TV'S HIGH-STAKES, HIGH-TECH BATTLE It's over HDTV, the biggest thing since color. Both Japan and Europe are well ahead. Can the U.S. electronics industry catch up? Should the government help? If so, how?
By Norm Alster REPORTER ASSOCIATE Frederick Hiroshi Katayama

(FORTUNE Magazine) – WHEN color television burst upon the world in the early 1950s, the U.S. was in the vanguard: The first commercial broadcasts used a pioneering system developed by RCA. It was the end of the decade before full-scale color TV transmission began in Japan, and Europe did not have it until 1967. Now the most important advance in television picture technology since color is about to unfold -- and this time the U.S. lags far behind its rivals. The new technology -- HDTV, for high-definition television -- was recently described by a Federal Communications Commission advisory panel as ''an economic opportunity of almost unparalleled proportions.'' That's because HDTV delivers to the home screen images that have the clarity and richness of film. In the U.S. conventional TV pictures consist of 525 horizontal lines from the top of the screen to the bottom. Those lines start getting annoyingly visible as the picture stretches across ever bigger screens. By contrast, HDTV pictures have 1,000 to 1,250 lines. The signals typically carry four times as much information, making possible vividly detailed images on substantially enlarged screens. HDTV screens will be wider too -- a filmlike 5.33 to 3 width-to-height ratio instead of the squarer 4 to 3 of today's tubes. That will enhance the visual impact on TV of wide-screen epics like Lawrence of Arabia, Ben Hur, Doctor Zhivago, and Star Wars. HDTV will open the living room to pageantry, spectacle, and wide-open spaces -- anything, in fact, that demands breadth, breathes color, or sings with detail. Cavalry charges. Chariot races. Fiery aerial dogfights. Cattle herds against red-ribboned Western sunsets. Or, more prosaically, the stains on Columbo's ratty raincoat. The rich weave of a Blake Carrington suit. The rotation of the seams on a Dwight Gooden curve ball. HDTV won't lend verisimilitude to the overheated plots of Falcon Crest or Santa Barbara, but it will give them the look and feel of real life. The FCC had a tough time setting standards for color television back in the 1950s. It reversed its original choice of a CBS-developed system in favor of RCA's -- in part because RCA's was fully compatible with existing black and white sets, making possible a gradual changeover to the new technology. This time the choices are even harder. HDTV has attracted the attention of just about every major media and electronics company in the world, and each has a stake in what the FCC decides. As the likely replacement for 160 million American TV receivers and VCRs, HDTV could become a $145 billion business over the next 20 years. Because HDTV requires sophisticated integrated circuits and vast memory-chip capacity, U.S. semiconductor and computer companies are worried that offshore domination of HDTV could directly threaten their own core businesses.

Although HDTV research dates back to the 1950s, a number of technological advances recently converged to whisk it out of the lab and toward the living room. Research on human vision established that much of the information carried by conventional color TV signals -- the pattern of a tweed jacket on a running man, for example -- is lost on the viewer. By omitting or delaying the delivery of such data, HDTV can pack more useful visual information into the same video signal. This requires contributions from two rapidly developing types of semiconductors: digital-processing chips to massage the signal and memory chips to store the delayed information temporarily. That kind of memory would have cost $25,000 to $30,000 per set a decade ago, says William Glenn, an HDTV pioneer at the New York Institute of Technology. Today those memories go for $100 to $200. In the frantic global race to bring HDTV to the home, the Japanese -- who else? -- are a long step ahead of the pack. Japan Broadcasting Corp. (NHK) has developed a satellite-based system that will make its debut in that country by 1990. The Japanese have been pressing hard to get the rest of the world to standardize technology, staging splashy shows -- exhibitions for Washington lawmakers, pilot broadcasts from the Seoul Olympics -- to evangelize the infidels. Faced with the prospect of Japanese domination of HDTV, European governments and industry put together a consortium to develop a home-grown system. Europe's satellite-based HDTV should be fully in place by 1992. THE U.S., which has virtually abandoned consumer electronics to the Asians and the Europeans, has yet to make vital decisions on what sort of high- definition system it will adopt. In September, as expected, the FCC determined that HDTV must not make the nation's TV sets obsolete overnight. (The NHK system in Japan, by contrast, will not be compatible with existing sets.) Now the FCC must sift through more than 20 proposals, including several from Japan and Europe, before it fixes the critical technical specifications for over-the-air HDTV broadcasts. The proposals differ widely in the quality of picture resolution and in the amount of the electromagnetic spectrum -- already jammed with signals that range from cellular telephones to FM broadcasts -- that they require (see box). ''There probably is no perfect solution,'' reckons Dennis Patrick, chairman of the