Digital D Day
As fans gather at Meadowlands stadium in early November to watch the Buffalo Bills take on the New York Jets, CBS producers will be seeing double. Inside two separate production trucks, different directors will be barking orders at two camera crews. Two on-air teams of commentators will be calling the plays: One is for regular broadcast. The other will comment on action that's shot in a state-of-the-art, high-definition format for digital broadcast. Says CBS Corp. Chairman and Chief Executive Michael H. Jordan: "It will be a spectacular experience." Maybe. But at best, only a few hundred people will be able to watch it, clustered around a dozen or so high-definition TVs in New York.
Across the country, in San Diego, Anna Galloway will be clicking on her $5,500, 56-inch Panasonic HDTV. But the executive director of a San Diego real estate service center won't be watching any cinema-quality HDTV pictures. "I'll be watching the cooking channel," she says. San Diego TV stations won't start digital broadcasts until next year. Even if digital shows were available now, Galloway would need another $1,500 hunk of equipment--a special broadcast set-top box--to decode the new over-the-air signals. For now, her cable box won't do the trick.
A fitful dawn is breaking over the digital-TV revolution. On Nov. 1, 42 TV stations will transmit the first digital broadcasts, marking a watershed in "convergence"--that magical state where computing, telecommunications, and entertainment seamlessly intermingle. From now on, however messy the process, no high-tech industry will be left untouched. Fortunes will be made and lost as broadcasters, cable operators, computer makers, consumer-electronics companies, and many others scramble for positions in the shifting digital hierarchy.
Some industries will see their worlds turn upside down. Cable seems the best-defended, with its lock on American homes. But if broadcasters and TV makers capture the digital living room, companies such as Dell Computer, Compaq, and Intel could have a problem. Who needs a Pentium PC if simpler, cheaper appliances let you browse the Web or videoconference with friends on a giant high-resolution screen? Broadcast equipment makers, such as Harris Corp. and Lucent Technologies, Inc., are already having a heyday. Hollywood and the computer-game gang also stand to gain, as interactive-TV programmers look for more compelling content.
BUt for broadcasters more than any other group, this is Digital D-day. Networks and their affiliates are dead last to climb aboard the digital bandwagon, while industries competing for the same eyeballs are already well on their way. Eight million American households already get TV from satellite broadcasters via transmissions that are 100% digital (although viewers are watching the signals on conventional analog sets). Cable systems will have spent $33 billion on digital upgrades by 2001 and are beginning to offer 300 channels, high-speed Internet access, and even TV Web-browsing. PC makers, facing slower growth, are mapping their own thrusts into the Living room. Web startups are snatching away viewers with alluring online games and chat rooms. "We're not going to remain in the analog world for long," says Federal Communications Commission Chairman William E. Kennard.
But the road from broadcasters' analog past to the digital future is already beset with technical fumbles and fiascos, along with shaky broadcast business plans--or, worse, no plans at all. Once heralded as a gold mine, digital TV is starting out as a minefield. Contrast this with the last big change in TV: from black-and-white to color. In the 1950s, one company, RCA, controlled key segments of the business--from TV-set making to the NBC network. Today, a dozen different industries all want to be in RCA's shoes.
If this is the broadcasters' last stand against their rivals, it's not an auspicious start. Advertisers are reluctant to spend anything on HDTV until there is an audience. And here's another big hitch: Cable operators, whose customers make up 67% of all TV-watching homes, have resisted carrying broadcasters' digital programs.
Clearly, cable will be hard to beat, even when broadcasters are armed with new digital transmissions. Attempting to break cable's stranglehold, frustrated broadcasters such as Rupert Murdoch's Fox Broadcasting Co. are backing off HDTV programming altogether. Fox and others are experimenting with alternative uses for the airwaves allotted for HDTV. One radical--but legitimate--option is splitting the spectrum into six or more digital channels. If several local stations banded together, they could create the equivalent of miniature over-the-air cable systems that might earn far more money than a single HDTV channel.
It's puzzling that broadcasters are still searching for moneymaking schemes in digital TV, after all the pains they took to get it. In 1996, after a decade of fierce lobbying by broadcasters and TV makers--mostly European and Japanese--Congress lent TV stations each an extra six-megahertz slice of the airwaves for free, to transmit digital TV. That was in addition to their existing analog spectrum. By law, stations in the top 10 markets must begin these broadcasts by next May, but most are starting this fall. Stations in the top 30 markets must start by next November, and the rest by 2003. By 2006--or whenever 85% of homes finally get digital TV--broadcasters are supposed to return their analog airwaves. Then, the government could auction it off for new uses. But it could take two decades before the market hits 85%, according to Paul Kagan Associates.
