TRANSCRIPT OF PROCEEDINGS Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 --------------------------------------) In the Matter of: ) ) Advanced Television Systems ) MM DOCKET NO. 87-268 and Their Impact Upon the ) Existing Television Broadcast ) Service ) ) EN BANC Hearing ) --------------------------------------) DATE OF MEETING: December 12, 1995 VOLUME: PLACE OF MEETING: Washington, D.C. PAGES: 1 - 283 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 --------------------------------------) In the Matter of: ) ) Advanced Television Systems ) MM DOCKET NO. 87-268 and Their Impact Upon the ) Existing Television Broadcast ) Service ) ) EN BANC Hearing ) --------------------------------------) The above-entitled matter come on for meeting pursuant to Notice at 1919 M Street, N.W., Room 856, Washington, D.C., on Tuesday, December 12, 1995 at 8:30 a.m. APPEARANCES: Reed E. Hundt, Commissioner Susan Ness, Commissioner James H. Quello, Commissioner Andrew C. Barrett, Commissioner Rachelle B. Chong, Commissioner I N D E X PANEL 1: PANELIST: PAGE NO. Richard Wiley, Advisory Committee ATV 16 Steven Rattner, Lazard Freres and Company 19 Ed Grebow, TELE-TV 22 Neil Braun, NBC, Inc. 24 John Hendricks, Discovery Communications SINC/NCTA 27 Stanley Hubbard, Hubbard Broadcasting, Inc. 29 Lawrence Grossman, Brookside Productions 31 Andrew Lippman, MIT Media Laboratory 34 PANEL 2: PANELIST: PAGE NO. Gigi Sohn, Media Access Project 91 Alan Braverman, Capital Cities/ABC 94 Barry Diller, Silver King Communications 96 Faye Anderson, Douglass Policy Institute 100 David Honig, Minority Media Telecommunications Council 102 John Siegel, Chris Craft/INTV 104 PANEL 3: PANELIST: PAGE NO. K. D. Horowitz, Viacom 156 George Keyworth, Progress Freedom Foundation 159 James McKinney, Advanced Television System Commission 161 Edward Reilly, McGraw-Hill Broadcasting/MSTV 163 John Major, Motorola 165 James Carnes, Sarnoff/Grand Alliance 168 Joseph A. Flaherty, CBS/ATSC Broadcast Caucus 170 PANEL 4: PANELIST: PAGE NO. Bruce F. Allan, Thomson Consumer Electronics 214 Sherwin Grossman, CBA 217 John Abel, Datacast Partners 219 Ralph Gabbard, Gray Communications/NAB 221 David Liroff, WGBH Educational Foundation 223 Joseph Tasker, Jr., Compaq Computer Corporation 225 Meeting Began: 8:30 a.m. Meeting Ended: 4:41 p.m. P R O C E E D I N G S (8:30 a.m.) COMMISSIONER HUNDT: Good morning, everybody. We're going to have a really big show today. I would like to thank our extremely distinguished panelists. They've all taken time from their very busy schedules to contribute to the important public debate about digital television. We're going to have very brief opening statements. You're in the middle of mine, and then we'll go through the different commissioners, and then we'll get started. This hearing today is intended to kickoff a heightened public open debate about digital television. As we will learn today, a group of brilliant scientists has put a digital genie in the bottle, and that genie can grant many different wishes. Our excellent FCC staff has given me a brief guide to avoid terminological implosion and I want to share it with you. So this is the way it goes. The spectrum we're talking about is for digital broadcast. It's currently unused and unusable spectrum. Today large chunks of the broadcast allocation lies unused to avoid interference with the old technology, the current technology, of analog transmission. With the new digital technology, we can add additional broadcasting in the spaces in between. For example, in Washington, D.C, the dark spectrum between analog broadcast on Channel 20 and Channel 22 could be used for digital transmission. in other words, it's the space that would be filled by a Channel 21 if you had a Channel 21. So when we use the term digital spectrum, we're talking about, for example, the 6 MHz in the space between Channel 20 and Channel 22. Digital broadcast licenses are assumed to be 6 MHz. The 6 MHz can be used to transmit a wave, the wave can carry bits, the digital Morse code for delivering voice or video or data. The Grand Alliance transmission standard can use 6 MHz to deliver almost 20 million usable bits per second. The transmission standard can be used to deliver different amounts of bits to display different formats. A very high resolution format will require more bits than a less high resolution format. A progressive format will require more bits than an interlaced format. High definition, as opposed to digital, is just one of many digital formats. High definition is a synonym for highest resolution, and it requires more bits, obviously, than a less high resolution format. Standard definition is a synonym for a format that has a less high resolution than high definition, and it requires less bits but it still produces some terrific pictures. As the engineers have explained to me, the fewer bits that are used for the picture, the more pictures or programs that can be simultaneously delivered by the bit stream. So, for example, if a broadcaster elects to use a standard definition format for digital transmission, the broadcaster probably can send more simultaneous programs. So that's how the experts have explained it to me and ask you to pass on to you and hopefully the many experts who will testify today can build on this brief introduction. In particular, I would like to call your attention to the display of digital video technology at 2000 M Street. It will be open all day today through lunch until 5:30 p.m., and I particularly would like to thank the following companies who set up the displays: The Grand Alliance, Texas Instruments, USSB, DirecTV, Sony Corporation of America, NBC, Inc., Hitachi of America, Microsoft Corporation, and CBS, Inc. If a picture is worth a thousand words, their displays are worth a million bits, and I strongly urge you to visit the site. The digital spectrum is beachfront property on the Cybersea, and, as we all know, Congress and the Administration are discussing whether the licenses to use the digital spectrum should be auctioned. The other apparent possibility is to give the digital spectrum licenses to today's analog broadcasters, and then retrieve, for the public, the analog licenses on some date certain, or when certain conditions are met. Then the analog spectrum could be auctioned. We're happy to hear anyone's comments on this subject, but, of course, these questions will be decided by Congress and not the FCC. Whoever receives the digital spectrum licenses, and however they are meted out, the FCC needs to decide whether there should be any restrictions on the use of the licenses. Should we order that only one transmission standard be used? Should we order that that transmission standards should be used to deliver only one particular format? For example, should we order that only the very high resolution format called High Definition is permissible as a matter of law? Or should we order that only progressive scan formats are permissible as a matter of law? Or should we strive to be deregulatory and to keep our mitts off the marketplace? Should we follow the advice Jack Nicholson gave in the movie "Chinatown," to avoid mistakes, do as little as possible. Well, as opposed to interfering with business judgements about transmission standards and formats, a different question is whether the FCC should ask licensees of analog or digital spectrum to deliver programs that serve the public interest in ways that mere marketplace competition might not do. It comes as no surprise to anyone that, speaking personally, that I'm very interested in hearing the views of the panelists about the possibility of using the increased capabilities of digital transmission to serve the ends of children's education and reform of the campaign process. It is certain that digital transmission will increase the number of TV programs broadcast over the air. Doesn't that mean that it can also increase America's ability to use the wonderful medium of broadcast to serve all the dimensions of the public interest. The great thing about today's open meeting is that this is the right time and the right place to talk about the future of television in this country. The is an historic moment similar to the late 1940s when the FCC and Congress made the fundamental decision that shaped the analog television of the last half century. So let's all recognize that none of us want to use this opportunity -- none of us want to let this opportunity go buy, none of us want to pass it up. We want to debate vigorously, with good cheer and optimism, all the questions and the many answers that digital TV generates. Thank you. Commissioner Quello. COMMISSIONER QUELLO: You bet. Very fine statement and mine will be much less technical. But I hope that maybe years from now, during my fifth and sixth term as Commissioner, I hope to be able to say I was there when HDTV, the greatest invention since color television, was just a glimmer in the FCC's eye, and I hope to be able to look around at the dramatic and widespread public excitement about high definition pictures, at the high penetration levels of digital television that surpass all instruments, and at the proliferation of high definition programming, and at a stronger than ever broadcast industry available free to all the public. However, this day may never come if the Commission, the Congress or the White House makes any serious missteps in the rollout of advanced television. Perhaps the biggest threat, in my mind, would be a decision to either auction the digital channel or to compress the transition to an advanced television to such a short period of time that both broadcasters and consumers would be threatened. Should the government and the American public eventually recover the value of the 6 MHz the broadcasters relinquish? Absolutely. However, they should not be forced to choose between an early return on spectrum and a viable- free advanced television system, and I think transition to HDTV must be a progressive evolutionary process. I will, therefore, be focusing my energies in this very important proceeding, on insuring that high definition is a success for consumers and broadcasters alike. While the goal of a balanced budget is vital to the future of our democratic society, it should not be accomplished by threatening the position of the United States in the global economy or by impeding the ability of broadcasters to bring to every home in America the next and best generation of free television. So I look forward to hearing all of the varied views of this very expert group of panelists. Thank you. COMMISSIONER BARRETT: Thank you, Mr. Chairman. My learning curve becomes a regressive on when listening to myself, so I choose, Mr. Chairman, to put the statement wherever it goes in the record, give it to everyone and to compliment you and Commissioner Quello for your overview. But I also wanted to follow-up on what the chairman had suggested, and that is to take a tour of the -- what's the address, 2000 M Street. I went over yesterday and caught a cold from Commissioner Chong yesterday and I thought that we would also, Mr. Chairman, I'd like to advice everyone, go see Stan Hubbard's son, and you can see what a bright child of his mother, he took after his mother, obviously, but go see Rob Hubbard, who makes a great presentation, Mr. Chairman, who you did see yesterday, and it's an excellent overview. And I want to compliment Chairman Wiley for all of his hard work, and I will forego the statement, Mr. Chairman, and make it part of the record of whatever it is we're doing here today. Thank you very kindly. COMMISSIONER NESS: Mr. Chairman, the subject of this En Banc, whether and how we transition our television broadcasting industry from an analog to a digital system, is perhaps the most challenging issue facing the Commission today. But we're not alone. It is challenging for broadcasters who must decide whether to invest billions of dollars in new equipment without new revenue streams to cover capital costs and without assurance that their audiences will follow. It is challenging for Wall Street, which is not certain such an investment will succeed. It's challenging for video providers, who want the opportunity to compete for digital licenses. It's challenging for consumer, electronics and computer manufacturers, who much rapidly roll out equipment to retrofit our video population. And above all, it will be challenging for consumers who are mostly unaware that in a decade or so, their analog television sets and VCRs may become obsolete. Digital broadcasting offers a future that is full of promise. One need only visit the advanced television demonstrations across the street to appreciate the extraordinary progress that has been made to date. Many have labored to achieve what is truly a remarkable product, the Grand Alliance standard. I want to express my appreciation publicly to Chairman Dick Wiley and his committee for their very fine work. We're at a crossroads in this country, should we proceed with the digital transition as proposed or should we consider other options? I begin today's hearing with some preliminary thoughts: First, free, over-the-air broadcasting provides and invaluable service to the American public. It serves us all any time, any place, rich or poor, urban or rural. It educates, informs, and entertains. When widely held, its diversity of voices serves as an insurance policy for our democracy. Among video distributors, only broadcasting is available as a free advertiser-supported service throughout the country. We must be cognizant of the millions of consumers who