Digital Broadcast Television Transition: Several Challenges Could Arise in Administering a Subsidy Program for DTV Equipment
Published: 2005-05-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The digital television (DTV) transition offers the promise of enhanced television. At the end of the transition, radiofrequency spectrum currently used for analog broadcast television will be used for other wireless services and for critical public safety services. To spur the digital transition while preventing any loss of television service to households, some industry participants and experts have suggested that the government subsidize DTV equipment to enable households to view digital broadcast signals. This testimony provides information on (1) some challenges to administering a subsidy program for DTV equipment, (2) some administrative options for implementing a DTV subsidy, (3) examples of government programs that make use of rebates or vouchers to provide subsidies, and (4) other efforts necessary for the completion of the DTV transition. We discussed administrative challenges to and options for a DTV subsidy with federal and state government officials, electronics manufacturers and retailers, and experts in product promotion. As in our previous work, we take no position on whether a subsidy should be implemented or not, or whether, if a subsidy program is established, it should be implemented in any particular way. While policies other than a subsidy might help promote the DTV transition, any other such approaches were not part of this investigation.
section_title: What GAO Found
paragraphs: We found that several administrative challenges might arise in implementing a subsidy for DTV equipment. One of several key challenges we identified would be determining those eligible to receive a subsidy. If the subsidy were restricted to low-income households or to households that rely exclusively on over-the-air television, methods to identify these households would need to be developed and may prove to be challenging. Another key challenge would be ensuring that eligible recipients understand the availability of a subsidy, how they could obtain it, and what equipment would be subsidized. Effectively communicating this information will likely first require that information about the DTV transition itself is successfully communicated to the public. Several administrative options could be used to provide a government subsidy to help households obtain DTV equipment, including a refundable tax credit, government distribution of equipment, a voucher program, and a rebate program. The suitability of any of these methods depends on aspects of the subsidy's design, such as which entity is most appropriate to administer the subsidy and who would be eligible to receive the benefit. Various government programs make use of rebates or vouchers to subsidize consumers' purchase of products. We reviewed three rebate and three voucher programs that might provide insight for the development of a DTV subsidy and found that differences existed between these types of programs. We observed that eligibility for the voucher programs was specifically defined and the benefits were targeted to low-income individuals, whereas eligibility for the rebate programs was not based on income. Overall, however, we found these programs differed with respect to what might be undertaken for a DTV subsidy. In addition to the administrative challenges of a subsidy program, there are other aspects of the DTV transition that are ongoing and will take time to complete or may pose their own challenges. For example, the channel election process, which will determine each television station's channel placement for its digital signal, will not be final until sometime in 2007, according to the Federal Communications Commission. Another issue that might arise relates to antennas used to receive digital broadcast signals. Although many stakeholders believe that antennas used for analog reception will work well for digital signals, we were also told that reception of digital signals may vary on the basis of a household's geography and other factors.

section_title: Letter
paragraphs: I am pleased to be here today to report on our work on the challenges to  and the administrative options for implementing a subsidy program for  consumers to purchase digital television (DTV) equipment. As you know,  the return of radiofrequency spectrum used for analog broadcast  television at the end of the DTV transition will provide many benefits to  society, such as easing the spectrum scarcity facing public safety first  responders, engendering economic growth and consumer value from  spectrum redeployed to wireless services, and affording the federal  government revenues from the proceeds of a spectrum auction. Under the  law, the transition’s end is, in part, dictated by consumers’ adoption of  digital television equipment. While the purchase of digital televisions is  steadily increasing, it nevertheless appears unlikely that a sufficient  proportion of households will have digital television equipment in place by  the end of 2006—the date originally set by Congress as a goal for the  transition’s end.
Households viewing television solely through the reception of over-the-air  signals must take action to ensure that they have the necessary equipment  to be able to view digital broadcast signals before the transition occurs  and analog broadcast signals are shut off. If they do not take such action,  they will lose television service. Consequently, the DTV transition imposes  costs on some American households, assuming those households purchase  equipment capable of receiving digital television signals to avoid the loss  of television service. In February we reported to this Subcommittee that of  the roughly 21 million households in the United States that rely exclusively  on over-the-air television, nearly half have incomes under $30,000. Cable  and satellite subscribers might also, at some point, need to upgrade their  equipment—and thus incur costs related to the DTV transition—in order  to be able to continue to receive broadcasters’ digital signals through their  subscription providers.
In order to spur households’ adoption of the digital equipment necessary  for the transition, some have suggested that the government provide a  subsidy to certain households to purchase a device, known as a set-top  box, that can receive digital broadcast television signals and convert them  into analog signals so that they can be displayed on existing analog  television sets. This device—which several manufacturers have stated  could sell for as little as $50 once they are produced in high volume— would enable the household to view digital broadcast signals without  purchasing a digital television set. To the extent a subsidy facilitates the  DTV transition, it might be advantageous for several reasons, such as (1)  promoting a more rapid reclamation of valuable radiofrequency spectrum  for other uses, which could spur economic growth and improve public  safety, (2) possibly increasing government revenues from spectrum  auctions by ensuring that companies that bid on spectrum can more  quickly and with greater assuredness claim unencumbered spectrum, and  (3) minimizing any loss in television service that households might suffer  because they have not yet obtained necessary equipment for receiving  digital broadcasts. At the same time, policymakers might consider these  benefits in relation to other contexts in which policy decisions of the  federal government have imposed costs and burdens on Americans  without compensation. We believe while it is difficult to measure the  specific benefits and costs of undertaking a specific DTV subsidy program,  it is also difficult to evaluate the suitability of subsidizing the costs  imposed by this particular government policy relative to other policies that  have also imposed costs on citizens.
While there may be other policy options to spur the DTV transition, my  testimony today only will focus on the use of a DTV equipment subsidy  program. In particular, I will discuss the challenges to and several  administrative options for a possible subsidy program. As we developed  this work, no specific option for administering a DTV subsidy was formed,  and as such, our work focused on the possible challenges to a hypothetical  program. As in our previous work, we take no position on whether a  subsidy should be implemented or not, or whether, if a subsidy program is  established, it should be implemented in any particular way.
