The Transition to Digital Television

Jérôme Adda

University College London

Marco Ottaviani

London Business School

Talk Plan

1. Digital television

2. Business and public policy problem

3. Model

4. Data and results

5. Effects of policies on viewers’ incentives

From Analogue to Digital TVTV platforms: terrestrial, cable, satellite, broadband TV

Benefits: digital compression technology allows more efficient use of bandwidth, by a factor of 6

Costs: investment in transmission equipment by broadcasters and in reception equipment by viewers

Benefits and costs• are unevenly distributed among players• vary across platforms

Digital TV, EU Penetration

Coordination Problem

• Viewers’ incentives to migrate from analogue depend on:

(i) benefits from additional digital channels(ii) cost of digital reception equipment (‘set top box’

= STB or integrated television sets & aerial upgrade)

• Broadcasters make channels available on digital platform if there are many digital viewers

• Manufacturers and retailers offer cheap digital equipment if many viewers demand it

Public Good Problem

Broadcasting transmission is a ‘public good’: if one viewer is reached, all viewers are also reached at no additional cost [‘non rivalry’]

So, bandwidth (satellite transponder space, terrestrial spectrum) can be freed up only if all analogue viewers have migrated to digital

UK: Digitisation of Platforms

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

Q3, 1998

Q4, 1998

Q1, 1999

Q2, 1999

Q3, 1999

Q4, 1999

Q1, 2000

Q2, 2000

Q3, 2000

Q4, 2000

Q1, 2001

Q2, 2001

Q3, 2001

Q4, 2001

Q1, 2002

Q2, 2002

Q3, 2002

Q4, 2002

Q1, 2003

Q2, 2003

Households

Analogue satellite Digital satellite FTA satellite Analogue cable Digital cable Digital terrestrial ADSL

50%

BSkyB digitised satellite platform in 3 years

Cable 2/3 digitised

Digital Terrestrial (DTT) is progressing…

Business PolicyIn the UK:• Satellite (pay TV) network run by BSkyB

– Analogue only network up to 1998

– Digital & analogue ‘simulcasting’, 1998-2001

– Installed digital STB to all subscribers (free of charge)

– Analogue signal switched off in 2001

• Digital terrestrial– Pay operator (ITV Digital) subsidised digiboxes 1998-

2002, bankrupt 2002

– Now platform run by Freeview, subscription free

Cable Terrestrial Satellite

Interactivity + – –

Portability – + –

Bandwidth ++ – +

Investment ideal for small

catchment area

ideal for medium-

size catchment

area

ideal for large

catchment area

Comparison of Delivery Platforms

Talk Plan

1. Digital televisionDigital television

2. Business and public policy problem

3. ModelModel

4. Data and resultsData and results

5. Effects of policies on viewers’ incentivesEffects of policies on viewers’ incentives

Terrestrial TV: Public Policy• DTT uses radio

spectrum, a publicly owned resource – government act as “owner” and aims at solving economic coordination problem

• Social role of television [Public Service Broadcasting]

• Political importance of pluralism in media/information markets [legislation on concentration in media ownership]

LIMITED SPECTRUM UNIVERSALITY

Terrestrial Spectrum Constraint

Limited amount of spectrum [e.g., 368MHz in UK] that can be used for analogue & digital TV

• Population coverage of DTT [to 2/3] is limited until analogue switched off

• Power of DTT is limited until switch off, requiring often additional investment on antenna

Trade off between number of analogue and digital channels and population coverage

Digital Television Action Plan• UK Government has declared intention to start to

switch off analogue terrestrial signal between 2006 and 2010, with completion expected by 2012

• By then, most consumers will need to have digital TVs or digital set-top boxes

Achieving this “depends very much on how the broadcasters, manufacturers and consumers behave”

First step is understanding what drives viewers

Talk Plan

1. Digital televisionDigital television

2. Business and public policy problemBusiness and public policy problem

3. Model

4. Data and resultsData and results

5. Effects of policies on viewers’ incentivesEffects of policies on viewers’ incentives

Purpose of Model

Model

• built to predict numbers of viewers who adopt different TV platforms

• over time

• depending on exogenous market and policy parameters

Framework for considering policy effects

Illustration: Toy Examplet=1,2A & D available in t=1,2Viewer with• at, benefit from analogue• bt, incremental benefit from

digital• st, cost of switching to digitalPayoffs:

AA: a1+δ a2

AD: a1+δ (a2 + b2 – s2)

DD: a1+ b1 – s1 + δ (a2 + b2 )

DD

b1

b2

s1–δs2 s1

s2

AD

AA

DD

b1

b2

s1–δs2s1

s2

AD

AA

Laissez Faire vs. First Best

s2 + (CD–CA)

t=1,2

A & D available in t=1,2

Free to air broadcaster

• CD cost of digital transmission

• CA cost of digital transmission

Social payoffs:

AA: a1 – CA +δ (a2 – CA)

AD: a1 – CA +δ (a2 + b2 – s2 – CD)

DD: a1 + b1 – s1 – CD + δ (a2 + b2 – CD)

