
is only one part of a larger debate about copy protection in the digital
era; the issue also encompasses recorded music, films, and other media.
Many observers with whom we spoke in the content, consumer electronics,
and broadcast industries said that DTV copy protection is an important
hurdle that needs to be resolved. At the same time, many believed that
copy protection issues were ultimately less of a roadblock to the DTV
transition than other key challenges.

To speed the DTV transition, FCC has adopted an order requiring that by
2007 most new broadcast television sets include a tuner capable of
receiving digital signals over the air. Another policy option would be to
pair the over- the- air mandate with a requirement that new television
sets also be digital cable- ready. Because many more American households
receive television via cable than receive it over the air, mandating
digital cable- ready capability could be an effective policy for speeding
the DTV transition if the marginal cost of this requirement were found to
be reasonable. (See app. II for a discussion of other equipment issues
that are affecting the DTV transition.)

28 464 U. S. C. 417 (1984). 29 The fair use doctrine permits copying of
copyrighted works for such purposes as criticism, commentary, news
reporting, teaching, scholarship, or research. 17 U. S. C. S:107.

Digital Over- the- Air Tuners Have Been Mandated, but Digital Cable- Ready
Capability Has Not

Page 34 GAO- 03- 7 Digital Television Transition

On August 8, 2002, FCC adopted an order requiring that most new broadcast
television sets, as well as other equipment like VCRs that may contain
broadcast receivers, include the capability to receive DTV signals. 30
This DTV tuner mandate is being phased in over time on the basis of the
size of the television set. For example, all new sets of 36 inches and
above must have DTV tuners by July 1, 2005, while sets of 13 inches and
above must have the tuner by July 1, 2007. FCC said that its jurisdiction
to impose a DTV tuner mandate is established by the All Channel Receiver
Act of 1962, as amended, which gives FCC the authority to require that
television sets be capable of adequately receiving all frequencies
allocated by FCC for television broadcasting.

Currently, very few television sets sold in the United States are capable
of receiving digital broadcasts. FCC said it adopted the DTV tuner mandate
to ensure that consumers are provided with the capability to receive
broadcasters* digital signals and to move more rapidly toward completion
of the DTV transition. FCC also noted that the additional cost per
television set will be minimized by the large manufacturing volumes that
will result from the mandate. The National Association of Broadcasters,
which strongly supported the mandate, has cited estimates that the cost of
imposing a DTV tuner mandate may be as low as $16 per set by 2006.

Opponents of the DTV tuner mandate, which include the Consumer Electronics
Association, cite different estimates, saying that the mandate could raise
the price of a television set by as much as $250. Moreover, opponents say
it is an inefficient policy, given that more than four- fifths of American
households subscribe to a cable or satellite service for their primary
television set and may not need or use a digital broadcast tuner. They
argue that consumer demand, rather than a government mandate, should drive
whether digital tuners are offered in television sets.

Both sides of the tuner mandate issue raise valid points. Because more
than 25 million new television sets are sold each year, the DTV tuner
mandate will undoubtedly allow the 85 percent DTV penetration rate to be
reached more quickly. In addition, most experts believe that the per- unit
cost of the mandate, while hard to predict, is not likely to be very high
once the economies of large- scale production are achieved. At the same

30 In the Matter of Review of the Commission*s Rules and Policies
Affecting the Conversion to Digital Television, MM Docket No. 00- 39,
Second Report and Order and Second Memorandum Opinion and Order, FCC 02-
230, released Aug. 9, 2002. Over- the- Air DTV Tuner

Mandate Will Spur the Transition, but Standing Alone May Be Inefficient

Page 35 GAO- 03- 7 Digital Television Transition

time, the tuner mandate raises questions of economic efficiency: all
consumers purchasing sets of 13 inches or over will be paying for a DTV
tuner that the majority of them (those who receive their primary
television via cable or satellite) may be unlikely to use.

