(FORTUNE Magazine) – EVER WONDER why there's no Channel 1 on your TV? Half a century ago, when TV was a baby, there was a Channel 1. But ham radio and aircraft communications on adjoining frequencies caused serious interference, so the Federal Communications Commission took Channel 1 away. The FCC never renumbered the remaining frequencies, and TV dials have started with Channel 2 ever since. Moral: The path of technology to market is rarely simple or logical. So it is with high-definition television in the U.S. HDTV sets have wider screens and a much sharper picture than today's TVs, and they sound as good as compact disc systems. They are now available -- for about $35,000 -- only in Japan, where the NHK network has been broadcasting HDTV signals since last year. The technology has been slow in coming to America, in part because U.S. broadcasters are in no hurry to have it. While TV set makers confronting slumping sales view HDTV as a potential jolt of adrenaline, for broadcasters it is pure poison -- all extra cost, no extra income. Despite their misgivings, however, in the mid-1980s broadcasters invoked the demands of HDTV as an excuse to keep the government from parceling out surplus channels within the broadcast spectrum to other users who might cause local interference -- operators of mobile telephone systems, for example. The broadcasters argued that they would eventually need those channels to transmit HDTV programs as well as conventional ones. They won their case, and now a newly enthusiastic FCC is pressing them to get on with it. As a result, the U.S. may have HDTV by 1995 -- sooner than most had believed possible only a few years ago. Under the FCC's aegis, a private group funded by broadcasters begins testing HDTV transmission systems in April. If all goes according to plan, in 1993 the FCC will decide on the first completely new television transmission standard in more than 50 years. A handful of European, American, and Japanese companies, including Zenith, AT&T, Thomson, Philips, and General Instrument, are feverishly perfecting systems for the tests. Happily for American consumers, the U.S. introduction of high-definition television may have been delayed just long enough to take advantage of a major breakthrough. That technical advance could also keep the pioneering Japanese from winning the contest to develop a system for the U.S., as Japan is already committed to older technology developed for its home market. For decades the American television system, the world's first, has also been the worst in picture sharpness of the three worldwide standards. (The other two were developed in Europe.) Now the U.S. may end up with the best TV system -- and one invented by an American company. The breakthrough technology -- digital television transmission -- has generated both excitement and anxiety among HDTV advocates. Those who favor it say it will make for perfect reception. As a consequence, within the past nine months most of the HDTV contestants have switched to digital. But digital TV signals have never been broadcast from an earthbound transmitter, only from a satellite -- so the last-minute change is a gamble. Concern about American competitiveness has freighted HDTV with significance beyond its promise of enhancing the viewer's enjoyment. It has become a touchstone for the ability of the U.S. to reclaim a major role in the consumer electronics industry. The FCC has said that in choosing a standard, it will consider the country in which the proponent does its research and development. Backers of digital transmission say that the underlying computing technology plays to American strengths in microprocessors and that its emergence shows the U.S. can leapfrog the Japanese. The celebration may be premature. The FCC will require the winner of the contest to license its transmission and receiver technology to any company, domestic or foreign, that wants to take part in HDTV development -- so any head start will evaporate within a year or two, probably before the market for HDTV sets becomes substantial. (It shouldn't take long for the amount HDTV adds to the price of a set to come down to $700 or so.) As for HDTV's reviving U.S. electronics manufacturing, forget it. No matter who wins the contest and cashes in on the patent rights, the big money will go to the companies that actually make the new TV sets and production equipment. They are mostly foreign owned. In any case, the color TV business, with annual U.S. sales of about $6 billion, is hardly big enough to drive the consumer electronics industry (1990 U.S. sales: $33 billion), let alone the electronics industry as a whole ($282 billion). Moreover, nearly half the color TV sets sold in the U.S. are already made in America, while Zenith, the only remaining American TV set company, produces many of them in Mexico. The FCC process is unlikely to alter market share in set manufacturing. KIM MATTHEWS is sitting at a keyboard in a