A Study to Estimate the Economic Impact of Government Policies Towards Digital Television

Executive Summary Prepared for Radiocommunications Agency and Department for Culture, Media and Sport

January 1998
London

Project Team:

NERA

Phillipa Marks

Mark Shurmer

Ivan Viehoff

Smith System Engineering

Richard Womersley

Executive Summary

Introduction

1.This study by National Economic Research Associates (NERA) and Smith System Engineering (Smith) for the Radiocommunications Agency (RA) and the Department for Culture, Media and Sports (DCMS) assesses "The Economic Impact of Government Policies for Digital Television and for the Closure of Analogue Transmissions". The main issues addressed by the study are:

• the costs of moving all TV households from analogue to digital television reception;

• how government might encourage a mixture of consumers, industry and the taxpayer to bear the cost of switching from analogue to digital transmission; and

• how government might deliver analogue switch-off in 5, 10, and 15 years time, including analysis of the implications of key timing issues, such as the naming of an analogue switch off date 5 or 10 years in advance.

Our approach to these issues has involved first projecting the likely take-up of Digital Terrestrial Television (DTT) over 15 years in the absence of any closure of analogue services. The impact of an accelerated analogue shut down date is then assessed against this reference case. Our analysis has been informed by discussions with industry and we would like to thank all those organisations who assisted us in this work.

2. DTT services are due to be launched in the last quarter of 1998. Six multiplexes have been licensed each capable of offering around five programme services. The existing terrestrial analogue television services (BBC1, BBC2, ITV, Channel 4, S4C and Channel 5) will be simulcast in DTT and it is government policy that viewers must continue to be provided with access to these qualifying services free of charge. In addition, DTT will offer new free-to-air and subscription television services, and data and interactive services, with a return path provided via a modem connection to the public switched telephony network. The projected population coverage for the DTT multiplexes varies from around 92% for the largest down to around 70% for the smallest.

3. Digital satellite services are expected to launch by Summer 1998 and digital cable services are also likely to commence around that time. Digital satellite and digital cable will each have the capacity to offer over 200 programme services and a range of interactive services.

4. In order to receive digital services households will need to purchase either:

• a set top box (STB) to decode the digital signal back into analogue format for display on existing analogue sets; or

• in the case of DTT, a STB or an integrated digital TV set (iDTV) which is likely to be both analogue and digital compatible.

5. A proportion of households (estimated at less than 30%) will also need to purchase new antennas to receive DTT, while digital satellite and cable households will also have additional installation costs (e.g. modifications to satellite dishes and a new cable for those households not subscribing to analogue services). Households may also need to purchase new VCR equipment. In the digital environment existing VCRs will only offer limited functionality - that is the viewer will generally be restricted to recording the channel currently being watched. Full VCR functionality will require either the purchase of a STB for each VCR or the purchase of a new digital VCR when these become available.

The No Shut Down Scenario

6. We have projected the likely take-up of DTT over the next fifteen years assuming there is no closure of analogue services. The projections are necessarily somewhat speculative as there is a general lack of "hard" supporting data. DTT has not been implemented in other countries, meaning there is no firm data on consumer reactions, on equipment costs or on the practical difficulties of implementing DTT. To deal with these uncertainties we have adopted a scenario approach describing likely upper and lower bounds to consumer take-up of DTT. The scenarios draw on the experience of the transition from black and white to colour TV transmissions. The projections are shown in Table 1.

7. Our analysis suggests that the take-up of DTT will be a gradual process driven largely by the set replacement cycle, which is assumed to stay constant at the existing rate of 8 years. Even in the high take-up scenario DTT penetration of TV households does not reach 100% until 2013. This would suggest that an earlier closure date for analogue transmissions will only be possible if methods can be found to accelerate the take-up of DTT.

8. We estimate that the gross costs of the moving from analogue to digital television, in present value terms are in approximately:

• £1.1bn in transmission infrastructure costs;

• £6-9bn in the costs to households of digital reception equipment (excluding the costs of new aerials or VCRs that might be incurred);

• £6bn in additional programming expenditures.

The above estimates of costs to households does not take account of the analogue equipment purchases they would otherwise have made. Taking these purchases into account gives a net cost of digital equipment of £1-2bn.

Initiatives to assist take-up of DTT

9. The main efforts to assist take-up will be by the multiplex operators. These include:

• Subsidy: Plans are not finalised, but the favoured option is to offer cash back to customers who purchase digital equipment and take out a subscription to BDB.
• Co-ordinated marketing and technical advice: the multiplex operators have created the Digital Multiplex Group as a forum to co-ordinate their efforts in these areas.
• TV Promotion: Current analogue UHF broadcasters have committed air-time to promoting DTT.

10. We examined a number of policy options available to the government to accelerate take-up of DTT and reduce the likely time to analogue switch-off. The most important policy initiative is to provide an early announcement committing to switch-off over a clearly understood timescale. The announcement should not give room for major slippage or cancellation.

11. Clear information should be given to purchasers of analogue sets of the consequences of this purchase decision. This should not be implemented immediately, but at a carefully judged time once iDTV sets have become a practical alternative for the majority of the population.

