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Date:` ` November 1, 19960*ZZ     X` hp x (#%'0*,.8135@8:0*H&H&@@Ԍ` `  The first sense in which antitrust has arisen is in the context of whether or not a coalition of industry members seeking government mandates to enforce their agreement is a competitive problem or not. Well, of course, as you know, when competitors reach an agreement in restraint of trade each one of them has an incentive to cheat, and enforcing the agreement is a problem, and one object of the antitrust laws is to make it difficult to enforce those agreements, the agreements themselves being unlawful. ` `  One way to deal with that problem is to come to the government and have the government enforce the agreement. And, of course, there are lots of industries over the years who have done that optometrists, lawyers, others. But that's nowadays frowned on by enlightened policymakers. ` `  In other words, there is a presence dilemma problem, to be specific here. There is presence dilemma problem facing the members of the grand alliance, especially to the extent they are manufacturers. Each one of them may think they have a technology which is superior to the technology described in the grand alliance standard. Each one of them may think that they could do better. If the standard is adopted voluntarily, anyone of them might cheat, come into the market with their own Beta or VHS or the%?0*H&H&@@ equivalent. ` `  And it's in the interest of the group as a whole to prevent that from happening, and so it is sensible for them to seek government regulations preventing anyone of them from cheating on the agreement. ` `  Now, as I said several times, it may very well be that this standard is the economically optimal standard. Okay, in which case one ought to discover this cheating for the moment. The problem is one doesn't know for how long. ` `  The second sense in which antitrust has come up has been in the context of whether or not it would be whether antitrust concerns prevent industry groups for agreeing voluntarily on standards; that is, just people worrying about antitrust prosecution stop them from agreeing on standards. And I really thinks that's not a serious concern. ` `  The Justice Department has brought very few cases and they have been very carefully targeted in this area. They have brought two kinds of cases. The first kind is where the standard in question is price, right. And the second is where the standard in question is explicitly adopted for the purpose of excluding a competitor, a particular competitor. And most people would agree that that's a sensible thing to prosecute. ` `  Beyond that, there has been very little government%@0*H&H&@@ frowning upon industry groups that come together to set standards. For example. SAE has been doing it for years now, a real industry with no problem, Society of Automobile Engineers. ` `  At one point towards the end of his remarks Jeff said something which I wrote down as carefully as I could. If I have got it wrong, I apologize, but I am going to read it. And if it's what he said, I want to say I agree with it. He said, "We should not mandate that broadcasters can't broadcast in a manner that serves their interest." This is in the context of interlacing, but I think it's perfectly general. Yes, I agree. ` `  Finally, there is this issue of equilibrium, and getting stuck in an equilibrium where it's in nobody's interest to change, even though there is a superior alternative standard or technology. It's easy to think about how difficult it is to overcome that kind of problem and forget how often we solve it; how often the market has solved it, or we can think of the clever ways in which it is solved. ` `  One of the ways that happened recently that struck me is the way Netscape solved the problem of selling servers to people who use network service given that they were no clients out there with software that could use the servers. ` `  What did they do? They gave away the client%A0*H&H&@@ software, and they are selling apparently a lot of servers. They actually had a profit. There is a way to overcome this network externality compatibility problem, but a very clever one, and I am sure there are many others. ` `  Thanks. ` `  MR. FARRELL: Thank you. ` `  Lee? ` `  DR. SELWYN: Thanks. ` `  I think what I need to do is take a cue from the tactics of the presidential candidates and try to use my time to first answer a previous question. ` `  Chuck Jackson raised the question about two questions with respect to the timing of adoption and development of the computer industry proposal versus the grand alliance proposal. And with respect to that, I am informed that basically there should be no difference in timing the computer industry proposal is to the extent that it is other than a subset of the grand alliance proposal, it has been demonstrated, it has been shown to be operative and should not produce any delay. ` `  And with respect to the question of compatibility with the cable industry, digital TV standard, I am informed again that, to the extent that the cable industry standard is compatible with the grand alliance with a segment of the grand alliance proposal, so too is it compatible with%B0*H&H&@@ the computer industry proposal. So these are nonissue. ` `  I wanted to try to respond to some of your points, Joe, but also I wanted to address some of the suggestions with respect to stakeholder interests. ` `  I have absolutely no difficulty understanding the interests of the TV set manufacturers in their desire to sell $100 billion worth of television sets to the American public. That's pretty obvious. I have a great deal of difficulty understanding the genuineness or genuiousness (sic) of the broadcasters' interests in promoting high definition television. ` `  What do the broadcasters get out of high definition television? Well, what they get out of HDTV are additional frequencies, additional channels. If HDTV succeeds, in fact, if any digital TV format succeeds to the point where the NTSA NTSC channels can be returned, then what the broadcasters get out of that success is losing the very additional channels that they had previously been awarded. ` `  On the other hand, if HDTV fails, but enough HDTV receivers are, or at least digital receivers are out there to justify some continuation, perhaps for a further extension of the originally proposed transition period, or maybe even a definite transition period, what the broadcasters get out of the failure is they get to keep that%C0*H&H&@@ additional channel for a longer period of time. ` `  So it's hard to imagine why the broadcaster would be supporting HDTV other than for the purpose of obtaining additional frequencies, and that their interest in doing that is also is as obvious as the interests of the TV set manufacturers in selling $100 billion worth of equipment. ` `  Your suggestion, and the suggestion of something short of a permanent fullblown standard such as a standard that sunsets, it seems to me that that is essentially what the computer industry is proposing. Not so much something in terms of