Television:  The Digital Future A consultation document

Introduction

1. Today, we publish the research undertaken by National Economic Research Associates (NERA) and Smith System Engineering Ltd on behalf of the Department for Culture, Media and Sport (DCMS) and the Department of Trade and Industry's Radiocommunications Agency (RcA); "A Study to Estimate the Economic Impact of Government Policies towards Digital Television." The Government invites comments on the content of the NERA report.

2. Section 33 of the Broadcasting Act 1996 requires that, by the fourth anniversary of the granting of digital terrestrial licences by the Independent Television Commission (ITC), the Secretary of State for Culture, Media and Sport shall require the BBC and ITC to report to him on the availability of digital terrestrial television services provided by the existing analogue terrestrial broadcasters and penetration of digital receiving equipment. The NERA report was commissioned as a preliminary exercise to help inform Government policy in taking forward this statutory responsibility. Following the ITC's recent granting of digital licences, the statutory deadline prescribed by section 33 is 19 December 2001, though the Government currently envisages it starting the process before that statutory deadline.

3. NERA were asked to construct an economic assessment of the migration from analogue to digital television broadcasting and to examine the impact that Government policies might have on securing analogue switch-off in 5, 10 and 15 years' time. The report goes into some detail on a number of technological solutions and the costs of several options. The views expressed in the report about those options are those of NERA and not of the Government.

4. NERA draw the following main conclusions from their analysis:

1. Shut down of analogue TV transmissions appears feasible in a 10-15 year time frame, but not within 5 years.

2. There are likely to be significant benefits from an early announcement of a closure date for analogue services, in terms of a more rapid fall in the price of digital reception equipment and a corresponding increase in the rate of consumer take-up.

3. The most promising options for providing qualifying services to the final 5-10% of the population not covered under existing digital terrestrial television roll-out plans are either to extend roll-out of digital terrestrial television for at least 3 multiplexes, or to provide for carriage of the qualifying services on digital satellite (or a mixture of these two approaches). Serious consideration should also be given to the use of cable or Multipoint Video Distribution Systems to provide infill in coverage Ablackspots@ areas. More detailed technical and costing work is required to identify the optimal delivery method for particular areas.

4. The provision of services to the final 5-10% of the population and the subsequent shut down of analogue services might be partly funded by the auction of the spectrum released for other uses.

5. At present the large majority of the viewing public relies on analogue terrestrial broadcasting. The Government hopes that, following the introduction of digital broadcasting in 1998, most of these viewers will make an early switch to digital broadcasting services on the basis of the prospective benefits, such as more broadcast services, including some new free to air services from the BBC and ITV; better picture and sound quality and access via the television screen to other services, including interactive information, education or public services. No one will be forced to buy digital equipment but the Government expects that such equipment will be attractive to viewers.

6. The Government wishes to explore what might be done, without distorting the market, to promote digital television and to expedite the switch-over from analogue to digital receiving equipment. In doing so, however, it will have regard to the following considerations:

1. analogue services should not be switched off until the overwhelming majority of people can obtain access to digital services (99.4% of the UK population are currently able to receive analogue terrestrial services);

2. the particular access which must be secured is the viewer's continuing ability to receive through digital means the channels currently available free to air through analogue terrestrial transmissions;

3. the Government does not wish to impose a particular digital equipment type or transmission medium. Rather, it is seeking to explore whether there are measures which might encourage and expedite the purchasing of receivers by viewers choosing freely between the available digital options;

4. nevertheless, the Government does wish to encourage maximum compatibility between various types of receiving equipment. This facilitates both access to public service channels and competition and choice for consumers based on services provided.

7. The NERA report raises a wide range of issues on all of which the Government would welcome the views of broadcasters, manufacturers, retailers, regulators, consumer organisations and the viewing public - without prejudice to any particular course of action. These are highlighted in the analysis which follows.