FCC. ''There are only a series of trade-offs.'' & Testing the various proposals could delay the choice of a U.S. standard for another year or more. The company whose system is selected -- the U.S. entries include Zenith and a number of small research labs, including Glenn's -- stands to benefit enormously from patent royalties even if it never manufactures a high-definition TV set or VCR. HDTV sets that play prerecorded tapes and videodiscs may be available within two years, probably at prices in the $3,000 range, and some cable companies could start offering premium HDTV services at about the same time. ''The real push for HDTV will come from cable,'' predicts Brenda Fox, vice president of the National Cable Television Association. When over-the-air broadcast HDTV will arrive in the U.S. is still anybody's guess: It could be five to ten years away. Eventually, says Robert Hansen, president of Zenith's consumer products group, HDTV sets will cost a premium of just $100 or so. Remember the names that adorned all those stately old wooden TV cabinets? Admiral . . . Magnavox . . . Philco . . . RCA . . . Sylvania . . . Quasar. Today only Zenith is U.S.-owned -- and its loss-plagued TV operations are up for sale. Tandy Corp., the other major American consumer electronics company, doesn't make TV sets, but Chairman John Roach says he would consider doing HDTV R&D as part of an industry consortium. For other U.S. electronics companies, the focus has been on an HDTV task force, organized by the American Electronics Association, that includes computer makers IBM, DEC, AT&T, Hewlett-Packard, and Apple, along with such chip companies as Intel, Motorola, and National Semiconductor. At a spring meeting, says AEA President Richard Iverson, 47 members agreed that getting back into the consumer electronics business is crucial to the industry's survival. For that reason, deciding on a transmission system -- important and complex as that is -- pales beside the more fundamental and far-reaching battles that will be fought over HDTV. Japanese and European television set manufacturers -- beneficiaries of government support in their home markets -- now hope to extend their head starts to the U.S. In Washington concern is growing that foreign domination of HDTV could add an additional $20 billion or more a year to the U.S. trade deficit well into the next century. For policymakers, the critical question is this: With Japan and Europe subsidizing broad cross- industrial efforts in critical technologies, what -- if anything -- should the U.S. do to allow its own industry to participate, at least in its home market? CONSUMER ADVOCATES, including FCC Chairman Dennis Patrick, want the best HDTV system for the U.S., regardless of the commercial consequences. Others, notably in Congress and the Commerce Department, see HDTV as a looming nightmare for U.S. high-tech industries and the U.S. trade balance. They want government support to offset that in Europe and Japan. Because of HDTV's eye- popping consumer appeal, the issue may well intensify the already heated national debate over competitiveness, international trade, and government support for commercially strategic industries. NHK threw the first stone in the water in 1970 when it launched a $500 million development program that pooled the efforts of Sony, Toshiba, NEC, and other Japanese technology leaders. About 15% of the money came from NHK, which is publicly supported. As a result, Japan can now produce almost everything required for HDTV: picture tubes, receivers, VCRs, programming on videotape, semiconductors, cameras, and transmission equipment. When the Japanese began actively promoting their wares in Europe, consumer electronics manufacturers struck back. Jean Caillot, president of Thomson International of France, says his company concluded that the only way to head off the Japanese was to organize a pan-European HDTV effort. Together, Thomson and N.V. Philips of the Netherlands -- Europe's two largest consumer electronics companies -- began rounding up recruits. Before long, 29 European corporations and research laboratories signed on for a joint development project. Eight nations in Europe kicked in about a third of the consortium's $200 million budget. The Japanese had hoped to export their HDTV broadcast system, called Muse, to Europe, but now, says Caillot, ''Muse has no chance.'' IN THE U.S. SO FAR, the HDTV debate has been dominated by broadcasters who transmit their signals through airwaves -- the networks, their affiliates, and independent local stations. They worry that they will be unable to compete with home video or cable unless the FCC allocates the additional bandwidth that may be necessary for over-the-air transmission of HDTV signals. Current television signals use a six-megahertz-wide band of frequencies. Researchers continue to make progress in squeezing more and more information into less and less spectrum, but true HDTV will probably require an additional three to six ! megahertz. (Japan and Europe face less of a problem because their individual markets can easily be reached by satellite, and the extremely high frequencies used for satellite transmission are less crowded than those assigned to TV. By protecting local broadcasters, the FCC in effect ruled out satellites as the backbone of an HDTV system for the American market.) Videotapes present no such difficulty, and home HDTV video systems are due from an array of Japanese manufacturers in 1990 or 1991. Broadcasters