sunsetting, and I will get to that in a second, but something that is less than pervasive. The computer industry is proposing a baseline, a platform. Satisfy that, and every digital television receiver and converter that is sold will be capable of receiving every digital television program that is transmitted, pure and simple. ` `  The grand alliance can't say that, pure and simple. ` `  Now, with respect to sunsetting, I'm not sure that sunsetting is per se important because the reason for getting the standard started is to overcome the startup problem, and once it's overcome, whether or not the official standard is sunset may not make all that much difference if the standard had been accepted. It's kind of like, you know, starting a fire. Once you get it going it takes on a%D0*H&H&@@ life of its own, and deciding that the fire should never have been started in the first place doesn't make it stop. ` `  So it seems to me that the computer industry is proposing precisely this notion of a minimal standard that is being put in place to just get things going to a point where there is some likelihood of success of digital television. I just can't see how the grand alliance proposal gets to any give back of channels unless one takes on faith that consumers are clamoring for high definition television. ` `  And we are so far from proving that or knowing anything about the complexion of consumer demand for high definition television that it seems to me that accepting something like that on faith is simply not possible at this point in time. ` `  With respect to the inter and intra industry incentives, the grand alliance proposal clearly benefits its two principal industry groups; for different reasons, but they clearly benefit. But as I think we have outlined here today, there are other industries that have a stake in this outcome, in the result. ` `  Let me give you an example. You had mentioned that nonbroadcast sources of software that are not restricted to the same bandwidth, bandwidth constraints as broadcast television might, might in fact be able to%E0*H&H&@@ introduce services that couldn't be carried or introduced capabilities that couldn't be carried in an overtheair format. ` `  For example, I an envision a situation in the future, and now I am going for the sake of this discussion taking on faith that at least some subset, some subset of consumers, enough to matter, are interested in not just high definition TV, but let's say ultrahigh definition TV, where they want large wallsize screens with perhaps substantially more detail than even the HDTV formats are being proposed. ` `  Now, what you would like to be able to do in a situation like that is let the market, if the market wants to produce a video disc of some sort or some other media that can support that for movies or the like, and be a superset of an existing broadcast format, then that same equipment could be utilized very effectively to support a broadcast and a nonbroadcast application. And it's that multiindustry interoperability and compatibility that makes, it seems to me makes a lot of sense, and that's why we need flexibility and not locking in a specific set of capabilities and locking out all others. ` `  Similarly, the issue of aspect ratio. We have seen the coalescing of the grand alliance around 16 by 9, but in a recent letter from Leonard Nimoy to Commissioner Chong, he suggested that what the film industry really%F0*H&H&@@ wanted was an aspect ratio of 2 to 1 or even greater than 2 to 1, and he signed that letter his salutation in that letter to the Commissioner was "Live long and prosper," which I thought was, as a confirmed Trekkie (sic), I was pleased to see that. ` `  In any event, it seems to me that we just don't know enough about demand, we don't know enough about technology to lock in anything more than the most minimal level of assurance of some success. The computer industry proposal is the only one that assures that all receivers get all broadcasts, and that doesn't impose inordinate costs on the consumer for functionalities that they may not particularly want or need. And I think it's consistent with precisely the kind of things that you are suggesting. ` `  MR. FARRELL: All right, Jeff? ` `  DR. ROHLFS: The examples I gave at the beginning were to illustrate how difficult the startup problem is for ATV in particular. One of the issues that's always raised, well, there are a lot of other products that have succeeded without standards, what's different here. And what's different here is that in order to have success here it's necessary for two different industries to coordinate activities; namely, the manufacturers and the broadcasters, in addition to consumers. ` `  That's not the case in modems. That's not the%G0*H&H&@@ case in Worldwide Web, but it is the case in two other examples that I cited, which were CDs and DVDs. And it's interesting to see that in a real world situation how is it that the market solves the standards problem. And the answer is they reach an agreement, all the parties sign an agreement that they will not use any standard other than the agreed upon standard. And there are time frames which are set in terms of the commercial interest of the players, but that's essentially what's happened in those industries, and that's the way standard setting actually gets set in a market when you have a difficult startup problem like this one. ` `  Now, so far as I can see, there is very little difference between the Commission mandating a standard and the Commission simply blessing the process that the product parties have gone through. ` `  For example, if the parties were you could view the process as this, as we the industry, the grand alliance, has come up with a standard. We want to agree to that standard, sign on the line that we are going to abide by this standard and no other. We want you, the Commission, to determine that our doing that is in the public interest. ` `  Now, if the Commission were to do that, I don't think it would be very much I don't think the consequences would be very much different than if the%H0*H&H&@@ Commission were to mandate a standard. What's essentially the problem is that if they are unable to make such an agreement or if they do make such an agreement that could be challenged before the Commission as not being in the public interest, then the standard then you don't have a standard. Then the industry can't then nobody can build a set because they don't know how to build it, and the industry never gets out of the null equilibrium. ` `  So the issue here, I think, is not is not government compulsion. The industry wants to agree to a standard. It's just that because of the pervasive government role in broadcasting the government needs to be a party to the agreement because otherwise it can be challenged as not being in the public interest, and the FCC can't avoid that role. That in fact if they were to now decide they are going to leave it to the market, the inevitable consequence is some years from now they would be having a proceeding on whether the market standard is in the public