Moreover, although the DTV mandate will help reach the 85 percent
threshold more quickly, it will do so largely because cable and satellite
households that purchase new television sets that include the digital
overthe- air tuner will count toward the threshold even though they may
not actually watch their television over the air. To watch local digital
broadcasts over cable or satellite* presuming those broadcasts were being
carried by their cable or satellite operator* many of these households
would need additional equipment. The tuner mandate thus could result in a
scenario where analog signals are turned off in a market because 85
percent of households are capable of receiving local DTV channels over the
air* but the majority of those households are cable or satellite customers
who, in practice, are not actually using their set for over- the- air
reception.

Cable and over- the- air television each uses a different digital format
and thus each requires a different type of tuner to decode digital
signals. Although a digital over- the- air tuner has been mandated,
another option would be to additionally mandate that new television sets
be digital *cableready.*

With a digital cable- ready television set, the cable line would plug
directly into the set and digital signals could be viewed without need of
a cable set- top box. Cable- ready analog television sets have been
available for many years, but there are no cable- ready digital television
sets currently on the market. Digital cable- ready sets could be important
to the DTV transition because consumers may be more likely to purchase
digital television sets if the set does not require a set- top box to
access cable service.

Digital cable- ready capability is more complicated than analog cable-
ready capability, and there is no one definition for what constitutes a
digital cable- ready television set. FCC and television manufacturers
generally consider a digital cable- ready set to include, at a minimum, a
digital cable tuner (to receive and process digital signals) and a slot
for a *point of Mandate for All Televisions

to Be Digital Cable- Ready Might Have Benefits

Page 36 GAO- 03- 7 Digital Television Transition

deployment* (POD) security device (to handle encrypted cable programming).
31

In February 2000, after much negotiation, the Consumer Electronics
Association and the National Cable & Telecommunications Association
submitted to FCC an agreement of basic technical standards for a digital
cable- ready television set. However, since that time, the two industries
have been unable to resolve details related to that agreement, including
licensing and programming guide issues. Television manufacturers say they
are reluctant to roll out digital cable- ready sets until all cable
systems implement the agreed- upon technical standards, and they have
requested that FCC implement a timetable for national cable standards. FCC
and the Congress are monitoring the negotiations but so far have left the
issues to the industries to resolve on their own and, to date, have not
imposed any significant requirements regarding digital cable- ready
television sets.

Because far more households receive local broadcast signals via cable than
via over the air, pairing a digital cable- ready mandate with the existing
over- the- air tuner mandate might be an efficient policy for ensuring
that households are able to receive and watch DTV signals. It is not clear
what the additional manufacturing cost would be of incorporating digital
cable tuners and POD slots into television sets that already include
digital over- the- air tuners. The Consumer Electronics Association has
stated that because the electronic components for digital cable tuners are
almost identical to those for digital broadcast tuners,

*manufacturers could include combination broadcast and cable tuners in
their products at a cost that would be little greater than the cost of
either a broadcast- only tuner or a cable- only tuner.* 32 Nonetheless, a
more detailed cost- benefit analysis would need to be undertaken before
such a policy was implemented, particularly in light of the probable
requirement for a POD slot to make the set digital cable- ready.

31 FCC has adopted three definitions to designate a digital television set
as digital cableready. Under all three definitions, the set includes a
digital cable tuner and a POD slot. Under two of the definitions, the set
also includes other functionalities, such as digital inputs and support
for interactivity. See In the Matter of Compatibility Between Cable
Systems and Consumer Electronics Equipment, PP Docket No. 00- 67, Report
and Order,

FCC 00- 342 (released Sept. 15, 2000). 32 Letter to W. Kenneth Ferree,
Federal Communications Commission, from Michael Petricone, Consumer
Electronics Association, filed in CS Docket No. 97- 80,

Implementation of Section 304 of the Telecommunications Act of 1996;
Commercial Availability of Navigation Devices, and PP Docket No. 00- 67,
Compatibility Between Cable Systems and Consumer Electronics Equipment,
Sept. 11, 2002.

Page 37 GAO- 03- 7 Digital Television Transition

The idea previously discussed in this report for a *date- certain* cable
switchover from analog signals to digital signals might be especially
effective if paired with a mandate that all new television sets sold be
digital cable- ready. Because about 25 million new television sets are
sold each year, significant numbers of households would own a television
set capable of receiving digital signals via cable without the need for a
set- top box by the date- certain cable switchover, thereby lessening the
need of cable subscribers to obtain set- top boxes when the switchover
occurs.