"PIPE DREAM." Broadcasters won't get far with HDTV unless consumers buy the sets. And with prices in the stratosphere, prospects for that are uncertain. "It's a pipe dream that large numbers of people will spend $6,000 to $9,000 on a new TV," says David E. Mentley, vice-president for display research at Stanford Resources Inc. in San Jose, Calif.
Confusion and unresolved technical problems could also frighten buyers away. The expensive HDTV sets on sale this year can handle many different dIsplay formats. At one extreme stands HDTV, which more than doubles the number of scanning lines that form TV pictures. Other formats are only slightly better than ordinary TVs. Shoppers will face a dizzying array of choices--just as PC buyers must learn their way around megahertz and megabytes.
If a salesperson tells you, for example, that the HDTV you purchase today is "future-proof"--that it will cope with all upcoming improvements--then you should shop somewhere else. Digital TVs are like PCs: The one you buy today may look dated next year. None of the first crop of HDTVs in stores now can display all the information, or "pixels," in an HDTV broadcast. In five years, or maybe 10, they will all do so.
The set you finally buy will need careful testing. In the rush to HDTV, broadcasters' technical committees didn't have time to test all the different broadcast gear against the sets of all manufacturers. The "encoder" boxes used at stations to prepare the digital signals for broadcast aren't identical. So sets purchased by consumers in some areas may not be able to decode the signals from the local TV station.
Then there's the dreaded "cliff effect." As signals on the airwaves bounce between buildings and otheR obstructions in big cities, they get muddled, a phenomenon known as multipath. It's an especially serious problem in UHF bands allotted for digital broadcasts. If this happens with analog signals, viewers get static or blurry artifacts called ghosts. With your new digital TV set, the image simply "falls off the cliff"--the screen goes blank. The sets are not at fault. Instead, some of the technology for digital transmission is not robust enough, and broadcasters have not tested it in varying geographies.
The Consumer Electronics Manufacturers Assn. (CEMA) says that setmakers can correct such problems with more powerful antennas. "Don't worry, we'll get it worked out," insists CEMA President Gary Shapiro. But engineers can't patch problems until they understand them--too late, in this case, to help "early adopters" who purchase the first digital sets.
Equipment makers just want to sell the heck out of giant HDTVs. These range from $5,500 to $10,000 and up, and deliver fatter profit margins than current sets, even large-screen ones. Some, like the Panasonic HDTV that Anna Galloway uses in San Diego, are sold like monitors, and the tuner/decoder boxes are sold separately. William L. Mannion, general manager at Panasonic Consumer Electronics Co., a unit of Matsushita Electric Industrial Co., predicts that all HDTV vendors combined could sell about 50,000 digital TVs in the next 12 months, including set-top boxes.
To create consumer momentum, Sony Corp. is subsidizing CBS's high-definition National Football League broadcasts. And Philips Electronics will spend $100 million in the coming year to promote digital TVs and other products. "This is a gold rush," says Cees Jan Koomen, president and CEO of Philips Consumer Electronics in Palo Alto, Calif. Koomen and others believe flat screens will eventually replace today's hulking space-hogs. Large plasma screens from Fujitsu, NEC, or Pioneer cost $10,000 or more. For top performance, HDTVs may always cost that much. But in a few years, there should be some wide-screen digital TVs offering less-than-HDTV resolution for under $1,000.
If the future is bright, the present is anything but. Without new TVs in viewers' homes, how will broadcasters make the digital gambit work? There's no easy answer. HDTV was never linked to any proven market demand. The campaign for HDTV started in 1986 as an effort by the National Association of Broadcasters (NAB), to keep control of the airwaves. Motorola Inc. and other companies were then demanding a slice of the broadcasters' unused frequencies for two-way radio service. The broadcasters insisted that they needed to keep their spectrum in order to launch HDTV, so they could catch up with Japan, which was ready to test its own HDTV plan.