In February we testified before this Subcommittee and provided estimates  of the cost of a subsidy for set-top boxes using data on household  television characteristics and expected set-top box costs. Today we will  discuss (1) some challenges to administering a subsidy program for DTV  equipment, (2) some administrative options for implementing a DTV  subsidy, (3) examples of government programs that make use of rebates  and vouchers to provide subsidies, and (4) some other efforts necessary  for the completion of the DTV transition. In addition to information  provided in this testimony, we will provide a more detailed study on these  and other issues related to the DTV transition for the Committee later this  year.
To address the issues we will discuss today, we interviewed federal and  state government officials who have experience in providing assistance to  individuals or households through various subsidy programs. The agencies  we contacted include the Department of the Treasury, the Department of  Agriculture’s Food and Nutrition Service, the Department of Health and  Human Services, and state social service agencies from Alabama, Illinois,  Maryland, and Texas. These states were chosen to represent varied  demographic and geographic characteristics. We also spoke with  companies in several key industry segments including nine electronics  manufacturers, four electronics retailers, and a rebate fulfillment house (a  company that processes rebates for manufacturers and retailers).  Additionally, we interviewed a rebate and retail promotion expert, an  academic who has studied consumer rebate redemption behavior, and  representatives from the Promotion Marketing Association. We also  contacted a company that provides identification and credential  verification services. For general information about the DTV transition, we  spoke with seven broadcasters, three cable and satellite companies, and  five television station owners. We also had several meetings with Federal  Communications Commission (FCC) staff and various industry trade  groups, such as the National Cable & Telecommunications Association,  the Satellite Broadcasting and Communications Association, the  Consumer Electronics Association, the National Association of  Broadcasters, and the American Cable Association. We obtained  information on government programs that used rebates or vouchers from  program administrators and other sources. We contacted the National  Telecommunications and Information Administration (NTIA) to ask  questions about their views on the administration of a DTV subsidy  program, but an agency official stated that they had no official comment.
We conducted our work from August 2004 to May 2005 in accordance with  generally accepted government auditing standards.  We discussed this  testimony with FCC officials to obtain their comments.  FCC provided  technical corrections that we incorporated where appropriate.
We found that several administrative challenges might arise in  implementing a subsidy for DTV equipment. Key issues we identified  include challenges related to making determinations about (1) which  federal entity would administer a subsidy program, (2) whether a  rulemaking process would be necessary to fully determine and stipulate  how the subsidy program will be structured, (3) who would be eligible to  receive a subsidy, (4) what equipment would be covered, (5) how  information about the subsidy would be communicated to consumers and  industry, and (6) what measures, if any, would be taken to limit fraud.  Some of these issues could be particularly difficult to address. For  example: If the subsidy were only available to low-income households, a possible  method of identifying these households would be to use receipt of  some other low-income assistance—such as food stamps—to identify  those eligible for the DTV subsidy. A drawback to this approach,  however, is that agencies overseeing such programs may not be  allowed to release lists of their recipients to others. If the subsidy is  only provided to households that rely exclusively on over-the-air  television, the identification of these households may be difficult  because no list of such households exists, and information on the  inverse—those households that subscribe to cable or satellite service— is dispersed across hundreds of providers in the country, and these  providers may also face limitations on the release of their subscribers’  lists to others.
Another key challenge would be to make sure that eligible recipients  understand that a subsidy is available to them, how they can obtain it,  which equipment the subsidy can be used for, and where they can  obtain the equipment. Effectively communicating this information  would likely first require that information about the broader DTV  transition is effectively communicated to the public. Three years ago  we found that many Americans did not have an awareness of the DTV  transition. Recently, the Consumer Electronics Association reported  that knowledge of DTV is increasing. Our interviews with several  retailers and manufacturers, indicated, however, that while consumers  are more familiar with the concept of high-definition television, many  are still confused or unaware that at some point in the future analog  television will cease operation and analog televisions sets will not be  able to receive digital over-the-air television signals.
Several administrative options could be used to provide a government  subsidy to help households obtain DTV equipment. The four options for  administering a DTV subsidy that we reviewed are a refundable tax credit,  government distribution of equipment, a voucher program, and a rebate  program. We found that the suitability of any of these methods depends on  aspects of the subsidy’s design, such as which entity is most appropriate to  administer the subsidy and who would be eligible to receive the benefit.  For example, if the DTV subsidy were only available to low-income  households, a voucher might be a possible method to deliver the subsidy.  Alternatively, if the subsidy is more widely available, a rebate might be a  good delivery mechanism.
Various government programs make use of rebates or vouchers to  subsidize consumers’ purchase of products. We reviewed three local  government rebate programs that provide incentives for furthering  environmental policy goals and three voucher programs, including one  state program that subsidizes equipment for deaf and hard of hearing  individuals and two federal programs that provide assistance to needy  households to purchase food. For the programs we reviewed, we found  differences existed between the rebates and vouchers programs that might  provide insight for the development of DTV subsidy. Regarding eligibility  determinations, we observed that eligibility for the voucher programs was  specifically defined and the benefits were targeted to low-income  individuals, whereas eligibility for the rebate programs was not based on  income. Overall, however, we found these programs differed with respect  to what might be undertaken for a DTV subsidy. Further, choosing not to  participate in any of the programs we reviewed would not cause a  household to lose any existing service or functionality. In contrast, if a  household relying exclusively on over-the-air television chose not to take  advantage of a DTV subsidy for which it is qualified, and then did not  obtain the necessary equipment to receive broadcast digital signals, the  household would lose access to broadcast television signals when the  transition occurs.