interest, being essentially where they are now. ` `  The second point I want to raise is that the grand alliance standard involves a lot of flexibility. No one is required to build a receiver that receives all 18 signals. Nobody is required to broadcast in any particular format. And what Lee said is that Lee essentially is saying that that's he is not fighting that particular standard, which%I0*H&H&@@ is the one that's actually proposed, what he is criticizing is a much more pervasive standard where receivers are required to pick up all 18 signals. ` `  DR. SELWYN: That's not what I said. That's not what I said, but go ahead. ` `  DR. ROHLFS: The standard where essentially one can imagine things evolving in many different ways. For example, some broadcasters have already said that they intend to broadcast in progressive format. If it's true that it costs a lot of extra money to accommodate interlace, then it's quite possible that the sets will not be built to accommodate an interlace format, at least in the high definition range, although they probably would in the low definition range. That could be that could come out of discussions among the industry participants after the after an agreement is reached about setting the general parameters of the standard. ` `  There is a lot of flexibility built in that is actually agreed upon by industry participants. What is really being proposed here is that the computer industry, which is really a nonplayer in this process, is going to set the standards, and the government would then, by mandating these minimal requirements, would essentially limit the flexibility, and this is not an agreement of the players that are actually in the industry, broadcasting or producing%J0*H&H&@@ the sets. It's an agreement that's being imposed on the outside by a nonplayer. It's a result that could never happen in a marketdriven process. ` `  And I guess the final thing I want to sum up with is the it really is true that the people who support the standards are the people who will benefit if ATV succeeds, and I will say what I said again about the broadcasters. The broadcasters, the broadcasters benefit from broadcasting in ATV because they avoid a competitive disadvantage because they can't hold ATV back forever. ATV will be getting to consumers via cable. It will be getting to consumers via satellite ultimately. And they can be left out of the process with an inferior product unless they can rally behind some sort of an ATV standard. ` `  So I think the broadcasters have an interest in success. The manufacturers have an obvious interest in success. And the cable industry, perhaps the most likely scenario perhaps the most likely scenario for them is they don't want to see it because if ATV comes in in overtheair broadcasting, then they need to expend a lot of money. Their cash flow is a little constrained lately. They would just as soon not face that problem. ` `  I accept what Bruce said, just because you have perverse interest doesn't mean that your arguments are wrong, but nonetheless, I think the Commission needs to bear%K0*H&H&@@ in mind incentives in evaluating the arguments. ` `  MR. FARRELL: Thank you. ` `  Do you want to Lee? ` `  DR. SELWYN: Yes, I just want to clarify one point. ` `  My point with respect to the grand alliance receiver standard is this. If the receivers if the receivers are not capable of receiving all 18 formats as a matter of a mandatory requirement, then the market will drive the prices down, and the capabilities down to whatever consumers are demanding. And that will mean that in the marketplace less than all of these formats will become available. ` `  What is likely to happen then is that since the proliferation of the lower priced units that are not capable of receiving TDTV broadcasts at all, that will just display blank screens in that case, will simply then make TDTV unavailable even in standard definition format unless the under the grand alliance proposal. ` `  So what I am saying here is that if the Commission goes with the grand alliance proposal, it must enforce a mandatory receiver standard or else it will never get to TDTV, and let me give you a very good example of something that falls precisely in this category. ` `  SVHS is a much higher quality image than standard%L0*H&H&@@ VHS, but SVHS takes cannot be played on standard VHS VCRs. They just don't they are not playable at all. As a result, there are very few, if any, I have never seen a rental or for sale prerecorded tape that is in super VHS format, and consequently that entire technology is basically dies on the vine. There aren't very many of those machines that are sold because you can't get software for it, and there isn't any software because it's incompatible, it would be incompatible with the 90 plus percent of machine that it cant see. ` `  And I see exactly this outcome with respect to HDTV if receivers will go blank when an HDTV broadcast comes on. ` `  So if the standard goes with the grand alliance standard, it will have no choice, if it wants to get to high definition television, to impose mandatory receiver standards for all format. It just doesn't make any sense otherwise, and that's what imposes the largest cost on consumers. ` `  MR. FARRELL: Very good. ` `  Go to the floor. Jeff. ` `  AUDIENCE PARTICIPANT: Yes, I want to ask a followup question to that. I see Jeff Kraus in the audience, and I understand, if memory serves me right, did you ever purchase a prerecorded super VHS tape %M0*H&H&@@Ԍ` `  AUDIENCE PARTICIPANT: Twice. As a matter of fact, "Raiders of the Lost Ark" is available in super VHS. I believe others are also. ` `  DR. SELWYN: Well, I haven't seen them. They certainly are not very they certainly don't proliferate. ` `  AUDIENCE PARTICIPANT: If I can just clarify something. Is it your position that you believe the higher bulk of services associated with VHTV standard, which equate at various levels is it your position that that would be entirely on manufacturers and will not receive certain signals, that they will base their product lines on those types of sets and be incapable of ` `  DR. SELWYN: No, that's based on the assumption that the that every product does receive all signals. What I am saying is that because consumers will not want to pay for a product that will receive a signal that doesn't do anything for them on a standard NTSC receiver, that they use this converter box to in connection with, that the market will ultimately force lower end less than fully capable ATSC units to be offered. ` `  AUDIENCE PARTICIPANT: Consumers would actually purchase a set that would go blank if ` `  DR. SELWYN: If consumers if consumers well, if ` `  AUDIENCE PARTICIPANT: Is that your belief? %N0*H&H&@@Ԍ` `  DR. SELWYN: Yes, that is precisely my belief. Consumer the only reason if consumer demand I am operating on the basis here that consumer demand for digital television is not demonstrated, and that the only reason that consumers would buy this at all is because they will have heard from their government that if they don't do something their NTSC receivers will go black