feared that consumers would embrace HDTV home video before they could provide a competitive alternative. The result would be a de facto standard, with new- generation TV sets, programming, and production equipment made to a set of specifications they could not match. They also worried that premium HDTV service on cable would present them with a technical fait accompli. Understandably concerned, broadcasters appealed to the regulatory powers in Washington. They reminded the FCC that by providing free programming, local news, weather, and other services, they were serving the public interest. (One sign of how seriously broadcasters take the competitive threat: NBC assigned 26 people to help prepare a report advising the FCC on HDTV policy.) Chairman Patrick concluded that there is indeed a public interest in keeping over-the- air broadcasters competitive in HDTV. The FCC is looking at ways to give them the necessary extra spectrum. Beyond that, Patrick says, ''My instincts are very much free-trade oriented.'' That view puts him at odds with Representative Edward J. Markey, chairman of the House subcommittee that oversees the FCC, who thinks HDTV is a classic case where a public-private partnership is in everybody's interest. ''If we lose HDTV to Europe or the Japanese, it could have implications for the entire electronics industry,'' Markey warns. His concern is echoed by Commerce Secretary C. William Verity, who says, ''The government needs to be a player -- but what kind of player I don't know.'' A Commerce task force is expected to recommend soon just what government policy should be. The potential impact of HDTV on the semiconductor and computer industries bothers electronics manufacturers. Japan's domination of consumer electronics has already created huge captive markets for its semiconductor companies. Just 5% to 6% of U.S. semiconductor production goes into consumer electronics, vs. 30% or more in Japan. The most advanced consumer electronics products use more . and more semiconductors: VCRs require as many as 120 integrated circuits each and account for 12% of total Japanese chip output. HDTV receivers will rival advanced computer workstations in both the number and technical sophistication of chips they need. ''In Japan consumer electronics is the engine that pulls the economic train,'' says Commerce Department analyst Jonathan Streeter. Conversely, notes David Staelin, professor of electrical engineering at MIT, when you lose consumer electronics production know-how, ''you weaken your ability to compete in low-cost production of all products with sophisticated electronics content.'' It's clear, he adds, that ''the future of most products is increasingly electronics-based.' ' At this point a number of U.S. computer and semiconductor companies are doing research on HDTV, but most are unlikely to proceed with hardware development until the FCC settles on a national standard. THE EROSION of U.S. semiconductor prowess troubles even IBM, itself a major producer of chips, because Japan's preeminence in semiconductors has been translated into growing control of the chipmaking equipment that IBM's operations depend on. The company recently concluded that Japan already has a lock on half to three-quarters of the 20 major processes involved in chip production, including making the photolithography lenses used for inscribing circuits on chips. Computer manufacturers have several reasons to get in on HDTV. For one, HDTV receivers may finally transform the computer from a machine used largely in business into a mass-market consumer product. HDTV sets are likely to have enough information processing power to function as computers when not in use as TVs, explains MIT professor William Schreiber, who is also on the staff of the university's famed Media Laboratory. They would need only the addition of a keyboard and a disk drive. The big, clear displays would increase the attractiveness of home information services. Jeffrey A. Hart of the Berkeley Roundtable on the International Economy believes that U.S. computer firms may have to get into HDTV manufacturing to remain abreast of technology and to keep their own costs competitive. Chairman John Roach of Tandy says a national effort in HDTV would have to be partially funded by the government because of the uncertain return on investment and because of America's weak base in consumer electronics. Assistant secretary of commerce Bruce Merrifield argues that the vertically . integrated consortiums of Japan and Europe ''are far beyond the capabilities of individual U.S. companies to match.'' He believes the government must at least help lower the cost of capital for U.S. firms, perhaps through tax credits or guaranteed loans. Stephen Fields, strategic planning director at National Semiconductor, doubts that U.S. industry can compete unless it emulates Japan's industrial policy. ''They wrote the book,'' he says. ''We have to be willing to do what they did as a nation and as an industry.'' This, he adds, could require tax incentives, trade barriers, and government subsidies. Hart of the Berkeley Roundtable contends that such protectionist measures may be unnecessary. He says adoption of a U.S.