Now that they have it, how do they make it pay off? Big money is being spent. The NAB estimates the nation's 1,576 TV stations will shell out $16 billion over the next 10 years to convert to digital. Still, without enough TV sets out there, broadcasters have little incentive to produce HDTV programs--which can cost $25,000 more per hour than ordinary shows. (That might not sound like much, but it adds up. There are 11,000 prime-time hours in a year.) And without programming, viewers won't be persuaded to buy HDTVs. "Nobody has come forth with a convincing business plan," says CBS Senior Vice-President Martin Franks.
There are almost as many strategies as there are channels on the dial. ABC will start by airing the Disney movie 101 Dalmatians in HDTV. NBC will start showing The Tonight Show with Jay Leno in high definition next spring and the films Men in Black and Titanic down the road. Affiliates will likely go with digital sports shows first and then produce their own high-definition local newscasts. "We're going in early for competitive reasons," says Michael J. Fiorile, CEO of the Dispatch Broadcast Group, which owns a CBS and an NBC affiliate. A.H. Belo Corp, with stations in Dallas, Houston, and Seattle, is also mounting an aggressive HDTV strategy.
Broadcasters think that digital TV could be a potent weapon against the encroaching cable networks. For years, broadcasters have bristled at cable-only channels such as CNN, ESPN, and HBO, which siphon away advertisers and get subscription revenues via the cable and satellite operators that carry them. According to Warburg Dillon Read, cable-TV advertising will grow 15% annually through 2000, outpacing the 5% to 7% growth of the networks.
Now, broadcasters think prettier pictures will deliver a premium look, giving them an edge over smaller specialty cable channels, such as the Food Network, that can't afford to produce shows in high definition. Well-heeled cable channels, though, are already hatching HDTV plans: Both HBO and Discovery Network plan next year to offer high-definition versions of their service, charging high subscriber fees.
Broadcasters don't levy any such fees, and HDTV may not allow them to charge premium ad rates. "We never ended up charging more for color [after black-and-white]," notes Charles H. Jablonski, NBC's vice-president for broadcast and network engineering. Even the few advertisers interested in HDTV now aren't sure when they would pay more for those ads. "There's only three people watching, and we don't have any way today to track them," says Jim Gosny, associate director of commercial productions at Procter & Gamble Co., which has produced seven experimental ads in high definition.
Some broadcasters, sharing that skepticism, are mapping out strategies that don't involve HDTV. In fact, there are many ways to use multiple channels: Fox, for example, could replay hit shows in different time slots. (Imagine reruns of Beverly Hills 90210 at 6, 7, 9, and 11 o'clock.) The networks also could give sports fans even more views on the action. Says Fox TV Network President Larry Jacobson: "We can have the Mark McGwire-cam."
RAISING HACKLES. It sounds good, but where are the bucks? Fox's Jacobson is also looking at straight, cable-like pay-per-view. This, too, is fraught with challenges. Most broadcasters have never had to deal with individual subscribers and have no means of billing them. "Challenging cable to a war would be like a Civil War army taking on General Patton," says Nat Ostroff, vice-president for new technology at Baltimore's Sinclair Broadcast Group.
Meanwhile, the very suggestion of such "multicasting"--splitting the allotted spectrum--has raised the hackles of lawmakers in Washington. The FCC is likely to impose a levy on such services. After all, Congress lent the airwaves to the broadcasters for free, despite budgetary pressures to auction them off. "We didn't intend to give spectrum to them for any purpose other than over-the-air broadcast," says House telecom subcommittee Chairman W.J. "Billy" Tauzin (R-La.). He would like broadcasters to air at least some HDTV programs. Otherwise, the spectrum give-away "would be unfair to other communications players who had to buy theirs," he says.
Cable companies did spend billions--not to buy spectrum, but to upgrade their systems. Now, they're on their way to owning the digital battlefield. They have added fiber optics, better set-top boxes, and more powerful computers and switches. Using the same compression and encoding tricks employed by satellite broadcasters, they will soon be squeezing 10 or 15 channels into the space that used to carry just one.
Broadcasters may try to enlist cable operators, to help launch HDTV. But the cable industry hasn't gone out of its way to make its systems technically compatible with digital broadcasts. At this moment, cable boxes can't display HDTV broadcasts at all. The two industries use different "modulation" schemes--the methods of getting digital bits onto so-called carrier waves. Cable systems and digital transmissions can theoretically be made to work together--and it might happen in time for the Nov. 1 broadcasts. But the solution could require servicing equipment in the homes of early purchasers of the new HDTVs.