permanently, and for all time. So they will have to do something. ` `  And when that happens consumers that don't see any specific benefit from digital television will obviously postpone the purchase as long as possible, and at such point in time as they are forced to make that purchase, if they don't see any benefit, if there isn't must HDTV around, they will look for the cheapest way to accomplish what they are trying to do, which is to simply preserve their ability to get any TV at all. ` `  AUDIENCE PARTICIPANT: It's not ` `  DR. SELWYN: Well, who says that broadcasters won't broadcast in HDTV if there aren't very many HDTV capable receivers. ` `  AUDIENCE PARTICIPANT: That just seems very unrealistic with that type of set [inaudible]. ` `  DR. SELWYN: Well, I think it's even more unrealistic to think that the American public will spend, whether it's 50 billion or 100 billion dollars, on something%O0*H&H&@@ that they don't actually want. And I think long before anything of that sort is imposed on the American public somebody ought to really determine whether or not that demand exists. ` `  You know, just because you set a standard doesn't mean that people will flock to buy it. ` `  AUDIENCE PARTICIPANT: On that rate, do you figure capability or incapability? Which is it? ` `  DR. SELWYN: Well, we have estimated a transition cost over a 10year period with replicating to the best that we could the transition pattern, the migration pattern for colored TV, but collapsing it into a 10year time frame instead of the 20 years that it roughly occupied. ` `  For the fully capable ATSC device at approximately $100 billion, assuming that Moore's law halves the cost of the VLSI components every 24 months. When we modified that assumption to a 36month process, the cost increased to about $150 billion. ` `  We also attempted to test the hypothesis that there would be both high end and low end units that would be offered, that is, high end, fully capable, and low end, SDTV only, and when we when tested that we made the assumption that 80 percent of consumers would buy the SDTV only units, and my recollection is I don't have it on front of me that I think our number there was in the 60 some odd billion%P0*H&H&@@ dollar range, and we estimated the transition cost for units capable of receiving the baseline signal under the computer industry proposal at a little over 50 billion. ` `  MR. FARRELL: Okay. Let me ask for the panelists, when you take a question if you could repeat the question so that it goes on the tape and so on. And also ask questioners to phase their questions in a way that can readily be repeated. ` `  Yes? ` `  AUDIENCE PARTICIPANT: I'm a little concerns. Mr. Chairman, you raised the issue in your summary the notion that there are social benefits associated with the speed of the return the spectrum. I am a little concerned that none of these panelists have really have really looked at that issue. ` `  We have recently gone through an experience where the FCC has auctioned off 90 megahertz of PCS spectrum, and that brought in about $15 million. And we're talking here roughly about returning roughly that same amount of spectrum for auction but at a frequency that's 10 times lower in the VHS spectrum rather than two gigahertz. So the media is 10 times as valuable since it's 10 times lower frequencies. But maybe it's not quite 10 times as valuable. ` `  Okay, it's certainly in the tens of billions and maybe hundreds of billions of dollars of value to the%Q0*H&H&@@ country. That's with out regard to how that spectrum can be reused for some other purpose and benefit the country. ` `  I am little concerned that none of these panelists have addressed that. ` `  MR. FARRELL: Okay, let me try to repeat the question. ` `  I think the question is what about the potentially very large social value and perhaps monetary value of getting spectrum back? And how does that affect your analysis and your views? ` `  Let me ask any and all of the panelists to comment on that. ` `  DR. OWEN: Well, I will take a crack at it just to start. ` `  It seems to me that this is an issue that arises largely because of the certain rigidity in thinking about the nature of the problem that you face here. We're talking about whether or not the Commission should mandate a standard for a particular kind of broadcasting. ` `  Let's assume that the Commission doesn't mandate a standard, the Commission waits for the market to do it. There is a completely, and I mean completely separate issue of what, if any, broadcast spectrum to allocate to that service in addition to what's now allocated to broadcasting, and what the transition measures should attend, if any,%R0*H&H&@@ should attend that. ` `  I don't think it has anything to do with whether or not it's a good idea to mandate a standard, and I think that the linkage between those two issues is one that need not constrain the Commission. ` `  DR. ROHLFS: The it seems to me if I were to, if I were to address the issue, what I would say is that the real problem here is that the Commission is going to take two years now and think over the computer industry filing and the cable industry filing, and everything will be delayed two years, including the return of the NTSC spectrum. And while that may serve the interests of certain parties, it doesn't serve the it doesn't serve the public interest. ` `  I think the important thing is that the the Commission has taken long enough to develop a standard. They have a standard now, and it's time to and the way to get the rapid return of the spectrum is to move forward instead of dithering. ` `  DR. SELWYN: I think the real problem here is that the broadcasters get their spectrum for free, and the alternate use that's being proposed would have to pay for it. So we don't really have the opportunity to have the marketplace make the kind of economic decision on the best use of this resource.%S0*H&H&@@Ԍ` `  If we really were serious about addressing this problem, we would make the broadcasters bid for those licenses against other uses. And if we did that, then we would really determine the correct way to allocate the resource and the correct social costs of the two alternatives. ` `  But the very fact that the broadcasters don't pay and other users would pay distorts the relationship and creates precisely the very perverse incentive that I have describe that the broadcasters have, which gives them a tremendous incentive to hold onto those free frequencies for which there is no outofpocket cost to them for as long as they possibly can, and the value of that far exceeds the dubious benefit of those small the small segment of the consumer market that actually wants HDTV. ` `  MR. FARRELL: Yes? ` `  AUDIENCE PARTICIPANT: Given the fact that bring about the establishment of HDTV, and in determining the players [inaudible]. ` `  MR. FARRELL: The question is wasn't the whole point of this to make sure there is high definition, and if there were to be no requirement for high definition, wouldn't that undo the whole purpose? ` `  DR. SELWYN: I think that gets to precisely the point that I