FTC Staff Comment Before the FCC In the Matter of Advanced TV Systems and Other Matters

V880064
Before the
Federal Communications Commission
Washington, D.C. 20554
In the Ma tter of
Advanced Television Systems
and Their Impact on the
Existing Television Broadcast
Service
Review of Technical and
Operational Requirements:
Part 73-E, Television Broadcast
Stations
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Reevaluation of the UHF Television)
Channel and Distance Separation 	)
Requirements of Part 73 of the 	)
Commission's Rules 	)
CDMMf3smN 	AUTHOR!ZED
MM Docket No. 87-268
November 30, 1988
COMMENTS OF THE STAFF OF THE BUREA U OF ECONOMICS OF
THE FEDERAL TRADE COMMISSION

I. 	Introduction and Summary
In 	its 	Tentative 	Decision 	and 	Further 	Notice 	of 	Inquiry 	(NOI),l 	the
Federal 	Communications 	Commission 	(FCC) 	requests 	comments 	on 	several
proposed 	regulatory 	policies 	for 	Advanced 	Television 	(ATV).2 	These
proposals 	include 	the 	FCC's 	tentative 	decision 	to 	allocate 	spectrum
administratively 	to 	terrestrial 	A TV 	broadcasting. 	The 	FCC 	is 	also
considering setting a technological standard for A TV. 	In addition, the FCC
has 	tentatively 	decided 	to 	require 	ATV 	systems 	to 	be 	compatible 	with
existing National Television System Committee (NTSC) television receivers for
a 	transitional 	period. 	This 	decision 	would 	require 	that 	A TV 	signals 	be
receivable on NTSC receivers, or that they be simulcast with a signal that is
receivable on NTSC receivers.
In 	these 	comments, the 	Bureau of Economics' staff makes three main
points: 	1) 	the 	FCC 	should 	consider 	allowing 	the 	market 	to 	determine 	the
total quantity of spectrum allocated to ATV; 2) administratively setting an
optimal A TV standard requires considerable information on the benefits and
1 In 	the Matter of 	Advanced Television Systems and 	Their Impact of
the 	Existing 	Television 	Broadcast 	Service. 	Review 	of 	Technical 	and
Operational 	Requirements: 	Part 	73-E. 	Television 	Broadcast 	Stations.
Reevaluation 	of 	the 	UHF 	Television 	Channel 	and 	Distance 	Separation
Requirements of Part 73 of the Commission's Rules, MM Docket No. 87-268,
September 	1, 	1988. 	Also 	see 	Broadcast 	Television 	Service: 	Policies 	and
Requirements 	for 	Advanced 	Television 	Systems, 	Federal Register, Vol. 53,
October 3, 1988, p. 38747.
2 These 	comments 	are 	the 	views 	of 	the 	staff 	of 	the 	Bureau 	of
Economics of the Federal Trade Commission. 	They are not necessarily the
views of the Federal Trade Commission or of any individual Commissioner.
Please 	contact 	staff economist 	Paul 	Pautler 	at (202) 	326-3357 	if 	you 	have
any questions regarding these comments.

costs to society;3 and 	3) the proposed requirement that 	ATV 	be compatible
with 	existing 	television 	receivers could impose 	future 	costs on society that
exceed any benefits.
II. 	Interest and Experience of the Federal Trade Commission Staff
The staff of the Federal Trade Commission -- upon request by federal,
state, 	and 	local 	governmental 	bodies 	-- 	comments 	on 	regulatory 	proposals
that 	may 	affect competition, consumers, or the efficiency of 	the economy.
The FTC staff has on several occasions examined the competitive and other
effects 	of 	FCC 	proposals 	to 	regulate 	the 	broadcast 	and 	cable 	industry."
3 In 	these 	comments, 	we 	evaluate 	proposed 	policies in 	terms 	of 	their
impact on the net benefits (benefits minus costs) to society, including both
producers and 	consumers. 	The 	policy 	that 	is optimal 	(best for 	society) is
the one that maximizes the sum of producers' and consumers' net benefits.
" See 	the 	comments of 	the staff 	of 	the 	Bureau of 	Economics 	of 	the
Federal Trade Commission before the Federal Communications Commission In
the Matter of Amendment of Part 74 of the Commission's Rules Concerning
FM Translator Stations, Docket 	No. 88-140, August 	15, 	1988. 	See also 	the
comments 	of 	the 	Federal 	Trade 	Commission's 	Bureaus 	of 	Competition,
Consumer 	Protection, 	and 	Economics 	before 	the 	Federal 	CommuJllcations
Commission 	In 	the 	Matter 	of 	Selection 	of 	Initial 	Licenses 	Using 	Random
Selection 	or Lotteries Instead 	of Comparative Hearings, Docket No. 81-768,
December 30, 	1981; In the Matter of Amendment of Section 	73.3597 of the
Commission's Rules on Applications for Voluntary Assignments or Transfers
of 	Control, 	BC 	Docket 	No. 	81-897, 	March 	1, 	1982; 	In 	the 	Matter 	of
Amendment of Part 76. Subpart J. Section 76.501 	of the Commission's Rules
and 	Regulations 	Relative 	to 	Elimination 	of 	the 	Prohibition 	on 	Common
Qwnership of Cable Television Systems and National Television Networks, CT
Docket 	No. 	82-434, 	December 	8, 	1982; 	In 	the 	Matter 	of 	Domestic 	Fixed
Satellite 	Transponder 	Sales, 	CC 	Docket 	No. 	82-45, 	April 	16, 	1982; 	In 	the
Matter of Amendment of 47 C.F.R. Section 73.6580) on the Syndication and
Financial 	Interest 	Rule, 	BC 	Docket 	No. 	82-345, 	January 	31, 	1983; 	Reply
Comments In the Matter of Amendment of 47 C.F.R. Section 73.658Ci) on the
Syndication 	and 	Financial 	Interest 	Rule, 	BC 	Docket 	No. 	82-345, 	April 	26,
1983; In the Matter of the Processing of New Domestic Satellite Applications,
Report No. DS-265, May 7, 1984; In the Matter of Amendment of Part 76 of
the Commission's Rules Concerning Carriage of Television Broadcast Signals
by Cable Television Systems, MM Docket No. 85-349, February 25, 1986; In
the Matter of Amendment of Section 73.3555 of the Commission's Rules on
2