Direct broadcast satellite service, like cable and over the air, requires
a digital tuner to decode the digital signal and turn it into the picture
that appears on the television screen. Satellite uses a third format for
transmission of digital signals. Some digital television sets on the
market are digital *satellite- ready* in that they incorporate a satellite
tuner and do not require a set- top box to receive satellite service.
However, a satellite DTV tuner mandate would not help reach the 85 percent
threshold to the extent that a cable DTV tuner mandate would. First, there
are many more cable subscribers than satellite subscribers in the United
States. In addition, unlike cable operators, satellite operators are not
required to carry local broadcast channels (although if they choose to
carry any local channels in a market they are required to carry all of
that market*s channels). Satellite companies are uncertain about their
plans for offering local broadcasts once the DTV transition is complete.
This is partly because the HD programming that many local stations will be
providing requires greater bandwidth than current analog programming, and
this will impact the satellite systems* capacity to carry local broadcast
stations.

The DTV transition will affect nearly all Americans by changing the nature
of television* a main source of news and entertainment* and requiring
nearly every household to obtain new equipment. Despite this, few
Americans seem aware of the DTV transition and the implications it will
have for them. This lack of knowledge is, in and of itself, a barrier to
the transition*s timely completion. It is likely a factor in the sluggish
sales for DTV equipment and the lack of pressure by viewers for networks
to provide more HD programming and for cable systems to carry local
digital broadcasts. To date, FCC has made recommendations to the private
sector but has not undertaken significant initiatives of its own to
increase public awareness about DTV and the transition.

Until recently, laws passed by the Congress and rules implemented by FCC
regarding the DTV transition have been focused largely on the rollout of
DTV signals by broadcast stations. But factors driving consumer adoption
Conclusions

Page 38 GAO- 03- 7 Digital Television Transition

also are important because the transition cannot be completed until
sufficient numbers of households can view the digital broadcasts. The
realization of most of these factors has largely been left to market
forces. Generally, market- driven adoption of new technologies is
considered best, but the current circumstances in the DTV transition
suggest that it is unrealistic to anticipate that market forces will bring
about the completion of the transition within the originally anticipated
time frame. Thus, it would be helpful for policy- makers to better
understand the various options that could be implemented to advance the
timeliness of the DTV transition.

FCC*s recent DTV tuner mandate serves as a notable exception to the
transition*s market- driven approach. However, that mandate alone* which
will not take full effect until mid- 2007* may not be enough to complete
the transition in a timely and reasonably seamless manner. An additional
option would be to require digital cable- ready capability in addition to
the over- the- air digital tuner. Because more than two- thirds of
households receive cable, mandating that televisions be digital cable-
ready may prove a cost- effective policy option for hastening the DTV
transition, particularly when paired with the existing over- the- air
mandate. While the additional cost of the digital cable tuner is likely
small, it is less clear what the incremental cost of the POD slot would
be. In addition, outstanding cable compatibility issues would need to be
resolved before a digital cable- ready mandate could be implemented.

Another policy option related to DTV that we have identified is to set a
date- certain when broadcast stations* right to invoke a must- carry
status for their stations* signals would transfer from their analog
signals to their digital signals. This option could have the advantage of
speeding up cable carriage of digital signals while avoiding problems
inherent in requiring dual carriage. Pairing this date- certain switchover
with a digital cableready mandate has the potential to be especially
effective. The digital cable mandate would ensure that when the switchover
did occur, a significant portion of households would both receive local
digital broadcast signals and have the equipment in place to view those
signals. However, the switchover policy could have disadvantages as well,
such as possible adverse effects on smaller stations. As such, this policy
would need to be evaluated more closely.