If a subsidy program is implemented, it will pose many challenges for the  implementing agency and industry. However, there are other aspects of  the DTV transition not related to the implementation of possible subsidy  program that are ongoing and will take time to complete or may pose their  own challenges. For example, the channel election process, which will  determine the channel placement for each television station’s digital  signal, is ongoing. Because a proposed rulemaking will follow the end of  this selection process (scheduled to be completed in August 2006), all  stations’ final selections will not be set until sometime in 2007, according  to an FCC official. Another example of an issue that may arise as the DTV  transition progresses relates to antennas used to receive digital broadcast  signals. While many stakeholders we interviewed told us that antennas  used for analog over-the-air reception should work well for the digital  broadcast signal, a few stakeholders (including an antenna manufacturer,  a broadcaster, and a retailer) told us that reception will depend on  geographic and topographic factors and that some people may need new  antennas or adjustment of existing antennas.
subsections: section_title: Background
paragraphs: The United States is currently undergoing a transition from analog to  digital broadcast television. With traditional analog technology, pictures  and sounds are converted into “waveform” electrical signals for  transmission through the radiofrequency spectrum, while digital  technology converts these pictures and sounds into a stream of digits  consisting of zeros and ones for transmission. Digital transmission of  television signals provides several advantages compared to analog  transmission, such as enabling better quality picture and sound reception  as well as using the radiofrequency spectrum more efficiently than analog  transmission.
A primary goal of the DTV transition is for the federal government to  reclaim spectrum that broadcasters currently use to provide analog  television signals. The radiofrequency spectrum is a medium that enables  many forms of wireless communications, such as mobile telephone,  paging, broadcast television and radio, private radio systems, and satellite  services. Because of the virtual explosion of wireless applications in  recent years, there is considerable concern that future spectrum needs— both for commercial as well as for varied government purposes—will not  be met. The spectrum that will be cleared at the end of the DTV transition  is considered highly valuable spectrum—sometimes called “beachfront  spectrum”—because of its particular technical properties. In all, the DTV  transition will clear 108 MHz of spectrum—a fairly significant amount. In  the Balanced Budget Act of 1997, the Congress directed FCC to reallocate  24 MHz of the reclaimed spectrum to public safety uses. Since the terrorist  attacks of September 11, 2001, there has been a greater sense of urgency  to free spectrum for public safety purposes. The remaining returned  spectrum will be auctioned for use in advanced wireless services, such as  wireless high-speed Internet access.
To implement the DTV transition, television stations must provide a digital  signal, which requires them to upgrade their transmission facilities, such  as transmission lines, antennas, and digital transmitters and encoders.  Depending on each individual station’s tower configuration, the digital  conversion may require new towers or upgrades to existing towers. Most  television stations throughout the country are now providing a digital  broadcast signal in addition to their analog signal. After 2006, the  transition will end in each market—that is, analog broadcast signals will  no longer be provided—when at least 85 percent of households in a given  market have the ability to receive digital broadcast signals.
section_title: Several Challenges Might Arise That Require Consideration in Administering a Subsidy Program for DTV Equipment
paragraphs: During the course of our review, we identified several administrative  challenges to implementing a subsidy for DTV equipment. For example,  prior to implementing a subsidy program, various determinations need to  be made, including (1) which federal entity will administer a subsidy  program, (2) whether a rulemaking process is necessary to fully determine  and stipulate how the subsidy program will be structured, (3) who will be  eligible to receive a subsidy, (4) what equipment will be covered, (5) how  information about the subsidy will be communicated to consumers and  industry, and (6) what measures, if any, will be taken to limit fraud.
subsections: section_title: It is Unclear What Entity Would Be Best Suited to Administer the Subsidy Program
paragraphs: One challenge to the DTV subsidy that we identified is determining which  entity should administer the subsidy program. An industry representative  told us that the implementing agency should have some level of  telecommunications expertise in order to be able to set appropriate  standards for the equipment being subsidized and to effectively educate  consumers about the DTV transition. In our opinion, policymakers might  also consider if the entity has experience administering a household  assistance program.
Based on our discussions with government officials, it appears that no  single entity has the combined technical knowledge and subsidy  administration expertise that might be necessary to successfully  implement a DTV subsidy. For example, while FCC and NTIA have  telecommunications knowledge and are responsible for managing the use  of the radiofrequency spectrum, neither has experience administering a  federal subsidy program of this kind. We asked these agencies about their  ability, based on their experience, to administer a DTV subsidy. NTIA had  no official comment. FCC officials told us they believe the Commission  could have some role, such as defining which equipment would be eligible  for the subsidy, but did not believe FCC was best suited to administer the  entire subsidy program. Further, an FCC official said it might be  advantageous for the administering entity to leverage the expertise of state  government agencies to assist with delivering the subsidy to low-income  households.
We also asked two agencies that have experience administering federal  assistance programs, the Department of Health and Human Services and  the Department of Agriculture’s Food and Nutrition Service, about their  ability to implement a DTV subsidy. Although these agencies have  experience with subsidy programs, they do not have expertise in  telecommunications. Officials from the Department of Health and Human  Services told us the agency would not be well suited to administer a DTV  subsidy because their programs, such as Temporary Assistance for Needy  Families, are narrowly defined—a household must have children to be  eligible for Temporary Assistance for Needy Families—and would not  offer broad enough coverage for a DTV subsidy. Similarly, officials from  the Food and Nutrition Service said they did not believe their agency  would be the best entity to administer the subsidy. However, after we  asked whether the state agencies that administer food stamps could  provide a DTV subsidy to their recipients, Food and Nutrition Service  officials said that this might be possible under certain conditions, but that  an agreement would most likely have to be reached with each state and, in  their view, the states should be paid for the costs they incur in doing so.
When we contacted four state heath and human services agencies that  administer various assistance programs on behalf of the federal  government, such as food stamps, all four indicated that it might be  possible for the states to provide the DTV subsidy to the low-income  individuals who already receive assistance from one or more programs  they administer. However, they told us there would be costs associated  with implementing a subsidy program, such as staff time, programming  costs, postage, and envelopes. One state we contacted estimated that it  would cost approximately $552,000 to mail vouchers to the approximately  1.5 million households that receive food stamps, Medicaid, and Temporary  Assistance for Needy Families within the state. However, two states told  us that if the program ran over a period of time it would be difficult to  track which households already received the DTV subsidy as people go on  and off of assistance over time, so some households could receive  duplicate benefits. Further, three of the four states told us that such a  program would be burdensome on their limited staff resources.
section_title: Implementing a Subsidy Program May Require a Rulemaking Process
paragraphs: A rulemaking process might be required to implement a DTV subsidy, and  if so, this would likely have implications for how quickly a subsidy  program could be established. While legislation could broadly define the  parameters of the subsidy program and may even prescribe specific  elements of the programs’ structure and administration, it is not  uncommon for a federal agency to determine that a rulemaking process is  necessary to more fully detail how a program will be implemented.  Through a rulemaking, the agency would finalize the rules of the program  that were not specifically addressed in the legislation. FCC told us that if  the legislation is very specific a rulemaking process may not be necessary  for a DTV subsidy. However, FCC did note that rulemakings have been  used in the past after legislation enacted new programs. For example,  rulemaking processes have been undertaken several times to make  adjustments to the Lifeline Assistance Program since it was established in  1985.