A) DIGITAL SIGNAL COVERAGE

8. Digital terrestrial, cable and satellite services are all expected to be launched in 1998 but each delivery system has limitations of coverage. The Government does not favour any single transmission medium for delivering digital services. It will be for industry and the consumer to adopt the delivery media most suited to their needs. NERA conclude that it is likely that a mixture of delivery platforms will be needed to ensure digital coverage reaches in the medium term that now secured by analogue terrestrial transmissions.

Terrestrial

9. The initial 81 site transmission plan for digital terrestrial television services will deliver six multiplexes carrying the services of the BBC, Channels 3, 4 and 5, S4C in Wales, and new services offered by British Digital Broadcasting, S4C Digital Networks Ltd and others to between 69-92% of the population (All the existing terrestrial television channels will be delivered to over 90% of the UK population but some of the new BDB services will not reach beyond 69%, initially). The Government will be discussing with the Independent Television Commission and the BBC the spectrum planning of digital terrestrial television transmissions beyond the initial 81 sites to extend coverage into those areas unserved by the first stages of the terrestrial transmission network.

10. The Government would welcome views, particularly from digital terrestrial multiplex providers, on the role of digital terrestrial transmissions in increasing coverage beyond the initial planned 90% of the UK population and on how quickly the digital terrestrial television transmission network could be extended - assuming spectrum availability - beyond the initial 81 sites, and what costs would be involved.

Cable

11. When the existing cable franchises have completed their construction some 80% of UK homes will be passed. Digital cable services are required to carry the existing terrestrial free to air services. In those parts of the country - including in urban 'black-spots', where digital terrestrial television coverage is unlikely to be possible - cable will provide an alternative means of securing access to those services. For the foreseeable future, however, there will continue to be some areas not served by cable.

12. The Government would welcome views of cable companies as to how quickly digital cable services could be extended to the maximum possible coverage.

Satellite

13. NERA estimate that digital satellite will reach between 70 - 80% of the UK population but raise questions relating to access to free-to-air services which have been encrypted for copyright reasons. Digital satellite nevertheless also has a role to play in securing access to services, particularly for those living in remote areas.

14. The Government would welcome any comments from satellite broadcasters and others on the assessed coverage; the costs involved in extending that coverage to remote areas and the copyright issue.

Multipoint Video Distribution Systems

15. The NERA study refers to the possibility of using frequencies between 40.5-42.5 GHz to extend the coverage of digital qualifying services. This spectrum is currently reserved for Multipoint Video Distribution Systems (MVDS) to extend Local Delivery (cable) Licensees' services. To date, however, no licensee has used this spectrum commercially although there are currently two sets of trials assessing the viability for MVDS to extend cable distribution. The Government is also considering the use of this spectrum for the provision of broadband interactive multi-media services.

16. The Government would welcome comments - in particular from the broadcasters of the qualifying services, Local Delivery Service licensees and prospective interactive multimedia service providers - on MVDS use

1. to extend coverage of the qualifying services by encouraging its use to increase the number of homes passed by cable services which are required to carry the qualifying services;

2. to extend coverage of all digital terrestrial television services (including the qualifying services) by enabling digital terrestrial television multiplex licensees to use MVDS to extend multiplex coverage in those areas unserved by UHF transmitters.

3. of other frequency bands than 40.5 - 42.5 GHz.

17. The Government notes that NERA rules out, at this stage, the use of Digital Subscriber Line technology to deliver broadcasting services via the fixed telephony network. Nevertheless, the Government recognises that NERA's analysis of delivery systems for digital broadcasting may not be definitive and would therefore welcome views from those who believe other delivery systems can assist in extending the reach of digital television services across the UK.

Guaranteeing reception of "qualifying services"

18. The Government's priority is the digital delivery of the current services of BBC 1, BBC 2, Channel 3, Channel 4, S4C in Wales and Channel 5 where it is already received by terrestrial means. In their report, NERA categorise these as "qualifying services". All these services will be broadcast free to air via digital terrestrial television and the BBC and Channel 3 have already made clear that they will broadcast additional programme services free to air on digital terrestrial television. The Government looks forward to learning more about these new services as they are developed by the broadcasters.