darkened room. He punches in a code, and on the video monitors next to him a surrealistic scene unfolds. Against a background of blue sky and puffy clouds, multicolored egg-shaped objects move in stately procession, entering the backs of blank-faced humanoids and emerging on the other side. To a lay person the image seems virtuosic in its rendering of three-dimensional forms. Matthews studies the high-resolution display. ''See the egg as it comes through the body?'' he asks. ''It's just slightly fuzzy around the edges.'' In the parlance of the HDTV trade, Matthews has golden eyes -- he sees detail that many others overlook. The darkened room is part of AT&T's Bell Laboratories in Murray Hill, New Jersey. AT&T is working on one of the systems that the FCC will test; Matthews, 31, a computer specialist, is one of several dozen technicians assigned to the project. The company is pooling its resources with Zenith, which has been working on HDTV for years. People in the industry call the pair the American Consortium, not to be confused with the American Alliance (General Instrument and MIT) or the Advanced Television Research Consortium (Philips of the Netherlands, Thomson of France, the David Sarnoff Research Center, and NBC). Both of those teams are also in the HDTV sweepstakes. NHK is developing a system on its own. Broadcasters have modified the present transmission standard many times since its adoption in 1941. Known as NTSC, after the National Television System Committee, which devised it, that standard was able to accommodate without basic change such enhancements as color and stereo sound. This time will be different. Two defining characteristics of any standard are the number of horizontal scanning lines -- a determinant of sharpness -- and the aspect ratio, the relationship of width to height. HDTV will alter both. The scanning lines, which are formed by a beam of electrons, will increase from NTSC's 525 to 787.5, 1,050, or 1,125, depending on which system the FCC anoints. The aspect ratio will widen from 4 by 3 to 16 by 9 -- roughly the shape of a movie screen. Each program will go out twice -- once on the ordinary NTSC channel and again on the high-definition channel. Though HDTV is a quantum leap forward, it lacks the economic imperative that pushed color TV along. In the 1950s NBC, the broadcaster, RCA, which made color sets, and the Sarnoff labs, which developed color transmission, all reported to the same man, David Sarnoff. He figured that his company would make a good return on its investment in color programming and studio gear when RCA sold millions of sets, and he was right. RCA gave away the Sarnoff Center, to SRI International, a research and consulting firm. None of today's broadcasters make TV sets, so none can profit similarly from HDTV. In 1987, after the FCC granted the networks' petition to reserve unused TV frequencies for HDTV, the agency announced it would set up the industry-funded advisory committee that will eventually select a high-definition standard. The committee is headed by a former FCC chairman, Richard Wiley, now a lawyer in Washington, D.C. Local broadcasters instantly panicked. Wild estimates circulated of how much each station would need to spend for HDTV; the most notorious figure was $38 million, so high that it seemed to threaten the existence of the business. At the time, the average network affiliate had annual pretax profits of only $3 million on revenues of $16 million, and independents made next to nothing. Even if the broadcasters decided not to introduce HDTV, cable TV operators -- who have wired over 55% of the country's 93 million TV households -- would be able to offer it. The stations, already fighting for viewers, faced irrelevancy. THAT $38 MILLION estimate wasn't really accurate, since it represented the total replacement cost of a broadcaster's equipment, not an upgrade for HDTV service. The latest numbers, based on separate studies by CBS and the Public Broadcasting System, range from around $1 million or $2 million for a station that simply wants to pass along a network feed to $10 million or $15 million for a major station with an HDTV production studio. But the original estimate, which came at a time of rising debt and increased competition, was so scary that it helped cause the market value of stations to fall 20% to 25%. Once the FCC had set up the advisory committee, the call went out for companies to develop an advanced broadcasting system. After dropouts and consolidations, the number of proposed systems has been winnowed from 23 to six (see table). One is called enhanced-definition television, or EDTV -- wide screen, digital sound, but only a little more picture clarity than today. Its proponents -- Philips, Thomson, Sarnoff, and NBC -- say it could be a halfway house on the path to HDTV. Broadcasters could transmit an EDTV signal over the same channel as the current NTSC signal with relatively inexpensive modifications