Regulatory Review: The Digital Switchover

by Gerry Oberst

Despite the financial malaise in some parts of the satellite industry, many commercial initiatives remain to provide access to Internet and digital television services. As the satellite industry provided the first major push toward digital broadcasting, it is only fitting that it also should be among the first to provide other digital services, particularly in areas difficult to reach, such as rural or other isolated territories.

At the same time, nevertheless, there is a loud drumbeat from some levels of government to find ways to expand access to new digital services. These efforts could take the form of subsidies or special incentives to get digital infrastructure to all corners of their countries.

In the midst of this clamor, the satellite industry should remain vigilant that any government programs or subsidies do not stack the decks against already existing or planned satellite services. As an industry, the satellite sector must insist upon platform neutrality that would permit the industry to get on with the task of providing new services on the proverbial level playing field.

An example of the complexities of this issue arose in a report prepared for the European Commission and released in mid-April of this year. The massive report on “Digital Switchover in Broadcasting” examines market, spectrum and public policy aspects of the digital transition.

The chapter on market factors examines past transitions from one form of technology to another, with examples such as the shift to color television and the introduction of VCRs, DVDs and mobile telephony. It acknowledges that the many different market players in this new transition can have different strategies and goals. Thus it argues that pay TV players operating through satellite transmissions have virtually all completed the digital switchover, and “are the fiercest opponents to incentive policies aimed at promoting terrestrial switchover and turn-off.”

As the report recognizes, satellite pay TV operators do not oppose the switchover itself, but oppose public subsidies for switching costs that would not be technologically neutral and could distort competition. After all, these market players have already financed digital satellite reception, usually without any government encouragement or funding.

Further, if network upgrades for terrestrial services are subsidized, the price of terrestrial transmission would be artificially low, which the report says could bias competition in favor of terrestrial operators. Subsidized digital terrestrial television would directly challenge satellite TV in low-density population areas, so satellite pay TV operators are “even more worried” than are cable operators.

An interesting assessment is that satellite operators themselves have “no particular interest” in accelerating the turn-off of analog transmissions over their transponders. With the current supply of satellite transponders, the operators reap additional revenues from simulcasting. Nevertheless, the operators also oppose digital transitions aimed at universal digital terrestrial coverage. Satellite footprints, in their view, are a more economical and competitive way of serving remote areas than relying upon large-scale public intervention.

In contrast to this satellite perspective, another factor acknowledged in the report is that some regulators favor national territorial infrastructure (in the words of the report, “notably compared to satellite”), because national regulation of those terrestrial services is easier to implement.

Regardless of what mix of platforms are used, the report finds that a purely market-led approach will only slowly fill in the gaps for digital coverage. Various structural market failures could prevent a faster and wider switchover. Nevertheless, there are general interest objectives related to the switchover, such as more efficient use of spectrum, competitive aspects and cultural gains from greater diffusion of media content. Therefore, the report includes a very wide variety of recommendations on how to make the transition smoother.

These recommendations include crowd pleasers such as deregulation, more consumer information on new digital services, and ensuring consumers’ access to multi-platform competition. There remain, however, worrisome ideas such as additional spectrum taxes and a “switchover fund” that could “consolidate macro-economic transfers in a transparent way.” To this non-economist, that last phrase means taking money from one industry sector’s pockets and putting it into another’s–and that looks dangerous.

A long annex to the report contains over 200 pages of profiles of the situation in most European countries for digital service, plus short assessments of the United States and Japan, mostly current to mid-2001. The enormous variety of different national approaches should be daunting to policymakers. Due to its date, the report does not pick up more recent national policy initiatives to foster digital service, which also could lead to a potpourri of national subsidies or requirements.

This digital transition report is available on the Web site of the European Commission’s Information Society Directorate General. With its various annexes, summaries and presentation slides, the report consumes over 12.3 megabytes of capacity–so do not rush out to download it. It is a bear to print as well. In any event, it reflects that this debate over digital transitions carries some significant opportunities as well as risks for the satellite sector.

Gerry Oberst is a partner in the Brussels office of the Hogan & Hartson law firm. His email address is [email protected].