depend upon broadcasting for their news and entertainment. Whatever we do, we must ensure continued service to all, including those who cannot or choose not to subscribe to pay services Second, of all the video competitors, only broadcasters much receive this Commission's blessing before it can upgrade its service to digital. Cable can be digital without FCC's permission. DBS already is digital and can provide high definition if it so chooses. Video dial tone, wireless cable, and LMDS are all planning to go digital. If our goal is to promote competition among video providers, broadcasters must have the digital tools to compete. Third, the Grand Alliance system was carefully crafted through a very public process. It was designed, developed, and paid for, not by government, but by private industry. The broadcasters, both commercial and public, as well as cable, computer, manufacturing and film industries, invested their time and their talents. Extraordinary efforts were made to accommodate every sector without sacrificing the goals of digital broadcasting. The Grand Alliance standard provides great flexibility, is computer friendly, and ha plenty of headroom for new advances. And it is homegrown. It has the potential to expand domestic jobs and grow industries. Advocates of other systems will have a high burden of proof. Fourth, spectrum is a national resource. We must ensure that it is efficiently used. As I study various spectrum transition scenarios for broadcasting, I will be focusing on both short-term and long-term benefits, particularly the possibility or freeing up 100 to 150 MHz at the end of the process through increased efficiency. Fifth, historically, broadcasters were viewed as stewards of the airwaves. In this special position of trust, broadcasters were given mandatory carriage and channel positioning on cable systems. In exchange, broadcasters were expected to serve local communities in "in the public interest." If incumbent broadcasters are to receive a free second channel for digital conversion, I want to know more clearly how their public interest obligations will be fulfilled. Finally, and most importantly, our decisions must be in the public interest. I want to better understand the impact that our digital television proceeding will have on consumers. If we go ahead, for the first time, a major transition will not be backwards-compatible. I therefore want to examine what maximum public benefit we can have while minimizing disruption and cost. These are some of my thoughts, Mr. Chairman, and I look forward to hearing our distinguished panelists' comments on these issues. Thank you. COMMISSIONER CHONG: I just want to clarify that it was Commission Barrett that had the cold yesterday, and I'm pretty sure he sneezed on me when we were looking at Stan Hubbard's and I woke up this morning with a runny nose, so it's your fault. I wanted to add my thanks for everyone coming. I know you have busy schedules and the fact that you all made it is terrific. I wanted to thank the staff, first of all, for pulling this hearing together. I think that I was the one that asked for this back when we were doing the digital notice because there was a lot to learn, both policy-wise and technology-wise and I thought this might be helpful that we would all focus. It seemed to me, back then, that a lot has changed since the first decisions were made about digital television and it was important for us to have a thorough understanding of where our technology had brought us at this moment in order make good decisions going forward. I wanted to state up front that I have a very central concern, and that is, preserving and promoting free over-the-air television, which I think is central to a democratic society. And, as a result, I think that the transition that we're going through from analog to digital is inevitable and we can't really expect broadcasters to maintain their audiences if they're going to be in a Startrek era with Gunsmoke technology. So these are the concerns I'm going to be asking about when we get to the panelists. We have said that we think that the principal use -- I have said that the principal use of the spectrum ought to be for free over-the-air broadcasting. Is this going to be a reasonable approach given the increased flexibility broadcasters will get when they transition to digital? And if broadcasters do use the spectrum for ancillary uses, non-free broadcast, I want to know whether it would be fair to make them pay for that. Secondly, in past decisions, the Commission has decided to loan a second 6 MHz channel to broadcasters to avoid disenfranchisement of viewers during the transition, and I want to know whether this approach is still the right one, given that some parties have expressed some interest in standard digital channels that might possibly require less than 6 MHz. And if we do allocate less than 6 MHz, doesn't this undercut the very commendable and impressive achievements of the Grand Alliance. As a world leader in HDTV right now, why would be backtrack on that decision at this point? If this transition happens, how do we ease the transition? This is the primary area of my concern. What would a reasonable transition period be? Can we learn from any past experiences, such as the transition from black and white to color, or the introduction of CD-Rom and what about consumers? I shudder to think about what would happen when Aunt Beulah turns on her analog TV in 10 years and it doesn't work. There's going to be a couple of irate phone calls made at that point. So how do we ease the transition for consumers, what's reasonable, and what about the impact of the transition on the small and the medium-sized broadcasters, including community broadcasters? What about public television stations which are suffering from budget cuts right now? I want to hear ideas on how we can accommodate the needs of these broadcasters. And finally, spectrum efficiency, are there ways we can manage the transition to maximize the use of the spectrum, freeing up valuable spectrum for other uses is a very important governmental interest. So, that's plenty to ask about, I look forward to a full and lively discussion and I thank you again for coming today. COMMISSIONER HUNDT: Thank you very much. Let me move quickly into the panel. First, I'd like to note the addition of Andy Lippman from the MIT Media Labs to the panel over here on this side, and thank you very much, Andy, for coming. And before I kick it off by asking foreman chairman Dick Wiley, who also the chairman of the advisory committee to make the first remarks, I'd like to especially acknowledge people on the FCC staff who are responsible for all of the work behind this particular day: Donna Jean Ward, Roger Holburg, Alan Cohen, Dan Bring, Brett Tanitser, Mary Beth McKerrick, Manya Bagdadi, Tom Tanosovich, and in particular, probably the key person in the Mass Media Bureau for this whole effort, who has been providing us all on the Commission tremendous assistance, Saul Shapiro. The timekeepers are harsh and strict disciplinarians. They have cards to warn everyone, including the Commissioners, of how short the time is and if you go over their rules, they will leap across the table and choke you until you stop, an embarrassing experience that all of us will want to avoid by simply following their advice. Dick. MR. WILEY: Mr. Chairman, Commissioners, it is a privilege to appear before you this morning. Each of you has received the Advisory Committee's final recommendation. I won't take the time to discuss this conclusion this morning. Suffice is to say, that the Grand Alliance's digital standards represents world leading technology -- (Bad mike, unable to hear.) MR. WILEY: I'll start. Mr. Chairman, Commissioners, it's a privilege to appear here. Each of you has received the Advisory Committee's final recommendation. I won't take the time to discuss its conclusions. Suffice it to say that the digital TV standard of the Grand Alliance represents world leading technology permitting ATV's dazzling pictures and sound, multiple SDTV programming, and myriad NII data services and all on a dynamic basis. In my written testimony I describe some of the key technical issues that the Advisory Committee faced including progressive scanning versus interlaced scanning. Now, as you know the Grand Alliance technology incorporates both formats at minimal additional cost, thus reasonably meeting the needs of all affected industries. As such, and let me emphasize here, it would represent the world's only progressively scanned television system and with fully advances and compression technology, it should be possible to migrate to an all progressive scanning format in the future. Now, let me offer my own brief rules on four criticisms of the FCC's long-standing ATV program. First, that the FCC's planned transition to digital television represents a "give away" of valuable frequencies to existing broadcasters. But in reality, it is only an exchange of one spectrum block for another with, with the public ending up with a greatly enhances video service in the process. Second, that the digital channel, so to speak, should be auctioned, but this could disrupt the Commission's orderly transition plan and likely deprive broadcast viewers of the full advantages of ATV. A better alternative, in my view, is to auction the returned and probably more valuable channel. Third, broadcasters might be given less than a full 6 MHz channel, but the Grand Alliance system cannot be sliced up in this manner. Instead, an entirely new transmission system would have to be designed and tested, assuming anyone had the financial incentive to do that. And in the meantime, the American public would be deprived of the services provided by digital HDTV including NII interoperability, and the United States might well lose its position of clear technical superiority which ultimately should add greatly to our economy. Fourth, and finally, that the lower resolution SDTV is just as good as HDTV. But the hundreds of advisory committee technical experts and lay viewers did not see it this way. The truth is that high definition television represents a whole new video platform and a quantum leap forward in the state of the art. Fortunately, however, the Grand Alliance's supple framework eliminates any need for choice, we can have both HD and SD. In all, ladies and gentlemen, the United States and the FCC stands today on the threshold of an exciting new video era. But to bring it to fruition, a new television transmission standard should be should be established and I urge you to do so as soon as feasible. Such an action will make it possible for the American public to enjoy the greatest advance ever in broadcast and video technology. Thank you, and good luck. COMMISSIONER HUNDT: Mr. Rattner. MR. RATTNER: Speaking as a member of the financial community, I believe that the financial world will ultimately consider what emerges from these deliberations with two parameters in mind, certainty and flexibility. Investors have traditionally favored the media industry for a variety of reasons, strong financial performance being, of course, the principal one. But investors have also appreciated that while certain sectors of the media industry have been heavily regulated, that regulation has been accompanied by a degree of certainty. For example, in financing television stations, Wall Street has been able to assume with confidence that station licenses would continue to be renewed, that no fees or taxes would be levied on the spectrum, and that no other significant regulator action would impede the ability of broadcasters to earn profits while meeting their public service obligations. In contrast, that confidence was somewhat shaken in recent years with regard to the cable television industry, as we went from regulation to deregulation and back to regulation. While I know from my own experience in Washington that regulators by and large take their responsibilities very, very seriously, the inevitably tortuous process of developing new regulatory frameworks can cause considerable angst on Wall Street. Thus, my first suggestion is that whatever policies are developed with regard to the new spectrum be specific, clear, as simple as possible, and subject to as little change as possible after their adoption. To the extent that the Commission can convey such an approach convincingly to Wall Street, the ability of broadcasters to raise capital to finance ATV projects will be enhanced. The second principle that I would set further would be flexibility. Wall Street recognizes the extent to which the media and communications businesses are changing. Take, for example, the matter at hand. Five years ago, HDTV appeared to be the focus of attention in this area. Today, opinions differ dramatically on the best use of new available spectrum. Since we all have difficulty predicting new technological developments and consumer preferences, investors generally hope that the government will let companies make their own strategic choices. This can also be viewed as in the public interest as it is likely to maximize the chance that whatever services are provided are those of greatest interest to consumers. This is certainly true in the case of digital television, which has the potential to provide new services for consumers and help insure that broadcasters become active participants in the next phase of information delivery. Specifically, I think investors are most interested in the opportunities for multiplexing and new communications services since it is hard to see how