compared with those required for HDTV. Opponents answer that EDTV produces a second-rate picture and would delay the adoption of high-definition TV. The FCC decided to test EDTV, but it will pick an HDTV standard first -- in effect scuttling the proposal unless HDTV bombs. Each HDTV system must master two disciplines: compressing the signal -- fitting a lot of information into a little space -- and transmitting it from the broadcast station to the home. All HDTV systems will use digital compression, which selectively discards inessential bits of information within the signal -- for example, some of the detail in objects moving so fast that the eye sees them only as a blur. Once a signal is compressed, the ability of the transmission system to convey its message accurately becomes vital. Originally the applicants planned to transmit signals in analog form -- a stream of pulses corresponding in strength to the voltage that each pixel, or dot on the screen, is meant to receive. Today's TV and radio transmissions use analog signals; so do LP records. The conventional wisdom changed last year after the surprise entry of General Instrument, a New York satellite and cable equipment company. Jerrold Heller, head of GI's HDTV project, says the company jumped into the fray because the planned systems would be unfriendly to satellites. The three million U.S. households that get their TV signal via satellite would have had to double the diameter of their dishes, now five feet to ten feet across, in order to receive analog HDTV. General Instrument had experimented with digital transmission for satellite communication and found digital signals easier to send error-free than analog signals. Because digital signals are also easier to detect at a distance, broadcasters can use smaller, less powerful transmitters, not only saving money but also reducing the chance of interference with other channels. That advantage is crucial. To prevent interference in today's system, operators who use the same channel must be at least 170 miles apart. But the total number of channels within the broadcast spectrum is limited. For every broadcaster to get a second channel, HDTV stations will have to be able to operate within 110 miles of another user of the same frequency without causing interference. On June 6, 1990 -- two days before the application deadline -- General Instrument became the last HDTV contender and the first with an all-digital system. Even if GI had nothing to lose, its move was audacious. No one has ever successfully sent a digital signal through the air, except from high- powered satellites and very-high-frequency microwave transmitters. Satellites and microwave towers have the advantages of power and unimpeded lines of sight, either to dishes or other microwave towers, while broadcasts of all sorts -- weaker and emanating in all directions -- are more susceptible to earthbound interference from sources as mundane as wet leaves. Certain kinds of interference could be particularly hard on digital signals. The most nettlesome is reflection from buildings and moving objects. Analog signals represent an infinite number of points on a continuum. When they bounce off buildings, the result is ghosts on the screen, but ghosts are tolerable if they are close to the real image. A digital signal, however, is a set of instructions in 1s and 0s, and a slight reflection can turn it into a set of instructions for something completely different -- most likely gibberish. Action scenes can also freak out digital systems. The quantity of information could overwhelm the ability of a set to translate the instructions and get the pictures on the screen. Motion would become choppy, something the eye is exquisitely sensitive to. GENERAL INSTRUMENT has earned kudos for its clever solutions to these problems, at least in computer simulations. The system protects the picture from breaking up by emitting a periodic test pulse. The receiver is programmed to recognize the pulse and calculate how reflections have changed it; the set can then correct all incoming signals. Says Jim Gaspar, a manager at Panasonic's advanced-television labs, who saw a GI simulation last year: ''We were absolutely amazed at how good it was.'' In the wake of GI's entry, the competing groups had to rethink their strategies. Even as recently as a year ago, none of them believed the test schedule left enough time to perfect digital transmission. Now they could no longer risk backing an obsolescent technology. Since November, three have switched to digital: the Zenith-AT&T group; MIT, now pooling interests with GI on a second system as well; and the Sarnoff consortium, which added a digital HDTV system alongside its analog EDTV entry. The test schedule holds. ''The FCC has asked us to do something we think is impossible,'' says Jack Fuhrer, director of Sarnoff's television research laboratory. ''But four of us are trying like mad to do it.'' Of all the contenders, only