One of the most important goals for completing the DTV transition is the
recapture of the broadcast spectrum that televisions stations will be
returning. There is significant economic value embodied in this spectrum,
and it has been allocated for both public safety needs as well as for new

Page 39 GAO- 03- 7 Digital Television Transition

commercial services. Delays in completing the DTV transition would
compromise for some time the ability to fully utilize this spectrum.
Understanding the relative time frames for the transition* that is, the
time frame with and without certain policy changes* is key to
understanding the implicit cost to society of allowing the transition to
move at its current pace. Ultimately, decisions about implementing further
legal or regulatory changes to speed the DTV transition require balancing
the costs and burdens of those changes with the benefits of returning the
broadcast spectrum in a timely fashion.

Some issues affecting the DTV transition, such as the production of HD
television programming, are largely outside of traditional federal
legislative or regulatory control. Other issues, such as inclusion of an
overthe- air tuner, have already been addressed by FCC or are the subject
of ongoing proceedings. Our recommendations are in areas over which FCC or
the Congress have authority, and that have not been widely discussed but
could have an important impact on the success of the DTV transition and
the speed with which spectrum used for broadcasting can be returned for
other uses.

We recommend that the Chairman of the Federal Communications Commission
take the following actions:

1. Explore options to raise public awareness about the DTV transition and
the implications it will have. For example, FCC might consider a public
education campaign of its own, or it might consider partnering with the
affected industries to provide consumers with more information about DTV
products and the DTV transition. Such actions could help speed consumer
adoption of DTV equipment as well as inform the public about a transition
that will affect nearly all Americans.

2. Direct the relevant FCC bureaus and offices to examine the costs and
benefits of mandating that all new televisions be digital cable- ready in
addition to the existing mandate for a digital over- the- air tuner. As
part of this process, FCC should conduct an independent analysis that
estimates (1) the additional cost to consumers of adding a digital cable
tuner and POD slot and (2) the timetable of the DTV transition with and
without such a mandate. FCC should then report its recommendations as to
the actions it believes the Commission or the Congress should take
regarding a digital cable- ready mandate. Recommendations for

Executive Action

Page 40 GAO- 03- 7 Digital Television Transition

3. Direct FCC*s Media Bureau to examine the advantages and disadvantages
of a policy that would set a date- certain for cable carriage to switch
from full carriage of analog signals to full carriage of digital signals.
Such a policy could be implemented by transferring broadcasters* must-
carry rights from analog to digital on that date, or through some other
means. The Chairman also should direct the Media Bureau to examine the
possibility of combining such a policy with a digital cable- ready
mandate. As part of this examination, FCC should estimate the amount of
time it will take for the DTV transition to be completed with and without
implementation of these policy options.

We provided a draft of this report to FCC for review and comment. In its
comments, which are reprinted in appendix IV, FCC said the report analyzes
some of the difficult challenges facing the DTV transition and should add
useful input to the policy- making process. FCC agreed that it is
important to explore options for raising public awareness, and emphasized
that Chairman Powell has called on industries involved in the transition
to take concrete measures to educate the public about the DTV transition
and its implications. Regarding our recommendation on cable- ready DTV
equipment, FCC noted that it has been engaged in a long- term effort to
achieve compatibility between digital television sets and cable systems,
and that many of the technical standards for digital cable- ready sets
were not finalized until recently. FCC said it will be addressing these
issues in a forthcoming Report and Order. Regarding our recommendation
related to a date- certain for transfer of must- carry rights from analog
signals to digital signals, FCC noted that its digital carriage proceeding
sought comment on a wide range of options regarding must- carry, including
an option similar to the one we described in our draft. FCC said that the
record is now closed in that proceeding, and that its staff is preparing a
draft order for the Commission*s consideration. The actions described by
FCC in their response are positive steps; however, we believe the
Commission should also adopt our specific recommendations. FCC also
provided us with technical changes to the report, which we incorporated
where appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 14 days
after the date of this letter. At that time, we will send copies to
interested congressional committees; the Chairman, FCC; and other
interested parties. We also will make copies available to others upon
request. In addition, this report will be available at no cost on the GAO
Web site at Agency Comments

Page 41 GAO- 03- 7 Digital Television Transition

http:// www. gao. gov. If you have any questions about this report, please
contact me at 202- 512- 2834 or guerrerop@ gao. gov. Key contacts and
major contributors to this report are listed in appendix V.

