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Turning off

January 19th, 2006

My article in today’s Fin was on digital TV policy (but was peripherally influenced by discussions here about the AWB monopoly and Kerry Packer). Over the fold. Comments appreciated, as always

From the early days of the Rum Corps to the infrastructure monopolies of the 21st century, the easiest route to business success in Australia (with the exception of property speculation) has been the acquisition and exploitation of government-created monopoly rights. The range of such monopoly rights has been vast, from taxi licenses to the AWB monopoly on wheat exports.

The late Kerry Packer was well aware of this fact. Packer was an astute and capable businessman with interests ranging from magazine publishing to ski resorts. The core of his wealth, however, was derived from government-created rights, first to operate one of three commercial networks and later in the gaming industry. Among the many monopoly rights created by Australian governments, media and gaming have been the classic ‘licenses to print money’.

Because of his wealth and his commanding personality, Kerry Packer possessed great political power. Governments of both parties sought, whenever possible, to appease Packer, and his fellow-magnate Rupert Murdoch while trying, through rules such as the cross-media ownership laws, to prevent them amassing even more concentrated power. The result was the tangle of ad hoc restrictions and historical exceptions with which we have to deal to day.

Nowhere was the Packer influence more evident than in the policy regarding digital television, formulated in 1998. The expansion in channel capacity feasible with digital TV opened up a wide range of possibilities, in particular that of a profusion of competing channels. That was, of course, anathema. The possibility that appealed to Packer, and was embraced by the Howard government, was that of a bigger, brighter version of the status quo.

The embarrassment of riches provided by digital spectrum was dealt with by a policy innovation unique to Australia. Broadcasters were required to use the extra spectrum to transmit high-definition TV, which could be viewed only by households willing to spend thousands of dollars on receiving equipment.

All the evidence available at the time, reinforced by subsequent experience, suggested that consumers didn’t want HDTV, at least at the prices likely to apply in the foreseeable future. If market forces were allowed to work HDTV would be at best a niche market.

But reliance on market forces has never been a strong point of communications policy in Australia. At the time the decision was made, the government had just closed down the analog mobile telephone network, ignoring the protests of rural Australia. So the decision was made that analog TV would be turned off at the end of 2008, a comfortable decade away.

The whole idea, like much of the discussion surrounding the overhyped notion of ‘convergence’ was based on the 1960s idea of a family gathered round the loungeroom TV set, which they would be eager to upgrade to the latest and greatest. In fact, the median household today has two TV sets and at least one VCR, and possibly other devices like computer TV tuners and DVD recorders. Only about 10 per cent of these are digital, and even now analog devices are outselling digital.

If the analog shutdown goes ahead, all of these devices will either have to be scrapped or equipped with individual set-top converters, at an estimated cost of $100 a box, just to continue working as before.

Faced with this market outcome, the government has had no alternative but to drop the 2008 shutdown date. This decision makes nonsense of the rest of the policy, and should provide the basis for a comprehensive re-assessment.

The Australian Consumers Association has set out many of the main points that need to be addressed in its submissions to a range of government inquiries. The requirement for HDTV should be scrapped, one or more additional free-to-air networks should be allowed to enter the market, and the set-aside of spectrum for datacasting, under highly restrictive conditions should be abandoned. Most importantly, the provision of free spectrum to the existing monopolists should be ended, and TV spectrum auctioned under procedures similar to those used for other forms of telecommunications.

Changes of this kind have been resisted on the grounds that TV networks have already invested hundreds of millions of dollars in digital conversion, and should not be faced with a change in the rules. But if this principle were adopted, no policy would ever be changed. In any case, households face costs of between one and two billion dollars, more than the amount the networks have invested in digital conversion so far, just to maintain their existing service.

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  1. SJ
    January 19th, 2006 at 22:27 | #1

    John, You’ve repeated some of the paragraphs above. E.g. “If the analog shutdown goes ahead…”

    Also, there are about 7.5 million households in Australia. At your cost of $100 per box, that would come to a total of $750m. How do you conclude that “In any case, households face costs of between one and two billion dollars”? Something is wrong with your total, or else you haven’t properly explained your assumptions about the number of boxes per household. (Not that that negates your overall point in any way).

  2. jquiggin
    January 19th, 2006 at 23:16 | #2

    SJ, you need one box per device. So, for two TV sets and a video, you need three boxes.