The rulemaking process generally takes time because it requires a wide  range of procedural, consultative, and analytical actions on the part the  agencies. Sometimes agencies take years to develop final rules. Among  other things, the rulemaking process generally requires agencies to (1)  publish a notice of proposed rulemaking in the Federal Register; (2) allow  interested parties an opportunity to participate in the rulemaking process  by providing written data, views, or arguments; (3) review the comments  received and make any changes to the rule that it believes are necessary to  respond to those comments; and (4) publish the final rule at least 30 days  before it becomes effective. Further, the Office of Management and Budget  reviews significant proposed and final rules initiated by executive branch  agencies other than independent regulatory agencies before those rules  are published in the Federal Register. A former official from the  Department of Health and Human Services told us that industry  participants, interest groups, or other stakeholders can challenge a  proposed rulemaking, which can delay the process further. He said that in  order to avoid such challenges, it is essential to have the key stakeholders  involved early in the process. That is, if the key stakeholders have the  opportunity to provide input prior to the development of the rulemaking  and are satisfied that their concerns are addressed, they will be less likely  to file a challenge to the proposed rulemaking.
section_title: Eligibility Criteria Pose Challenges to the Administration of a DTV Subsidy Program
paragraphs: Determining who would be eligible to receive the subsidy could present an  administrative challenge to developing a subsidy program. If the  government decides not to provide a DTV subsidy to all households, it  would need to establish criteria to determine who is eligible. For example,  a means test could be imposed to restrict eligibility to low-income  households determined to be in financial need of the subsidy. The subsidy  could also be limited to only those households relying on over-the-air  television signals, on the grounds that these households are likely to be the  most adversely affected by the DTV transition.
Eligibility for Low-Income Households: If it is determined that a DTV  subsidy will only be made available to low-income households, a means  test of some kind would need to be used to identify the appropriate target  households. Officials from the Department of Health and Human Services  told us that using the income-based eligibility criteria of existing social  service programs to define eligibility for a DTV subsidy program would be  the most efficient way to employ a means test. That is, by using the receipt  of an existing program benefit that is means tested, a new program could  be effectively implemented without developing a means test specifically  for that program. However, we were also told that one of the drawbacks to  using these existing programs is that not all who are eligible for any  particular program actually choose to apply for and receive benefits. This  would mean that by only providing a DTV subsidy to those already  receiving other assistance, some people who would be eligible for the  subsidy based on their underlying income would not qualify for the  subsidy because they have chosen not to receive another form of  assistance. Officials from the Food and Nutrition Service told us that for  the Food Stamp Program, approximately 54 percent of those who would  be eligible for the program receive the benefit nationwide. It was thus  suggested to us that if recipient lists from social assistance programs were  used in developing eligibility determinations for a DTV subsidy, it might be  beneficial to use more than one program. By combining the participants of  several programs, a DTV subsidy for low-income households would target  a higher percentage of needy households than if only one program was  used to establish eligibility. For example, FCC told us that the Lifeline  Assistance Program uses receipt of any of seven social assistance  programs, including food stamps and Medicaid, as an eligibility  requirement.
Privacy concerns could, however, be a limitation of using existing social  welfare programs to develop eligibility for a DTV subsidy because the  agencies administering these programs may be prohibited from providing  the list of recipients to any outside entity. Under current law for example,  food stamp recipient information might not be available to other federal  agencies or to any private party or outside entity that might be involved in  the administering the subsidy. Another limitation in using these data is that  there is continuous change in recipient rolls because of people entering  and leaving the program. Those implementing a DTV subsidy program  would need to take into account the volatility of recipient rolls in deciding  how this information could be used.
Eligibility for Over-the-Air Households: Some stakeholders we contacted  indicated that a DTV subsidy should be focused on or limited to only those  households that rely exclusively on over-the-air television. Because no list  of these households exists, limiting a subsidy in this manner will require  determining who the over-the-air households are—a task that could pose  administrative challenges. One possible approach to identifying over-the- air households is to first identify cable and satellite subscribers. A  combined list of all cable and satellite subscribers could be used as a  mechanism to check whether those applying for a DTV subsidy are not  qualified for the subsidy.
The process of combining cable and satellite subscriber information into a  comprehensive list could be a highly challenging task. First, cable industry  officials we interviewed expressed concern over providing their  subscriber lists to a government agency or another entity. Cable officials  told us that under current law, they could not turn over subscriber  information to the government without prior permission from subscribers  unless they were under a court order. Cable industry officials also told us  that any change in current legislation would need to include liability  protection for cable and satellite companies because their subscriber  lists—which include personal information provided to these companies  from subscribers—would be outside their control. An industry official said  that even more stringent safeguards would need to be in place if the  information were provided to an outside entity—such as a contractor— rather than to a government agency. One cable company official stated  that even if the law were changed to allow the company to provide its  subscriber lists, it would be placed in the awkward situation of having to  inform their subscribers that their names were provided to the government  to help administer a subsidy that the cable subscribers are not eligible to  receive. The cable company official also stated that subscribers would be  sensitive to their information being used in this manner, especially in light  of recent security issues related to personal information.
A second challenge to developing a national list of all cable and satellite  subscribers is the difficulty of merging this information across all cable  and satellite companies. Currently, there are over 1,100 cable and satellite  companies operating throughout the country, with a total of nearly 90  million subscribers. Information from these companies, which is  maintained in various formats, would have to be collected and combined  into a comprehensive list of subscribers. Cable industry officials stated  that the process of merging and maintaining a list of nearly 90 million  subscribers would not be an easy undertaking. For example, one cable  industry official estimated that the process of working through all the  technical logistics for establishing a list could take 6 to 12 months.  Additionally, cable industry officials stated that there is significant “churn”  (i.e., the number of people moving on and off subscriber lists) in the  industry. For example, one cable company official stated that churn can be  as high as 10 percent of subscribers from month to month. Another cable  industry official told us that a significant level of resources would be  needed to keep such a combined subscriber list up to date.