Sincerely yours, Peter Guerrero Director, Physical Infrastructure Issues

Appendix I: Scope and Methodology Page 42 GAO- 03- 7 Digital Television
Transition

To understand the benefits and implications of turning off the analog
broadcast signals, we reviewed relevant studies, statutes, and Federal
Communications Commission (FCC) proceedings on the topic, and we spoke
with officials at FCC and the National Telecommunications and Information
Administration as well as officials in the United Kingdom, Canada, and
Japan who are addressing their nations* digital television (DTV)
transitions.

To understand consumer adoption of DTV, we reviewed and analyzed data from
the consumer electronics industry and other sources on DTV equipment sales
and projected trends. To obtain anecdotal information on retail practices
in marketing and selling DTV products, we visited 23 retail consumer
electronic stores that sell DTV equipment in several locations: Boston and
Worcester, Massachusetts; Las Vegas, Nevada; Los Angeles, California; and
the Virginia and Maryland suburbs of Washington, D. C. During our visits,
we posed as shoppers and asked sales staff a standard set of questions
designed to gauge their knowledge of information that would be important
to a potential consumer of DTV equipment. We also interviewed senior
executives at the corporate offices of 4 consumer electronics retailers.

In addition, to gauge consumer awareness and understanding of the DTV
transition, we contracted with Opinion Research Corporation (ORC), a
national market research firm, to include questions regarding the DTV
transition in one of the national telephone surveys conducted by ORC on a
regular basis. The survey contained a set of 10 questions that asked
respondents general questions about their television use (such as how they
receive their television signal) and some questions specifically designed
to gauge their knowledge and familiarity with the DTV transition. The
questions were closed- ended, with response options read to the
respondents. A total of 1, 009 adults in the continental United States
were interviewed between November 29 and December 2, 2001. The
contractor*s survey was made up of a random- digit- dialing sample of
households with telephones, stratified by region.

To use the survey results to make estimates about the entire adult
population 18 years and older in the continental United States, ORC
weighted the responses from the survey to represent the characteristics of
all adults in the general public according to four variables: age, gender,
geographic region, and race. Because our results are from a sample of the
population, the resulting estimates have some sampling error associated
with them. Sampling errors are often presented as a 95 percent confidence
interval. The percentage estimates we present in this report have a 95
Appendix I: Scope and Methodology

Appendix I: Scope and Methodology Page 43 GAO- 03- 7 Digital Television
Transition

percent confidence interval of about plus or minus 3 percentage points or
less. The practical difficulties of conducting any survey may introduce
nonsampling errors. As in any survey, differences in the wording of
questions, the sources of information available to respondents, or the
types of people who do not respond can lead to somewhat different results.
We took steps to minimize nonsampling errors. For example, we developed
our survey questions with the aid of a survey specialist and pretested the
questions before submitting them to ORC.

To understand the role of cable and satellite carriage in the DTV
transition, we spoke with representatives from 5 large companies that that
own multiple cable systems; 10 broadcast stations, including those with
and without cable carriage of their digital signals; and the 2 national
providers of direct broadcast satellite service. We also discussed these
issues with representatives of the National Cable & Telecommunications
Association, the National Association of Broadcasters, FCC, and other
relevant parties. We also reviewed relevant documents, including FCC
proceedings related to cable carriage.

To review issues related to the availability of digital programming, we
spoke with representatives of television broadcast networks; cable
networks; studios that produce and format television programming;
television advertisers; and trade associations that represent these
interests, including the Motion Picture Association of America and the
National Association of Broadcasters. We also conducted a literature
review to determine what digital programming is currently available. In
addition, we reviewed and analyzed data related to programming from our
survey of U. S. commercial broadcast stations that we conducted in the
fall of 2001. To review the status of DTV copy protection issues, we spoke
with representatives of broadcast networks and television producers as
well as representatives of consumer electronics manufacturers. We also
spoke with representatives of trade associations and other organizations
that are concerned about copy protection issues, including the Electronic
Frontier Foundation. In addition, we reviewed relevant legislation and
court proceedings.