    Doubling problem fixed now I hope

  3. SJ
    January 19th, 2006 at 23:33 | #3

    OK, we’ve established that you didn’t just make an error in calculation. But, like I said, you haven’t properly explained your assumptions about the number of boxes per household.

    Your assumption is that each household will require between 1.3 and 2.7 boxes. May I ask how you arrived at those numbers?

  4. jquiggin
    January 20th, 2006 at 05:54 | #4

    For the upper bound, take 3 devices per household and assume 10 per cent digital, $100/STB, which is status quo. For the lower bound, some educated guesses about possible decline in number of analog devices, scrappage of some very old devices, decline in cost of STB.

  5. Brian Bahnisch
    January 20th, 2006 at 06:12 | #5

    We live in an area that has difficulties in reception and two TVs (plus two VCRs). Last year our signal had been pretty shocking so we got a guy in to tune it just before Christmas. The result was the purchase of two boxes (you only need one for a TV plus VCR). The cost was $250 per box, plus installation, a total of $583.

    The signal is now clear and sharp, much better than it’s ever been, we have some extra features we didn’t know we needed, and access to extra digital chanel’s from ABC, 7 and 9 (haven’t used them yet.)

    The downside is that we now have three remote controls per setup and the instructions are so bad that we had to ring the guy up several times to learn how to do simple things.

    I think buying a box and installing it yourself would defeat most people.

    We had rung another firm we had used before and they also warned us that it would probably require a $250 box. The guy who came seemed honest and well-qualified and was here for at least 90 mins for his $80 so maybe there’s a markup on the box. But I repeat, you would be very clever to instal it yourself unless you have a degree in electronic engineering.

  6. wilful
    January 20th, 2006 at 09:02 | #6

    I installed my STB myself no problems (but hey I can set the VCR to record programs when I’m out, so maybe I’m a whizkid) but $100 a box would be a very conservative price. Only the cheapest chinese models would be anything like that. So $2bn is an underestimate if anything.

    The commercial channels don’t offer anything else apart from wide screen (why I got mine), better sound and an integrated TV program (whoop doo). Digital 2 can be quirkily interesting, and timeshift some interesting things that I would otherwise miss, like stateline.

    It’s a disgraceful situation when the entrenched powers can basically block progress and the government has no vision or understanding of what the medium could be, so really don’t give a rats. But it’s par for the course in John Howard’s Australia.

  7. Dave Ricardo
    January 20th, 2006 at 10:03 | #7

    As I understand it, if you have digital Pay TV, you don’t need a set top box, because the Pay TV box performs the same role.

    Speaking of Pay TV, what is to be made of Russell Balding’s resignation? Did he fall, was he pushed, or is moving to the Sydney Airports Corporation just a good career move?

  8. Hal9000
    January 20th, 2006 at 11:04 | #8

    “The downside is that we now have three remote controls per setup and the instructions are so bad that we had to ring the guy up several times to learn how to do simple things.

    I think buying a box and installing it yourself would defeat most people.”

    I agree re both the annoying remotes and Engrish instructions, but not complexity of installation – automatically self-installs with the 2 models I’ve seen. One was $120 (TEAC) and the other $99 (Chinese generic). The Chinese generic one is the better and more intuitive to use btw, although the instructions were clearly written by a non-English speaker equipped only with a Chinese-English dictionary. I’ve since seen one in a discount electrical trader for $85. You can fix the remotes issue for a further $60-100 for a fancy all-in-1 remote, which are very easy to use. The things I don’t like about digital are: why can’t we have a single ‘what’s on?’ channel; why are there so many identical channels – a bit like Soviet supermarkets – lots of stuff on the shelves, but all the one thing? and why can’t I get SBS when I got good reception on analog?

    One other issue – the biggest tech tv thing in the US now is TiVo, which is a sort of computer-cum-digital box-cum-hard drive recorder. It observes your viewing habits and automatically records the things you normally watch. It can detect genres via communicating with TiVo central, so it’ll pick up new programs in the kind of genre you watch. It keeps on recording all the time. When the drive is full it then starts deleting older stuff (you can quarantine stuff you want kept) to make space for new stuff. The hard drive will hold a couple of weeks of programs and you can watch one while another is recording. So if you’re out partying and miss the final ep of your favourite show, you haven’t missed it. But the best bit of all is, it edits out the ads, station promos etc automatically. The OzTiVo site http://minnie.tuhs.org/twiki/bin/view/Main/WebHome claims TiVo Inc simply doesn’t have a business plan that includes setting up in Australia. This doesn’t seem possible for a nation with the highest market penetration of tv recording/playback devices in the world.