Model Assumptions• Dynamic discrete choice model of individual

adoptions of primary TV set, with comparison of– current cost of reception equipment

– future viewing benefits

• Treat prices and expectations as exogenous

• Impose perfect foresight of future prices

• Allow probabilistic belief about switch off date

• Assume away network or learning externalities, but allows for experience curve in equipment prices

Viewers’ Decisions

1. Long-term choice of platform to adopt

2. Medium-term choice of package of channels

3. Short-term choice of channel to view

Our model focuses on (1) & (2), where (1) is an ‘investment decision’ involving a switching cost

Instantaneous Preferences

Viewer’s utility from package j in period t is

• X is vector of platform attributes

• p is vector of prices of each platform

• is preference shock with extreme value distribution, capturing idiosyncratic variation in consumer preferences

jt

,),,( jt

jt

jt pXpXju

Dynamic Problem

A viewer enters period t with platform i, and then chooses platform j from a choice set It

The value is defined recursively as:

where ct(i,j) is cost of switching from platform i to j, with ct(i,i)=0

jiViV tIjt t,max)(

)(,),,(),( 1 jVjicpXjujiV ttt

Two Phases1. Post-switch phase (S):

• Analogue not available

• Stationary problem with value function VS(i, p, X)

2. Pre-switch phase (A): • Viewers can choose analogue

• Viewers expect that analogue will be switched off in period t (conditional on not having been switched off earlier) with probability

• Value function is:t

jVjVpXjiujiV Stt

Att

A 1)1(),,,(,

III St

}{AIII At

Talk Plan

1. What is digital television?What is digital television?

2. Why should we economists care?Why should we economists care?

3. Purpose of our modelPurpose of our model

4. Data and results

5. Effects of policies on viewers’ incentivesEffects of policies on viewers’ incentives

Data• Survey data with stated preferences for

television by UK consumers

• 434 individuals’ choices in up to 40 different scenarios

• In total 16,010 observation

Heterogeneity of marginal utility for channels as function of household characteristics

Baseline Scenario

Talk Plan

1. What is digital television?What is digital television?

2. Why should we economists care?Why should we economists care?

3. ModelModel

4. Data and resultsData and results

5. Effects of policies on viewers’ incentives

Policy Alternatives• A firm switch off date has been adopted in Berlin• The UK has increased the number of channels

available on the DTT platform as well as its coverage

• Subsidies to low-income have been given to low income households in Berlin

• Pay-television content might be made available on the French DTT platform

• Subsidies have been introduced in Italy• Digital equipment has been mandated in the US

UK: September 1999 AnnouncementThe Government is committed to ensuring that

terrestrial analogue broadcasting signals are maintained until:

• Everyone who can currently get the main public service broadcasting channels in analogue form (BBC 1 and 2, ITV, Channel 4/S4C and Channel 5) can receive them on digital systems;

• Switching to digital is an affordable option for the vast majority of people;

• As a target indicator of affordability, 95% of consumers have access to digital equipment.

Timing Issue

“The switch over process could start to happen as early as 2006 and be completed by 2010, depending on the progress made by broadcasters and manufactures, and the interests of consumers being served.”

Question: What is the effect of credible announcement of switch off in 2010?

Firm Commitment to Switch off Simulations show that:• Almost all viewers (more than 95%) will adopt

digital TV before switch off, if they perceive switch off to be inevitable in 2010

Reason:• Preference for television is very strong, so very

few viewers will opt out of television to save the cost of set top box…

Firm commitment to switch off date should work

Expectation of Early Switch Off

Experiment v. Baseline: Switch off expected at T=10

Share of No Television

Conditional Switch off Policy With switch off conditional on meeting 95% criterion,

multiple equilibria result. In one equilibrium, switch off takes place at T=10. In another equilibrium, there is no switch off at T=10.

1. The “switch off at T=10” equilibrium survives.2. There is also a “no switch off at T=10” equilibrium

in which consumers expect no switch off: – Given that consumers expect that analogue will not

be switched off, (at least 5% of) consumers will not buy set top boxes

– 95% criterion will not be met at time of switch off– So, there will be no switch off

Other PoliciesIf firm commitment to switch off is not politically

feasible, other policies to speed up adoption:

• Increase quality of digital channels

• Give subsidies to STB

• Give coupons/rebates on TV licences to low-income families or old viewers

Increased DTT Quality

Launch of Free ‘Basic’ Satellite

Effect on consumer surplus of (expected) analogue switch off at

different dates

Impact on consumer surplus

(£ billions)3 -4.354 -3.865 -3.486 -3.127 -2.828 -2.649 -2.3610 -2.0211 -1.7912 -1.5713 -1.3714 -1.1815 -1.0116 -0.8317 -0.6718 -0.5219 -0.38

Switch-off period

ConclusionFocused on viewers incentives:

1. large switching costs spontaneous adoption takes time

2. considerable fraction of “digital if pushed” who go for digital only if analogue is not available

3. very few “never digital” who prefer no TV to digital expectations about switch off time are key

4. free DTT adds competition to pay TV market

Caveat: Broadband/internet TV