To review issues related to DTV tuner mandates, as well as other equipment
issues, we spoke with representatives of four consumer electronics
manufacturers, two industry standards organizations, three industry trade
associations, and a consumer advocacy organization. We also toured the
facility of a large DTV manufacturer. In addition, we reviewed documents
from FCC proceedings involving technical issues related to the DTV
transition.

Appendix II: Equipment Issues Affecting the DTV Transition

Page 44 GAO- 03- 7 Digital Television Transition

FCC has mandated that most new television sets include a DTV tuner.
However, several other equipment issues that could affect the pace of the
DTV transition are still being resolved.

*Digital inputs* are connections that allow digital information to flow
into the digital television set. Digital inputs facilitate the use of copy
protection technologies and the connection of digital television sets to
set- top boxes or other devices. Most digital television sets manufactured
thus far have included only *component analog* inputs rather than digital
inputs. This is problematic because these digital television sets may not
be compatible with future devices or technologies, including those
designed to provide copy protection. The consumer electronics industry
appears to be settling on two types of digital inputs, and the FCC
Chairman Michael Powell has called for one or more of these inputs to be
included in all new HD monitors and digital receivers by January 1, 2004.
A representative of one manufacturer with whom we spoke told us that his
company plans to include both types of digital inputs in its DTV equipment
in the near future.

Eventually, each of the more than 250 million analog television sets
currently in use in the United States will need to be retired, replaced,
or attached to a *digital- to- analog converter box.* A digital- to-
analog converter box will allow consumers to keep their analog television
sets once the DTV transition is complete by (1) converting digital signals
to analog signals and (2) when necessary, converting high definition
signals to standard definition. It is not yet known how much digital- to-
analog converter boxes will cost once they become widely available. One
expert with whom we spoke suggested that these converter boxes would need
to cost about $50 or less before large numbers of consumers would be
willing to purchase them for their analog television sets. Appendix II:
Equipment Issues Affecting the

DTV Transition Digital Inputs and Copy Protection Technologies

Digital- to- Analog Converter Boxes

Appendix II: Equipment Issues Affecting the DTV Transition

Page 45 GAO- 03- 7 Digital Television Transition

There are different types of digital- to- analog converter boxes for
television signals received over the air, via cable, and via satellite
because each of these three platforms uses a different digital
transmission format. 1 Converter boxes for over- the- air signals are
essentially digital receivers that are intended for use with an analog
television set. 2 The issue of digitalto- analog converter boxes could
present the DTV transition with another

*catch- 22.* Consumers currently receiving analog television signals over
the air have little incentive to purchase a converter box for their
television set until the analog signals are shut off. However, the analog
signals cannot be shut off until enough consumers are able to see the DTV
signals* such as through the purchase of a converter box. 3

There are some concerns that digital television sets in locations with a
weak signal will have difficulty receiving over- the- air broadcasts. This
issue is important for the DTV transition because with a digital signal,
unlike an analog signal, the picture is lost completely when the signal is
inadequate. Over- the- air viewers who may currently tolerate a weak,
snowy analog signal could find themselves without any signal at all when
they try to receive the digital broadcast signal. FCC has declined to
impose minimum performance thresholds for over- the- air digital tuners
(or

*receivers*). In its August 8, 2002, Report and Order, FCC said that it
believed that competitive forces were the best approach for ensuring that
DTV receivers perform adequately and meet consumer needs. 4 Efforts are
under way by the broadcast and consumer electronics industries to improve
the effectiveness of over- the- air digital tuners. One expert with

1 Manufacturers can also combine more than one of these capabilities into
a single box. 2 A digital receiver currently on the market for use with a
digital monitor could also, in theory, be used as a digital- to- analog
converter box with an analog television set. However, because these
receivers currently retail for about $600, few if any consumers use them
for this purpose.