Well-formulated 	public 	policy for 	broadcasting in 	general 	and 	for 	A TV 	in
particular can increase consumer satisfaction with television programming by
not artificially restricting the range of options a vaiJa ble to consumers.
III. 	The FCC Should Consider Allowing the Market to Determine the Total
Quantity of Spectrum Allocated to ATV
The 	FCC 	has 	tentatively 	decided 	to 	limit 	the 	spectrum available 	for
ATV 	service 	to 	the 	spectrum 	currently 	allocated 	to 	broadcast 	television,
excluding 	that 	part of the 	UHF and 	VHF frequencies 	already assigned 	to
non broadcast 	users. s 	This 	tentative 	decision 	appears 	to 	be 	based 	on 	the
assumption 	that 	current 	non broadcast 	use 	of 	the 	broadcast 	spectrum
precludes use for ATV service. 	The resulting limit on the spectrum available
for ATV leads the FCC to consider also limiting the spectrum available to an
individual 	A TV 	station.
interest.6
Neither 	limit 	is 	necessarily 	in 	society's 	best
If 	spectrum 	could 	be 	freely 	transferred 	among 	broadcast 	and
non broadcast 	users 	of 	the 	television 	broadcast 	spectrum, 	then 	users 	with
high-valued services would 	bid spectrum away 	from 	users with 	low-valued
Broadcast Multiple Ownership, MM Docket No. 87-7, July 	J5, 	J987. 	We also
note that in 	December 	1923, the Report of the FTC on the Radio Industrv
contributed 	to 	the 	passage 	of 	the 	Radio 	Act 	of 	1927 	and 	the 	succeeding
Communications Act of 1934.
S In this regard it is important to note that the FCC will grant no new
broadcast licenses in the UHF region pending its decision in the current proceeding.
6 Commissioner Quello, in a separate statement, dissents from the FCC
in part by opposing a 	limit on the amount of spectrum available for 	ATV.
He 	argues 	that 	it is 	too early 	in 	the 	technological 	development 	process 	to
make a tentative decision on spectrum availability.
3

services. 7 	From the spectrum users' point of view, voluntary transfers would
take 	place only 	if 	both 	buyer and 	seller 	were 	made 	no 	worse 	off and 	at
least one was made better off. 8 	The buyer would 	increase its revenues by
using more spectrum, while the seller would receive more than it could have
earned 	from 	continuing 	deployment 	of 	the 	spectrum 	in 	its 	present 	use.
While 	we 	cannot 	be 	sure 	that 	the 	market 	will 	ultimately 	allocate 	more
spectrum to A TV than is currently allocated to broadcast uses by the FCC,
we 	can 	conclude 	that 	the 	market 	will 	tend 	to 	allocate 	spectrum 	to 	its
highest valued uses. 9
7 The maximum price that a user would be willing to pay for a license
is the amount that, when added 	to the other costs of the service provided
with 	the 	license, equals 	the 	revenues expected 	from 	the 	purchasers of 	the
service. 	Some non broadcast spectrum users that society wishes to subsidize
-- for example, some fire and ambulance services -- may be willing to pay
less 	for 	spectrum 	than 	some 	broadcast 	users. 	Free 	market 	spectrum
transfers are nevertheless in society's best interest. 	It is more efficient to
subsidize fire and ambulance services by grants of money that can be spent
for spectrum, labor, or equipment, than. to allocate spectrum administratively
to 	these 	services. 	Administrative 	allocation 	may 	increase 	the 	costs 	to
society 	of 	fire 	and 	ambulance 	services 	above 	the 	most 	efficient 	level 	by
granting more spectrum to them and less to other uses. 	If grants of money
are 	deemed 	unrealistic, 	the 	FCC 	could 	prevent 	the 	transfer 	of 	spectrum
licenses 	used 	for 	public 	safety 	purposes, 	while 	permitting 	the 	transfer 	of
licenses used for other purposes. 	To the extent that such transfers provide
a 	windfall 	to 	current 	licensees, 	the 	FCC could 	either 	design 	a 	system 	to
capture the windfall or decide to write it off as a one-time subsidy to the
entities 	involved. 	In 	this 	regard, the 	FCC should 	note that, even 	without
license 	transfers, 	the 	current 	licensees 	are 	already 	receiving 	a 	substantial
part of the windfall in the prices that they charge for their services.
8 Frequently 	both 	would 	be 	made 	better 	off. 	For 	this 	reason 	a
transfer 	that 	would 	impose substantial 	costs on 	either 	buyer or seller (see
NOI, para. 76) would not be made voluntarily unless the price compensated
each party for these costs.
9 The strength of actual and 	potential competItIon 	in 	many 	television
markets makes it unlikely that broadcast stations can collude on advertising
rates. 	In 	many 	markets 	at 	least 	three 	over-the-air 	stations 	compete 	for
viewers, 	and 	cable 	and 	DBS 	systems 	offer 	alternative 	sources 	of
programming. 	Collusion appears even less likely if the FCC decides not to
restrict the total quantity of spectrum available for ATV service. 	Additional
4