HDTV alone will generate sufficient additional revenue to fund major capital expenditures. Regulatory action that limited broadcasters' ability to enter new businesses would almost certainly decrease the availability of capital for digital conversion. None of this should be construed to mean that there are not circumstances under which the FCC should mandate service. History suggest that in some instances, such as the introduction of UHF, mandates are essential to generating consumer interest. Certain common technical standards may also well be sensible. We simply must weigh very judiciously the benefits of the mandate against the market's potential to determine the best available use of resources. These two principles are the major thoughts that I would like to convey today, and I thank you all for letting me appear. MR. GREBOW: Mr. Chairman, Commissioners, TELE-TV is a partnership formed by Bell Atlantic, NYNEX and the Pacific Telesis Group. We announced in October of '94 our intention to offer a wide range of advanced television programming, consisting of both "traditional" channels as well as communications and interactive capabilities. We will launch, by the end of 1996, through digital wireless transmission and hybrid fiber-coax cable, as well as on switched digital (fiber-to the curb) systems to be deployed by our partners beginning in 1997. TELE-TV promises a new generation of television, offering not only unequalled breadth, diversity and quality, but also interactivity and interconnectivity available today only in the telephone environment. TELE-TV thus represents a convergent blending of the best of telephone, computing and television. The Commission has asked whether digital technology will make broadcasters a more effective competitor in the increasingly challenging video marketplace. I think the answer to that question is a clear yes. Digital technology will allow broadcasters to offer both high definition television and multiple free over-the-air standard definition television, neither of which broadcasters can do today. Should the Commission decide to allocate free spectrum for the conversion of broadcasting to digital technology, we believe that the Commission should continue its policy of promoting HDTV. Specifically, the Commission should encourage broadcasters to offer a minimum amount of HD content. There are several sound public interest reasons for such an approach: the public interest in assuming technical excellence in the broadcasting service, the public interest in stimulating the marketplace for new and innovative HDTV digital TV sets and the public interest in avoiding confusion between standard definition and HD standards. The Commission has also asked about the impact of broadcasters' use of digital technology on broadcasters' competitors. Aside from additional competition, about which we do not believe that competitors can complain, there are two policies the Commission should refrain from adopting to avoid adverse effects on competition in innovation. First, the Commission should not mandate the carriage or processing by competing media of any non-free over-the-air service offered by broadcasters. We acknowledge the powerful arguments, both for and against mandatory carriage requirements, for free over-the-air broadcast signals in the analog domain. However, should broadcasters be permitted to use new digital technology for other than free over-the-air broadcasting, they lose, it seems to me, their unique and powerful public interest arguments. Like any other competitor, these carriage arrangements should be worked out in marketplace negotiations. Secondly, the Commission should continue its policy of not requiring other media to utilize transmission schemes compatible with the Grand Alliance HDTV System, or set specific signal or equipment standards for this purpose. Specifically, the Commission should not take any steps to impose mandatory standards or other regulatory constraints on the wide range of innovative proprietary set-top boxes now being introduced into the marketplace. Such a policy avoids action that might inhibit the rapid innovation of digital technology in non-broadcast media. In closing, I want to take this opportunity to congratulate the Commission on the work it has so successfully overseen in this field. Thank you very much. COMMISSIONER HUNDT: Thank you, Mr. Braun. MR. BRAUN: As president of the NBC Television Network, I'm honored to be here today to discuss digital broadcasting. NBC shares the excitement over the potential of digital broadcasting but my goal today, is to ask you to evaluate everything you hear against one seminal principle. Please make sure that FCC rules and policies give broadcasters the opportunity to compete on a level playing field in the digital domain. In order to compete, broadcasters must first have the technical capability to provide consumers with comparable picture and sound. HDTV, if that's what consumers want and that's what our competitors are giving them. Imagine, could broadcasting be competitive today if government policies had forced us to remain a black and white medium while all other video services had moved to color, of course not. Our competitive disadvantage will be just as acute, if we don't have the ability to offer the same high definition pictures and CD quality sounds that will be available on cable, telco and satellite programming services. Broadcasting is the only competitor to these paying media that is free and available to everyone. We're not asking for special treatment, quite the contrary. We're trying to prevent the tilting of the competitive playing field against us. Secondly, in order to compete, broadcasters must be able to reach the entire potential audience, we need universal access. Once we have access to the audience, we'll compete with all video services. What we cannot tolerate is a gatekeeper who stands between broadcasters and the audience, and we're particularly concerned about gatekeepers who own their own programming or program services and, therefore, have ever incentive to favor their proprietary interests over others. If our ability to attract a mass audience is impaired, the economic base of broadcasting will almost certainly be destroyed, and if the public's access to broadcasting is curtailed, broadcasters will find it increasingly difficult to serve the needs and interests of local communities. It is important that government rules and policies allow broadcasters to compete for several reasons. To begin with, broadcasting will be the foundation for and delivery of all digital video technology. If broadcasting isn't competing in digital, it will take consumers far longer to buy digital sets. Without the programming investment and promotion of broadcast television behind them, many of the new services you will hear about today will never be launched, many of that are launched will fail or be marginally successful. But if broadcasting cannot compete, it will affect more than television. The unique promotional power of broadcast television is critical to the launch of new consumer products and services and therefore critical to the GNP. Entertainment programming is one of this country's biggest exports with television programs accounting for 21 percent of the $8 billion generated abroad during 1994. So, as broadcasting is diminished, it will negatively affect the balance of trade. Equally important, over-the-air television is the one medium that provides the same high quality programming to both the haves and the havenots. It is the most widely shared experience of our society. For these reasons, the decisions the FCC faces are momentous. I implore you to make those decisions in a way that allows NBC and other broadcasters to succeed or fail in the marketplace as equal competitors. Please don't condemn us to an early demise by forcing us to compete as an analog or inferior digital pace against the pay services of tomorrow. Thank you. COMMISSIONER HUNDT: Thank you, Mr. Hendricks. MR. HENDRICKS: Mr. Chairman and Commissioners, my name is John Hendricks, and I'm the founder, chairman, and CEO of Discovery Communications. Discovery is a privately held multimedia company which manages and operates the Discovery Channel and The Learning Channel and other related businesses. I'm testifying today on behalf of the National Cable Television Association, which, as the principal cable industry trade association, represents the interests of cable programming networks such as Discovery. However, let me devote just one sentence to my role as a TV consumer every night, and how generally excited I am about the new differentiated services that my broadcast competitors will be introducing through advanced digital television. I appreciate the opportunity to appear before your to discuss, from the perspective of a non-broadcast, cable programmer, the implications of the transition to digital television. The cable industry generally has been ahead of the back in embracing technological advances such as digital compression. For example, we, at Discovery, have taken the lead in enhancing consumer control over viewing opportunities through the development of at digital satellite service called "Your Choice TV." From the perspective of a cable programmer such as Discovery, the most important digital spectrum policy decisions will be those the Commission will make regarding the application of must carry and retransmission consent rules to digital TV. Discovery believes the imposition of must carry requirements severely interferes with competition in the video marketplace and impedes the development of new programming by forcing cable operators to devote a significant portion of their capacity to the carriage of programming without regard to viewer preference. Must carry artificially restricts the availability of capacity to cable programmers who have no over-the-air access to viewers. As a result, cable programmers cannot build and develop their audiences and entrepreneurs will be unwilling to risk their capital by investing in new services and programming. Most importantly, must carry will deny the American public the choices and services that will evolve out of a more robust, unrestricted competitive digital TV environment. I also urge the Commission to consider carefully the potential for broadcast retransmission rights to create similar competitive disadvantages. In particular, I urge the Commission to adopt safeguards to prevent broadcasters from unfairly leveraging their retransmission consent rights to demand carriage of additional over-the-air services. In conclusion, I would like to emphasis that cable programmers intend to a vital part of the digital TV revolution. There already are nearly 200 networks vying for carriage and dozens more are in the planning stage. For example, Discovery has announced plans for the development of five new digitally transmitted services focusing on niche programming areas, including at least one service specifically devoted to children's programming. The public's access to these and other new services should be determined by the marketplace, not by regulations that skew the competitive environment. Thank you. COMMISSIONER HUNDT: Thank you, Mr. Hubbard. MR. HUBBARD: Thank you, Stanley S. Hubbard's my name. I thank you very much for the opportunity to be here. I think that everybody in this room believes that the transition to digital will be a very good thing. I know I do, I was there when the switch was turned on in 1948 and I was there when the color switch was turned on and I hope to be there when the HDTV switch is turned on for terrestrial broadcasters. But in order for that to work, it must be done in a very carefully crafted manner. I've heard a lot of talk about give away of channels, and I can assure you that when we, as broadcasters, have to turn on a more desirable channel for a less desirable channel in order to make the switch to HDTV or to digital, that's not, to me, a give away. I think that being on a fasttrack, too fast a track, could destroy the attempt to go to digital because, as Commissioner Chong said, I don't think people are going to want to wake up one day and find out that in order to watch their free over-the-air television, they must go out and buy a converter or buy a new television set. I believe that this transition is going to take 10 to 15 years, at the minimum. I believe that the broadcasters need all 6 MHz, as Chairman Wiley suggested. I think that any attempt to put more than one broadcaster on a 6 MHz spectrum allocation would be a grave mistake and we would be playing Russian roulette with the interference possibilities. I think it's going to be a wonderful thing, not a negative thing, for a broadcaster to be able to provide two free services at a time. For example, in some day part there may be an entertainment program on a non-HDTV program, while at the same time there may be an educational program on which Chairman Hundt talks about, or there may be a discussion on whether or not there should be higher speed limits in the state of Minnesota. All programming will not be HDTV programming. There are thousands and thousands upon hours of good documentary material, educational material, material that John Hendricks uses which is not in the HDTV format and to suggest that we should use all that 6 MHz all the time for HDTV, I think, would be a very grave mistake. So I commend the Commission, I ask you to please to got carefully. I ask you to, at all time, recognize the important free service that the American people have and to not take a chance and jeopardize