have been getting at. The broadcasters have%T0*H&H&@@ been very resistent to any mandatory minimum broadcast requirements for high definition signals. ` `  If that is the purpose of the additional channels, and the transition structure that is being described and proposed by the grand alliance is to overcome the startup problem due to the presence of network externalities, then the solution is to give these licenses to the broadcasters expressly on condition that they use those frequencies for HDTV, because then at least the consumer would have some reason to want to go out and buy HDTVcapable receivers. ` `  But if the broadcasters have no obligation to broadcast HDTV, there is no particular reason to expect that they will if there are no receivers out there capable of receiving those signals. ` `  AUDIENCE PARTICIPANT: So why should we give them the spectrum? ` `  DR. SELWYN: I agree, I don't see why we should, not unless they are willing to commit to some specific minimum requirement. ` `  Now, you know, one of the possibilities under a more flexible standard, for example, is if the you know, there are really two separate issues here. We could migrate to SDTV to get HDTV entirely, and basically have the same amount of same number of broadcast channels occupying substantially less spectrum than it does today. %U0*H&H&@@Ԍ` `  So there are really two separate decisions that have to be made, and they really should be separated as economic matters. ` `  The first issue is the return of the existing analog frequencies and replacement of those frequencies with SDTV digital channels, which occupy perhaps a fourth of the bandwidth. ` `  Now, that could be treated in much the same way as the process by which, for example, users of private microwave have been compensated when their frequencies have been usurped or reassigned, and I suppose that one could overcome the social cost issue if the value of the released frequencies exceeded the cost of equipping consumers receiving units with SDTVcapable converters. Then some economic process could be established to flow a portion of the proceeds of the spectrum auctions back to consumers to, in effect, pay them for the equipment modifications that are required, and you could still end up perhaps with a substantial profit to the government. ` `  The second issue is do we want to allocate four time perhaps as much spectrum for the purpose of getting to HDTV, and that's a separate issue. And if the answer to that is yes, and the broadcasters are going to be given these licenses, then it seems to me that there has to be a condition that requires that they actually go forward and%V0*H&H&@@ offer HDTV. And we haven't seen that. We haven't seen that kind of commitment forthcoming from the broadcasters. ` `  MR. FARRELL: Yes? ` `  AUDIENCE PARTICIPANT: Dr. Selwyn, if I understood you correctly, you have estimated that the additional cost of making digital televisions capable of receiving HDTV as opposed to SDTV is roughly twice. It's roughly $60 billion if only 20 percent of the sets sold will do that, and it's $100 billion if 100 percent can do that. ` `  Have I interpreted your analysis correctly, and do the other panelists agree that that's the right breakdown? ` `  DR. SELWYN: Well ` `  MR. FARRELL: Can you just repeat the question? ` `  DR. SELWYN: Yes, let me repeat the question. ` `  The question is, is my is it correct to interpret my analysis that the cost of converters, assuming 20 percent have HDTV capability, and 80 percent SDTV only would be about $60 billion over a 10year transition versus $100 billion for 100 percent SDT capability? ` `  That is correct with respect to converters. That does not include the costs of SDTV display receivers themselves. In other words, we are speaking here only of devices that are capable of taking the SDTV or the HDTV, as the case may be, signal and transforming it so it can be displayed on an analog NTSC television set. %W0*H&H&@@Ԍ` `  It's consumer who actually want to see HDTV pictures in HDTV format would then have to spend additional money to acquire the large screen HDTV displays. That's not included in that estimate. ` `  AUDIENCE PARTICIPANT: And do the other panelists agree that the HDTVcapable converters for the NTSC set would be twice as expensive as the NDSC excuse me the SDTVcapable ` `  DR. OWEN: I have no idea. ` `  DR. ROHLFS: Yes, I have no idea either. ` `  AUDIENCE PARTICIPANT: Thank you. ` `  DR. SELWYN: And, you know, I am an economist, not an engineer. And the source of the source of my information, which is cited in the papers that were submitted with the computer industry comments, was studies that were conducted by industry, knowledgeable industry members who looked specifically at the components of this equipment, and attempted to project the change in costs over time based on the operation of Moore's law and the assumptions with respect to increased manufacturing efficiencies based on higher volumes of product. ` `  AUDIENCE PARTICIPANT: Can I make a comment ` `  MR. FARRELL: Behind you. Yes. ` `  AUDIENCE PARTICIPANT: Yes. Regrettably, I or anyone else who knows the answers to these questions were%X0*H&H&@@ not invited to be on the panel. I won't even bother to phrase it as a question to Dr. Selwyn, but just note that numerous parties filed for advice to this study. People who genuinely do know something about putting these products that are showing that those costs are based on completely fallacious assumptions and have no basis in value. It pains me to hear them repeated as if they are the value and should not be the base of a discussion on them. ` `  DR. SELWYN: Okay. May I respond to that, please? ` `  MR. FARRELL: Yes, let me just repeat it. ` `  DR. SELWYN: Okay. ` `  MR. FARRELL: The comment was that the cost estimates are wildly, irresponsibly wrong. ` `  DR. SELWYN: We have looked at the reply comments and the most obvious observation about these criticisms of what we have done is that they sort of ignore the entire distribution channel, and go solely to manufacturing. ` `  The consumer electronics industry as a general matter experiences manufacturing costs running at about onethird of the cost of the final product when brought to market, to the retail market and sold to the consumer. And if you in fact take the estimates that have been provided for manufacturing costs in those reply comments to which you just referred, and you multiply them by three, you come up with which is what you must do in order to provide the%Y0*H&H&@@ conversion for manufacturing cost to delivered retail product then you come up with essentially the same price level that we have estimated. ` `  In addition, it also appears that in developing those replies assumptions were made with respect to the quality of the unit and the capabilities of the unit that perhaps reflected a lower quality than we had assumed. ` `  But our assumptions were consistent and based largely upon statements by members of the TV manufacturing industry with respect to cost relationships that are consistent with those, and the information that you have just referred to is simply incomplete, and therefore is irrelevant. ` `  MR. FARRELL: Yes? ` `  AUDIENCE PARTICIPANT: How did the marketing for all this hardware get arrived at? Do you have any [inaudible]. I go into buy a new TV set once every ten years or so. The last time I was in there maybe two years ago, and it was difficult to get any information at all about the quality of the [inaudible]. There is no information to make a choice. ` `  MR. FARRELL: The question is how does the retail marketing of television receivers factor into all of this? ` `  DR. OWEN: If you watch television, you will see a lot of ads, and they will explain to you which one is best.