If 	A TV 	programming 	were 	permitted 	to encompass 	the spectrum 	now
used 	by the non broadcast licensees of the broadcast television spectrum via
market-based 	transfers 	of 	spectrum, 	the 	potential 	for 	an 	increase 	in 	the
Dumber of viewers could make more ATV stations profitable than otherwise.
More viewers could receive the quantity and 	variety of A TV programming
that 	they 	prefer. 	By 	contrast, 	administratively 	restricting 	the 	spectrum
allocated to A TV service could deny viewers the benefits of this additional
A TV programming. 10
Because 	broadcast 	television 	is 	supported 	by 	advertising 	revenues, 	it
does 	not 	necessarily 	provide 	the 	programming 	that 	best 	satisfies 	viewers.
For example, a relatively small group of viewers with intense preferences for
particular 	programming 	may remain unsatisfied 	because advertisers tend 	to
support 	programming 	that 	draws 	the 	largest 	possible 	audience 	size.
Permitting 	ATV 	programming 	to 	expand 	beyond 	the 	spectrum 	limits
contemplated 	by the FCC in this proceeding would increase the probability
that such viewers' preferences would be satisfied.ll
spectrum 	would 	facilitate 	entry 	by 	new 	broadcast 	television stations. 	The
increased 	potential 	for 	entry 	would 	further 	discourage 	any 	attempts 	to
collude by incumbent stations. 	In some markets, however, incumbent NTSC
stations may now wield market power, or after purchasing a rival's license,
an 	incumbent 	ATV 	station 	may 	be 	able 	to 	obtain 	market 	power. 	This
possibility calls for careful antitrust scrutiny of license purchases in such markets.
10 As 	noted 	above, 	market 	transfers 	of 	spectrum 	will 	result 	in
additional spectrum going to ATV use only if that is the highest valued use
of 	the 	spectrum. 	This 	additional 	spectrum 	could 	be 	used 	to 	provide
additional 	programming 	at 	the 	same 	level 	of 	signal 	quality 	or 	the 	same
amount of programming at a higher level of signal quality. 	We discuss below
the higher signal-quality alternative.
11 This would, of course, increase the probability that those benefiting
from 	existing, lower-valued 	uses of 	the spectrum would 	become dissatisfied
as spectrum was shifted 	to higher-valued 	A TV uses. 	For a 	more extensive
5

Even if the FCC restricts the total spectrum available for ATV service,
we suggest that the FCC permit current licensees in the television region of
the 	spectrum 	-- 	both 	broadcast 	and 	nonbroadcast 	licensees 	-- 	to 	use 	their
licenses 	for 	both 	broadcast 	and 	non broadcast 	purposes.12 	If 	existing
restrictions 	on 	license 	use 	were 	removed, 	for 	example, 	a 	would-be
broadcaster 	seeking 	spectrum 	for 	A TV 	service 	could 	obtain 	the 	needed
license from an incumbent NTSC broadcast licensee, or from a non broadcast
licensee. I3 	Also, a licensee that incurs unanticipated delays in inaugurating
A TV 	service 	could 	transfer 	otherwise 	idle 	spectrum 	temporarily 	to 	a
non broadcast 	licensee. I4 	Such 	free-market 	license 	transfers 	would 	tend 	to
allocate 	spectrum 	to 	the 	most 	highly 	valued 	uses. 	Transfers 	would 	also
ensure that valuable spectrum did not remain idle.
One 	important 	consideration 	in 	the 	FCC's 	current 	deliberations
regarding 	A TV standards is 	the amount 	of spectrum 	per 	broadcast station
required by ATV technology.I6 	Because the FCC is considering limiting the
total 	spectrum 	available 	to 	A TV 	to 	the 	broadcast 	spectrum 	(excluding
discussion 	of 	these 	issues 	see 	Comments 	of 	the 	Staff 	of 	the 	Bureau 	of
Economics 	of 	the 	Federal
Communications Commission, In
Commission's Rules Concerning
August 15, 1988.
Trade 	Commission 	before 	the 	Federal
the Matter of Amendment of Part 74 of the
FM Translator Stations, Docket 	No. 88-140,
12 As we noted above in footnote 7, the FCC may choose to make an
exception for spectrum licenses used for public safety purposes.
13 Such 	a 	would-be 	licensee 	would 	have 	to 	comply 	with 	all 	FCC
requirements to use the spectrum.
14 This proposal would require tha t the licensee observe the applica ble
interference standards.
IS Whether 	or 	not 	the 	FCC should 	set 	an 	A TV 	standard 	is discussed
below.
6

non broadcast 	users' 	holdings), 	and 	because 	of 	the 	agency's 	ideal 	that 	as
many broadcasters as possible be able to provide A TV service, the FCC has
expressed a preference for the ATV system that requires the least amount of
spectrum per ATV station. 	As we observed above, modifying the licenses of
non broadcast 	users 	of 	the 	broadcast spectrum, 	and 	permitting 	transfers 	of
those 	licenses 	to 	ATV 	stations, 	can 	increase 	the 	quantity 	of 	spectrum
available 	for 	ATV 	service. 	More 	available 	spectrum 	could 	enable 	more
stations 	to 	transmit 	ATV 	at 	any 	given 	level 	of 	quality.16 	Alternatively,
more 	available 	spectrum 	could 	enable 	the 	same 	number 	of 	stations 	to
transmit A TV of higher signal quality, which would require more spectrum
per sta tion.
Even if the FCC chooses to limit the total spectrum available for ATV
to 	the 	broadcast 	spectrum 	(excluding 	nonbroadcast 	users' 	holdings), 	the
interests of consumers may not be served by selecting the A TV system that
uses 	the 	least 	amount 	of 	additional 	spectrum 	per 	station. 	In 	particular,
viewers may prefer relatively fewer ATV stations, each with more spectrum
to provide higher signal quality. 	In that case, choosing the ATV technology
that 	minimizes 	spectrum 	use 	could 	prevent 	the 	development 	and
implementation of a more spectrum-intensive technology that would provide
viewers a higher quality service that they might prefer.
The FCC's ideal 	that all existing television 	broadcasters provide 	A TV
service may 	not reflect consumer preferences. 	The 	ideal assumes in effect
that, 	regardless 	of 	receiver 	costs, 	consumers 	would 	prefer 	an 	all-A TV
16 It is generally believed 	that higher quality requires 	more spectrum.
In this regard, the spectrum above I GHz may be suitable for ATV service.
7