any of that service and if they have any questions, I'd be happy to answer them. COMMISSIONER HUNDT: Mr. Grossman. MR. GROSSMAN: Thank you, Mr. Chairman. I want to join my colleagues in congratulating you all for holding these hearings that seek to make Federal Communications policy suitable for the digital era. Certainly the arrival of the digital era gives you and the Congress a unique opportunity to revisit the increasingly outmoded and, I believe, largely archaic regulatory scheme that has governed broadcasting for over half a century. I agree with Steve Rattner, in the conviction that the more complex the situation, the clearer and simpler the rules should be. I urge you to recommend to the Congress three basic approaches to telecommunications policy for the information age. First, to do away with the policy that treats broadcasters differently from everyone else. That sounds rather radical, but commercial broadcasting is a business first and foremost and a very good one, and not basically either a public service, and certainly not a public trusteeship, as anyone who listens to radio and watches television would know. In this age of postcard station renewals, greater public service requirements for thousands of radio and TV stations can't realistically either be either overseen or enforced by any government agency and more are coming on board every day. In the digital age, it no longer makes any sense for broadcasting to have that special status, and if there are requirements to be imposed, I certainly agree with what the chairman has said in the past, that they should be specific and limited and clear and focused very clearly on things like children's programming and the very important political campaign process. Secondly, I urge you to recommend that unused radio spectrum be auctioned off rather than given away to broadcasters for high definition at this point. Let the consumers in the marketplace, not the government, decide what are the best uses for the spectrum and what new commercial services should be introduced. Broadcasters should be encouraged to broadcast in the digital mode and make the best use of their bandwidth to engage as well in non-broadcast services. Winning bidders in spectrum auctions should be required, it seems to me, to provide every existing broadcaster with enough bandwidth for at least one digital TV channel free of charge. And for now, that requirement would best serve the interests of small broadcasters as well as the big ones. And yet, such an auction would still produce tens of billions of dollars, estimates run from $25 to $70 billion as a significant public dividend for the commercial exploitation of the public spectrum. Third, and finally, I urge you recommend that this Congress follow the wise example of a republican Congress more than a century ago, which, in a moment of extraordinary foresight, authorized the sale of unused public land to finance a remarkable educational initiative. The Land Grant College Act of 1862 opened new educational horizons for millions of Americans and it was what build the nation's great system of public universities and educational research centers. Today's equivalent of the unused public land of a century ago is the public's unused radio spectrum and from the money to be earned from the auctions, a brand new educational and civic information trust fund, suitable for the new age, can be developed and it can interconnect schools and libraries and homes for the benefit of all Americans. Thank you very much. COMMISSIONER HUNDT: Thank you, and Mr. Lippman. MR. LIPPMAN: Good morning, and thank you for the opportunity to speak here. HDTV is an idea whose time is passed. In the 25 years since the issue was first invented, it's been eclipsed. The initial vision was a clearer new television set that you'd wake up to on Christmas morning with the same programs, the same programmers, the same audience and the same means of distribution, but it's been overtaken. Instead, we have new programs, new programmers, new audiences and new means of distribution. The variables were right, but the sign bit was wrong. Digital television is thriving, high definition television is withering on the vine. the new opportunity before us is digital broadcasting, not necessarily HDTV or not necessarily even television at all. The explosive penetration of personal computers attest to this, they're begging for networks to attach themselves to. The FCC faces a challenge today, it faces a one gigabit challenge, that's the capacity of the UHF band. The challenge is how to get the bits out and how to leave the meaning of those bits up to society to determine. You might watch high definition television during the scrimmage and download a new operating system to your personal computer in the midst of the huddle. You can't assume that a television set will be tuned into those bits at all, you might assume that computers, pagers, telephones and everything else imaginable, even your jacket, could be tuned to those channels. The Grand Alliance has done a tremendous engineering job building a system for the delivery of high definition television pictures and the delivery of the bits that will carry those pictures. They deserve a shot. We deserve a mechanism and a way for us to move forward into the future. They don't deserve an exclusive shot, they deserve one of the many infinite uses of the almost infinite number of bits that are going to be out there. The challenge before you is, get the bits out as rapidly as possible and leave the meaning of those bits up to us to determine dynamically, fluidly, as the technology and the demands of society declare. Thank you very much. COMMISSIONER HUNDT: Thank you all very much. What we are going to do is have a round of questions and answers. It will be six minutes for each commissioner and then another six minutes for each commissioner. If the answer has used up most of the six-minute time, I'm sure the questioners will be frustrated and irritated beyond measure. Commissioner Quello. COMMISSIONER QUELLO: Okay, Mr. Wiley, you've been an effective leader in HDTV, you've seen it for over eight years, but with auctioning of the digital channel still a possibility. However, as distasteful that it might be to some, can you explain in detail what, in your view, would be the economic impact of an auction of the ability of broadcasters to finance the transition to advanced TV? MR. WILEY: Well, I think auctioning of the digital channel would interfere with the FCC's long planned and orderly transition from analog to digital to the detriment of the broadcast viewing public. What you would have is the inefficient analog transmission remaining, perhaps forever, and high definition television probably becoming only a subscription service. There is nothing wrong with that, but I think it should also be accompanied by free over-the-air broadcasting service. And finally, auction revenues are likely to be higher on the returned and repacked NTSC channels, so if we want to have auctions, and we want to get the maximum revenue, if that's the goal, then I think I would auction the return channel. COMMISSIONER QUELLO: Um-hum, all right. Mr. Hubbard, can you provide us with an estimation of the difficulties broadcasters might have in earning a profit in the new digital era. You've taken quite a risk yourself for advanced service to the service to the consumer, what do you see as earning a profit in the new digital era? MR. HUBBARD: Well, Mr. Quello, I think the larger the market, the easier it will be to earn a profit. But, you know, most markets in this country are not New York, Los Angeles and Chicago. You know, when you get to the smaller markets, such as in Albuquerque or Wichita or at Tulsa, it's going to be very difficult and very expensive for those stations to switch over to digital and it's going to take them a long time to return to the profit stream that they have today because the investment is not going to result in any increased profit. COMMISSIONER QUELLO: All right, thank you. MR. HUBBARD: But a lot of increased expense. COMMISSIONER QUELLO: Yes that's the way I see it, too, but -- Mr. Hendricks, on must carry, you know, I've been with that as long as you have or maybe longer, you know. At one time I was able to make the statement that no monopoly or semi-monopoly transmission pipeline should be able to impede or prevent a broadcaster from serving the public -- a broadcaster's license to serve and so on -- that's been pretty much my attitude on must carry and, you know, isn't there a danger that cable operators could extract pre-carries from broadcasters for their very valuable signal without a must carry? You want to take that on, John? MR. HENDRICKS: Sure, I think the -- COMMISSIONER QUELLO: You've heard it before. MR. HENDRICKS: -- the issue boils down to cable programmers, such as Discovery and A&E, we only have one shot to get to the marketplace. We have no broadcast transmission facilities so our primary means of distribution are via cable. For broadcasters, they have, of course, their primary means is over-the-air broadcast. A supplemental means is through cable retransmission. Our fear, and our nightmare, is that a group of five local broadcasters compressing their extra channel, at say, six to one, would have 30 channels that would flood on a must carry basis the cable system. The cable systems are tight as they are today. Some day, they'll have another five channels, perhaps, that can convert to digital, which would be another 30 delivery channels. But, you know, our position is clear, we think that the broadcasters can clearly develop a documentary channel and that would be a great thing to have free over-the-air broadcasting for either at the local level or at the national network level for a broadcaster to have a new documentary channel. But we think it would be enormously unfair for then mandatory carriage then on the cable system that could displace Discovery or A&E or Learning. COMMISSIONER QUELLO: Well, with your multi-channel capacity, why should they have to displace anyone? MR. HENDRICKS: Well, there's a myth that there's this 500 channels of capacity and that ignored the 15-year transition period to digital. A cable operator has to keep up carriage of the analog signal. Once any signal goes digital, it becomes invisible to virtually all of America until they get the new decoding equipment. And so the cable systems today are at average capacity of around 45 channels, through upgrades they'll get another five, perhaps ten, analog channels that could be converted, those additional channels, to digital. So five new channels at six to one compression, would give 30 new channels. Now, someday, maybe 15 years from now when everybody in the United States has digital decoding equipment, that 50 channel cable system could go, say, at ten to one compression and have 500 channels, but that's a long way into the future. COMMISSIONER QUELLO: Well, I think of the broadcasters getting five or six channels for the single channel now is going to be sometime in the future, too, I mean, if that's going to be used as an argument. But, Mr. Grossman, I made the statement and I probably disagree with you a little bit on this, and I said broadcasters had their best executives and the best engineers developing HDTV and digital for eight years. They finally developed it, now that it's developed, they say, well, auction it off. You can compete with all people, have direct payment from consumers and compete with them. Now, we know that going into HDTV will cost broadcasters the price of a transmitter, they will be transmitting initially with people that don't have HDTV receivers, it's going to be a very expensive process. I find it a little hard to accept as fair the fact that broadcasters developed the technology and now they have to bid against everyone that has maybe direct income, whether it's the telephone, cable, or cellular, how do you answer that? MR. GROSSMAN: I agree, it's a very hard decision, Mr. Quello. But I also agree with Mr. Lippman, that in many ways, this has gone by. The broadcasters will have the 6 MHz that they use for analog. Down the road, they may decide and you may decide it would be wise to convert to HDTV if that seems to be the way. The Japanese certainly are having terrible problems in that very conversion, and here you have an opportunity to really let the American people and the companies in the marketplace decide which way this spectrum should be used and how to use it in the most efficient manner and the best way to assure that it will used in the most efficient manner is to see what prices that will fetch and particularly when the public dividend that could be created for that in terms of reducing the deficit and providing for alternative systems for education and specific and public service use. I think the price is well worth it. COMMISSIONER QUELLO: Okay, I've been told my time is up, so. MR. WILEY: Can I just comment on that last point, though. COMMISSIONER QUELLO: Yes. MR. WILEY: That HD has somehow gone past that Mr. Lippman and Mr. Grossman have made. I don't know understand the basis for that? I mean, the Japanese system, which is a satellite delivered system, analog transmission, is certainly not a guide for what could happen here in the United States with the terrestrial system with the world's leading technology. To say that it's simply gone, I think, is just fallacious. Plus we can have, once again, both high definition and standard definition and all the NII interoperability. It's our bullets, we can have it all and I don't know