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The CBO plays CYA

Sun, 10/31/1999 - 7:00pm
Jeffrey Krauss, Spectrum Auction Gambler and and President of Telecommunications and Technology Policy
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By Jeffrey Krauss, Spectrum auction gambler and and President of Telecommunications and Technology Policy

Two years ago, the Congressional Budget Office (CBO) told Congress that by auctioning off spectrum now used for analog TV broadcasting, the Treasury could raise $6.1 billion. Now the CBO has released a report saying that the $6.1 billion estimate was grossly inflated, but it isn't its fault. In fact, it will be the cable industry that's to blame, because cable won't accept a "must-carry" regime for digital broadcast signals. This is such a transparent case of "cover your butt," even for Washington, that it doesn't pass the laugh test.

The law

In 1997, Congress passed the Balanced Budget Act. This law requires the FCC to take back analog TV channels from broadcasters by 2006, and auction them off to raise money for the Treasury. Two catches. First, broadcasters get to keep the analog channels until 85 percent of TV households can receive all the local stations that are broadcasting digital TV.

Second, the auctions have to be held early enough so that the receipts can be deposited in the Treasury by September 30, 2002. This law has at least two obvious problems. Most of the auction winners will have to wait at least six years from the time of the auction until they can start using the channels. In some areas, the channels that are auctioned in 2002 can be used immediately without causing interference to any analog TV reception, but only for low-power applications. But most of the channels cannot be used until analog broadcasting comes to an end. The second problem is that the 2006 date for the end of analog broadcasting is wildly optimistic, and this CBO report explains why. (You can download the report, "Completing the Transition to Digital Television," from the CBO Web page, www.cbo.gov, under "Studies & Reports-Telecommunication.") Reality

The reality is that digital TVs are too expensive, there is little attractive programming, and there is a dispute over which modulation to use. The transition to digital TV will be slower than the government would like.

Digital TVs will probably be too expensive over the next few years, and people won't buy them until the prices come down. The CBO now admits that penetration of digital TVs will be far less than 85 percent by 2006. And the longer it takes to reach 85 percent, the less in revenues will be achieved in the 2002 auctions, because a longer delay in getting access to the channels decreases the value of the spectrum to prospective bidders. CBO also admits that earlier estimates that led to the $6.1 billion revenue calculation are too high. Further, CBO expects a 10 percent decrease per year for every year beyond 2006 that analog broadcasting continues. Even that assumes that bidders in 2002 will have a good idea about when this spectrum will really become available. The fact is that any uncertainty in 2002 would scare bidders and lead to even lower revenues.

By the way, the high cost of digital TVs and absence of programming are only two factors that could slow the transition to digital broadcasting. In addition, there is the ongoing controversy over indoor reception, which is related to the choice of 8-VSB modulation instead of the COFDM modulation chosen in Europe. So long as there is any possibility of a switch in modulation, some broadcasters will be reluctant to make the investment in digital transmission equipment, and this could slow the transition.

The blame

So the CBO, having promised $6 billion, but now estimating only $4 billion, has to find someone to blame. And guess what-it's blaming the cable industry. The case goes like this:

Cable TV passes 90 percent of homes, and 67 percent of these homes subscribe to cable. By 2006, that number will increase to 70 percent or more. So if cable companies carry digital TV broadcasts, that would go a long way toward meeting the requirement that 85 percent of homes must be able to receive digital TV broadcasts. The CBO solution is quite simple: the FCC should adopt a tough must-carry policy. And if cable companies resist, they can be blamed for the $2 billion shortfall.

And evidently, voluntary agreements between cable MSOs and broadcast networks won't be sufficient-the law requires that viewers must have access to every one of the digital TV stations in town in order to count toward the 85 percent penetration requirement. So the home shopping stations and the non-commercial stations that carry duplicate programming must all be available on cable, a situation not likely to occur with voluntary agreements.

Government agencies are not supposed to lobby one another, but this report is a fairly blatant case of the CBO lobbying the FCC to adopt a must-carry policy for digital TV. We'll have to wait until the FCC makes its decision, perhaps later this year or early next year, and then watch the 2002 auctions to see whether the CBO made a $2 billion, or perhaps even bigger, blunder.

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