broadcast 	industry 	to 	the 	current 	NTSC 	industry.17 	Depending 	on 	the
relative prices of NTSC and ATV television receivers, however, some viewers
may prefer ATV service, while others prefer NTSC service.
Similar 	variation 	in 	consumer 	preferences 	for 	picture 	and 	sound
qualities 	are 	illustrated 	by 	photographers 	and 	music 	listeners. 	Some
photographers 	choose 	to 	buy 	high-priced 	35 	mm. 	cameras, 	while 	other
photographers 	choose 	cheaper, 	lower 	quality 	equipment. 	Similarly, 	some
music listeners choose to buy CD players, while other music listeners choose
lower quality equipment.
Together with the FCC's contemplated restriction on the total quantity
of spectrum 	available 	for 	A TV 	and 	the 	agency's 	preference 	for 	the 	A TV
system that uses the least amount of spectrum, the ideal could result in an
ATV system 	that .is of 	lower overall quality 	than 	consumers might 	prefer.
Lower 	quality 	and 	the 	high 	cost 	of 	ATV 	receivers 	would 	decrease 	the
demand for A TV programming, and some stations would find it profitable to
continue to offer NTSC programming. 	As a result, any additional spectrum
that the FCC had assigned to these stations for A TV broadcasting would lie
fallow 	or, if permitted, would 	be transferred 	to lower-valued 	non broadcast
users.
IV. 	Administratively Setting an Optimal ATV Standard Requires Considerable
Information on the Benefits and Costs to Society
Although the FCC notes that it is premature to adopt an ATV standard
at present, the FCC also proposes to work with 	industry to develop such a
17 We present 	below some different views on 	the expected cost of an
ATV receiver.
8

standard. 	In 	general 	there 	is 	no 	single 	answer 	to 	the 	Question: 	Does 	a
standard necessarily make society better off? 	In some instances government
can impose a standard that maximizes the value of output to consumers. 	In
other instances, the value of output is higher if standard setting is left to
coopera tive 	deliberations 	by 	private 	industry.18 	In 	still 	other 	cases, 	the
value 	of 	output 	might 	be 	maximized 	if 	no 	standard 	is 	adopted, 	and 	the
choice of 	technology or technologies is left 	to the competitive activities of
participants in the market.
The 	NOI 	indicates 	that 	the 	FCC 	is 	contemplating 	setting 	an 	ATV
standard 	in 	the 	near 	future, 	with 	assistance 	from 	cooperative 	industry
groups. 	Accordingly, we suggest that the FCC consider its options in terms
of three general categories: 	l) setting a standard early in the technological
development process, 2) reserving judgment on a standard until later in the
technological 	development 	process, 	and 	3) 	leaving 	the 	choice 	among 	ATV
technologies to the market. 	We do not possess sufficient information at this
time to be a ble to recommend one of these options to the FCC. 	Instead in
the dis\,;ussion that follows 	we present the advantages and disadvantages of
each option.
1) 	Setting a standard early in the technological development process
Under 	the 	first 	option, 	the FCC would 	encourage cooperative private
industry groups rapidly to gather the available information on potential ATV
technologies. 	Based on 	this information, the FCC would choose a standard
18 In 	this 	discussion 	we 	are, 	of
groups collude to adopt standards that
thereby 	reduce 	consumer 	welfare.
cooperative setting of standards, such
increase economic welfare.
course, 	not 	advocating 	that 	industry
unreasonably restrict competition and
Instead 	we 	are 	considering 	the
as those to promote fire safety, that
9

while 	these 	technologies 	were 	still 	in 	the 	early 	stages 	of 	their
development. 19 	This 	option 	may 	provide 	large 	gains 	if, 	based 	on 	the
relatively limited information that the industry can gather rapidly, the FCC
chooses 	the 	right 	ATV 	technology, 	and 	if 	(absent 	that 	choice) 	gathering
additional information would lead to long delays in the choice of a standard,
and the market would fail to elicit inves'tment in the development of A TV.
However, this option also presents a high risk that the FCC will choose the
wrong ATV 	technology, thereby failing to encourage ATV programming, or
misdirecting 	private 	investment 	and 	delaying 	introduction 	of 	the 	right
technology.20
This risk is increased because technological development of ATV is at
an early stage. 	A large number of ATV technologies are under development,
and their characteristics are subject to substantial and rapid change. 	As a
result, industry will likely be able rapidly to obtain only highly speculative
information 	on 	the 	costs 	and 	benefits 	of 	different 	ATV 	systems. 	This
information 	includes the equipment costs that each 	A TV technology would
impose 	on 	broadcasters 	and 	viewers, 	and 	consumer 	preferences 	for 	the
different 	levels 	of 	quality 	that 	different 	technologies 	would 	offer. 	Such
19 Perhaps 	less 	restrictively, 	the 	FCC 	could 	protect 	a 	chosen
technology 	from 	interference 	by 	other 	technologies. 	This option 	-- 	which
the 	FCC chose 	in 	TV 	stereo -- could 	encourage adoption 	of a 	technology
without 	precluding 	later 	use 	of 	any 	superior 	technologies 	that 	might 	be
developed. 	Protecting a particular ATV signal technology means that rival
technologies for sending A TV signals would not be allowed to interfere with
the 	performance 	of 	receivers 	that 	decode 	signals 	from 	the 	protected
technology. 	This 	does 	not 	imply 	that 	rival 	A TV 	technologies 	must 	send
signals that can be decoded by ATV receivers that can decode signals from
the protected technology. 	That is, compatibility is not required.
20 Even 	if 	the 	FCC chooses 	the 	best 	A TV 	technology 	at 	a 	particular
point in time, the choice may delay improvements to other technologies that
prove ultimately to be superior to the chosen one.
10