why we should step back to the past simply because the Japanese haven't done it. COMMISSIONER HUNDT: I think Mr. Wiley was borrowing from your time, Commissioner Barrett. COMMISSIONER BARRETT: Meanwhile -- that gives me a little more time. MR. WILEY: Yes, I always thought it was give, give, give. Go ahead, Commissioner Barrett. COMMISSIONER BARRETT: Steve, how are you? MR. RATTNER: Fine. COMMISSIONER BARRETT: We have a heard a great deal about the limited amount of -- Mr. Grossman and Mr. Lippman talked about HDTV having passed by and Dick just responded in kind from his perspective. How does the financial community feel in terms of the capital that they have, given the fact that you have many places to place you invested money in and you have a limited amount to invest, has it passed by from your perspective? MR. RATTNER: I think Stan Hubbard addressed this in connection with STV or with digital TV and I think it goes even more so with HDTV. As I said in my statement, from the point of view of Wall Street, it is difficult for us to see what incremental revenues or profits would result from financing HDTV expenditures. That's not to say that HDTV shouldn't happen, it's just very difficult for us to see how that's going to result, as I said, in additional revenue and cash flow. COMMISSIONER BARRETT: If you had to place in some kind of ranking order, where you would advise institutional investors to invest their money or who they want to invest money, where would HDTV rank? It certainly would rank above video-on-demand, but where would it rank? MR. RATTNER: I'm not sure it would rank above video-on-demand. COMMISSIONER BARRETT: Well, that's interesting. MR. RATTNER: I think, again, if you look at it purely from a profit and loss point of view, putting aside public policy issues which, I don't think, we should put aside but for the purposes of answering your question, I'll put aside for the moment, many of these new services that all of us on the panel alluded to that could be provided, whether it be data transmission or wireless communications or whatever, certainly have the potential for profit and therefore would be of interest to Wall Street. Video-on-demand, a much debated and controversial subject, has some possibility for profit as well. As I said before, HDTV, it's not obvious to me, and I don't think it's obvious to anybody on the panel, where that exactly leads in terms of profits. Not to say it's a bad thing, but where it leads in terms of profits and so what I come down to, in my own thinking on this, is it just strikes me that unless there is some form of HDTV mandate, I think it's very difficult to envision how or why HDTV ultimately happens. I think if you turn the spectrum over to the broadcasters and say, do what you want with it, I would be relatively pessimistic myself that there would be a lot of HDTVs simply because the economics don't push you that way. So if the policy decision is we want HDTV, I think it's going to require some form of mandate from the Commission for that to happen. COMMISSIONER BARRETT: Hum, okay. Dick, you're shaking your head, take at least 30 seconds to -- MR. WILEY: Okay, I'm just have -- all the universe of film product that we have today, in our language, which is a big advantage for this country, is high definition television and I don't have any question that broadcasters, if given 6 MHz, will end up showing high definition television sports and the film product. But I think they should also get the opportunity to do SDTV, multiple SDTV and other kinds of data services. COMMISSIONER BARRETT: Mr. Braun, you had talked about you find it difficult to fund local programming, when things do not occur as it relates to the spectrum. Tell me what programs you're talking you'd have -- MR. BRAUN: Local news in particular, but what -- COMMISSIONER BARRETT: Let me ask you a question. MR. BRAUN: Sure. COMMISSIONER BARRETT: When you do fund that, that's revenue supported? MR. BRAUN: No, don't forget the networks actually pay the local broadcaster to carry their programming so one of the -- there's a vast number of television stations in this country that would not be profitable were it not for the compensation paid them by networks. That money is reinvested in local news. They would not be able to have local news operations if they did not have cash compensation from networks. COMMISSIONER BARRETT: Well, you're right, no question about that but that's part of the affiliation agreement. It seems to me that while I don't always react to the term, and I use it quite often with my colleague, Jim Quello, free over-the-air broadcasting. What we're really talking about is advertise-sponsored local programming and clearly you are not doing this without revenue support from other sources in addition to the network, at a local level -- situation. MR. BRAUN: It's all advertising, no, it's all advertising. It's advertising supported at the national level and at the local level. COMMISSIONER BARRETT: Okay, I just don't want to make people think it's free. We don't pay for it, but it has -- MR. BRAUN: Right, it's free to the consumer, it's free to the consumer. COMMISSIONER BARRETT: Okay. MR. BRAUN: And I -- COMMISSIONER BARRETT: And you were going to respond to my question which basically to Mr. Rattner was from the financial perspective, and Dick from the amount of public policy, I'm not sure where you're from. MR. BRAUN: If I may. Well, the question I would raise is -- COMMISSIONER BARRETT: No, I don't want you to raise a question, are you going to respond to the -- MR. BRAUN: Well, the response to Mr. Rattner's comment is then that likewise, I presume, the financial community would find it uncertain and ambiguous if broadcasters were legislatively or regulatorily prohibited from competing against other forms of delivery for CD quality sound and digital pictures. I think it would be -- COMMISSIONER BARRETT: What other forms of delivery? MR. BRAUN: Other wire line and DDS. So if we don't have sufficient bandwidth to actually deliver comparable sound and picture, I think the financing underpinnings of the broadcasting industry are actually going to be at risk. COMMISSIONER BARRETT: Okay, Stan, were you going to -- MR. HUBBARD: I say Mr. Braun is absolutely right, so is Mr. Wiley. Everybody will want to go into HDTV, it'll start from the bigger markets down, as did color. COMMISSIONER BARRETT: Thank you, Mr. Chairman, I will -- and again -- well, let me go back to Mr. Rattner again because I think it's important that we understand that what Chairman Wiley's talking about and what Steve is talking about certainly, while not compatible while they sit there, we can make good public policy and do the things that make Mr. Rattner survive and certainly do the things that Dick Wiley wants to see come forth. Steve, if you had in your mind to be able to develop the -- a policy in your mind to take care of your financial interests and take care of Chairman Wiley, what would you do as a regulator? MR. RATTNER: Well, let me say, I'm happy to say I think I'm going to survive, whatever we do on this question. But -- COMMISSIONER HUNDT: And very handsomely as well. MR. RATTNER: Excuse me, and you as well? COMMISSIONER BARRETT: Mr. Chairman, I want to tell you, we were in Italy and I had to fly back on a slow plane. MR. RATTNER: Germany, Germany. COMMISSIONER BARRETT: And he took a much faster plane back. Germany, we were in Germany, that's right, Germany. Now, I'll tell the truth, that's where I caught that cold, in Germany last week. MR. RATTNER: It felt like Italy. I think that what I would say on that, and unfortunately, i can't solve your problem for you completely because I'm not a regulator, I'm in the financial world. I have no problem with you, with HDTV, with the Commission mandating HDTV, with broadcasters doing HDTV, and, as a consumer, I probably would actually be a buyer and enjoy it and make use of it. All I'm here to point out to you here are a couple of things. First, that I don't believe that HDTV will happen in a meaningful way without some form of a push from the Commission because I don't believe, for example, if the spectrum is auctioned, that the resources will be available for the existing broadcasters to buy it and use it for HDTV. I don't believe there's any great financial incentive today for a broadcaster's interest in HDTV at all, even if he had the full 6 MHz, simply because I don't know if there's any way for him to recoup that money, and therefore, voluntarily I'm not sure he's going to do it. So, if the Commission decides that from a public policy point of view, from the point of view of promoting American interest internationally, the Grand Alliance, all these different things that we all know about, I think the Commission's going to have to make it happen and that is going to involve a very difficult public policy balance between allocating the full 6 MHz for HDTV, at least part-time, and I take your point, Dick, versus having it being used for other services that could produce greater profits. It's a bit of an apples and oranges comparison, unfortunately. Greater profits on the one hand, versus a public interest or a long-term public benefit of having high definition television. COMMISSIONER BARRETT: Something we do -- and have some high level respect for the investment thoughts and a number of other things. Let me stop and I may, on the next round of questioning, may want to get back into that. MR. RATTNER: Can I just say one last question on this, Commissioner? From an investor yield -- COMMISSIONER BARRETT: That's the end of time. MR. WILEY: You'll get a chance, I'm sure. COMMISSIONER HUNDT: You can a chance, Commissioner Ness. COMMISSIONER NESS: Thank you, Mr. Chairman. Mr. Wiley, you talk about the flexibility of the Grand Alliance system and Mr. Hendricks commented about his concerns with respect to must carry. How do you rationalize, how would you handle if you were here to make a determination about must carry, how would you handle the Grand Alliance system with respect to the limited carriage opportunities on cable? MR. WILEY: Well, I think that is, you know, really a government policy but, from my standpoint, I think if you give the broadcasters four channels, it is a little difficult to require, it seems to me, must carry of cable on all those channels. I think that would be more difficult. I'd like to see the HDTV channel and they use the whole channel for one program. I think that should be must carry, under current policy. COMMISSIONER NESS: Okay, Mr. Rattner, you comment quite eloquently about the dual goals of certainty and flexibility. How do those dual goals live happily ever after in an environment where a broadcaster perhaps would be able to offer paging services or other services in competition with some of the other folks that you regulate, or that you finance, rather, and who have paid for their spectrum? Is that an issue bringing into question the certainty in the marketplace? MR. RATTNER: Well, purely from a financial community point of view, that degree of flexibility would be a plus, not a minus. In other words, the fact that a broadcaster would not be restricted to providing one form of service or another, whatever it might be, would enhance the broadcasters ability to finance because, left to his own devices, the broadcaster is going to develop one or more projects that represent in his mind the most profitable use of the spectrum, he will come to us. The fact that there's competition, we can deal with competition and all these markets are becoming more competitive and there's nothing wrong with that but he will have the ability to come to use and say, I'm going to use Channel X for this purpose, will you finance it, and we will have the confidence to know that he has the right to use Channel X for that purpose, more or less in perpetuity, subject to good behavior and so on. COMMISSIONER NESS: Okay, Mr. Grossman, you talked about requiring the auction winners to carry another broadcaster's signal. Wouldn't that prevent the auction winner from broadcasting in HDTV? MR. GROSSMAN: It probably would, unless it was a broadcaster who won, and the reality is that very few broadcasters would be able to put up the money or would be willing to put up the money, as Steve suggested, to bid for that specific purpose. And the real question is, in the free market place, when consumers, in the end, are making those decisions and investors are making the decisions and nobody can predict what's going to happen, I think it's a high question as to whether you would want to mandate such a system, rather than let it flow out and then you still have the 6 MHz on analog that eventually can be dealt with if everybody decides that HDTV is the way, down the road, when you have more information. COMMISSIONER NESS: Certainly you talk about the ability of choice, but wouldn't it be very difficult if there's not a critical mass of programming out there for an HD opportunity to survive, Mr. Grossman? MR. GROSSMAN: Yes, it would be very difficulty, and again, that's what the American people and what the investment community is going to have to sort out and decide. I think for all of those sort of civic and educational purposes that you consider to be central, and we all consider to be central, then you have an alternate way instead of imposing those requirements on broadcasters as has been traditional, you have an alternate way to fund them, in the manner that I suggested. COMMISSIONER NESS: Mr. Lippman, you talk about having many standards, how, if you were a manufacturer of consumer products, such