To make matters worse, cable operators may not agree to carry broadcasters' new digital programming. By law, cable systems are obliged to transmit broadcasters' existing analog channels--but not necessarily their new digital telecasts. Broadcasters say their huge investment in digital TV will go down the tubes if cable doesn't carry the new programs and nobody sees them. "It's like bringing a baby into the world and not supporting it," says Sinclair's Nat Ostroff.
But Atlanta's Cox Communications Inc. and other cable operators don't want to give up any room on their pipe for nothing. "Bandwidth is the single most important asset we've got," says Lynne Elander, director of product development at Cox. "We've spent billions of dollars of investment on it, and we're not in the position to be paring it away willy-nilly."
Capitol Hill is not amused by this wrangle. Although the FCC prefers to let the networks negotiate their own deals for carriage with the major cable systems, lawmakers threaten tougher cable "must-carry" legislation. If the FCC punts, "I'm almost certain Congress will act," says Rep. Tauzin.
SCRAMBLE FOR CONTENT. Now, with the exploding popularity of the World Wide Web and the premium consumers place on interactivity, cable has landed in the catbird seat. Its upgraded connections allow for two-way interaction, including fast Internet cruising. In contrast, to browse the Web over satellite or terrestrial broadcast, consumers have to tie up their phone line. The cable industry is now gearing up to sell everything from more TV channels to phone service to video-on-demand movies and interactive TV. With its massive audience, it is the linchpin industry of digital convergence. "Cable is the ultimate infrastructure," says Time Warner Inc. chariman Gerald M. Levin.
As digital convergence gathers force, Hollywood and computer-game makers are ready to cash in on the scramble for better content. Sony, for one, has already converted a library of 300 films to high-definition format ready for broadcast. And hundreds of movie titles for digital video discs are already formatted for digital broadcast as well. But with new digital VCRs due out soon to accompany HDTVs, Hollywood is unlikely to unleash its shows without copyright protections built into HDTV systems.
Meanwhile, Silicon Valley is eyeing digital TV warily. Computers, after all, are in just 43% of U.S. homes--most of which have more than one TV. The PC camp fears that digital TVs could supersede PCs as the entry point to the Web. Intel, Microsoft, and Compaq have suffered a string of humiliations in the TV arena. Their early designs for PC/TV hybrids have gone nowhere. And they didn't dominate the first incarnation of digital broadcasting--namely, satellite TV.
Microsoft Corp. and Intel Corp. have also failed to seize control of digital cable boxes, although moguls such as Tele-Communications Inc. Chairman John C. Malone have been careful not to shut either company out. All Microsoft and Intel have managed, so far, is to make minority investments at the edges--Microsoft in Comcast Corp. and in the Road Runner cable-modem service and Intel in At Home, another cable-modem service.
Intel and Microsoft scoff, however, at the notion that an $8,000 HDTV set is a winning convergence product. Instead, they're pinning their hopes on set-top boxes and other appliances, which will also work with digital TVs. Compaq Computer Corp. hopes to supply sub-$300 set-top boxes that hook into a home network. "If you want to place bets, Intel, Microsoft, and Compaq will be there at the end," says Trey Smith, Compaq's vice president for advanced products. Adds Thomas A. Galvin, director of market development at Intel's content group: "TV is just another form of information delivery that's going digital."
At the digital dawn, each industry is racing for higher ground. People have compared the birth of terrestrial digital broadcast to the transition from black-and-white to color TV in the 1950s. They're wrong. It's vastly more complex and risky. "It's more like the transition from radio to TV," says Fox's Jacobson. The visual improvement may not be as obvious. But the impact on industry is greater.
Today, broadcasters have the hardest road ahead, and PC companies have a lot of adjustments to make. Cable companies rule the roost--for now, at least. And whichever camp the future favors, better pictures spell big bucks for the Sonys and Philipses of the world. If Intel and Microsoft are in a tight corner, they'll likely innovate or buy their way out of it. Consumers will get clobbered with choices. We will all become guinea pigs in experiments with convoys of new digital gear, rife with complex incompatibilities. "It will take a lot of work to put the last 50 years of broadcast, the last 20 in cable, 15 in PCs, and five for the Internet--all at the same time--on the home screen," says Steven Guggenheimer, Microsoft's group product manager for digital television. "It requires cooperation." Right now, that's the last thing on anybody's mind.