Another possible, albeit difficult, way to determine who the over-the-air  households are would be to send queries to cable and satellite providers to  ask if particular people who have applied for the DTV subsidy are, in fact,  already subscribing to cable or satellite. For cable customers, a database  would need to be developed to direct the queries to the applicable  provider. According to FCC, the Commission maintains a master data base  with information on all franchised cable areas—of which there are over  30,000. The most identifiable geographic information in that database is  the name of county where each cable franchise is located. If an applicant  for the DTV subsidy provided a county of residence, a query could be sent  to all the franchised cable areas in that county. However, an FCC official  told us that in many counties there are multiple cable franchises operating.  Moreover, the FCC official stated that even though there is a contact name  for each franchise area, in many cases, the contact was someone at a  corporate headquarters of the cable company. Thus, we believe that to  contact the local cable franchise directly, the database would need to be  further developed to include information—perhaps an e-mail address at  the local franchise level—to which the query could be sent. This process  could be time consuming for both the entity processing the subsidy  applications and the cable providers. On the satellite side, we believe  querying the satellite providers might not be too difficult because there are  only two primary providers. However, people may object to their personal  information being sent to the satellite providers as well as the cable  providers in their area. Another option might be to use information  maintained by companies that perform subscriber billing for cable and  satellite companies. We were told that about six large billing companies  provide billing services for a substantial majority of the cable and satellite  companies. Representatives from a company that provides identification  and credential verification services told us they could verify that  individuals applying for a DTV subsidy do not subscribe to a cable or  satellite service by checking the applicant’s address against the addresses  maintained by the cable and satellite providers’ billing companies. To  protect the privacy of subsidy applicants, the identification and  verification services company told us such queries should be based on an  individual’s address rather than name or Social Security number. Company  officials also told us that it would likely take a few months to develop this  checking process.
section_title: Congress and Implementing Agency Must Determine What Specific Equipment Would Be Subsidized
paragraphs: One of the administrative elements of a subsidy program that would likely  need to be determined is exactly what equipment will be subsidized. In  making this determination, policymakers might consider both policy  issues as well as issues related to the ability of the program to be  implemented and managed.
From a policy perspective, several of the manufacturers and retailers we  contacted told us that they believe it would be most beneficial to  consumers if the program did not put highly specific limits on the type of  equipment they could buy with the subsidy. In particular, some  stakeholders generally believed that eligible consumers should not only be  allowed to apply the subsidy toward a basic set-top box, but should also  be allowed to apply that amount toward enhanced set-top boxes (those  with upgraded features or functions) or digital televisions capable of  receiving and displaying digital broadcast signals. Several stakeholders  noted that any product that enables consumers to receive digital broadcast  signals does the job of ensuring that there is no loss in television service  when the transition occurs. Moreover, some said a wide application of the  subsidy provides consumers the most choice and promotes the adoption  of digital television. An opposing view is that a subsidy should only be  designed to ensure that there is no loss of television service when the DTV  transition is completed, and therefore the subsidy should only be  applicable to a set-top box.
From the perspective of administering the program, determining what  items the subsidy can be applied towards is critical for communicating to  manufacturers, retailers, and consumers a key parameter of the program.  Some stakeholders noted that either the Congress or the administering  agency would need to identify the products that would be subsidized so  that manufacturers produce the appropriate equipment. If the intent is to  subsidize only simple set-top boxes, FCC officials told us that the subsidy  would cover boxes that have only analog outputs. If the Congress or the  implementing agency determines that the subsidy will be more broadly  applicable, the particular parameters of the program would need to be  communicated to the manufacturing industry so that their business plans  can proceed.
There would also likely be some process by which specific items meeting  the parameters of the subsidy program are approved and flagged as  eligible for the subsidy. Manufacturers need certainty about what items  are approved for the subsidy if they are to place a rebate coupon on or  inside of the equipment boxes, along with any related information.
Specific identification of subsidized items will also be important for  retailers as they make inventory decisions and train staff about how to  guide consumers’ purchasing decisions. Also, if retailers are asked to play  a part in the administration of the program, such as by accepting vouchers  or printing rebate coupons at the time of sale, it will be critical for them to  have validation of items that are eligible for the subsidy. And, clearly,  consumers need to understand which items they can purchase using the  subsidy.
Some industry representatives we contacted also expressed concern about  the interface between industry and the government in the design of the  subsidy program. In particular, industry representatives said that the  government should work with industry as the subsidy program is  developed to ensure that the program is designed in a manner that will  provide incentives for manufacturers and retailers to participate.  Additionally, some companies noted that the government would need to  provide industry with information on the expected scope of the program in  order to avoid shortages of equipment at retail. In general, some  companies told us that industry should be involved in the development of  the program to help ensure that it is designed and implemented efficiently.
section_title: A Successful Subsidy Program Will Require an Effective Information Campaign about the DTV Transition and Subsidy
paragraphs: To successfully implement a DTV subsidy program, eligible recipients will  need to understand that a subsidy is available, how to obtain it, which  equipment the subsidy can be used for, and where they can obtain the  equipment. Thus the agency responsible for implementing the program  would need to undertake a communication campaign. At the same time, it  could be difficult to provide information about the parameters of the  subsidy program if there is not a general understanding about the broader  DTV transition. As such, it appears that an information campaign regarding  the availability of a subsidy for DTV equipment might need to be  coordinated with a more general information campaign about the  transition and its ramifications for American households.
Three years ago we found that many Americans did not have significant  awareness of the DTV transition, and we recommended that FCC explore  options to raise public awareness about the transition and the impact it  will have on consumers. Since that time, FCC and industry have  undertaken efforts to better inform the public about the transition. In  March of this year, the Consumer Electronics Association, an association  of electronics manufacturers, reported that consumers’ understanding of  digital television has improved. This association surveyed individuals and  found that, compared to past years, there has been an increase in  consumer familiarity and understanding of DTV, as well as an increase in  the likelihood of over-the-air households to take action to avoid losing  television service.