as a television set, how would you be able to determine what to offer the consumer and would that not, if you had to address many different standards, would that not increase prohibitively the cost of the television set? MR. LIPPMAN: Well, first of all, we already have a plethora of standards out there. Most of the computers that we use in work stations and commercial environments and the ones that are approaching our desktop already sweep out a picture that's clearer than most of the high definition television systems that we've seen today. So the transition to those kinds of scan rates is not difficult, nor is it needlessly expensive, it's rooted in old single-purpose thinking to believe that you have to do it once and you have to do it only one way. The digital electronics that allow you to intermediate between standards are becoming much, much simpler every day and by the time that we have high definition television broadcasts and it's not necessarily obsolete, it's simply not the driver of the transition to digital technology. As those broadcasts emerge, so will our ability to intermediate between them. So it's not an inherently expensive task, it's more like a software task. COMMISSIONER NESS: Mr. Hubbard, finally, in your testimony you mentioned that translators are very important particularly in rural areas, how, for provision of local news, for example, how would we address the issue of local translators the cost of conversion to digital and their carriage in a world of digital television? MR. HUBBARD: Well, there are more than 5,000 translators in this country and, of course, that's the lifeline to many, many people for television service. It would seem to me that this once again underlines the need for a long transition period which will allow these local communities who pay for their translators to raise the money and, at some point, switch over. But if you say to them tomorrow morning, you're going to have to be digital, they'll all be off the air, they can't raise the money. They have a terrible time paying their electric bills. COMMISSIONER NESS: I don't think anybody is assuming that we would immediately be seeing -- MR. HUBBARD: I'm not assuming it either, Commissioner, I just say that that would be a disaster. COMMISSIONER NESS: Okay, thank you, my time is up. COMMISSIONER HUNDT: Commissioner Chong. COMMISSIONER CHONG: Thank you. I want to follow-up with Mr. Rattner. Mr. Gabbard, in the fourth panel, talks about the costs of converting to digital television for small and medium size broadcasters, and he estimated it was about $1.8 million to do a conversion to digital excluding the cost of a new tower. And he expressed concern about how broadcasters would be able to obtain financing from the financial community for this conversion. I wanted to know what you thought about that scenario. Do you think small and medium broadcasters would have difficulty obtaining financing for approximately $1.8 million to convert given the financial situation of broadcasters in that size? MR. RATTNER: It's going to be a function of individual circumstance. I agree with Mr. Hubbard, there's no question that the cost of this digital conversion is going to be significant, it's going to be born, as I've said a couple of times now, without any immediate prospect of additional revenues or cash flow and therefore it's going to have to be financed out of existing station operations. So what that means is that a broadcaster who doesn't have $1.8 million in the bank, is going to go have to borrow it and he's, in effect, going to have to pledge some portion of his existing cash flow to repay that loan over time. If he has no other debt, that probably works and he can probably get that financing. It's not a huge amount even for a smaller station, given the value and cash flows of these. If he's heavily leveraged or otherwise under any financial pressure, it could certainly, at the margin, cause him some problems. COMMISSIONER CHONG: Now, suppose the government conducted an auction of these channels and a smaller medium- sized broadcaster wanted to borrow money to participate in a auction, would a broadcaster have difficulty borrowing that kind of money? MR. RATTNER: It's actually a very similar situation to the one you already asked about, it would be -- assuming the full 6 MHz were auctioned off and they didn't even get one channel for their digital conversion, and they then felt compelled or wanted to buy such a channel, again, without any immediate prospect of additional revenues or cash flow, the cost of that channel, whatever it turns out to be, would have to be financed out of existing cash flow from operations. And the same answer, if they're doing well and they don't have a lot of debt, they presumably could finance it, it would cause them significant pain. If they're not doing well, it could be impossible. COMMISSIONER CHONG: Thank you. Mr. Braun, your fellow panelist's Mr. Grossman, suggested that broadcasters shouldn't have public interest obligations anymore and that broadcasters should buy their channels in an auction and be able to carry whatever they want and then pay fees according to their use of the spectrum. Do you think that broadcasters are amenable to that kind of approach, would they be happy with that? MR. BRAUN: No, not even close. First of all, in response to Mr. Grossman, I'd like to say in terms of the free market idea he's espousing, the consumer would never get a chance to vote with respect to broadcasting HDTV because they don't spend consumer dollars on that, so it would really be the diminution of the market and therefore the loss of advertising revenue which would force the contraction of the broadcasting system, not the consumer's decision that he doesn't want to receive free over-the-air local broadcasting. But, in addition to that, I will tell you, just as good business, the whole so-called affiliate wars of the last year where the networks were all competing for local affiliated stations, it's possible to be misperceived as a fight over VHF band stations, but it's much more than that, it's about stations that have strong local identifies, who have news franchises, who have a relationship with their community that brings audience to the television set because that's good business for us. It's a great promotional platform to tell them what's going to be on when the network time periods come. So more than just having affiliates with strong VHF signals, the long-term viability of local news is critical to the networks. COMMISSIONER CHONG: Mr. Grebow, you were contending that the Commission should encourage broadcasters within constitutional limits to offer a minimum amount of HD content and I was wondering what exactly you meant by that, what constitutional limits were you talking about, and I presume -- I mean, are you saying that we ought to have a minimum or that we shouldn't have a minimum, and if we did have a minimum, what would that minimum be, a quantitative kind of minimum or some other kind of time of day minimum? MR. GREBOW: We believe that the Commission does not require some minimum content of HD, that HD will not happen and that if the Commission believes, as we do, that HD is important, then it is going to have to require it. Now, there are constitutional issues that have been raised that I'm not in a position to address, but the Commission needs to decide if it believes that HD is something that American consumers want, and if it's a public policy important imperative. If it is, we believe that some reasonable number should be required. There is no magic number, some proponents have suggested five hours per week, that's probably sufficient. Remember, it's requiring any HD that forces broadcasters to make the investment, so the importance is to require the first hour, really. COMMISSIONER CHONG: How tough would it be to deliver five hours a week, Mr. Braun? MR. BRAUN: Well, NBC has gone on the record as saying we would support that minimum mandatory requirement so -- that's based on the belief that it's going to be critical to our competitive stance. So however tough it is, we believe we have to do it. COMMISSIONER CHONG: Well, let's ask the cable guy. Mr. Hendricks, cable, are going to be doing HDTV, broadcasters say that they have to be competitive, are you guys going to do it? MR. HENDRICKS: Yes, I think that you'll see high definition television as something that's on the cable menu, you know, three to six years from now. You know, I'm supportive of the broadcaster having 12 MHz to play with so that they can be competitive in being able to multiplex their services as well as be in a position to offer high definition television. COMMISSIONER CHONG: Now, it's my understanding cable's upgrading their system to do precisely that, isn't that true? MR. HENDRICKS: Yes, cable's upgrading its systems to provide additional capacity, and again, it'll take a long time to digitize the entire system, but we should have five to ten additional channels within about three to four years. COMMISSIONER CHONG: Thank you, I think my time's up, Mr. Chairman. COMMISSIONER HUNDT: Thank you. Mr. Hubbard, you have the capability to choose to transmit in the format called high definition right now, isn't that right? MR. HUBBARD: With our direct blockade satellite system, yes, sir, we do. COMMISSIONER HUNDT: And you're not doing that, is that correct? MR. HUBBARD: Well, no, we're not doing it. COMMISSIONER HUNDT: You're not doing that because you don't know of anyone who could watch it? MR. HUBBARD: Well, who would -- there's no one that can watch it, that's the very primary reason. COMMISSIONER HUNDT: So that's a case of relying on the market to make these decisions instead of asking the FCC to order you to broadcast in one particular format? MR. HUBBARD: Yes, it is. COMMISSIONER HUNDT: Mr. Hendricks, the cable industry is deploying boxes of the digital conversion, that's right, isn't it? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: These boxes will take a digital signal over the cable hookup and will translate it to an analog picture so I can watch it on the TV that I already have, isn't that right? MR. HENDRICKS: That's correct. You will get a hybrid transmission from the cable head-in of analog which would be the bulk of the signal, and then a portion of the spectrum would be digital and that's what your box would decode. COMMISSIONER HUNDT: In generalizing about the cable industry which includes many different players, does it appear right now to be the cable industries business strategy to deploy these digital down converter boxes to all of the cable subscribers? MR. HENDRICKS: No, because of the costs of the equipment, we think that most often it would be the cable operator would be advertising that the new convertor boxes are available, the new content services would be advertised and those consumers who were interested in paying for the new services would get the new boxes. COMMISSIONER HUNDT: Do I understand you to be saying that cable's thought is that consumers will be making the decision to spend the money on the digital convertor based on the notion that they can get some new content? MR. HENDRICKS: Well, you have to understand, I think a large segment of cable consumers feel that they are television saturated. There are some consumers, though, that want more services, movies on demand, and it will be those consumers we think that would readily respond to new offerings. COMMISSIONER HUNDT: And what the digital revolution does for cable is it gives cable the opportunity to offer more channels and more content, correct? MR. HENDRICKS: Yes, what digital offers both cable and broadcaster is additional capacity. COMMISSIONER HUNDT: Additional capacity to deliver more programs, right? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: Now, this digital down convertor box that I might choose to subscribe to will display the picture on my analog TV, right? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: So, I will not get, because of the limitations of my television, I will not get the kind of resolution that a high definition picture coupled with an appropriate receiver might give me? MR. HENDRICKS: That's correct -- COMMISSIONER HUNDT: So, in other words -- MR. HENDRICKS: But the cable industry will have to wait until high definition television is first feeded by the broadcast industry to be able to make use of the new sets. COMMISSIONER HUNDT: So, in other words, the cable industry won't have any business plan to deliver a high definition format unless and until some other industry finds a way to convince customers to buy a receiver that will actually display with appropriate resolution the high definition image. MR. HENDRICKS: Yes, that's why I think it's some three to four to five years out. COMMISSIONER HUNDT: Meanwhile, Mr. Rattner is saying it's never going to be out unless we order the broadcasters to deliver a high definition picture. Isn't that what you were hear him saying? MR. HENDRICKS: Yes. COMMISSIONER HUNDT: And you hear Mr. Braun saying the same thing and Mr. Grebow saying the same thing, right? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: In other words, the view seems to be that unless the FCC interferes with the market, there isn't going to be a substantial number of people who are going to buy the receivers that are appropriate for high definition, but, in fact, we can't order anyone to buy that kind of home theater, can we? MR. HENDRICKS: I don't think so. COMMISSIONER HUNDT: We don't have -- our powers are limited, they're limited no matter what we may think, they're limited in some respects, aren't they? MR. HENDRICKS: That's correct. COMMISSIONER HUNDT: Mr. Lippman, do you see any public policy reason for us to interfere with the market so as to try to promote a particular format, bits are bits, aren't they? MR. LIPPMAN: It's been said by others on this panel and I certainly agree. I don't agree that without your forcing people to transmit HDTV pictures will never have high definition television. The natural evolution -- COMMISSIONER HUNDT: You mean, it just might happen in the marketplace? MR. LIPPMAN: It not only might happen in the marketplace, but it's unavoidable in a smooth and seamless way through the pure evolution of the screens that we have in our living rooms and on our desks without any CD necessary and by the time those TV sets, as you might call them at that time, defuse through the marketplace, the investment hurdles might be ever so much smaller to overcome and even Mr. Rattner would care to invest. COMMISSIONER HUNDT: But this smooth and seamless evolution that you're talking about would be one driven by consumers and the marketplace as opposed to the government, isn't that right? MR. LIPPMAN: Yes, and the access to the digital networks that you could provide in the UHF band. COMMISSIONER HUNDT: Mr. Rattner, if we auctioned the digital spectrum, presumably someone would pay something for it, you agree with that, don't you? MR. RATTNER: I agree. COMMISSIONER HUNDT: And presumably it would be people who saw that they could make a profit using that spectrum, right? MR. RATTNER: Presumably. COMMISSIONER HUNDT: Now, if we give the digital spectrum to a current broadcast licensee who doesn't have the financial resources to develop it, what logically is that particular licensee going to do with the spectrum? MR. RATTNER: If he can't develop it, depending on the rules, he'll turn it back or he'll sell it as the rules permit. COMMISSIONER HUNDT: Do you think we should prohibit the analog broadcast licensee who might receive the digital spectrum license, should we prohibit them from transferring the digital license? MR. RATTNER: Well, that's a long and broad question. Let me say this, I think that if you -- COMMISSIONER HUNDT: I thought that was a yes or no question. MR. RATTNER: I know, but unfortunately it's not a yes or no answer, so I'm going to give you a slightly different answer. If you -- I don't believe that the problem of broadcasters being unable to develop the digital spectrum is a substantial one. In other words, I think if you give the digital spectrum to broadcasters, I'm not saying whether that's right or wrong, but if you decide to do that, with little or no restrictions as to how they use it, then, I believe, they will find a way to use it and get finance because we will finance them. COMMISSIONER HUNDT: Should we prohibit them from transferring the digital broadcast license? Should we make it unsellable for 15 years? MR. RATTNER: It's a public policy question, it really depends on -- COMMISSIONER HUNDT: Do you see any public policy reason to interfere with the marketplace? Normally, in the market, you'd allow them to transfer property. MR. RATTNER: Normally in the market you would allow them to transfer. I think, in this particular case, there is certainly a significant public policy issue over whether you should give broadcasters a full additional 6 MHz and tell them to use it for anything they want regardless and it's theirs forever. In other words, it is not obvious to me that you should give broadcasters six more MHz and let's assume that they all wanted to go into cellular phones or data transmission, and that they should get that for free and they should have the right to have it in perpetuity. That's not obvious to me, that's a public policy question. COMMISSIONER HUNDT: Because it might be too much of a gift? MR. RATTNER: Yes, that's not part of the deal going in. COMMISSIONER HUNDT: All right. Commissioner Quello. COMMISSIONER QUELLO: I have kind of a hypothetical question for say Mr. Braun, Hubbard, some of those in broadcasting. Say that Congress and the FCC decides that you have to pay for the digital and for the HDTV in an auction. Does broadcast have any plans once you pay for it and you -- that's a big bite, I mean, you're going to have to pay for the transmitter, your transmitting simulcasting to people that don't have very many receivers, yet it's going to be a long evolutionary process, has there been any planning at all, and I'm putting on my old broadcast has now, of maybe providing a hybrid service similar to cable where you would all of a sudden, if you're going to pay for the auction, you're going to have a pay service and let people pay for, let's say, football, baseball, basketball, hockey, the best movies, the soap operas, the best news in the world so that you could -- all of a sudden you go from free TV to a pay service TV and you're sitting now on still the most attractive programming, any plans for doing that? Has that come up in anyone's mind on how you're going to do it you have to pay an exorbitant price for an auction and wouldn't that be pretty much the end of free over-the-air TV? I've said that before, I think we'd be developing a nation of have and havenots. But if I'm going to pay for the auction, I want to be able to finance it and I think, if I have that kind of a proposition, it should be very attractive to Mr. Rattner and all the other people that actually invest money. MR. BRAUN: I'd like to address that, Commissioner. Actually, I had a conversation on that topic just yesterday. Later today NBC is going to be making an announcement about an acquisition of rights far out into the future and of a major event of public interest that's traditionally always been carried on free over-the-air television, and precisely because of the uncertainty that we're discussing today, I discussed with the people negotiating that arrangement to please preserve the flexibility to be able to do whatever is necessary in an economic climate where we can't reach a universal audience in the kind of picture and sound that they're used to. Meaning, in fact, that we would charge -- in fact, have the right to be able to charge for certain types of program, this particular program, in fact, over time, if we couldn't make money on it by delivering it free over-the-air. We have to hedge that bet. COMMISSIONER QUELLO: I think there's a general feeling that broadcasters are entitled to a channel only for broadcast purposes, not for cellular and paging and all the other things that might be very profitable. MR. BRAUN: Right. COMMISSIONER QUELLO: So I was just thinking if ahead, if you're going to get a broadcast channel, how are you going to pay for it? MR. BRAUN: Well -- MR. HUBBARD: May I respond also? COMMISSIONER QUELLO: Sure. MR. HUBBARD: I can't envision any broadcaster being so foolish as to try and charge for their broadcast services. And I can't imagine a Commission allowing that. The very purpose for our licenses and for our being is to be good public servants and provide a free over-the-air service, and I, for one, reject the concept of a broadcaster charging for services. And, if I might also add, if it were to be an auction situation, I don't think very many broadcasters, Steve, would be able to win that auction. You'd have AT&T or USWest or whoever coming in and winning the auction, the prices would be so high that it would then become a pay service. That would be the end of free over-the-air, in my opinion. COMMISSIONER QUELLO: So it's, if you go auction, why it's going to be a pay service, but you can't visualize broadcast every being pay service? Of course, most of us don't want broadcast to be a pay service, either. MR. HUBBARD: I don't either, Mr. Quello. COMMISSIONER QUELLO: We owe that service to the public. MR. HUBBARD: What I'm saying is if there were an auction situation, I think that the market price for the spectrum would be so high that broadcasters would be out of business and then new people would have that spectrum and they would charge because they had paid so much, and that'd be the only way they could recover. COMMISSIONER QUELLO: All right, thank you. Have you got something, Larry? MR. GROSSMAN: I just wanted to -- I certainly agree with that and that's why I would suggest that if there were an auction situation that you do reserve at least enough spectrum for a digital channel for any television broadcaster who wants to use it, so you can have the best of both worlds, in a sense. COMMISSIONER CHONG: Does that include the community broadcasters? MR. GROSSMAN: I beg your pardon? COMMISSIONER CHONG: I'm sorry, Jim, this is your time. COMMISSIONER QUELLO: Community broadcasters, yes -- COMMISSIONER CHONG: Oh, I'm sorry. COMMISSIONER QUELLO: I've just have one more question for Mr. Wiley. Do you respond to Mr. Lippman's argument that there are standards already out there and therefore no need to mandate HDTV? MR. WILEY: Well, I'm not comfortable with mandating certain programming requirements, but I do think it's essential to set a standard. I think to insure efficient use of the ATV spectrum, to give the public certainty to get the service quickly, I think the Commission needs to act and I think it's especially so, and going back to some comments that the chairman asked or the questions he asked, I think the ATV spectrum, after all, is going to be shared, sharing interspersed channels with the NTSC operations and I think you've got to look to having an efficient use of that spectrum. And the nice thing about it is, there really isn't any need for the Commission to do anymore work in this area. The standard had been fully documented, thanks to Mr. McKinney's organization's excellent work. I think there's a questionable precedent here to simply depart after the Commission has said to people, spend hundreds of thousands of hours and millions of dollars to develop this, and then walk away from setting a standard. I think that'd be most unfortunate. COMMISSIONER QUELLO: All right. COMMISSIONER BARRETT: Mr. Hubbard, you said that broadcasters should not be able to do what with the allocations? MR. HUBBARD: Charge for the services they now provide for free. COMMISSIONER BARRETT: If you take a look at the progressive scanning model which is more compatible with computers and you look at the interlaced scanning model which is compatible for higher resolution and you consider the fact that the Grand Alliance can do both, would you have a problem with people using any of that spectrum for data transmission or anything like that? MR. HUBBARD: No, as long as it accompanies the broadcast service, and I think that broadcasters -- COMMISSIONER BARRETT: What are they -- charge for those services? MR. HUBBARD: I'm going to get shot by friends in broadcasting, probably, but I don't think they should be able to charge for it. COMMISSIONER BARRETT: So, you don't believe in flexible use for the channel. MR. HUBBARD: Yes, I do. Yes, sir, I do, I think -- I believe in the use of any auxiliary channel in coordination with the main broadcast channel. COMMISSIONER BARRETT: How they then now make that attractive to Mr. Rattner's clients, if, in fact, I'm going to limit what they do under the Grand Alliance concept which can handle both of -- the progressive scanning and the interface scanning process? MR. HUBBARD: Broadcasters have a long history, Mr. Barrett, of always trying to give the public the best possible service, how to improve their picture, how to improve their news, how to improve everything. If you give it enough time to transition, I think every station in the United States will go digital and will give the best possible service without having to charge for that service. Without free service we're out of business. There's no point in having broadcasting. COMMISSIONER BARRETT: If we mandate some portion is to be used for broadcast purposes and then, in turn, can, under some concept, bid to Grand Alliance which can do both of the models, and they can provide data services, other services, that are compatible with computers and the high resolution aspect and they can charge for that, do you have a problem with that? MR. HUBBARD: No, I don't, but I also -- and this again, I'm a heretic, but I think that if -- what we get -- we have a broadcast channel which we have that because we developed it, we took the risk and I think to say that we're going to charge for the services without us paying something for the use of that particular service, I think is a mistake. COMMISSIONER BARRETT: Is that attractive, Steve, if, in fact, we limit the use for ancillary programs in addition to the broadcast aspect? MR. RATTNER: Clearly to the extent you limit the use of the spectrum and decrease flexibility, it becomes less attractive to Wall Street as something to finance. COMMISSIONER BARRETT: Neil, you're biting at the chops. MR. BRAUN: Well, the -- I agree with Stanley except for one thing, if, in order to compete in broadcasting in a competitive environment, we need to be able to have 6 MHz for HDTV transmission. If you preserve flexibility and we use it for pay services, we believe it's appropriate for you to make different rules for subscription services using that spectrum as opposed to free over-the-air. COMMISSIONER BARRETT: Well, what rules do we make if, in fact, we're getting what we want at a minimum or a maximum requirement that we have suggested that they do in terms of a broadcasting perspective? MR. BRAUN: I'm not sure I followed -- COMMISSIONER BARRETT: If, in fact, we get what we want for use of that free channel, if I may, of the