  9. Steve Munn
    January 20th, 2006 at 18:47 | #9

    An excellent, insightful article PrQ. Once again you get to the heart of the matter.

  10. January 20th, 2006 at 18:57 | #10

    People might be forced to read books if the TV stopped working. Can’t have that happen. Or worse, they could start blogging…

  11. Brian Bahnisch
    January 20th, 2006 at 22:14 | #11

    I must confess that I wasn’t involved with the digital box thing. My beloved has slightly better aptitude for these things, but only slightly. Since school was out she has more time, but we’re both time-challenged.

    I checked with her at brekky and she reckons she could have installed it given plenty of time. Also she knew about the cheap boxes, but thought she was going for quality. It’s a factor here as everything in this house has broken down in the last three months.

    She used to work with schools helping them to use AV equipt, so she has a fair idea about how apt people generally are. She reckons it is still a problem and I don’t think the people who comment here are a fair sample.

    There is another cost factor from our experience. Our problem was framed as a reception problem and the guy did get up on the roof to check the aerial, although it was after dark. He said it wasn’t ‘digital ready’ and a few bits that had fallen off, the aerial being over 20 years old. With digital the image is either there or it isn’t there. Luckily our old aerial was still good enough, but I suspect it was marginal. I’m sure some day soon after a summer storm it’s gonna fail.

    For now, though, it is really nice to watch tennis with only one set of lines on the court, and cricketers only hitting one ball.

  12. Terje Petersen
    January 21st, 2006 at 08:59 | #12

    Faced with this market outcome, the government has had no alternative but to drop the 2008 shutdown date. This decision makes nonsense of the rest of the policy, and should provide the basis for a comprehensive re-assessment.

    As Ziggy pointed out recently there is a lot of potential spectrum licencing revenue being missed out on by the government. Whilst the analogue spectrum stays tied up they can’t auction it off. So it may in fact be worth the governments while to subsidise the set top boxes so as to make the shutdown of analogue TV politically possible.

    But reliance on market forces has never been a strong point of communications policy in Australia. At the time the decision was made, the government had just closed down the analog mobile telephone network, ignoring the protests of rural Australia. So the decision was made that analog TV would be turned off at the end of 2008, a comfortable decade away.

    The Liberals opposed the shutdown of AMPS when in opposition. However the ALP had signed so many agreements (with Vodafone and Optus) stating that AMPS would be shutdown that once in government the Liberals had no real choice. However the fiasco with mandated nation wide ISDN shows that the Liberals don’t like leaving things to market forces either.

    From the early days of the Rum Corps to the infrastructure monopolies of the 21st century, the easiest route to business success in Australia (with the exception of property speculation) has been the acquisition and exploitation of government-created monopoly rights.

    We should not forget that prior to the monopoly status in telecommunications being granted by the government of the day to the post office, Australia had a thriving (although infant) array of competing private sector telephone operators. Whilst Telegraph had been pioneered by governments in Australia the private sector was behind all the early telephone exchanges. It took government action to kill off the private sector diversity and create the national monopoly monster that is today Telstra.

    In terms of expenditure the most offensive act of most governments it the propensity to raise taxes and then hand it out as welfare payments, in the process buying off its citizens. In terms of regulation the most offensive act of most governments is the propensity to create laws that prohibit private sector competition, all the time championing their role in “regulating” the animals.

  13. January 21st, 2006 at 12:03 | #13

    “As Ziggy pointed out recently there is a lot of potential spectrum licencing revenue being missed out on by the government.”

    Terje, it’s more complicated than that. Drawing the revenue at that point taps into the same economy that can be tapped into at other points by other means. So what counts isn’t so much the revenue raised there, but how that drawing flows through and its compliance costs and transaction costs etc. as compared with the alternatives, and so on (that isn’t a complete list of the criteria).

  14. Terje Petersen
    January 21st, 2006 at 14:21 | #14

    PML,

    The spectrum that currently carries the analogue TV signals has utility. Whilst the same images and sound is being broadcast in digital format on a different part of the spectrum then utility is being lost.