information 	would 	be 	needed 	to 	assist 	the 	FCC 	in 	selecting 	the 	A TV
standard 	that 	would 	be 	best 	for 	society, 	assuming 	that 	it 	would 	be 	in
society's interest for any standard to be selected. 21
The case of color television illustrates the risk that, at an early stage
of 	technological 	development, 	the 	FCC 	will 	choose 	the 	wrong 	A TV
technology as a standard. 	In 	1950, when the technological development of
color television was proceeding at a rapid pace, and after approximately nine
months of hearings to gather information from 	industry and other sources,
the 	FCC chose 	the 	CBS 	technology. as 	the 	standard. 	However, 	the 	choice
failed 	to 	encourage 	color 	programming 	because 	the 	CBS 	technology 	was
incompatible 	with 	existing 	monochromatic 	television 	receivers. 	Additional
information 	demonstrated 	the 	superiority 	of 	an 	improved 	compatible 	RCA
system. 	In 	response 	to 	an 	industry 	committee 	recommendation, 	the 	FCC
substituted the RCA system for the CBS system as the standard in 1953. 22
The case of AM stereo provides further illustration of the same risk. In
1980, from the five AM stereo technologies then under development, the FCC
21 Conflicting information 	now exists regarding the price and quality-
size 	relationship 	for 	HDTV 	receivers. 	With 	regard 	to 	price, 	an 	industry
executive 	has 	estimated 	that 	consumers 	will 	have 	to 	pay 	a 	$100 	premium
over 	a 	NTSC 	receiver, 	more 	if 	the 	FCC chooses 	an 	HDTV 	standard 	that
requires 	a 	wider 	picture 	tube. 	Another executive 	has suggested, 	however,
that 	after an 	initially 	high 	price, 	HDTV 	receivers will 	cost no 	more 	than
NTSC receivers (Broadcasting, 9/12/88, p. 30). 	Another estimate is that an
HDTV receiver will initially cost at least $1,500 (New York Times, 9/21/88,
p. D7). 	With regard to the relationship between the quality of HDTV service
and 	the 	size 	of 	the 	receiver, 	one 	industry 	executive 	has 	suggested 	that
consumers will perceive no difference between an HDTV signal and an NTSC
signal 	on 	a 	receiver 	with 	a 	picture smaller 	than 	26 	inches. 	By 	contrast,
another executive has suggested that a significant difference exists even on
a 14-inch receiver (Broadcasting, 9/12/88, p. 30).
22 S.M Besen 	and 	L.L. 	Johnson, Comoatibility 	Standards. Competition.
and Innovation in 	the Broadcasting Industry, Rand, November 	1986, pp. 91-
92.
II

chose the Magnavox system as the standard. 	This choice 	was criticized 	by
broadcasters and engineers who cited problems with the quality of the sound
transmitted 	by 	the 	Magnavox 	system 	and 	with 	the 	high 	cost 	of 	the
transmission 	equipment 	that 	the 	system 	required. 	In 	1982, in 	response 	to
these 	criticisms, 	the 	FCC 	rescinded 	its 	choice 	and, 	after 	setting 	minimum
standards for 	AM stereo systems, left the choice among technologies to the
market.23
2) 	Reserving 	judgment 	on 	a 	standard 	until 	later 	in 	the 	technological
developmen t process
Under 	the 	second 	option, 	the 	FCC 	would 	encourage 	extended
cooperative 	industry 	deliberations 	to 	gather 	additional 	information 	and 	to
promote the further development of A TV systems. 	Until these deliberations
were 	concluded, 	the 	agency 	would 	reserve 	judgment 	on 	the 	need 	for 	a
standard and on the· particular technology that would be selected. 	The FCC
would also consider alternatives to setting a mandatory standard, including
letting 	private 	groups 	cooperatively 	st'tect 	a 	voluntary 	standard, 	or
protecting a chosen system from interference by other systems. 24
Extended 	industry 	deliberations, 	and 	the 	further 	technological
development 	that 	would 	likely 	accompany 	them, 	would 	provide 	additional
information on 	the costs and 	benefits of different A TV technologies. 	For
example, private participants would have more time to collect information on
23 See Besen 	and 	Johnson, 	pp. 34-38. 	This case is considered 	further
below in our discussion of option 3.
24 The private groups would likely include representatives from several
industries -- for example, A TV system developers, equipment manufacturers,
broadcasters, 	and 	cablecasters 	-- 	with 	diverse 	interests. 	This 	diversity
reduces 	the 	risk 	of 	anticompetitive 	collusion 	on 	prices 	or 	quantities 	of
services.
12

the equipment costs that each technology would impose on broadcasters and
viewers, and on the preferences that viewers might have for ATV services of
different qualities and characteristics. 	With this additional information, the
FCC would face a reduced probability of picking the wrong ATV technology
as the standard, should it prove in society's best interest for the agency to
set 	a 	manda tory 	standard. 	Such 	information 	would 	also 	assist 	private
industry in selecting the right voluntary standard, absent an FCC choice. 25
Alternatively, the 	FCC could 	protect from 	interference the technology
chosen 	in 	industry 	deliberations. 	This 	alternative 	could 	encourage 	the
adoption 	of 	the 	technology 	without 	delaying 	the 	use 	of 	any 	superior
technologies that might be developed later.26
The increased probability of choosing the right technology would come
at the cost of delay in implementing ATV service. 	In general, the extended
deliberations 	contemplated 	in 	this 	option 	would 	require 	additional 	time 	to
gather information, to develop competing technologies further, and, possibly,
25 Limited cooperative aCtIVIty 	in 	response 	to 	a 	governmental 	request
for 	information in advance of a regulatory decision -- such as that already
encouraged by the FCC in this proceeding, and that contemplated in options
I 	and 	2 -- 	would 	not 	normally 	be subject 	to antitrust 	attack. 	The 	FCC
should, 	however, 	be 	aware 	of 	the 	potential 	antitrust 	implications 	of
standards. 	In 	this 	regard, see 	Department of 	Justice 	policy 	statements on
research 	joint 	ventures (for example, 	Antitrust Guide 	Concerning Research
Joint 	Ventures, 	November 	1980; 	and 	J. 	Paul 	McGrath, 	Assistant 	Attorney
General, 	Antitrust 	Division, 	"Remarks 	at 	the 	18th 	Annual 	New 	England
Antitrust Conference," November 2, 1984).
26 In 	the 	case 	of 	TV 	stereo, 	the 	FCC 	protected 	one 	system 	from
interference 	by 	other 	signals. 	It 	appears 	that 	the 	protected 	system 	will
become the de facto industry standard. 	It is, of course, possible that no de
facto 	standard 	would 	emerge 	in 	the 	case 	of 	ATV, 	even 	if 	the 	FCC gave
interference protection to one of the ATV technologies.
13