%Z0*H&H&@@Ԍ` `  (Laughter.) ` `  MR. FARRELL: You have to have a television first. ` `  Yes? ` `  AUDIENCE PARTICIPANT: The discussion has focused largely on cost of receivers and receiver volumes, and we have a wildly wildly successful HDTV service. And I don't hear anyone thinking about 10, or 20, or 30 years down the road should that scenario prove out with the expected drop in the cost of receivers. But the other element, the spectrum element and the broadcasting service, how do you factor in the value of that public interest justification, so to speak, for those decades of service into this scenario as to whether or not a standard is worth the bang for the buck? ` `  MR. FARRELL: I think the question is what's the public interest component of your thinking, and perhaps also how do you think about what's happening 30 years rather than five to 10 years down. ` `  DR. ROHLFS: I think the focus in terms of standards discussion and a lot of the policies is really the startup problem, and the issue is if we can if we believe that there may be an equilibrium in which a lot of people are purchase HDTV sets voluntarily, and they think they got a good buy, manufacturers are making a profit, broadcasters are benefitting as well, everybody is better%[0*H&H&@@ off. But the question is how do we get from there to here. ` `  And getting from there to here, getting from here to there involves solving a very difficult startup problem, which is what we have we have been focusing on here, I think, today. ` `  MR. FARRELL: Yes? ` `  AUDIENCE PARTICIPANT: Yes. Mr. Rohlfs, I have a question for you. It seems that one of the arguments in the document holds ATSC standards is it allows broadcasters the flexibility to pursue broadcasting in whatever particular format that they feel possible for the broadcast. However, you also stress that mandating receivers capable of receiving all of the HDTV format is not preferred. To me, that seems to preclude the argument that adopting a full standard would provide more flexibility to broadcasters. ` `  I was wondering if you could outline the benefits of adopting the full grand alliance standards and I'm sorry the NTSC standards, and not a receiver standard. ` `  DR. ROHLFS: The benefit is it would allow flexibility in outcomes, depending on how the facts evolve over time. For example, one way the facts might evolve over time is that Dr. Selwyn's estimates are completely wrong and the cost of providing flexibility are a tenth or a fifteenth of what he said. In that case, the natural equilibrium would be that the sets would probably accommodate a wide%\0*H&H&@@ range of formats; maybe not the whole 18, but a wide range of them. ` `  Another is that the set manufacturers, when they are actually getting ready to produce, discover that it costs a lot of extra money to accommodate particular formats, and they talk to and then there could be discussions among the industry participants that it's going to cost a lot of money for us to produce these sets. How about if you don't broadcast in these formats that are very expensive for us to accommodate. And as a result of those discussions a preferable equilibrium could be developed. This allows flexibility in terms of the market processes beyond the initial standard setting process. ` `  Now, I am not sure I would really recommend I'm not sure I would recommend this, and I think I need further study, but it certainly has the advantage of providing flexibility and not locking not locking us into, prematurely into deciding which of the 18 or whether we want to all 18 now, that that can be postponed to the future. But it does it does require further coordination among the parties, and there are some costs associated with that as well. ` `  MR. FARRELL: Yes? ` `  AUDIENCE PARTICIPANT: If you will tolerate me with one additional comment in response to this discussion,%]0*H&H&@@ the industry has already examined the issue very closely and found that an almost negligible additional cost, even with the first unit, all 18 formats to be supported. And the consumer electronics industry is saying there is no need to mandate the 18 formats because through an entity they all stand up and say they wouldn't dream of providing anything that did not include all of the 18 formats. So it's not an issue at all. ` `  MR. FARRELL: Okay, the comment is it will be cheap to provide all 18 formats, and so it really wouldn't be much of an issue. ` `  DR. SELWYN: Can I ask a question to the questioner? ` `  MR. FARRELL: Sure. He gave an answer. Yes. ` `  (Laughter.) ` `  DR. SELWYN: Now, you know, roughly speaking, in order to support HDTV you need more memory, you need more processing capability than for SDTV. And if I interpreted what you just said is that that doesn't cost anything. ` `  AUDIENCE PARTICIPANT: That is not true. I highly recommend that you read the reply comments in your own study. You could learn a great deal. It turns out that techniques have been demonstrated by Hitachi and others where you can do partial NPEG decoding, use the same amount of memory that is possible for an SDTV format, and a less%^0*H&H&@@ capable processor to decode the full HDTV quality format and SDTV quality at about the same cost. There is no necessary additional cost. That should be great news. ` `  DR. SELWYN: My understanding of the of the response was that the Hitachi format offers a solution to this. My understanding of the Hitachi format is that it operates on an incremental image differentiation process that creates jerky images, particularly for fast action type of material, and that it probably is not an acceptable alternative. It's not it's not simply cutting down or stripping out the excess detail from the high resolution image, but it's sort of losing portions of the of the movement and then correcting itself periodically when things get too far out of whack. ` `  People we have spoken with who have seen it demonstrated report that it is not something that consumers would find acceptable. ` `  AUDIENCE PARTICIPANT: I have seen it, and I don't share that opinion. ` `  DR. SELWYN: Well. ` `  AUDIENCE PARTICIPANT: It's better now than their first try at it. They have improved it and they are continuing to improve it. ` `  MR. FARRELL: Okay, the comment was Hitachi is improving and it's continuing to improve. %_0*H&H&@@Ԍ` `  Yes, in the back. ` `  AUDIENCE PARTICIPANT: Just to respond to the statement of Hitachi. You might be interested to know