19. At present, digital terrestrial television would appear to be the only delivery medium which will enable viewers to watch qualifying services without any payment beyond the initial capital outlay of purchasing receiving equipment. Nevertheless, where a viewer has chosen to purchase cable or satellite receiving equipment enabling access to qualifying services, the Government's basic aim relating to the switch-over to digital services will have been met. The Broadcasting Act 1996 introduced a statutory requirement on cable companies when broadcasting digitally to carry the digital versions of the qualifying services to their subscribers. Cable operators may also see opportunities in future to develop digital cable service packages including only the qualifying services. Such packages might include access to digital services via a single capital outlay (i.e. for purchase of receiving equipment and cable connection). The BBC and Channel 5 are also already committed to delivering their services via digital satellite.

20. The Government notes NERA's proposal that, rather than simulcast all 14 regional Channel 3 variations via satellite, a composite national Channel 3 could be delivered instead. Given that regional programming is a particular strength of the Channel 3 licensees and an element of the UK broadcasting 'ecology' which the Government wants to maintain, the Government has reservations about this proposal. It would welcome comments on the concept of a composite Channel 3 satellite service, as a means of securing access to digital Channel 3 in remote areas.

21. The Government would also welcome the views of the BBC, S4C, the Channel 3 and 5 licensees and Channel 4 on the merits of their services being distributed via digital satellite and the means by which the viewer can be guaranteed access to those services without additional charges.

22. The Government would welcome views from cable and satellite operators on what terms they would be prepared to offer connection to those consumers wanting access only to the qualifying services and whether operators would be willing to offer access on the basis of a single capital outlay.

The Self Help Television Scheme

23. The Self Help Television Scheme exists to assist small communities in the construction of relay transmitters to extend the transmission of analogue television services to currently unserved communities. A similar scheme might eventually assist communities unserved by digital services once digital terrestrial coverage reaches the vast majority of the population. However - as NERA suggest - if all qualifying services were carried by digital satellite then it may be more cost effective for such small communities to rely on Direct to Home satellite distribution of qualifying services.

B) DIGITAL RECEIVING EQUIPMENT

24. The NERA report estimates the total cost of equipping all television households with digital receiving equipment - either set-top boxes or integrated digital televisions - as ,6-9 billion and that, in the normal course of market development, by 2013 every household will have at least one digital receiver. This represents a major purchasing decision for every television household within the next 15 years which offers opportunities for receiver manufacturers and retailers. The Government would welcome views - particularly from manufacturers and retailers - on NERA's projections for take-up of digital receivers.

25. In spite of the various advantages of the new digital television services which will drive receiver sales, NERA recognises that there will be some who do not want to invest in new or more television channels. Digital terrestrial television will probably be the most likely access point to the digital age for this group, as they purchase digital equipment via the normal television replacement cycle. As digital receiver sales increase, their cost will decrease with economies of scale in production. This in turn is likely to encourage those replacing analogue sets to purchase digital rather than analogue receivers. The Government would welcome views - particularly from manufacturers, retailers and consumer organisations - on the factors influencing purchasing decisions and on industry assumptions on the relative prices of digital and analogue equipment.

VCRs

26. NERA conclude that the limited functionality of analogue Video Cassette Recorders (VCRs) after analogue switch-off will lead consumers to purchase either further digital receivers or digital VCRs when these become available.

27. The Government would welcome views - particularly from manufacturers, retailers and consumer organisations on

• the timescale for introduction of digital VCRs and their likely functionality; and

• the extent to which the inability of VCRs to record a different channel from the one being watched is likely to be a disincentive to invest in digital receiving equipment.