-developed transmission standard would not keep out foreign manufacturers, since they can design hardware to any standard. But it would neutralize their head start. MIT's Schreiber puts it this way: ''The adoption of an American-originated standard by no means guarantees the participation of American companies. However, the adoption of a Japanese standard guarantees their nonparticipation.'' By pooling their efforts, in a single year IBM, AT&T, Digital, Hewlett- Packard, Motorola, Intel, and Apple could match the $500 million Japan has already spent on HDTV research and development by adding just 5.2% to their combined 1987 research budgets of nearly $10 billion. A research consortium would present no legal problems since such combines were approved by the National Cooperative Research Act of 1984. Charles Rule, assistant attorney general for antitrust, says that joint manufacturing by U.S. companies could be legal as well. The key test of antitrust has always been the impact of industrial combinations on consumers, Rule explains. If such combinations result in higher prices for the consumer, they are in restraint of trade and therefore illegal. But in many industries today, notes Rule, no combination of American manufacturers would have the power to raise prices. In semiconductors, for instance, he says, ''if all the American companies got together in a joint venture and tried to raise the price, the chances are that American computer makers would simply turn to the Japanese, Koreans, and Europeans to provide their supply.'' INDUSTRIAL collaboration could become increasingly attractive for companies facing challenges from state-supported technology initiatives abroad. Merrifield of Commerce contends that blockbuster technologies dwarfing the investment capabilities of solitary U.S. firms are going to appear at an ever faster pace. ''The major new innovations are emerging more and more rapidly,'' he says. ''They'll occur in biotechnology, superconductivity, advanced ceramics -- all the emerging industries. Many of these technologies will be beyond the capacity of any individual company to do alone.'' If collaborative effort succeeds in HDTV, it could give America's policymakers and strategic industries a welcome alternative to the devil of protectionism and the deep blue sea of economic oblivion.


America's high-speed information highways are getting jammed with traffic. Broadcasters would like to widen their own lanes to carry the extra data that HDTV signals contain. But that would require squeezing other lanes, since the electromagnetic spectrum has fixed limits. As the chart shows, various kinds of radio, television, radar, and cellular telephone signals already jam these invisible highways. For each of those uses, the FCC allocates a range of frequencies. A television channel occupies a total of six megahertz (MHz) of bandwidth in either the very high frequency lanes or the ultra-high frequency lanes. True HDTV will probably require a 50% to 100% increase in television bandwidths. Broadcasters would like to send HDTV signals on UHF frequencies designated but not yet used for television. Operators of two-way mobile radios, particularly big-city police and fire departments and ambulance services, have also applied for those channels. With the emergence of HDTV, the FCC has stopped accepting applications for TV station licenses within a 150-mile radius of 30 major U.S. markets and at least temporarily backed off its own plan to allow mobile users to share the unused frequencies. ''I say we're paying a mighty stiff price for Laverne & Shirley reruns,'' grumbles John B. Richards, a Washington lawyer for mobile users, who favored the original FCC plan. Broadcasters are desperate to get added spectrum quickly so they can compete with videotape producers and the cable industry, which can deliver HDTV signals without it. Cable, of course, carries the over-the-air signals to its customers on its own wires. A 12 MHz HDTV signal would require two cable channels. Newer cable systems often have 50 or more channels, but for the 38% of systems that have fewer than 30 channels, HDTV could create a capacity crunch. | For worried broadcasters, there is at least one possible solution. To protect against interference, TV stations in the UHF band are separated by unused frequencies. Preliminary studies have indicated that new receiver technology would allow some of this empty spectrum to be invaded safely -- although stations might have to transmit at lower power, reducing their range. The spectrum problem is a key constraint on developers of HDTV transmission systems, who must struggle to pack more and more information into a leaner signal. The first HDTV proposal, from Japan's NHK, required nine MHz. NHK has since introduced more economical versions that use as little as six MHz but don't offer comparable resolution. North American Philips's proposal would require nine MHz of bandwidth. Zenith's would pack an HDTV picture into a low- power six-MHz signal that minimizes interference between channels, but stations would need two six-MHz channels -- one to deliver a picture to current sets and another to transmit a high-definition picture to new sets. The team of Thomson Consumer Electronics, NBC, and the David Sarnoff Research Center proposes a two-step transition. The first stage is a six MHz ''enhanced'' format; the second would require an extra six MHz. Both would be compatible with existing broadcast equipment and TV receivers. Robert Crandall, a senior fellow at the Brookings Institution, says it's no wonder that everybody is fighting for a larger chunk of the spectrum. The problem, he says, is that spectrum doesn't cost anything: ''When the government keeps the price of anything at zero, there's always a shortage.''