Based on our interviews with several stakeholders, it appears that despite  these findings many consumers—particularly those who may be the most  affected by the transition—may still be unaware or confused about the  DTV transition. Several of the company representatives with whom we  spoke told us that while consumers are more familiar with the concept of  high-definition television, they are still unaware or confused about other  aspects of the DTV transition. Some told us that few consumers  understand that at some point analog television will cease operation and  analog television sets will be unable to receive digital over-the-air signals.  We were told that it is especially difficult to provide consumers with a  better understanding of this in the absence of a hard transition date.  Additionally, some populations might be difficult to reach because English  may not be their primary language or because they only receive television  over-the-air and have no business relationship with a subscription  television provider that would likely provide them with information about  the transition.
section_title: Minimizing Fraud Might Be a Consideration in the Development of a Subsidy Program
paragraphs: Depending on how a subsidy program is structured and implemented,  there may be opportunities for people to defraud the government. For  example, one official familiar with government subsidy programs noted  that if everyone were eligible for the subsidy, the opportunities for fraud  would decline. For this reason, the more restrictive the eligibility  requirements, the greater may be the chances for fraud. In terms of  reducing fraud, those familiar with rebates noted that the more  requirements for rebate redemption—that is, the more documentation the  consumer must provide to redeem the rebate—the fewer problems with  fraud there are likely to be. However, we were also told that increased  requirements would tend to reduce the number of people who attempt to  redeem the rebate. An additional consideration regarding fraud is the cost  of fraud mitigation. A former official from the Department of Health and  Human Services told us that while minimizing fraud should be considered  in developing a subsidy program, the cost-effectiveness of these efforts  should also be measured. For example, we were told that administering  systems to mitigate and prevent fraud may be costly and may not be  worthwhile, especially if the value of the subsidy is low.
section_title: A Variety of Options Exist for Administering a DTV Subsidy, Each with Unique Challenges
paragraphs: While a government subsidy for consumers to purchase DTV equipment  could be administered in several ways, each of the subsidy options we  examined had advantages and disadvantages. Following is a description of  and stakeholders’ views on four DTV subsidy options: a refundable tax  credit, government distribution of equipment, a voucher program, and a  rebate program. As we noted above, we take no position on whether a  subsidy should be implemented, or whether, if a subsidy program is  established, it should be implemented in any particular way.
Refundable Tax Credit Program: One method that could be used to  administer a subsidy program for DTV equipment would be a refundable  tax credit, administered as part of the federal individual income tax. A  refundable tax credit could be designed to provide qualifying taxpayers a  refund greater than the amount of their tax liability before credits. Based  on the manner in which tax credits work, we believe that a tax credit for  DTV equipment would likely be structured such that consumers purchase  an eligible set-top box, maintain required information on their purchase,  and seek reimbursement for all or some portion of the cost from the  federal government for the equipment when they file their federal income  taxes. Based on discussions with an official from the Department of the  Treasury, it does not appear that this method would be well suited for a  DTV subsidy. The Treasury official told us that considerable administrative  burdens would be imposed on the Internal Revenue Service (IRS) to  administer a refundable tax credit for a one-time subsidy. This official  noted that implementation of a new tax credit would require the IRS to  change tax forms, as well as instructions, for the years that the program  would be in operation. Changing tax forms imposes administrative costs,  particularly if tax laws are changed after forms have been developed for a  given tax year. Additionally, he noted that IRS Form 1040 is currently  completely full, so that any new credit could require the form to be  lengthened from two pages to three pages, which would be costly and  burdensome. The official also noted that the availability of the tax credit  may cause some individuals who otherwise would not file a tax form to do  so, which would increase IRS administrative burdens. The Treasury  official also noted that there could be compliance problems with a tax  credit approach. Because of the small amount of the credit—likely about  $50—it would not be cost-effective for the IRS to assign resources to  check compliance, thus it would be very difficult to minimize fraudulent  use of the credit. In fact, IRS has had difficulty assuring compliance for a  refundable tax credit. In particular, for the Earned Income Tax Credit, IRS  estimated that roughly 30 percent of the dollars claimed was erroneous.
We heard from stakeholders that a tax credit for DTV equipment might not  be the most helpful to low-income Americans because individuals would  have to purchase the equipment with their own money and file—possibly  many months later—for a tax refund. Also, we were told some low-income  Americans do not file tax returns. We believe the additional costs and  burdens for such individuals to file taxes for the purpose of obtaining a tax  credit may exceed the value of the credit.
Government Distribution: With government distribution, the government  provides certain goods for needy citizens. One example of government  distribution is the Emergency Food Assistance Program whereby the  government provides food, such as dried fruit, non-fat dry milk, and  peanut butter, to states for distribution to selected local agencies—usually  food banks—which, in turn, distribute the food to soup kitchens and food  pantries that serve the public directly.
For the DTV transition, the government could directly provide the  necessary equipment to individuals, but we found there would be a  number of challenges to implementing and administering such a program,  and, based on discussions with state social service agencies, it appears  that this would be an unwieldy way to administer a DTV subsidy. One  challenge would be finding locations for distributing the equipment. We  heard from several officials whose state agencies administer benefit  programs that using local social services offices as a distribution point  would not be feasible. These officials cited the lack of space and staff  resources to store, secure, and distribute equipment as reasons why local  offices could not be used to administer such a program. Further,  stakeholders told us that government distribution does not take advantage  of existing retail supply chains that already move large quantities of goods  to stores throughout the country.
While a government distribution program would not require households to  pay for equipment in advance of receiving the subsidy, which would be  beneficial to low-income households, the program could present other  challenges to those eligible to participate. For example, stakeholders we  interviewed told us that a distribution program limits consumers’ choices  and provides no mechanism for consumers to obtain support if the  equipment does not work properly. Additionally, officials from one state  agency told us that people obtaining equipment at local offices would have  to wait in long lines, which could be problematic for those with physical  limitations, such as the disabled and the elderly.