to choose a standard. 27 	In the case of ATV, several factors would increase
the amount of time that these deliberations would require.
First, a 	dominant 	participant 	in 	the 	development 	of 	A TV 	technology
might 	be 	able 	to 	act 	as 	a 	"market 	leader" 	in 	adopting 	a 	particular
technology. 	However, deliberations to choose a standard are more difficult
when 	there are many nondominant participants with divergent views about
the 	"right" 	technology. 	In 	the 	case 	of 	ATV, 	the 	participants 	include
broadcast 	stations, 	program 	suppliers, 	equipment 	manufacturers, 	cable
systems, 	direct 	broadcast 	satellite 	(DBS) 	services, 	and 	Multichannel
Multipoint Distribution Services (fvfMDS), none of which is dominant. 	Each
group 	contains 	many 	members; 	for 	example, 	the 	NOI 	cites 	more 	than 	10
companies 	that 	are 	currently 	developing 	ATV 	technologies. 	In 	addition,
preferences 	regarding 	A TV 	systems 	may 	vary 	both 	within 	and 	among 	the
groups.
Second, 	deliberations 	are 	more 	difficult 	because 	there 	are 	many
potentially competitive ATV 	technologies. 	To illustrate, 	the 	NOI 	discusses
more than 20 ATV technologies currently under development. 	Of these, more
than 	10 	are 	compatible 	with 	NTSC 	receivers, 	five 	are 	incompatible 	with
NTSC receivers, and seven other systems have technical parameters that are
unknown to the FCC.
Finally, 	deliberations 	are 	more 	difficult 	because 	the 	development 	of
many A TV technologies is at an early stage. 	As a result, participants would
have 	much 	information 	to collect on 	those 	technologies. 	To 	illustrate, 	the
NOI 	notes 	that 	there 	is 	little 	information on such 	technical 	characteristics
27 Until 	a 	standard 	is 	chosen 	by 	the 	industry 	or 	by 	the 	FCC,
broadcasters and consumers will be reticent to invest their time and money
for sending or receiving equipment.
14

as 	spectrum 	requirements, 	interference 	characteristics, 	and 	interference
performance of receivers. 	Moreover, the NOI is silent on the information on
costs 	and 	benefits of 	different 	ATV 	technologies 	to 	broadcasters, 	viewers,
and the rest of society. 	Such information would be needed in order to make
the tradeoffs necessary to arrive at an optimal standard.28
3) 	Leaving the choice among ATV technologies to the market
Under the third 	option, the FCC would 	leave the choice among A TV
technologies to the competitive activities of participants in the market. 	The
agency 	would 	neither set 	a 	mandatory 	standard 	nor 	encourage cooperative
deliberations by private industry groups. 	On the one hand, this option would
eliminate the high risk associated with an FCC choice of an ATV standard
based 	on 	inadequate 	information. 	On 	the 	other 	hand, 	this 	option 	would
increase the risk that society will be worse off because the market will be
slow or unable to coalesce around the best A TV technology.
Absent an ATV standard, the market may fail to develop ATV because
investments are delayed 	or 	halted. 	The developer of one ATV 	technology
must 	incur costs 	that 	are 	not 	recoverable 	in 	the 	event 	that 	another 	A TV
technology wins out in the market. 	Similarly, A TV broadcasters and viewers
must 	invest 	in 	equipment 	whose 	costs 	are 	not 	recoverable. 	The 	potential
loss 	of 	these 	investments 	may 	deter' developers, 	broadcasters, 	and 	viewers
28 Note that the second and last factors increase both the difficulty of
the 	extended deliberations 	contemplated 	under 	option 	2, 	and 	the 	risk 	that
the FCC will choose the wrong A TV technology as the standard based on the
rapid deliberations contemplated under option 1.
15

from 	making them in 	the first 	place, even 	though all would 	benefit if the
investments were made.29
Such market failure may be illustrated by the case of AM stereo. The
development 	of 	this 	service 	may 	have 	been 	delayed 	because, 	absent 	a
standard, both industry and consumers have hesitated to invest in equipment
that could 	become obsolete. so 	One contributing factor 	to the problem may
be that none of the four AM stereo technologies is strongly preferred. 	As a
result, 	anyone 	who 	purchased 	equipment 	would 	have 	less 	assurance 	that
others would follow than if the purchased equipment were clearly superior. 31
Also, 	industry 	members are 	less willing 	to incur 	the 	costs 	of deliberations
because the gains from selecting a particular technology as the standard may
be small.
An alternative explanation for the slow growth of AM stereo, however,
is 	that 	consumer 	demand 	is 	weak 	because 	of 	AM 	stereo's 	cost 	and 	its
qualitative inferiority to FM stereo. 	It was estimated in 	1984 that adding
29 The 	absence 	of 	an 	industry 	consensus 	will 	deter 	investment 	under
either 	option 	2 	or 	option 	3. 	Option 	3, 	however, 	will 	likely 	entail 	even
greater 	disincentives 	to investment, 	since 	consumers 	and 	broadcasters 	may
not anticipate that a standard will soon emerge from the competition among
the 	many 	nondominant 	rival 	technologies. 	Conversely, 	option 	2, 	involving
industry 	cooperation, 	should 	more 	quickly 	lead 	to 	a 	standard 	or 	industry
consensus.
30 In 	his 	separate 	statement 	Commissioner 	Quello 	expresses 	concern
that, 	absent 	a 	standard, 	the 	experience 	of 	AM 	stereo 	will 	be 	repeated 	in
A TV. 	As 	we 	noted 	above, 	however, 	the 	FCC 	initially 	set 	an 	AM 	stereo
standard, but then rescinded it.
SI In 	an 	attempt 	to 	overcome 	this 	inertia, 	suppliers 	have 	offered 	to
lease 	systems, 	to 	supply 	on 	a 	free-trial 	basis 	the 	equipment 	whose 	costs
would 	be 	sunk, 	and 	to 	license 	patents 	on 	a 	royalty-free 	basis (Besen 	and
Johnson, p. 48).
16

