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Broadcasters have a BIG problem - Internet Appliance Providers have a BIG Opportunity
By John Latta and Amanda Rogos
(May 20, 1999)

WAVE Issue #9052

Our assessment of the Information Appliance market gained visibility into some interesting market dynamics. Intrinsic in the growth of the IA market is its cannibalistic impact on other markets. Part of this is due to the fact that IA products and services will prey on other markets to accomplish their growth. The question then is - what are the markets most subject to such prey? In the study we also developed the axes of this fifth era of computing as Free MIPS and Pervasive Networking. One of the most precious commodities is bandwidth. Another question is - where to get bandwidth? It turns out that the answer to both questions are related..

In December of 1996, the Federal Communications Commission (FCC) adopted a standard for the transmission of digital television, in their Fourth Report and Order, Docket No. 87-268. Its purpose was to serve the public interest, permit interoperability with computers, and encourage innovation and competition. This standard, called the ATSC DTV Standard included the ability to broadcast multiple streams, or multicast Standard Definition Television programming in addition to one, and under some circumstances, two HDTV programs, at visual quality better than the current analog signal. In the following months, the FCC also mandated a schedule for the transition from analog to digital.

However, no matter what the image quality or even the fact that it is digital, is immaterial if no one tunes in. For example, in 1998 there were 50,000 HDTV receivers shipped in the United States. In 1999 Strategy Analytics estimates that this number will increase to 130,000 receivers. Contrast this with the following: in the top 10 markets which serve 29,320,670 households with approximately 70,369,608 televisions (as of January 1998), the deadline to transmit digital television is this month, May 1999. In the 30 largest markets the deadline is November of this year while all commercial stations must convert by May 2002, and all commercial and noncommercial broadcasters by May of 2003. The installed based of HDTV receivers is expected to be less than 1 million units by the end of 2002. Compare this with today's 229 million analog receivers. Given the fact the broadcasters receive income based on the size of the audience the potential for income from HDTV transmissions is dismal. The broadcasters have a BIG problem.

The FCC's Fourth Report and Order also states that broadcasters can not only send video, but also voice and data simultaneously over their channels to provide a large range of services, switching easily and quickly from one type of service to another. For example, a broadcaster could transmit a news program consisting of 4 separate simultaneous SDTV program streams for local and national news, weather and sports, then transmit an HDTV commercial with embedded data about the product, then transmit a motion picture in an HDTV format simultaneously with unrelated data. At NAB we saw data bandwidth, using the so called "opportunistic" data transmission, i.e. vacant spaces in the MPEG2 data stream, where bursts of up to 8Mb/sec are available.

The broadcasters are also caught in a dilemma of their own making. It is now public policy that spectrum is a valuable asset owned by the government and its use is auctioned to the highest bidder. (Note that this policy came about as one means to address the budget deficit.) This began with the PCS auctions in December of 1994 and continues to this day with one of the more recent being the re-auction of the LMDS spectrum from those companies that defaulted on the original auction. This auction was opened April 27, 1999 and sold 121 Block A licenses and 40 Block B licenses in the LMDS spectrum, which includes, Block A: 27,500- 28,350 MHz; 29,100-29,250 MHz and 31,075-31,225 MHz Bands and Block B: 31,000-31,075 MHz and 31,225-31,300 MHz Bands. However, there is an exception to this policy of auctioning spectrum - the HDTV spectrum. One cannot understand this issue without having a sense for the power of the broadcasters in Washington.

Certainly the NAB (National Association of Broadcasters) is one of the most power groups on Capitol Hill. The broadcasters got their digital spectrum for free but this is characterized as spectrum which is "on loan" until the current analog spectrum is returned to the government. Thus, the government has a timetable for the conversion. However, given the flexibility that the broadcasters have from this new digital spectrum, as outlined above, they have the potential of reaping income from this. On 19 November 1998 the FCC addressed this issue with its Report and Order, Docket No. 97-247, where it stated that any income derived from the use of the digital spectrum for ancillary data transmission will result in a 5% tax on the revenue stream. Ancillary services were defined as computer software distribution, data transmissions, teletext, interactive materials, paging services, audio signals, and subscription video. The fee would be based on a percentage of gross revenues generated by feeable ancillary or supplementary services and goes directly into the US Treasury.

The FCC reasoned that the fee would afford broadcasters the flexibility to develop innovative DTV services. It was set at 5% for several reasons, one, it would fulfill the statutory obligations to impose a fee which would recover a portion of the value of the spectrum for the public, and two, it would prevent the unjust enrichment of broadcasters providing the services, and lastly, it would approximate the revenues that would have been received had the spectrum been licensed through an auction.

What then is the value of this spectrum from a quantity of data standpoint? As part of the Information Appliance market study we sought to determine the number of unique data messages that could be sent under three conditions: Daytime for 8 hours with an ancillary data channel and no impact on the MPEG data stream (=T- 1 rate), (3/4) of the 19MB/s data stream (assumes one SDTV channel) and 12 Hours of 19Mb/sec at night with no HDTV broadcasting.

As part of our research on the market study we spoke to the FCC to ask if there was a rule making on the use of the HDTV spectrum at night when no DTV is being broadcast. The answer we got back - no one has yet asked.

As can be seen from these quantities, the broadcasters have considerable potential as datacasters. This particular spectrum is also of further value in that there is at least limited building penetration.

Where are the broadcasters? We did a brief sample at the recent NAB conference. The broadcasters are of a different mindset. It would seem that their goal is Internet communications, webpages, and multimedia. This is another component of their BIG problem. Media presence on the Internet is frequently not generating enough revenue to even cover the expenses involved.

Here is where the information appliance providers have an opportunity. By working with these products and services, the broadcasters can leverage the spectrum for income production. Note that this is not an Internet play but one in which tailored information is provided both to individuals and groups at reasonable prices in a timely manner. Consider one concept developed in the Information Appliance market study - the use of the HDTV spectrum for the delivery of MP3 or some other audio encoded format to portable receivers for personal playback. We estimate that at night 51,300 unique 3 minute MP-3 encoded songs could be downloaded from one station.

Broadcasters have a BIG problem in the way they are approaching this market. The Internet, although allowing mass communication and reach, is not their killer app. In fact, as the available bandwidth increases to individuals the value of mass broadcasting faces continual decline. Yet, at the same time the transition to digital for broadcasters only brings its own BIG problem - not enough viewers and limited income. This falls back to the classic marketing problem - what is the core business of broadcasters? It may not be supplying mass content but their core business may be that of a spectrum manager.

This is all about the transition to the fifth era of computing.

http://www.fourthwave.com/report/

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