    To the extent that this utility can be reclaimed by closing down the current analogue TV broadcasts it is worth buying set top boxes.

    Regards,
    Terje.

  15. Mark White
    January 21st, 2006 at 19:35 | #15

    Great article! Spectrum is as natural as air, water or soil – and we don’t allow a monopoly on air, so why should the government allow these priviledged few to control something that belongs to all Australians?

    Maybe some day we will wake up to the big lie and demand they return spectrum to a commons, accessible to all.

    This is I’m convinced the way we can get real innovation to happen in the digital delivery of new media in Australia, and not just the canned dreams of a small cabal of old white men like Packer, Howard and the elites of the old parties who insist we keep such an idiotic unfair system in place.

  16. Terje Petersen
    January 21st, 2006 at 21:40 | #16

    Spectrum is as natural as air, water or soil – and we don’t allow a monopoly on air, so why should the government allow these priviledged few to control something that belongs to all Australians?

    The Kyoto protocol is in some ways trying to put a price on the usage of air. However I don’t think your analogy between air and spectrum is that helpful. If you use a particular part of the spectrum to transmit over a particular area you effectively exclude others from using that same piece of spectrum.

    When we drive on the road we have conventions (or regulations) that say which side we must drive on (an example of Nash equilibrium actually). This lets us share the road. Spectrum usage requires similar conventions (or regulations).

    Selling spectrum is like selling waterfront property. Not everybody is going to get to own a bit.

  17. Vee
    January 22nd, 2006 at 08:38 | #17

    Digital TV wont take off for the same reason pay tv is stagnating. Digital TV is too expensive as is pay tv presently. Consumers are likely to get confused about SD and HD Set top boxes and what televisions they need etc and from an anecdotal p.o.v. my uncle had to get a whole new aerial when he got his set top box – ridiculous stuff. I don’t know the solution to making digital tv more affordable and accessible but pay tv’s is to make the packages more flexible – a lot more flexible. And sorry for digressing.

  18. Andrew Reynolds
    January 22nd, 2006 at 11:07 | #18

    The other thing that seems to have been missed here is that we could have had genuine competition even in the analogue spectrum – most TVs sold have 12 channels on the VHF band and roughly 30 workable on the UHF band. These have either been denied to competition (in VHF) or hobbled (UHF). This has, as PrQ has rightly pointed out, been the fault of every government in this country since the 1940′s, so blaming Howard for being a conservative on this seems silly – we may as well blame Hawke for not allowing more either.

    Brian, if you do not want to have 3 controllers, go and get an “All in One” controller. Impressively chunky and it largely gets rid of the need for up to 6 other controllers. It does add about $60 to your stb investment, though.

  19. Ian Gould
    January 22nd, 2006 at 11:19 | #19

    Mark,

    A total open slather approach to the spectrum probably wouldn’t work – especially seeing as the current oligopolists would probably immediately crankup the power of their broadcasts and take up as many frequencies as possible to block new entrants.

    What would work would be setting up a digital broadcaster to act as a common carrier broadcasting several standard definition channels, either on a free-to-air or pay basis. There’s suffcient capacity for at least 5 or 6 such channels without impinging on the spectrum already allocated to the existing broadcasters.

    This broadcaster would act solely as an infrastructure provider, hiring its channels out to new market entrants and community groups.

  20. January 22nd, 2006 at 14:33 | #20

    Improvements which are convenient to the provider but not the user don’t sell. Do you own a digital AM radio?

    Technology which does the same thing but “better” doesn’t get traction. We didn’t care that audio cassettes had poor quality; we just responded to portability and the ability to record. Dolby did not create mass obsolescence and corner the market – it remained a luxury option.

    Digital mobiles were resisted, because there seemed to be no point. Now, if we suggested going in the opposite direction, there would be a revolt, because all those cute phone functions would disappear. But they weren’t there in the beginning, and the government had to use legislative force.

    Same with digital TV. No obvious benefit, no killer application. Even the voting function once touted as creating a games mad culture has morphed into mobile phones, which provide both mobility (wow) and a revenue stream for the broadcaster.

    And that is why the siphoning regs are so important – they are the killer app for cable, as we all know.