that Glen Reitmeyer said the Hitachi quality is so low that it's not good enough to sell. And he's at Sarnoff Labs so that should probably ` `  MR. FARRELL: Okay, so disagreement on Hitachi. ` `  AUDIENCE PARTICIPANT: I might add that we saw the demonstration of Gary Demos' version of the baseline standard, and he thought it absolutely unacceptable, and didn't even show half [inaudible]. ` `  MR. FARRELL: Okay, and the Demos standard is also being maligned. ` `  (Laughter.) ` `  MR. FARRELL: Yes? Yes? ` `  AUDIENCE PARTICIPANT: Mr. Owen, you discussed the performance standard versus design standard, I believe. Would you distinguish more clearly the difference? ` `  DR. OWEN: Yes. A ` `  MR. FARRELL: Do you want to repeat the question? ` `  DR. OWEN: Yes. I am asked to distinguish more clearly between design standards and performance standards. ` `  A design standard says that the brick wall has to be made up of bricks that weight 3.7 pounds, and are two inches by six inches by 2.7 inches, and have the following%`0*H&H&@@ clay content and titanium dioxide content, and the mortar has to be to the following exact ingredients, and the wall should be eight feet high. ` `  And a performance standard says the wall should be eight feet high. ` `  AUDIENCE PARTICIPANT: And in the RF application, what would it be? ` `  DR. OWEN: The equivalent the equivalent in an RF application is that the interference levels at particular points, geographic points, can't exceed certain levels at given frequency ranges. ` `  MR. FARRELL: Yes? ` `  AUDIENCE PARTICIPANT: I had just two simpleminded general questions. ` `  How does it doesn't seem to be be direct involvement in the decisionmaking process of the public about what costs will be imposed [inaudible]. The second part is has the economists estimated the cost [inaudible]. ` `  MR. FARRELL: Okay, just to repeat the questions, is it worrying that consumers don't seem to have an active role at the present point in time? And secondly, what is the costs, broadly interpreted, of delay in this decision? ` `  DR. ROHLFS: Well, the role of the consumers is very simple. Nobody makes any money if they don't buy the HDTV sets and watch the programming. So the consumers are,%a0*H&H&@@ at least in that sense, are being are part of the picture all along. ` `  I mean, I can't think of it's unusual, for all I know, for consumers to participate directly in standard setting process, but if they don't like what comes out they don't have to buy it. And I think that's the general answer to the involvement of consumers. ` `  I mean, with regard to the cost of delaying a year, the question is could I estimate it? Yes. Have I done it yet? No. ` `  MR. FARRELL: Lee. ` `  DR. SELWYN: Well, this is not exactly a totally voluntary act by consumers. If the Commission and the administration decide that at some point in the future, some identified point in the future NTSC analog broadcasts will cease, consumers will be forced to either give up TV entirely, or make a purchase of something. ` `  Now, what we have going for us with respect to issues of delay, the costs of the electronic components that are needed to support converters and digital receivers are dropping, and they are dropping rapidly. So, in fact, from the consumer perspective, a delay of even a few years actually potentially reduces the transition cost, and it's very sensitive to the year in which purchases are made. !!H!!HIf you delay it a few years, those cost do drop.%b0*H&H&@@Ԍ` `  Now, offsetting that is the delay then in the date at which the administration would be able to, whoever watch it is at that point in time, would be able to realize the revenues associated with the reclaimed analog frequencies. But the consumer decision is not a free decision. It's being distorted in large part because of the fact that these valuable frequencies are basically being used without payment by their present licensees, and at some point a payment will be received. ` `  But it really isn't obvious to me that there is very much social cost of delay if you get rid of the distortions or at least discount the distortions that exist in the present relationship between what broadcasters pay for the use of frequencies, and what other users will be required to pay once these frequencies are auctioned off. ` `  MR. FARRELL: Yes? ` `  AUDIENCE PARTICIPANT: I've got a question for Dr. Selwyn. You talked about the broadcasters having an incentive to keep the set frequency. Once you have a transition to digital made, why do they have that incentive? It seems like they would have costs. What benefit are they deriving from that of keeping the original analog channel if they have fullblown digital service? ` `  DR. SELWYN: Oh, if they have a fullblown service, then that's fine. But if that transition is never%c0*H&H&@@ completed. You know, most people have multiple, two, three, four television sets in their homes. The average is something, I think, around 2.5 or thereabouts. And the consumer, you know, may be willing to spend some significant amount of money perhaps to convert the primary set, the one in the living room, but the 9inch screen in the kitchen or in the bedroom, you know, might be delayed. ` `  And if the penetration rate of digital receivers is not sufficient to justify the elimination of NTSC channels, then the broadcasters get access to both the existing as well as the new channel. They can use the additional channel for multiple, potentially for multichannel or digital frequency allocation to support multichannel SDTV broadcasts, or HDTV, if they have that flexibility. If there is no market for HDTV, it's quite possible that they would benefit by actually being able to simultaneously offer free overtheair service as well as perhaps several pay TV digital channels on that on the new digital frequency allocation, while at the same time maintaining their analog channel and the market that it serves. ` `  MR. FARRELL: Okay. For the benefit of our television audience, the question was what is the gain to the broadcasters from keeping the second channel if indeed there is an effect DTV transition. 3Of course, regular%d0*H&H&@@ television viewers are good at guessing the question from the answer in any case. ` `  Yes, Chuck. ` `  AUDIENCE PARTICIPANT: Yes. A question for Dr. Selwyn. ` `  At the beginning of your response time you responded to my earlier question about the recent cable lab's standard for digital cable. And if I heard you correctly, that standard, which is general instruments symptom information, MPEG2, main level, quality AC3, and QAM. ` `  Did I hear you correctly? Did I hear you correctly when I thought I heard you say that that could be displayed by the Cicats display box? ` `  MR. FARRELL: The question is the cable lab's announced standard, can it indeed be displayed by the Cicats display box? ` `  DR. SELWYN: Kevin, do you want to help me out here? ` `  AUDIENCE PARTICIPANT: What he said was that Cicats transmission standard would be carried over cable system. It's the same it's the same [inaudible] levels. It's all the same. The only thing that's different is that you don't specify the profiles that a video format [inaudible].