NHK is sticking to its analog guns. The company argues that analog transmission is more appropriate for a consumer product: The technology is proven, and analog sets may be somewhat cheaper to make since the receiver is less complex. NHK is doing research in digital transmission for satellites but admits that exporting the technology to the U.S. would be politically impossible. The company has chosen analog as the basis of its HDTV system in Japan. How could it justify changing to a different and presumably superior technology overseas? One can glimpse the future in a control room of the Ed Sullivan Theater on Broadway in New York City: On a wide-screen monitor, pedestrians stroll the Champs Elysees, the Arc de Triomphe in the distance. The image is of conventional video quality. The lines of resolution are clearly discernible, and the picture shape is boxy, leaving blank a three-inch strip on either side of the tube. Soon, in a slow wave moving from left to right, the picture transmutes into high definition. The effect is startling -- like lifting a scrim to reveal an open window through which an uncannily three-dimensional vision appears. The scene was created by Captain New York, which took over the theater last year and converted it into a high-definition production facility. Captain is shooting the program material that all the HDTV systems will have to show when tryouts begin at the Advanced Television Test Center in Alexandria, Virginia. Workers are fitting out that $5 million facility with computers, television monitors, videotape recorders, and electronic measuring devices. + When its time comes, each rival HDTV group will wheel in up to eight racks of video and audio equipment that will prepare the signal for transmission and serve as the back end of a TV set -- all the electronics except the display monitors. The staff of the center will feed test pictures through the system, adding interference that mimics a hostile environment: reflections, radio transmissions from adjacent channels in the spectrum, lightning, a vacuum cleaner running in the next room. TV engineers, technicians, and electronics experts who serve the advisory committee will judge the results in Alexandria. Videotapes will go to a nifty communications lab near Ottawa, set up by the Canadian government, for so-called subjective tests in which ordinary couch potatoes recruited from a local university will offer their opinions. Assuming that at least one of the systems works, the winner will then undergo field testing to see if the lab results hold in the real world. WHEN THE FCC announces the new standard in 1993, the moment will mark an unusually fruitful melding of the public and private sectors. Richard Wiley, the advisory committee chairman, says, ''The theory of the committee is that it is a welter of private interests. Nobody is pristine, except me. I can honestly say I don't care who wins.'' All the competing groups sit on the committee, as well as other broadcasters and manufacturers, so the verdict is unlikely to be unanimous. But both Wiley and FCC Chairman Alfred Sikes have won wide praise for mediating conflicting interests and pointing the competition toward the technological frontier. Sikes also stood up to NBC and its European partners in relegating EDTV to the sidelines. Sikes makes no bones about favoring a group that does research and development in the U.S. ''The communications culture of the country in which you do your R&D will influence you, and a company obliged to work here will look beyond the present system to what we need in the next generation,'' he says. ''The Japanese began their research years ago in a culture without the same emphasis on land-based broadcast. When they came here to demonstrate HDTV in the early 1980s, they brought a satellite system.'' The future of broadcasting aside, the pressure is also on Sikes to promote job creation. His R&D argument may well serve a dual purpose. Asked when he thought he would have an HDTV set in his house, Tom Stanley, the FCC's chief engineer, paused, made some mental calculations, and said: % ''2005, which is the year I retire. By then there will be enough programming so I won't be squandering my Social Security money on some yuppie service.'' While Stanley may not be alone in holding off, some industry experts predict that HDTV makers will sell their millionth set within seven or eight years of introduction. That would put HDTV at the 1%-of-market milestone in about the same time as color television. The process of selecting a new television standard that should last well into the next century comes with paradoxes to spare. Most of the contenders in the advanced TV competition are betting their bottom dollar on technology that no one knows will work, for broadcasters who still fear it may ruin them, and partly in the name of national economic goals it will do little to further. But ah, those pictures . . . they'll really be something.