The Transition to Digital Television

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1 The Transition to Digital Television Jérôme Adda University College London Marco Ottaviani London Business School Economic Policy January 2005 Volume 20 Issue 41 Page

2 Micro-econometric Model In each period, each individual household chooses a platform for primary TV set, by comparing current cost of set top box future viewing benefits, net of subscription prices Households have preferences for characteristics of platforms, estimated from UK survey data (2002) Model predicts number of households adopting different TV platforms over time, depending on market and policy parameters

3 Baseline Scenario: No Policy 0.25 DTT 0.7 Analogue 0.6 Market Share Market Share years years 0.35 Cable 0.7 Satellite Market Share Market Share years years Slow progress of digital, with substantial analogue share in 2010

4 Expectation of Switch Off in 2010 Market Share DTT Market Share Cable DTT Baseline Experiment years Cable Baseline Experiment years Market Share Analogue Market Share DTT Analogue Baseline Experiment years Satellite 0.1 Baseline Experiment years Almost all households go digital by 2010, mostly adopting free DTT

5 Expectation of Switch Off in 2010: Market Share No TV Share of No Television No TV Baseline Experiment years Almost all viewers switch to digital by 2010 if they have no choice

6 Effect on consumer surplus of (expected) terrestrial analogue switch off at different dates Switch-off period Impact on consumer surplus ( billions)

7 Summary of Results 1. Large switching costs, so spontaneous adoption takes time 2. Many digital if pushed who go for digital only if analogue is not available 3. Very few never digital who prefer no TV to digital, so expectations about switch off time are key 4. Free DTT adds competition to pay TV market 5. Late subsidies induce some viewers to delay adoption, but early subsidies are mostly given to those who would have adopted spontaneously Caveat: Broadband/internet TV

8 Switching to Digital Television: Business and Public Policy Issues Norbert Maier London Business School Marco Ottaviani London Business School Forthcoming in Shane Greenstein and Victor Stango (eds.) Standards and Public Policy Cambridge University Press,

9 From Analogue to Digital TV TV platforms: terrestrial, cable, satellite, broadband TV Benefits: digital compression technology allows more efficient use of bandwidth, by a factor of 6 Costs: investment in transmission equipment by broadcasters and in reception equipment by viewers Benefits and costs are unevenly distributed among players vary across platforms

10 UK: Digitisation of Platforms Ho use hol ds 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 50% Digital Terrestrial (DTT) is progressing Cable 2/3 digitised 4,000,000 2,000,000 BSkyB digitised satellite platform in 3 years - Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1,,,,,,,,,,,,,,,,,,, Analogue satellite Digital satellite FTA satellite Analogue cable Digital cable Digital terrestrial ADSL Q2, 20 03

11 UK: Satellite BSkyB runs satellite pay TV network Sky lauched in 1989, won battle with BSB analogue only network up to 1998 controls premium content (sports and movies) digital & analogue simulcasting, installed digital STB to all subscribers (free of charge) analogue signal switched off in 2001

12 UK: Terrestrial Analogue: 5 channels (2BBC, ITV, Channel 4 and 5) Digital terrestrial pay operator, ITV Digital subsidised digiboxes fraught with technical problems bankrupt 2002 Since then, free platform run by Freeview backed by BBC and Sky 25 basic channels subscription free massive takeup

13 UK: Cable Cabling began in 1984 Many companies with local franchises Roll out obligations imposed to franchisees by ITC Double play (television + telephone) from early 90 s led to further investments and consolidation NTL and Telewest, pass 50% of households Both re-emerging from bankruptcy after heavy debt restructuring Upgrade to digital slowed down by debt burden Now, NTL 2/3 digitized, Telewest almost fully digitized

14 Comparison of Delivery Platforms Cable Terrestrial Satellite Interactivity + Portability + Bandwidth ++ + Upfront investment ++ + Ideal catchment area Small Medium Large

15 Digitisation of TV Networks, 2003 Count ry Terrest rial Cable Sat ellit e Aust ria 0% 4% 31% Belgium 0% 4% 25% Denmark 0% 8% 45% Finland 7% 2% 42% France 0% 32% 74% Germany 19% 8% 22% Greece 0% 0% 98% Ireland 0% 21% 95% It aly 0% 0% 88% Luxemburg 0% 1% 72% Net herlands 6% 2% 100% Port ugal 0% 2% 100% Sp ain 2% 17% 100%

16 Satellite v. Cable Satellite Broadcaster Cable Broadcaster Satellite Backbone Switch Switch Viewer Viewer Viewer Viewer Viewer Viewer Viewer

17 Consumers Decision to Digitise A & D available Consumer with: v A, benefit from analogue v D, benefit from digital s, cost of switching to digital Payoffs: Analogue: v A p A Digital: v D s p D Convert to digital if: (v D s) v A > p D p A

18 Broadcasters Decision to Digitise Broadcasting cost is fixed wrt number of viewers, N: Analogue transmission costs C A Digital transmission costs C D With homogeneous consumers: Analogue: charge p A =v A obtaining profits Nv A C A Digital: charge p D =v D s obtaining profits N(v D s) C D Convert to digital if: N(v D s) Nv A > C D C A [note that this outcome is socially efficient]

19 Satellite v. Cable Transmissions costs are non sunk: C D <C A N is population of entire country One decision is made at the country level Network investment costs are sunk: C D > C A = 0 Due to branch structure of the network, N is population in district Different decisions are optimal in different districts Convert to digital if: N [(v D s) v ] ] > C D C A

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