AM 	stereo 	increased 	retail 	receiver 	prices 	by 	$20-40.32 	A 	survey 	of 	AM
radio stations found none that thought its audience had increased as a result
of stereo broadcasts.88
In 	this 	regard 	it 	is 	instructive 	to 	note 	that, 	even 	after 	the 	FCC
adopted a compatible color television standard developed by the industry, the
growth 	of 	receiver 	ownership 	and 	programming 	was 	relatively 	slow 	for
several 	years. 	Ultimately, 	of 	course, 	color 	television 	became 	highly
successful.84 	Hence, it is possible that -- even with an AM stereo standard,
and 	even 	if 	AM 	stereo 	were 	ultimately 	to 	prove 	successful 	-- 	receiver
ownership and programming would grow slowly for some time.
We 	cannot 	predict 	how 	the 	ATV 	market 	would 	behave 	absent 	a
standard. 	We can, however, identify some possible outcomes. 	To the extent
that a single receiver reduces costs to viewers, the market will tend toward
outcomes 	with 	all 	television 	signals shown 	on 	one 	type 	of 	receiver. 	One
such outcome would have a single ATV technology that would be compatible
with 	NTSC television. 	Another outcome would 	have one ATV 	technology,
incompatible 	with 	NTSC, 	whose 	signal 	would 	be 	receivable 	on 	an 	NTSC
receiver 	connected 	to 	a 	translator.86 	Still 	another 	outcome 	would 	have
multiple ATV technologies, some incompatible with NTSC, but all receivable
82 See Besen and Johnson, p. 40.
88 See Besen and Johnson, p. 56.
84 See Besen and Johnson, pp. 94-95.
85 A translator permits otherwise incompatible technologies to interact.
Whether a 	translator would 	be superior 	to a standard depends on the costs
of each (Besen and Johnson, p. 7).
17

on 	a 	single 	"open 	architecture" 	receiver.36 	With 	available 	information,
however, 	we 	cannot determine 	which, 	if 	any, 	of 	these outcomes 	would 	be
best for society.
The absence of a standard may sometimes be in society's best interest,
for example, in the case of information search-and-retrieval systems (teletext
and 	videotex). 	Here two incompatible technologies have different features.
Because teletext transmits information in part of the television signal, there
is no limit to the number of simultaneous users. 	Teletext is, however, one-
way non interactive. 	By contrast, videotex, which 	transmits information on
telephone or cable television circuits, can serve a limited number of users at
the same 	time, but can provide 	interactive service. 31 	It is arguable that a
single standard would not have provided this diversity of features, leaving
some users' needs unserved.
4) 	Questions to answer to determine the correct option
In the preceding sections we outlined three general options available to
the 	FCC in 	considering 	ATV 	standards. 	The 	FCC can 	choose any 	of the
36 The economic basis for an open architecture receiver appears to be
the 	decreasing 	marginal 	cost 	of 	including 	the 	capability to receive 	signals
from additional systems. 	Decreasing marginal cost exists when the additional
(marginal) 	cost 	of 	adding 	one 	more 	system 	to 	a 	receiver 	decreases 	as 	the
number 	of 	systems 	increases. 	In 	the 	case 	of 	receiving 	television 	signals,
once a receiver can decode an NTSC signal and one A TV signal, the cost of
receiving additional signals appears to be low (see NOI, p. 52).
Decreasing marginal cost in a multisystem receiver is illustrated by the
case 	of 	AM 	stereo. 	Matsushita 	estimated 	in 	1982 	that 	one 	stereo 	system
would 	add 	between 	$10 	and 	$20 	to 	the 	cost 	of 	a 	receiver, 	and 	that 	the
remaining systems -- four at that time -- would cost an added $10-20 (Besen
and 	Johnson, 	pp. 	34-40). 	Hence 	the 	added 	cost 	falls 	from 	$10-20 	for 	the
first system to $2.50-5.00 per system for the next four systems.
31 Besen and Johnson, pp. 72-73.
18

following: 	1) set a standard early in 	the technological development process,
2) 	reserve 	judgment 	while 	encouraging 	industry 	negotiations 	to 	achieve 	a
consensus on a standard, or 3) leave the choice among A TV technologies to
the market. 	Given the information that now exists, the choice among these
alternatives 	is difficult. 	Our analysis, 	however, 	points 	to 	a 	few 	Questions
that 	may 	be 	important 	in 	deciding 	which 	option 	the 	FCC 	might 	want 	to
pursue. 	The reliability and completeness of the responses to these Questions
will vary with the option selected. 	Regardless of that choice, however, we
believe that the kinds of information contained in the responses can help the
FCC choose the policy that will best serve society's interests.
a) 	Is 	there 	likely 	to 	be 	a 	"breakthrough" 	technology 	in 	the 	future
that 	will 	cause 	society 	to 	miss 	the 	"best" 	available 	option 	if 	a
standard is chosen now?
b) 	What are consumer preferences regarding the likely Quality levels
of 	the 	A TV 	technologies 	currently 	under 	development?
Information 	might 	be 	gathered 	from 	consumers 	regarding 	their
preferences for various known A TV technologies and the intensity
of 	those preferences. 	Survey techniques may 	help determine the
strength of those preferences for experimental systems.
c) 	How many local stations would have to broadcast an ATV signal to
make 	the system of value to consumers? 	How would 	that 	value
change as more stations were able to broadcast A TV signals?
19

d) 	What time delay would consumers be willing to incur to reduce the
ultimate cost or improve the ultimate quality of A TV systems?38
e) 	What will be the costs of receivers and transmitters under each of
the 	various 	systems 	and 	what 	would 	be 	the 	cost 	of 	an 	open
architecture receiver if multiple transmitting systems existed?
f) 	Would translators reduce the cost of ATV systems and what would
be 	the 	cost 	of 	those 	translators 	to 	consumers?
translators reduce picture or sound quality?
Would 	such
g) 	What 	can 	we 	learn 	from 	the 	European 	and 	Japanese 	experience
with 	ATV? 	Does this experience indicate 	the 	magnitude of the
costs and benefits associated with early choice of a standard and
with the choice of a standard that is not NTSC-compatible?
h) 	Should the FCC wait to see whether cable TV chooses a standard
for HDTV? 	Due to the nature of consumer payment for cable TV
service, 	the 	cable 	experience 	may 	provide 	a 	means 	c 	market-
testing a standard.
38 Picking 	a 	standard 	early 	will 	not 	necessarily 	result 	in 	earlier,
more 	widespread 	use 	of 	the 	chosen 	ATV 	technology, 	particularly 	if 	it
becomes apparent that the "wrong" standard was chosen.
20