Government action to stimulate demand for digital receiving equipment

28. NERA considered a number of ways in which the Government could encourage purchasing of digital receivers. For reasons suggested in the report itself, the Government regards some of these possibilities as unacceptable. The Government believes the market will provide a far better mechanism for balancing the advantages and costs to manufacturers, retailers and viewers of moving to digital broadcasting than direct Government action such as banning sales of analogue receiving equipment or requiring the production of dual analogue/digital receivers.

29. NERA note that direct financial assistance or tax privileges could be used to encourage take up of digital services. The Government sees no need for either of these measures at this stage in the development of digital services, particularly in the light of the requirements in the Broadcasting Act 1996 that digital terrestrial television multiplex licences contain obligations on roll-out of digital terrestrial television services and encouraging take-up of receivers by the licensees themselves.

30. NERA also contemplate a policy of degrading analogue television signals to encourage viewers to purchase digital receivers to obtain better quality pictures. The Government is not attracted to this artificial development of a two-tier broadcasting service based on willingness to invest in new receiving equipment. However, it is unlikely that towards the end of the period of analogue transmission the Government could justify requiring broadcasters to repair a failed analogue transmitter at significant cost to reach a very small number of analogue receivers. Alternative arrangements would need to be made to serve those households.

31. The Government sees advantages in a fast take-up of digital receiving equipment which will increase consumer choice and access to the benefits of the new technology. The Government would therefore welcome suggestions for action it might take which would quicken the take-up of digital receiving equipment but would not unduly distort the market.

Information on point of sale of analogue receivers

32. NERA recommend that once Government has named a date for switching off analogue transmissions, the sale of all analogue receiving equipment should be accompanied by consumer information making clear that additional equipment would be needed after that date to enable the analogue equipment's continued use. The Government would welcome comments - particularly from manufacturers, retailers and consumer organisations - on the following:

• the merits of a legal requirement to inform the purchaser of analogue equipment of its limited future functionality;

• the form such customer information should take - oral advice by retailer; information physically incorporated on the equipment itself; associated written material;

• the application of such requirements to first time sale of analogue sets or all analogue sales (with the possible enforcement difficulties the latter entails);

• the timing of any such requirement - i.e. how many years before analogue switch-off date?

C) GOVERNMENT ANNOUNCEMENT OF DATE OF ANALOGUE SWITCH-OFF

33. One of NERA's principal conclusions is that the Government can encourage the development of digital services by firmly naming a date when the broadcasters must surrender the spectrum currently used for analogue terrestrial transmission. NERA believe that such a Government announcement could encourage the digital television manufacturing and retailing industries to produce the economies of scale to enable cheaper receivers for the consumer more quickly. The Government would welcome comments on NERA's assessment.

34. As has already been indicated, the Government will not switch off analogue terrestrial transmission until the overwhelming majority of the UK population currently served have access to digital reception via one delivery platform or another. Whatever actions are taken by broadcasters, manufacturers and retailers, there will be some current viewers who will not wish to purchase digital receiving equipment (for a variety of reasons). Once it is clear that this remaining group is a small minority, the Government will need to consider further how to secure the benefits to the economy as a whole offered by analogue switch-off. In particular, the release of the spectrum will enable the frequencies to be redeployed for a range of other purposes, including more broadcasting and telecommunications services.

35. This consultation paper is only the first step in the development of policy towards securing a date for analogue switch off. The Broadcasting Act 1996 requires that the Government formally consult the BBC and Independent Television Commission on the extent of digital transmissions and receiver take-up before the fourth anniversary of digital terrestrial services. It is the Government's current intention to consult both the ITC and BBC, shortly, on transmission plans and to commission the report envisaged by the Act early in the life of digital terrestrial television licences - once it is clear that digital services have been successfully launched.

36. NERA conclude that naming an analogue switch-off date within 1 or 2 years of the start of digital terrestrial services could reduce the costs to the economy of purchasing reception equipment by up to ,500 million over 10 years. The Government would welcome comments on this assessment.