Voucher Program: Another mechanism to subsidize DTV equipment could  be through a voucher program. A voucher—which is a coupon or  electronic benefit card, similar to a credit card, which provides purchasing  power for a restricted set of goods or services—could be provided to  households that qualify for a DTV subsidy. The federal government has  used vouchers to provide a variety of assistance to households, such as  food stamps and housing subsidies. Also, vouchers have been used on a  limited basis to provide benefits to consumers for the changeover of  certain technology. For example, the Colorado Department of Human  Services provided a voucher to individuals who qualified as hard of  hearing to purchase text telephones and other specialized  telecommunications equipment.
For a DTV equipment subsidy using a voucher system, various  administrative steps would be necessary to design and implement an  effective program. After decisions were made about the specific  equipment to be covered, vouchers would need to be distributed to eligible  households. Several of those we contacted noted that if the program is to  be means tested, state agencies—such as those that administer the Food  Stamp Program—might be able to mail vouchers to their existing  recipients. Additionally, with a voucher program, several administrative  steps involving the retail industry would be required. Participating  retailers would have to know how the program is structured, which  specific items were covered by the subsidy, approximately how many  pieces of DTV equipment were expected to be subsidized in a particular  area, and how the mechanism for retailer reimbursement would operate.
Overall, using vouchers to administer a DTV subsidy might be beneficial  for low-income households because such households would not be  required to pay for the DTV equipment in advance and then wait to be  reimbursed. However, stakeholders told us that this type of program could  create a burden on retailers because they must determine the authenticity  of the vouchers. Also, stakeholders mentioned that it might be more  challenging to include smaller and independent retailers in a subsidy  program that uses vouchers.
Rebate Program: A rebate program could also be used to administer a DTV  subsidy. Rebates generally require consumers to pay the full cost of an  item at the time of purchase and then send documentation to an address  specified by the manufacturer or retailer to receive a rebate by mail. The  documentation required generally includes the original sales receipt, the  UPC code from the product packaging, a rebate slip, and the customer’s  name, address, and telephone number. In most cases, this paperwork must  be sent within 30 days of the purchase, and consumers generally receive  their rebates up to 12 weeks later. According to the three rebate experts  we interviewed, only about 30 percent of rebates are ever redeemed. While  two rebate experts said that redemption rates would likely rise with a  larger rebate, such as might be provided with a DTV subsidy, none of the  three we spoke with believed that the redemption rate would rise above 50  percent. Also we were told that depending on the type of rebate, on  average 1 percent to 20 percent of rebate applications are rejected based  on the lack of proper documentation.
Typically, a variety of decisions are made in developing a rebate program.  For example, as we discussed these decisions with stakeholders, various  methods of implementing a rebate were highlighted, including placing the  rebate coupon inside the equipment box, affixing it to the outside of the  box, or printing a coupon at the cash register at the time of sale. The  method used would, in part, determine which entities have some  administrative responsibility for the rebate program. If a DTV subsidy  program were designed to have a rebate coupon placed in or on the box, it  would be the responsibility of the manufacturer to do so, while if it were  designed to have a rebate coupon generated at the cash register, the  retailer would be responsible for managing this process. A consensus on  the best rebate method did not emerge from our interviews with industry  experts.
One of the most difficult elements associated with using a rebate for a  DTV subsidy would be applying eligibility requirements. As previously  discussed, information about over-the-air and low-income eligibility is not  readily available to the rebate fulfillment houses—which are the entities  that process rebates for manufacturers and retailers—and there are legal  obstacles to the government collecting and providing that information to  them. Another downside of rebates is that consumers generally pay the full  cost of an item at the time of purchase, which could create a hardship for  low-income households. Furthermore, one rebate fulfillment center  representative told us that low-income individuals are less likely to  redeem rebates than other segments of the population. Similarly, an  official from a state agency told us that based on her experience a rebate  program is not a good choice if the subsidy is supposed to target low- income individuals because many low-income individuals are not  comfortable with rebates and will not redeem them. If eligibility for the  subsidy is not restricted, a rebate might provide a good delivery  mechanism. A benefit of using a rebate program for a DTV subsidy is that  this method could take advantage of the relationships that already exist  between retailers, manufacturers, and the rebate fulfillment industry.
section_title: Several Government Programs Have Employed Rebates or Vouchers to Provide Subsidies
paragraphs: We identified several government programs that have used or are using  rebates or vouchers to subsidize consumers’ purchase of products. While  aspects of these programs might provide insight into the establishment of  a DTV subsidy, we found, overall, that the programs we reviewed differed  in many respects from what might be undertaken for a DTV subsidy. We  reviewed three rebate programs that were implemented by local  governments to provide incentives for furthering a policy goal, such as  clean air, water conservation, and the use of energy-efficient appliances.  We also reviewed three voucher programs, including one state program  that subsidizes equipment for deaf and hard of hearing citizens and two  federal programs that provide assistance to needy households to purchase  food. See table 1 for key information about the six programs we reviewed.
We believe some aspects of the programs’ implementation, such as the  time required to develop a program and the manner in which program  information was disseminated, might have relevance to the establishment  of a DTV subsidy. For example, for two of the rebate programs, we learned  that it took several months to develop and implement the programs, with  one rebate program taking 12 months and another taking 18 months to  implement. In reviewing various other aspects of the programs, such as  eligibility determinations and what products were subsidized, we found  that differences existed between the voucher and rebate programs that  might also provide some insight for a DTV subsidy. For example, for all of  the voucher programs we reviewed, benefits were targeted to low-income  individuals, and eligibility was specifically defined. In contrast, eligibility  for the rebate programs not based on income; rather, a person only had to  reside in the location where the subsidy was being offered or be a water or  power customer to be eligible. We also found differences in the types of  products subsidized for the rebate and voucher programs that we  reviewed. Whereas the rebates subsidized items in an effort to further a  policy goal (generally environmental protection), the voucher programs  provided recipients with items for their basic needs.