12. DTT coverage will be incomplete, and multiplex operators may be willing to invest to extend coverage, for example providing infill using multi-point video distribution systems (MVDS). The government should adopt a flexible approach to MVDS licensing. This will give digital multiplex licensees the opportunity, if they are willing to invest, to ensure that at the least the core densely populated areas obtain full coverage of services available by DTT.

13. It is anticipated that at some point spectrum freed by closure of analogue transmissions will be made available for new uses, possibly through an auction. Some of the money raised in the auction could be used to fund a contractor to make arrangements which would assist switch-off in areas which will not have simulcast period.

Shutting Down Analogue Services

14. To shut down the analogue service, delivery methods which continue to provide at least the qualifying services to around 99.4% of the population must be found. It is easiest to close down analogue services in the areas where the DTT and analogue services are simulcast for an extensive period. This will initially be from 81 transmitters, but could be extended to about 120, thus covering 90 to 95% of the population. With an extensive simulcast and notice period comparable to the average set replacement cycle of 8 years, viewers are able to upgrade to DTT at a convenient time. In due course, it is anticipated that upgrading will not be expensive relative to analogue equipment, as iDTVs and digital STBs will fall in price and become available second-hand.

15. One approach is to continue to serve the final 5-10% of the population areas using the UHF spectrum currently used for analogue TV services. For example through:

• analogue to digital change-over: This would involve modifying analogue relay stations to digital operation. There would be no simulcast period. Four or five digital multiplexes could be transmitted following changeover, with potentially six multiplexes later once all the spectrum has been released from analogue services; or

• simulcast three multiplexes containing qualifying services: In this option, the existing analogue channels would continue to be broadcast together with the three digital multiplexes providing the qualifying services.

16. The major difficulty with such approaches is that if analogue transmissions are simply converted to digital, very little spectrum is released for other services. The extent to which UHF spectrum should be used, on economic grounds, to complete universal coverage depends upon its relative value in other uses. Whilst there may be areas where a UHF change-over might be appropriate, it appears unlikely that it will be economic to serve all areas with UHF transmissions.

17. All alternative methods for serving the final 5-10% of the population, namely cable, satellite, MVDS, and the telephony network include some ongoing costs, in terms of operating and maintaining local infrastructure and/or conditional access technologies, which are normally borne by the viewer. If the qualifying services are to be provided free of ongoing costs to the viewer, then these costs will have to be paid for by the public service broadcasters (when viewers do not wish to buy subscription services).

18. Of the non-UHF transmission options, only digital satellite is likely to provide coverage to all or most of the remaining 5-10% of the population. We understand that the BBC, S4C and Channel 5 will be carried by digital satellite thus providing extended simulcast in all areas. It will also be necessary to provide carriage of ITV and Channel 4 if all the qualifying services are to be available. Digital satellite provision of qualifying services could have knock-on benefits to other satellite service providers, as they can offer households a "one stop shop" for all TV services and may thereby have access to a larger customer base.

19. Other delivery methods may be useful for providing infill in certain areas. Cable could be used, for example, to extend coverage where black-spots occur in urban areas. MVDS could be useful for semi-urban areas or compact rural settlements. Even if the regulatory position were to change, we do not believe that the telephony network provides an economically viable means of delivering digital television services to the remaining 5-10 percent of the population.

20. Estimates of the costs of completing universal coverage using exclusively either UHF or satellite transmissions are given in Table 2. Two variants of the UHF option are considered:

• overnight analogue to digital change-over; and
• simulcasting three multiplexes containing the qualifying services.

UHF transmission is cheaper than satellite transmission in terms of annualised transmission costs and costs of reception equipment. However, using satellite allows more spectrum to be released.

21. Satellite transmission must, however, be encrypted for copyright reasons requiring the use of a smart-card by households to decode the signal. This raises the issue of whether the broadcaster or the viewer should meet the costs of administering the smart-card, estimated at £10 per household per annum, and the extra costs of purchasing digital satellite reception equipment if the free-to-air principle is to be maintained.

Implications of 5, 10, 15 year shut down

22. A 5 year shut down date for analogue services imposes additional costs estimated in present value terms of around £2.6bn of advanced purchases of main TV sets. Set against this cost the benefits of the early release of spectrum are likely to be relatively small because future use of the UHF spectrum will not be known with certainty at that time. This is because of the need for European-wide co-ordination of UHF spectrum use and this co-ordinated use must be registered in the International Telecommunications Union Radio Regulations, a process which in itself could take four years.

23. For these reasons, a 10 or 15 year shut down appears more realistic. A ten year shut down date imposes costs on households of £300-£600m (in present value terms) of advanced purchases of main TV sets. A government announcement in year 1 or 2 of a ten year closure date could substantially reduce this cost to around £100m. By the 15 year shut down date we project that all TV households will have a digital means of receiving qualifying services, although in practice it is possible there will be a small number of households that will not have purchased digital reception equipment.

Conclusions

24. We draw the following main conclusions from our analysis:

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

• 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.

• The most promising options for providing qualifying services to the final 5-10% of the population not covered under existing DTT roll-out plans are either to extend roll-out of DTT 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 MVDS to provide infill in coverage "blackspots" areas. More detailed technical and costing work is required to identify the optimal delivery method for particular areas.

• 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.

Television:  The Digital Future a consultation document

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