%e0*H&H&@@Ԍ` `  MR. FARRELL: I'm sorry. I'm not going to try to repeat that. ` `  (Laughter.) ` `  MR. FARRELL: Yes? ` `  AUDIENCE PARTICIPANT: What was the income that we got from the direct broadcast satellite use of frequencies than from cable uses? ` `  MR. FARRELL: I'm sorry. What was ` `  AUDIENCE PARTICIPANT: Income to the government is gained by direct broadcast use of frequencies than cable use? ` `  MR. FARRELL: Well, cable doesn't use spectrum. ` `  The question is what income to the government is derived from satellite broadcast ` `  AUDIENCE PARTICIPANT: Direct broadcast. ` `  MR. FARRELL: direct broadcast satellite versus cable. Anybody know? ` `  AUDIENCE PARTICIPANT: I guess the thing is that broadcasters should be paying for their frequencies. ` `  MR. FARRELL: Oh, I see. Well, I think let's see. I think Dr. Selwyn's point was that ` `  DR. SELWYN: I think everybody should pay for frequencies. I mean, I don't know, you know, the history of when these frequencies were assigned. I assume by cable use you're speaking of wireless cable, MDS type? %f0*H&H&@@Ԍ` `  AUDIENCE PARTICIPANT: Cars and Cband phones. ` `  DR. SELWYN: Okay. Oh, all right, the satellite. ` `  AUDIENCE PARTICIPANT: In cars. ` `  DR. SELWYN: You know, if the decision is made that radio spectrum is a commodity, that it has economic value and that its use should be earmarked to the highest bidder, then the only way that you can truly reach an economic, an economically optimum result is to require that all users pay for the use of frequencies. ` `  Now, the you know, the only exception to that is that if there is some overriding public interest, such as reserving certain frequencies for public safety purposes where in an auction process the public safety agency would not be in a position to pay for frequencies in the same way simply because of the tax structure or the funding structure. ` `  But as a general matter we should be letting the marketplace make these decision. And I would certainly have no problem in imposing, if the obligation is imposed upon broadcasters to pay for frequencies, I certainly would agree that cable and satellite broadcasters should pay for theirs as well. ` `  MR. FARRELL: Okay, one last question in the back. ` `  AUDIENCE PARTICIPANT: How can you filter in economically the cost I don't know what [inaudible] the%g0*H&H&@@ people who don't have faith to watch television, don't subscribe to any services they would pay for. Is it economically correct that if broadcasters pay for the frequencies and then the public don't have any preference for that service by paying, or is there some type of cost [inaudible] that portion of the [inaudible]? ` `  MR. FARRELL: Okay, I think the question gets at broadcasters paying for spectrum, and the question is if broadcasters paid for spectrum, would that imply that viewers had to pay to watch television? And if so, what are the welfare consequences of that? ` `  DR. SELWYN: Broadcasters do pay for spectrum. They pay for it right now, but they pay for it in the form of private auctions. They pay for it in terms of when when properties are sold the buyer is paying for spectrum to the seller. So there is there is already a marketdriven process to pay for spectrum. It just happens that those payments don't go to the government. They go to the seller of the property, and then they create opportunity costs for those broadcasters who retain their licenses, retain their properties because they have a sense of what the signal is worth in the marketplace. ` `  It isn't clear that substituting a payment to the government for a payment in this private market would necessarily alter the costs and impose new costs on%h0*H&H&@@ broadcasters. It would certainly change some of the values of these properties in terms of the private market because the government would not be taking a larger chunk of them. But I don't the price levels are market driven. They are based upon what revenues the broadcaster can collect from advertisers and others in its market. And I don't see that as necessarily being any different if we go to a government frequency auction versus a private frequency auction. ` `  AUDIENCE PARTICIPANT: How would you compensate the broadcasters that paid for their utilities now? How would you [inaudible] so that the next time they sold it the money wouldn't go to them, it would go to the government? ` `  DR. SELWYN: Well, that's a good question, and obviously you have to have some transition. However, these issues, you know, have come up in other fields with respect to land leases and land grants and other things. ` `  I am not by the way, I don't want to be recorded as recommending precipitously that, you know, a week from Tuesday that all broadcasters in the United States start paying for their frequencies. That's not my recommendation. I am simply pointing out that the disparity between the current obligation of broadcasters with respect to payment for frequencies and with respect to payment for the additional channels that would be granted to them to support ATV and HDTV, and the fact that the government is%i0*H&H&@@ salivating over the possibility of $100 billion plus in revenues for the sale of the reclaimed analog frequencies is creating a very serious economic distortion in this whole process, and I believe that the consumer indeed is being left out of it in part because of that reason. ` `  MR. FARRELL: Okay. Well, let's see. I think we had better close. I would like to thank all of our distinguished panelists for generously giving us their time and their views, and thank everyone who came, and we appreciate it very much. ` `  (Whereupon, at 4:00 p.m., the forum was concluded.) // // // // // // // // // // // // //%j0*H&H&@@  ? (! j   ` X V Heritage Reporting Corporation &(202) 6284888V "REPORTER'S CERTIFICATE ă   ?X  FCC DOCKET NO. : N/A  ?  CASE TITLE : TELEVISION STANDARDS  ?x  HEARING DATE : November 1, 1996  ?  LOCATION :  Washington, D.C.  I hereby certify that the proceedings and evidence are contained fully and accurately on the tapes and notes reported by me at the hearing in the above case before the Federal Communications Commission. Date: _11/01/96_ _____________________________ Official Reporter Heritage Reporting Corporation 1220 "L" Street, N.W. Washington, D.C. 20005 Bonnie J. Niemann  ? <! TRANSCRIBER'S CERTIFICATE ă  I hereby certify that the proceedings and evidence were fully and accurately transcribed from the tapes and notes provided by the above named reporter in the above case before the Federal Communications Commission. Date: _11/12/96_ ______________________________ Official Transcriber Heritage Reporting Corporation Joyce F. Boe  ?  <!PROOFREADER'S CERTIFICATE ă  I hereby certify that the transcript of the proceedings and evidence in the above referenced case that was held before the Federal Communications Commission was proofread on the date specified below. Date: _11/12/96_ ______________________________ Official Proofreader Heritage Reporting Corporation Don R. Jennings