    (Given the desire of the fta commercial broadcasters to erode quality and costs so completely, we can imagine a future in which the whole of commercial television shuffles to cable and pulls the plug on broadcast, leaving only the government broadcasters on the airwaves. Maybe not such a bad thing in the end.)

  21. January 22nd, 2006 at 19:02 | #21

    Terje, I meant, if you’re going to put numbers to it, you can’t simply judge it by the revenues “gained” by going digital. Other relevant numbers will change too, not necessarily even to the advantage of total revenue, and anyway the public gain in value isn’t the same thing as the government’s gain in revenue.

  22. Ernestine Gross
    January 23rd, 2006 at 16:07 | #22

    Need for refinement.

    Terje says: “When we drive on the road we have conventions (or regulations) that say which side we must drive on (an example of Nash equilibrium actually). ‘

    There are 2 Nash equilibria:

    1. LHS is Nash because: Given A’s strategy is to drive on the left hand side of the road, B best response is to drive on the left hand side of the road, and, given B’s strategy to drive on the left hand side of the road, A’s best response is to chose the strategy ‘drive on the left hand side’ – assuming both want to survive and neither of them has a vehicle which is so ‘big’, relative to the other’, that it could be used to push the other off the road.

    2. RHS is Nash because: Given A’s strategy is to drive on the right hand side of the road, B’s best response is to drive on the right hand side, and, given B’s strategry to drive on the right hand side, A’s best response is to chose the strategy ‘drive on the right hand side’, etc.

  23. Terje
    January 23rd, 2006 at 16:26 | #23

    Ernestine,

    Thankyou for saying what I meant (something I have trouble doing some days). There are indeed two equilibrium states for the road situation both of which are examples of Nash Equilibrium. Whilst such a convention would probably emerge naturally in the case of roads (who wants to die) it seems unlikely to me that there are any such conventions that would emerge naturally (or remain stable after being originally imposed) if we moved to a free for all in spectrum. Without a clear legal right of usage for a given frequency range there would no doubt be attempts by rival radio stations to jam eachothers signals.

    Jaming somebody elses signal is a win-lose outcome not a lose-lose outcome (as with driving on the wrong side of the road).

    Andrew,

    You said:-

    The other thing that seems to have been missed here is that we could have had genuine competition even in the analogue spectrum – most TVs sold have 12 channels on the VHF band and roughly 30 workable on the UHF band.

    I have never seen the move to digital TV as being about increasing competition in free to air TV. The point was to use the spectrum more efficiently so that as newer services are enabled by technology (eg high bandwidth mobile communications etc) we are using the available spectrum in an optimal manner. In other words given the finite nature of spectrum (dictated by the upper frequency of our technology) it was about using this resource efficiently.

    Additional free to air TV stations is merely one of many possible ways to use the extra capacity, and perhaps not the best option available.

    Regards,
    Terje.

  24. January 24th, 2006 at 23:19 | #24

    Terje, when my mother was posted in Italy just after VE Day, she found that the rule of the road was a local option, and hadn’t even been changed under Mussolini. When it comes to driving and matters of life and death, Italians make an intesting test case. As they say, in Rome the pedestrians are divided into two groups: the quick and the dead.

  25. Terje Petersen
    January 25th, 2006 at 15:31 | #25

    PML,

    If you imposed a “drive on the right” rule onto a large region and enforced it for a decade then revoke all associated laws and let people decide for themselves I would expect that the rule would stick. Even though a few nuts would on rare occasions cause injury.

    If you imposed a spectrum use policy of almost any type, enforced it for a decade and then revoke all associated laws and let people decide for themselves I would expect that enlightened self interest would not retain any stability.

    In some areas, such as property rights the use of force (ie the state or similar means) becomes overwhelmingly necessary at the margin. Of course if you don’t believe in property rights we could do away with the state entirely.

    Regards,
    Terje.

  26. Andrew Reynolds
    January 25th, 2006 at 15:40 | #26

    Terje,

    Not sure you could do away with the stae under that condition. It would soon re-emerge as one group sought to enforce a monopoly on violence. Doing away with the State would merely create a vacuum, which then some other interested party or parties would then step in to fill.

  27. Terje Petersen
    January 25th, 2006 at 20:53 | #27

    Andrew,

    Yes I agree. The state is a given. At best it can be minimised.

    Regards,
    Terje.

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