The Transition to Digital Television

1
The Transition to Digital Television

• Jérôme Adda
• University College London

Marco Ottaviani London Business School
2
Talk Plan

• Digital television
• Business and public policy problem
• Model
• Data and results
• Effects of policies on viewers incentives

3
From Analogue to Digital TV

• TV 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

4
Digital TV, EU Penetration
5
Coordination Problem

• Viewers incentives to migrate from analogue
  depend on
• benefits from additional digital channels
• 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

6
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

7
UK Digitisation of Platforms
50
Digital Terrestrial (DTT) is progressing
Cable 2/3 digitised
BSkyB digitised satellite platform in 3 years
8
Business Policy

• In 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

9
Comparison of Delivery Platforms
10
Talk Plan

• Digital television
• Business and public policy problem
• Model
• Data and results
• Effects of policies on viewers incentives

11
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
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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

13
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

14
Talk Plan

• Digital television
• Business and public policy problem
• Model
• Data and results
• Effects of policies on viewers incentives

15
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

16
Illustration Toy Example

• t1,2
• A D available in t1,2
• Viewer with
• at, benefit from analogue
• bt, incremental benefit from digital
• st, cost of switching to digital
• Payoffs
• AA a1d a2
• AD a1d (a2 b2 s2)
• DD a1 b1 s1 d (a2 b2 )

b2
AD
DD
s2
AA
s1ds2
s1
b1
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Laissez Faire vs. First Best

• t1,2
• A D available in t1,2
• Free to air broadcaster
• CD cost of digital transmission
• CA cost of digital transmission
• Social payoffs
• AA a1 CA d (a2 CA)
• AD a1 CA d (a2 b2 s2 CD)
• DD a1 b1 s1 CD d (a2 b2 CD)

b2
AD
DD
s2
AA
s1
s1ds2
b1
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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

19
Viewers Decisions

• Long-term choice of platform to adopt
• Medium-term choice of package of channels
• Short-term choice of channel to view
• Our model focuses on (1) (2), where (1) is an
  investment decision involving a switching cost

20
Instantaneous Preferences

• Viewers 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

21
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

22
Two Phases

• Post-switch phase (S)
• Analogue not available
• Stationary problem with value function VS(i, p,
  X)
• 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

23
Talk Plan

• What is digital television?
• Why should we economists care?
• Purpose of our model
• Data and results
• Effects of policies on viewers incentives

24
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

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Heterogeneity of marginal utility for channels as
function of household characteristics
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Baseline Scenario
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Talk Plan

• What is digital television?
• Why should we economists care?
• Model
• Data and results
• Effects of policies on viewers incentives

28
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

29
UK September 1999 Announcement

• The 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.

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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?

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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

32
Expectation of Early Switch Off
Experiment v. Baseline Switch off expected at
T10
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Share of No Television
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Conditional Switch off Policy

• With switch off conditional on meeting 95
  criterion, multiple equilibria result. In one
  equilibrium, switch off takes place at T10. In
  another equilibrium, there is no switch off at
  T10.
• The switch off at T10 equilibrium survives.
• There is also a no switch off at T10
  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

35
Other Policies

• If 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

36
Increased DTT Quality
37
Launch of Free Basic Satellite
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Effect on consumer surplus of (expected) analogue
switch off at different dates
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Conclusion

• Focused on viewers incentives
• large switching costs
• spontaneous adoption takes time
• considerable fraction of digital if pushed who
  go for digital only if analogue is not available
• very few never digital who prefer no TV to
  digital
• expectations about switch off time are key
• free DTT adds competition to pay TV market
• Caveat Broadband/internet TV