37. Such a saving is worth investigating further and the Government would like to examine the practicalities of naming an analogue switch-off date of 10 or 15 years' time (i.e. 2008/2013) and therefore seeks the views of interested parties. It is NERA's thesis that consumers will take little notice of the date for analogue switch-off at the time of the announcement and will ignore switch-off as an issue until relatively near the actual date. The Government would welcome comments on this view.

38. On the other hand, NERA believe that manufacturers and retailers will gain sufficient confidence from a firm Government decision to increase production to deliver economies of scale sooner than if the market were left to find its own level. The Government would therefore welcome comments on the form any Government announcement should take, and in particular on the following points:

• the respective merits of the 10 and 15 year dates (or others) and how such dates should relate to the penetration of digital services;

• the lead time between any Government announcement of switch-off and actual switch off;

• the extent to which switch off should be progressive over a period of years around the country or a single universal switch-off across the country;

• the point at which the Government announces how it will deal with those either unwilling or unable to invest in digital reception equipment;

• the implications if the take up of digital receivers is less than anticipated after the Government has announced a switch-off date.

D) RELEASE OF ANALOGUE SPECTRUM

39. In view of the greater spectrum efficiency of digital services, the cessation of analogue terrestrial broadcasting could release considerable amounts of spectrum. Subject to international agreement, this could be used for alternative services, bringing substantial economic and social benefits. The NERA report considers the possibility that, subject to the passage of the Wireless Telegraphy Bill, which is currently before Parliament, spectrum no longer required for analogue terrestrial broadcasting could be auctioned, either before or after the actual closure of the analogue terrestrial transmission network.

40. NERA suggest that the proceeds from such an auction could, in principle, then be used to subsidise the supply of digital reception equipment in areas that may not have had the benefit of a number of years of analogue and digital simulcasting of the qualifying services. The Government is already in the initial stages of considering the feasibility of this as a means of bringing forward analogue switch-off but it would be premature to reach decisions on this question until the market's reaction to digital television services is known. It is also not possible at present to estimate, with any confidence, the proceeds of such an auction - and hence the extent to which an auction would in practice facilitate the switch-off of analogue terrestrial transmissions. That is because it is not at this stage clear what the alternative uses of such spectrum might be. The Government has already consulted on the possibility of holding an auction of spectrum for Third Generation Mobile Communications (also known as UMTS). Experience in constructing and administrating that auction process will enable more detailed examination of the prospects for future auctions accelerating the timetable for analogue switch-off . However, as NERA explain, it could also take a number of years to obtain the necessary international clearance for these alternative uses.

41. The Government intends, without prejudice to any future course of action, to examine the options for auctioning spectrum currently used for analogue transmissions. Meanwhile views are sought on the prospective use of auctions, either before or after the international clearance of alternative uses has been secured, to bring forward the date at which it is possible to switch off analogue terrestrial transmissions. The Government would also welcome any other proposals to enable the early release of analogue frequencies which would respect the interests of analogue terrestrial viewers.

42. Further copies of this document and the whole of the NERA report can be obtained from the web sites of both the Department for Culture Media and Sport and the Radiocommunications Agency:

http://www.culture.gov.uk/NERA.HTM

RESPONSES

43. Responses to this consultation exercise should be sent by 4 September 1998 to:

Niall Mackenzie
Room 411
Department for Culture Media and Sport
2 - 4 Cockspur Street
London SW1Y 5DH

Email - niall.mackenzie@culture.gov.uk

44. All responses will be copied to both CII Directorate of the Department of Trade and Industry and Broadcasting Section of the Radiocommunications Agency. All responses - unless otherwise indicated - will be published in due course on the web sites of the DCMS and the Radiocommunications Agency. Respondents are therefore requested to confine confidential material where practicable to clearly marked annexes.

February 1998

NERA REPORT

Executive Summary

Main Report

Appendices

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