Overall, however, we observed that aspects of these programs’  implementation are dissimilar to what might be undertaken for a DTV  subsidy. First, choosing not to participate in any of the programs we  reviewed would not cause a household to lose any existing service or  functionality. In contrast, if a household chose not to take advantage of a  DTV subsidy for which it was qualified, and then did not obtain the  necessary equipment to receive broadcast digital signals, the household  might lose access to broadcast television signals when the transition  occurs. Additionally, none of the rebate programs we reviewed are  comparable to the size of a potential DTV subsidy in terms of number of  people served. While the national voucher programs serve millions of  households, they are unlike the DTV subsidy in that they are long- established programs with an entire infrastructure designed to provide  benefits to recipients on a recurring monthly basis. Due to differences in  the scope of the rebate and voucher programs we reviewed and a potential  DTV subsidy, it is not clear how applicable the administrative costs of  these programs are to estimating the costs of a DTV subsidy.
section_title: Other Efforts Necessary for the Completion of the DTV Transition Are Ongoing
paragraphs: If a subsidy program is implemented, it will pose many challenges for the  implementing agency and industry. However, there are other aspects of  the DTV transition not related to the implementation of possible subsidy  program that are ongoing and will take time to complete or may pose their  own challenges. For example:    Under current FCC time frames, the final process for television stations to  select their permanent channel placement for their digital signals is  ongoing. Broadcast stations began the process of choosing their final DTV  channel in February 2005. In August 2006, FCC expects to issue a Notice  of Proposed Rulemaking that includes a tentative DTV Table of Allotments  once the channel election process is finished. FCC will seek comment on  the proposed Table and then issue an order with a Final DTV Table of  Allotments, which, at a minimum, would take several months. An FCC  official told us that it would likely be sometime in 2007 before all the  allotments are finalized. In order for the DTV Table of Allotments to be  finalized by the end of 2006, FCC officials told us that they would need to  shorten the channel election process time frames that they currently have  in place. We were told that once stations know their final channel  assignments, they might need to make adjustments to certain equipment.  Therefore, we found that for stations that do not have certainty on their  assignments until sometime in 2007, equipment modifications will be  undertaken well into that year.
Currently, a small number of television stations are not yet broadcasting  digital signals. FCC told us that issues of technical interference and the  permitting process for locating and constructing broadcast towers are the  primary reasons these stations are not yet online with a digital broadcast  signal. For example, for any station located within 200 miles of the  Canadian border, coordination and approval from the Canadian  government is required, in accordance with international treaties.
At present, no requirements for the application of the Emergency Alert  System (EAS) apply to stations’ digital broadcast signals. FCC is now  considering how requirements will be set. An FCC official told us that  rules for EAS on DTV stations that are similar to requirements for analog  stations should be developed within a few months, but additional work  will look at whether there will be expanded functionality required in the  digital environment. According to FCC, the equipment that stations will be  required to purchase to meet the basic requirements that are likely to be  set before the end of 2005 is not very expensive. Because the requirements  for expanded functionality are not yet set, an FCC official told us that it is  not clear what the cost of any additional equipment will be.
Another challenge that may be posed by the DTV transition relates to  antenna reception of digital over-the-air broadcast signals. Many  stakeholders said that antennas currently used to view analog over-the-air  signals will be sufficient to receive DTV signals and an FCC official told us  that many viewers will have improved picture quality with digital signals.   However, a few indicated that improved antenna technology may be  needed for some households. An antenna manufacturer, a broadcaster, a  retailer, and other stakeholders said that the ability to receive digital over- the-air signals is variable and contingent on each household’s geography,  among other things, and that some people may need new antennas or  adjustment of existing antennas. In particular, we were told that adjusting  the antenna to receive digital broadcast signals can be more difficult than  analog signals because if the antenna is not aimed correctly, the television  may not be able to display any signal. Also, while interference from trees,  buildings, and other structures can distort an analog picture, this type of  interference can cause a complete loss of digital signals.
Ensuring that households understand the transition and how they will be  affected is critical to a smooth transition. Any household that does not  understand what will occur could be adversely affected. Over-the-air  households are the most likely to be impacted by the transition because, to  whatever extent cable subscribers will be affected, they will likely have  support and information provided by their subscription video providers.  Based on our work, other specific populations might also be more difficult  to reach with needed information about the transition, including low- income households and those who do not speak English as a first  language. The consequences of any information gaps are serious because  households could lose their access to television signals. During our work  on the transition to DTV in Berlin, Germany, we found that an extensive  information campaign was widely viewed as critical to the success of the  transition.
section_title: Concluding Observations
paragraphs: There are many difficult decisions and determinations that will likely be  considered if a subsidy program for DTV equipment is developed. In  addition, there are unique interfaces between the challenges we identified  and the administrative method used to deliver the subsidy that will require  careful consideration. For example, if such a program were developed and  eligibility were limited to only low-income individuals, it might be  advantageous to leverage the infrastructure and expertise that state social  service agencies have in providing assistance to needy households. But to  utilize the state agencies, the subsidy might need to be provided in the  form of a voucher because the state agencies have experience mailing  information and could mail a voucher to the low-income recipients of  other assistance. In contrast, if there were no eligibility restrictions  applied to the subsidy, a rebate might be a good method for administering  the subsidy because it would draw on the existing relationships between  manufacturers, retailers, and rebate fulfillment companies, all of whom  have extensive knowledge and experience in developing, advertising, and  implementing rebates. However, such a design might render the subsidy  less usable by low-income Americans.
The return of the spectrum for public safety and commercial purposes is a  critical goal for the United States. Implementing a subsidy program for  DTV equipment poses a variety of difficult challenges and may not be the  only policy option that could help advance the overall goal of reclaiming  spectrum. Given the importance of this transition, it seems critical for  knowledgeable officials in government and in industry to work together to  find the best means to address any issues that may impede progress in  completing the DTV transition—and the associated reclamation of  valuable radiofrequency spectrum.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions you or other Members of the Committee may  have at this time.
section_title: Contact and Acknowledgments
paragraphs: For questions regarding this testimony, please contact Mark L. Goldstein  on (202) 512-2834 or goldsteinm@gao.gov. Individuals making key  contributions to this testimony included Amy Abramowitz, Michael  Clements, Andy Clinton, Simon Galed, Eric Hudson, Bert Japikse, and  Sally Moino.
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