Digital TV: Leaving viewers in limbo
Flipping the switch on digital television will be a flop for plenty of consumers.
By Marc Gunther, FORTUNE Senior Writer


NEW YORK (FORTUNE) - Your old TV set may well go dark in 2009, and believe it or not, that's a good thing.

That's because, at the end of last year Congress approved legislation that set a date for the switch from analog to digital television -- February 17, 2009.

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But managing this transition -- which will render about 70 million TV sets obsolete -- will be not be easy. Nothing is, when the federal government gets involved. Indeed, Congress will soon have to revisit this issue, to clean up this mess it has created.

This fixed switch date allows consumers, electronics manufacturers, broadcasters, cable and satellite operators to plan for the transition. All have a lot at stake.

Viewers adrift

But for consumers with one of those 70 million sets -- many of whom are likely to be poor, elderly or uneducated, being forcibly switched from one technology to another will be a nightmare.

To be sure, the transition will facilitate a lot of progress for both the tech industry and the public sector.

Once TV stations switch to digital transmission, they will return to the government a big chunk of the radio spectrum they currently use to transmit their analog channels.

Some of that spectrum will go to first responders -- police, fire and public safety officials -- so they can better communicate with one another. Breakdowns in emergency communication slowed the response to the September 11 terrorist attacks and Hurricane Katrina. New spectrum should help.

The rest of the spectrum will be auctioned off to the highest bidders -- probably tech companies. The sale of this valuable, scarce real estate is expected to bring in about $10 billion, maybe more. That will help reduce the federal budget deficit.

Fostering innovation

Better yet, when the spectrum is sold off, the companies that buy it will use it to develop new technology and services. Cheap, ubiquitous wireless broadband access is one possibility. Mobile TV or music services are others.

Scheduled for 2008, the auction will be the biggest spectrum sale since a 1994-95 spectrum auction. That sale helped boost the mobile phone industry, boosting the number of cell phone subscribers in the U.S. from 24 million to 200 million. It also helped drive down the cost of wireless minutes from an average of 47 cents a minute to 9 cents a minute, according to analysis from financial services firm Stifel Nicolaus.

"With the new auction, we will finally become a broadband nation," says Blair Levin, a Washington analyst with Stifel Nicolaus. "Google, Yahoo!, Microsoft, Intel, Dell -- these companies will all benefit. The more broadband pipes you have, the more applications will come along, the more often you will upgrade your device."

Indeed, Microsoft (Research), Intel (Research), Dell (Research) and Cisco (Research) all joined a Washington lobbying effort called the High Tech DTV Coalition to push for digital television. Congress has been debating the issue for a decade, ever since the 1996 telecom bill gave digital spectrum to broadcasters, with the expectation that they would eventually give their analog spectrum back.

Government handouts

The difficulty, of course, is that the analog broadcast system will then be shut down -- which will leave most of today's TV sets unable to receive a signal over the air.

Roughly 20 million of those soon-to-be-obsolete sets are in homes where people don't subscribe to cable or satellite. The other 50 million or so are in pay TV homes, and used as second, third or fourth sets. Sets hooked up to cable or satellite services should work fine no matter what.

To avoid a consumer revolt, Congress has set aside about $1.5 billion to smooth the transition. Owners of outmoded TV sets will be eligible for two vouchers, worth $40 each, to help buy converter boxes that will enable today's analog TV sets to receive digital signals.

Yes, the very same federal government that is cutting back on college loans and food stamps will soon be issuing TV vouchers.

Consumer groups say this is only fair because the government is essentially reducing the value of people's property.

"If you are forcing consumers to adopt new technology -- whether or not they are ready -- you ought to provide full compensation for everyone," says Jeannine Kenney of Consumers Union.

Consumers Union says the transition, as currently planned, is "totally unworkable and unfair to consumers." It sure sounds that way.

Free TV signals scrambled

People are supposed to apply for the vouchers during a three-month window in 2008, and use them within three months. But there probably won't be enough vouchers to go around, and no one really knows how much converter boxes will cost. Disadvantaged people are most likely to be left behind in the scramble.

The nightmare scenario is that people who depend on free, over-the-air TV for news and entertainment will lose their access, or have to pay more for it, so that the rest of us can get faster service on our Blackberries and ESPN on our cell phones.

Congress will return to DTV soon to deal with these issues and others, notably some major wrangles between broadcasters and cable operators. This is a big deal. Let's hope Washington can get it right.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.