3 To some extent, this may be mitigated by some consumers purchasing
digital- to- analog converter boxes before the termination of the analog
signals. Consumers may do this because a converter box will give them
access to the content on digital broadcast channels (although not in
digital format), provide a clearer picture, and provide access to

*multicasting** that is, multiple programs on a single channel. 4 In the
Matter of Review of the Commission*s Rules and Policies Affecting the
Conversion to Digital Television, MM Docket No. 00- 39, Second Report and
Order and Second Memorandum Opinion and Order, FCC 02- 230, released Aug.
9, 2002, para. 60- 67. Adequacy of Over- theAir

Reception

Appendix II: Equipment Issues Affecting the DTV Transition

Page 46 GAO- 03- 7 Digital Television Transition

whom we spoke noted that DTV tuner technology is now in its fourth
generation and has improved significantly over earlier generations.

Appendix III: Analysis of the Consumer Survey

Page 47 GAO- 03- 7 Digital Television Transition

To gauge consumer understanding of the DTV transition, we contracted with
a survey research firm to conduct a random survey of 1,000 American
households. The consumers were asked questions that were designed to
ascertain their level of familiarity with and knowledge about the DTV
transition.

The survey collected basic demographic information about the respondent
(such as race, gender, income, education level, and age) and asked
questions related to television use, such as how the respondent*s
household receives its television signals. There were also three key
questions asking respondents about their awareness or familiarity with

(1) the transition from analog to digital broadcast television, (2) the
difference between a traditional analog and a digital television set, and

(3) the fact that analog sets will require a special converter box to
continue to receive over- the- air broadcasts at the completion of the
transition.

Forty percent of respondents were unaware of the transition from analog to
digital television and 48 percent were *not at all familiar* with the
difference between traditional analog television sets and digital, high
definition television sets. In addition, nearly 70 percent of respondents
did not know that after the transition, analog television sets will
require a converter box to continue receiving broadcasts.

We combined the answers to these three questions to create a scale of
knowledgeability about the DTV transition and used multivariate models to
see if there are relationships between demographic and other household
characteristics and knowledgeability of the transition. We included as
explanatory variables in the model contrasting groups of households.
Specifically, we included the following variables in the model:

 whether the respondent lived in 1 of the 30 largest television markets,

 whether the respondent was male,

 whether the respondent lived in an urban area,

 whether the respondent had a white- collar job,

 whether the respondent had at least a college education,

 whether the respondent was between 30 and 55 years old (this was
contrasted with age under 30), Appendix III: Analysis of the Consumer

Survey

Appendix III: Analysis of the Consumer Survey

Page 48 GAO- 03- 7 Digital Television Transition

 whether the respondent was over 55 years old (this was also contrasted
with age under 30),

 whether the respondent*s reported race was white,

 whether there was more than one telephone line in the respondent*s
household,

 whether the respondent reported having satellite television as the
primary television viewing method in the household (this was contrasted
with reporting cable as the primary television method),

 whether the respondent reported having over- the- air television as the
primary television viewing method in the household (this was contrasted
with reporting cable as the primary television method), and

 whether the respondent reported owning a DVD player. Table 1 shows that
males and white- collar and more educated households are significantly
more familiar with the DTV transition. Households that own a DVD are also
significantly more familiar with the transition. However, households still
receiving their television over the air, rather than via cable or
satellite service, were significantly less likely to be familiar with the
DTV transition. Age, race, and urbanicity did not have any effect on
respondents* familiarity with the transition.

Table 1: Differences in Familiarity with the Digital Television Transition
on the Basis of Household Characteristics

Household/ Respondent characteristics Regression coefficient

Reside in 1 of the 30 largest TV markets 0. 06 Male 0.79 a

Urban 0.17 White- collar 0.29 a

College or more education 0.45 a

30 to 55 years old (relative to under 30 years old) 0.17 Over 55 years old
(relative to under 30 years old) 0.17 White 0.06 More than one telephone
line 0. 21 Receive TV via satellite (compared with receive TV via cable)
-0.14 Receive TV over the air (compared with receive TV via cable) -0.34 a

Own a DVD player 0.56 a

a Bolding denotes statistical significance, p fraudnet/ fraudnet. htm E- mail:
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