V. 	The 	Proposed 	Requirement 	that 	ATV 	be 	Compatible 	with 	Existing
Television Receivers Could Impose Future Costs on Society that Exceed
Any Benefits
The FCC's proposed requirement that, during a transitional period, A TV
broadcasts be receivable on existing NTSC receivers appears unlikely to have
an 	impact 	for 	the 	immediate 	future. 	Even 	without 	this 	requirement,
broadcasters would probably not choose an ATV technology that would cut
advertisers off from a 	large 	fraction 	of 	their viewers.s9 	Hence, the near-
89 The 	experience 	of 	the 	CBS 	color 	television 	technology, 	which 	the
FCC originally chose as the standard, may be instructive in this regard. 	The
CBS technology was incompatible with existing monochromatic television sets.
As 	a 	result, 	viewers 	with 	such 	sets 	turned 	to 	other 	networks 	during 	the
hours when CBS broadcast in color, and many did not return to CBS during
the hours when it broadcast in black and white. 	A final 	blow to the CBS
system 	came 	when 	the 	government 	prohibited 	the 	manufacture 	of 	color
receivers due to Korean War demands. 	The CBS system was abandoned, and
a 	private 	industry 	group 	developed 	a 	compatible 	standard 	based 	on 	an
improved RCA system (Besen and Johnson, pp. 91-93).
In 	this 	regard, 	it 	is 	interesting 	to 	note 	the 	degree 	of 	compatibility
between 	A TV and conventional 	television 	in other parts of the 	world. 	In
Japan, the Ministry of Post and Telecommunications will provide two ATV
services: an 	A TV service -- at 	less than the 	HDTV 	level -- that 	is NTSC-
compatible, and an HDTV service by satellite that is incompatible with the
existing 	NTSC 	system. 	The 	compatible 	system 	has 	been 	proposed 	for 	a
gradual 	transition 	from 	NTSC 	to 	HDTV. 	In 	Europe, 	by 	contrast, 	HDTV
broadcasters plan to provide an HDTV service by satellite, that is compatible
with a DBS system, but not with the existing terrestrial broadcast television
systems. 	European 	viewers 	will 	have 	to 	buy 	a 	dedicated 	receiver 	and
satellite receiving antenna to receive the HDTV DBS signal. 	This outcome
appears 	consistent 	with 	the 	lesser 	importance 	of 	advertising 	revenues 	in
Europe compared to the United States.
21

term 	benefits of 	requiring 	that 	ATV 	broadcasts 	be compatible 	with 	NTSC
receivers are likely to be minimal or nonexistent, as are the costs.
As ownership of A TV receivers grows, however, the size of the A TV
audience 	could 	make 	profitable 	an 	A TV 	technology 	that 	is 	superior, 	but
incompatible 	with 	NTSC 	receivers. 	At 	that 	point 	the 	compatibility
requirement 	could 	delay such 	a 	technology, 	if 	the 	FCC did 	not 	relax 	the
requirement soon enough. 	The costs of the 	requirement would 	be 	the 	lost
benefits of the delayed ATV programming to the potential viewers.
The requirement could provide benefits in the future if it prevents the
premature ending of NTSC service, that is, the ending of service when the
net benefits to society from continuing NTSC television are greater than the
net 	benefits 	from 	initiating 	the 	incompatible 	A TV 	service. 	Although
inefficient 	replace~ent of a 	technology 	can 	occur 	in 	some 	instances,·o we
are unable 	to determine 	whether such an 	outcome is likely 	in 	ATV. 	The
discussion 	in 	the 	NOI 	of the different 	ATV 	technologies suggests that the
FCC also lacks the information needed to make this determination.
Because 	a 	compatibility 	requirement 	would 	likely 	have 	little 	or 	no
impact 	in 	the 	immediate 	future, 	it 	appears 	that 	the 	FCC 	might 	reserve
judgment on the requirement until additional information becomes available.
With additional information on costs and consumer benefits, the FCC could
make an 	assessment of the 	probability of inefficient replacement of NTSC
television 	and 	of 	the 	costs 	and 	benefits 	of 	delaying 	the 	use 	of 	an
incompatible ATV technology.
40 See Besen 	and 	Johnson 	(p. 25) for 	a 	discussion 	of 	this "inefficient
bandwagon" effect.
22

VI. 	Conclusions
Instead of restricting the quantity of spectrum that ATV service may
use, we suggest that the FCC permit licensees in the 	broadcast region, and
possibly 	other 	regions, 	of 	the 	spectrum 	to 	transfer 	their 	licenses. 	Such
license 	transfers 	could 	increase 	the quantity, quality, and 	variety 	of 	ATV
programming available to viewers. 	Transfers would also ensure that spectrum
did not remain idle.
With the information currently available to us, we cannot conclude with
certainty that the FCC or cooperative private industry deliberations should
set an ATV standard, or that the choice among ATV technologies should be
left 	solely 	to 	the 	noncooperative 	activities 	of 	participants 	in 	the 	market.
We 	have, 	however, 	identified 	several 	issues 	that 	the 	FCC 	might 	usefully
investigate in its deliberations concerning ATV standards.
Finally, 	we 	suggest 	that 	the 	FCC 	consider 	relying 	on 	the 	market 	to
determine 	how 	long 	NTSC 	programming 	continues. 	The 	alternative 	under
consideration, 	a 	compatibility 	requirement, 	may 	impose 	future 	costs 	on
society that are greater than any benefits.
23