spectrum, and we get that and you're able to do other things that are compatible with the usage of that spectrum, what difference does it make that I put rules down to limit you in terms of data transmission and things like that? MR. BRAUN: I'm simply making the point that what broadcasters are by and large arguing for is the ability to compete and we need the 6 MHz for that. But we don't need it 100 percent of the time. If we use it for things that generate a new revenue stream from subscribers, that should be subject to different rules and paying for value in that case. COMMISSIONER BARRETT: Why should it be when I'm getting what I want for what I've given you the allocation for, why should I then set a rule for what you can do when you're not using it for 100 percent of what I allocated it for? Why should the government be involved in that? If I'm getting what I want from you as a matter of public vision -- MR. BRAUN: Right. COMMISSIONER BARRETT: -- and I think the Chairman has put it before us more profoundly than anyone, if I'm getting that, even if it's the children's television stuff you had suggested, if I'm getting all of what I want and you have other time usages, and you want to use that flexibility, why should I determine what you should use it for and why should there be different rules for that flexibility? MR. BRAUN: I'm just acknowledging a distinction between those free over-the-air services that are totally supported by advertising and those which ask consumers to take money out of their pocket. I don't know there's a public policy interested in charging us, as long as you're getting what you want, you're right, there may be no public policy interest in charging us beyond that. COMMISSIONER BARRETT: Let me say this, let's assume that Congress says that we need -- you need to have 3-1/2 hours of children's television. And let's assume that we implement that and let's assume that one suggests that you need "X" number of hours of educational programming, if I'm getting that and you still have some time to be used for broadcast for whatever kind of services, why then, for that additional time, should I subject you to governmental rules after you have fulfilled my public policy vision? MR. BRAUN: No, that's clearly a quid pro quo, that makes -- COMMISSIONER BARRETT: I'm not even sure it's a quid pro quo in the legal sense because I've gotten what I want. MR. BRAUN: Well, right. I'm not -- COMMISSIONER BARRETT: Did -- I'm sorry. MR. HUBBARD: I agree, but if you require us to do certain things that are costly, that changes the whole -- COMMISSIONER BARRETT: And you do then. MR. HUBBARD: Yes, and we do them, then I agree -- COMMISSIONER BARRETT: And you have uptime for usage. MR. HUBBARD: Yes. COMMISSIONER BARRETT: Why, then, should the government tell you, set a different set of rules? MR. HUBBARD: You shouldn't, I think we're vehemently agreeing with you. COMMISSIONER BARRETT: Are you a lawyer, are you a lawyer? MR. HUBBARD: I think that all -- I went to law school. COMMISSIONER BARRETT: That's a good answer, we all wish we didn't go to law school. But before I congratulate Dick on his alma mater in Chicago going to the Rose Bowl and I was going to wear purple today, I'll wear it Thursday, this purple and black tie I'm going to wear. How do you respond to that, Dick, given that the Grand Alliance can do all that -- and, Mr. Chairman, I really apologize for doing this, for gone over now, I won't -- COMMISSIONER HUNDT: You're just taking Commissioner Ness' time. COMMISSIONER BARRETT: I apologize, Commissioner. COMMISSIONER NESS: This is a marketplace negotiation. COMMISSIONER BARRETT: Did you understand what I'm saying? I'm getting what I want, we have determined, by whatever mandate, that a certain amount of educational and a certain other kinds of programs we want, I've gotten that. There is still time to be used. Do you think I ought to be telling you, set up a different set of rules for your clients or how your friends ought to use that time? MR. WILEY: No. COMMISSIONER BARRETT: Okay, thank you very much, Mr. Chairman. I apologize, Commissioner Ness. COMMISSIONER HUNDT: He knew a yes or no question. COMMISSIONER BARRETT: He went to a great law school. COMMISSIONER NESS: During the transition from a terrestrially delivered network signal to an earth station satellite delivery, many of the networks provided some compensation or helped to underwrite the cost of those earth stations. I don't recall whether or not NBC fell within that category, but I believe so. I see someone shaking their head yes. Is there a similar -- and the reason it was done was so that it furthered the goal of the network to be able to make this deliver system which presumably had clearer pictures and cost less. I assume that there may be perhaps the same incentive to assist some of the network affiliated stations with a more rapid conversion to digital or to HD, if a network wanted to be able to maximize its audience and thus, perhaps, derive some revenues from delivery of HD signals, is this a concept that has been contemplated by your network, Mr. Braun? MR. BRAUN: It's not one that I've been privy to any conversation with, but, I mean, if I accept your premise that -- I mean, if what we are doing is preserving our ability to deliver a critical mass audience, we will have to think about that. I mean, if we believe that that's a critical issue to the continuation of delivery of a critical mass, we'll have no option other than to consider that. COMMISSIONER NESS: We talked a little bit earlier about must carry because this is still a very difficult issue to address when there are multiple programs streams coming down from broadcast. How, Mr. Braun, would you address Mr. Hendricks' concern about multiple channel delivery and must carry? MR. BRAUN: I think I'm in pretty much agreement with Mr. Hendricks, I mean, the distinction in my mind, again, still is free over-the-air versus subscription. If it's consumer financed, then I think we have to compete against all other services for carriage. If it is free over-the-air on a universal basis and we're making it available to cable operators, I think it should be on the same must carry basis as the primary must carry signal. COMMISSIONER NESS: When you use the digital converter boxes that would enable the viewer to use an analog TV set, are those converter boxes dynamic in that the amount of digital bits coming forward may vary so that you could have, for example, an HD transmission coming through or narrower programming to create more channels? How does that work? MR. BRAUN: I think the first generation might be somewhat limited but I think the boxes that will be available, say, a year -- that will be introduced say two years from now, will be robust enough to carry the full digital spectrum, will be able to reformat the bits and bytes to address the high resolution digital screen at that time. I think the early boxes that will be introduced next year will be somewhat constrained because, again, they'll be largely just passing through the analog signal about 40 channels, but they will be able to decipher that limited digital spectrum and redisplay video on demand and other services. COMMISSIONER NESS: So if an HD signal came through, you would be able to pass through an HD quality picture to the subscriber? MR. BRAUN: I'm just not sure about the first generation boxes, I'm pretty sure that the boxes in the second generation, two to three years from now, will be robust enough to address that. COMMISSIONER NESS: About 70 -- what, I guess about 66 or 65 percent of households now subscribe to cable and much of the cable viewership is to over-the-air broadcast channels. MR. BRAUN: Right. COMMISSIONER NESS: How will we be able to progress to have HD, for example, if the signals are being carried or being watched through a cable system? MR. BRAUN: Well, I think the opportunity here is to have government encourage carriage of certain hours during the week of high definition television. That, by and itself, I think, will drive the technology out. You know, to produce an economic model that Wall Street and Steve Rattner will respond to, I think the local broadcaster will have to probably have four or five new services that will be introduced on a multiplex basis and what we've ignored here is the revenue of advertising which has always been a strength of broadcasting. They can introduce an all news channel to compete with CNN, for interest, and finally people who have free over-the-air television, can have all news all the time, and that could be very powerful in the advertising world. COMMISSIONER NESS: Yes, my concern is if we are going to try to get high definition television, there's got to be a critical mass of viewers out there and even if there were to be sets, if they're not able to receive the HD signal, for example, through cable and they're cable subscribers, how does that work, Mr. Hubbard? MR. HUBBARD: They might buy an antenna. COMMISSIONER NESS: So, in other words, that might encourage folks not to subscribe or at least to use an A/B switch? MR. HUBBARD: Yes, most people will always get a better picture if they have an antenna than they will from a cable anyway, and I think with HD -- well, that's a matter of fact. What a cable company does is use an ordinary household antenna, but they hook it up properly, so there's a lot of people that can buy an antenna as they do for DSS. COMMISSIONER NESS: Okay, what percentage of a broadcaster's time ought to be free over-the-air broadcast? We talked about having the flexibility, if the Commission or if government does not regulate a specific number of hours of HD or other type programming, at what point do you feel that the consumer is perhaps not getting full value if, let's say, there were one stream of programming that were free and the rest of the streams of programming were all pay services, Mr. Braun? MR. BRAUN: It's hard to answer that question as a hypothetical. I would say that that is where the marketplace should determine it. Every technology looks for its killer application, its enabling application. Broadcasting is the application for digital that cumes 100 percent of television households every week. So, as Steve said before, I think it's the first hour of HDTV that's most critical, and I think incrementally we'll see what happens and we will learn by the market place about what level of programming commitment we drive penetration at. It's very had to forecast beyond that. COMMISSIONER NESS: Mr. Hubbard, do you have any thoughts on that? MR. HUBBARD: Well, it took seven years for the first million color TVs to be shipped and it's going to be a long process and broadcasters are better equipped than anybody else to do it. COMMISSIONER NESS: Okay, Mr. Wiley. MR. WILEY: I think we're going to see an evolutionary process, Commissioner Ness, but I think once the public sees it, and I invite anybody to go down there and look at it themselves this afternoon, they're going to say, I'd like to have that in my living room. And keep, again, in mind the fact that we do, in this country, have all that product which was 35 mm cinematography which is the equivalent of HDTV. It's available off the shelf and I think that will help the transition. COMMISSIONER NESS: In other words, absent government regulation, you would not have a problem if the broadcaster were to send out five streams of programming of which only one is free over-the-air and the remainder were all pay services? MR. WILEY: Well, I think that's a government policy decision. I think that Stanley Hubbard is right, a lot of broadcasters might be giving up their birthright in that instance, but some pay programming might make sense. COMMISSIONER NESS: Okay, thank you. COMMISSIONER HUNDT: Commissioner Chong. COMMISSIONER CHONG: I just have two last lines of inquiry. To any broadcaster on the panel, there's been lots of talk about using the additional flexibility you would have if you have digital. To your knowledge, are there broadcasters out there who would want to convert to digital and then, as a primary or entire use of their spectrum, use it for non-broadcast subscription services? MR. BRAUN: No. MR. HUBBARD: No, I don't think so. COMMISSIONER CHONG: My second line of inquiry is about the transition period. I've heard a lot about how, you know, we have, I think, 15 years currently set up in the decisions and some have suggested that maybe shorter was better, others have expressed concerns about the length. Mr. Hubbard, you suggested that maybe we should declare the end of the transition period as 95 percent penetration of high definition TVs into the marketplace. Why did you pick 95 percent, do you think a penetration standard is better than an arbitrary time standard and why? MR. HUBBARD: Well, the lower the penetration number is before its arbitrated, the more people are going to be still relying on the old sets, and 95 percent is 95 million homes and that leaves 5 million homes would have to convert and the fewer that have to or forced to, the better. It's going to be a hard pill for some people to swallow who don't want to do the new system, but at some point you have to bite the bullet. COMMISSIONER CHONG: And what about set-top boxes, I mean, when would be expect to have set-top boxes that are at a low enough price where most of those last 5 percent of Americans could afford it, anyone can answer that. MR. HUBBARD: I would think by that time, I'm in the set-top box business, and I would think by that time the set- top -- they are just chips, and by that time there should be enough of them to ma