The Transition to Digital Television
Jérôme Adda
University College London
Marco Ottaviani
London Business School
Talk Plan
1.
2.
3.
4.
5.
Digital television
Business and public policy problem
Model
Data and results
Effects of policies on viewers’ incentives
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
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
50%
14,000,000
12,000,000
Digital Terrestrial (DTT) is progressing…
10,000,000
Ho
use
hol
ds
8,000,000
Cable 2/3 digitised
6,000,000
4,000,000
BSkyB digitised satellite
platform in 3 years
2,000,000
-
Q3
,
19
98
Q4
,
19
98
Q1
,
19
99
Analogue satellite
Digital cable
Q2
,
19
99
Q3
,
19
99
Q4
,
19
99
Q1
,
20
00
Q2
,
20
00
Digital satellite
Digital terrestrial
Q3
,
20
00
Q4
,
20
00
Q1
,
20
01
Q2
,
20
01
Q3
,
20
01
FTA satellite
ADSL
Q4
,
20
01
Q1
,
20
02
Q2
,
20
02
Q3
,
20
02
Q4
,
20
02
Q1
,
20
03
Analogue cable
Q2
,
20
03
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 19982002, bankrupt 2002
Now platform run by Freeview, subscription free
Comparison of Delivery Platforms
Cable
Terrestrial
Satellite
Interactivity
+
–
–
Portability
–
+
–
Bandwidth
++
–
+
Investment
ideal for
small
catchment
area
ideal for
medium-size
catchment
area
ideal for
large
catchment
area
Talk Plan
1.
2.
3.
4.
5.
Digital television
Business and public policy problem
Model
Data and results
Effects 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
LIMITED SPECTRUM
•
Social role of
television [Public
Service
Broadcasting]
• Political importance
of pluralism in
media/information
markets [legislation
on concentration in
media ownership]
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.
2.
3.
4.
5.
Digital television
Business and public policy problem
Model
Data and results
Effects 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 Example
t=1,2
A & D available in t=1,2
Viewer with
• at, benefit from analogue
• bt, incremental benefit from
digital
• st, cost of switching to
digital
Payoffs:
AA: a1+δ a2
AD: a1+δ (a2 + b2 – s2)
DD: a1+ b1 – s1 + δ (a2 + b2 )
b2
AD
DD
s2
AA
s1–δs2
s1
b1
Laissez Faire vs. First Best
t=1,2
b2
A & D available in t=1,2
Free to air broadcaster
• CD cost of digital transmission
• CA cost of digital transmission
s2
Social payoffs:
s2 + (CD–CA)
AA: a1 – CA +δ (a2 – CA)
AD: a1 – CA +δ (a2 + b2 – s2 – CD)
DD: a1 + b1 – s1 – CD + δ (a2 + b2 – CD)
AD
DD
AA
s1–δs2
s1
b1
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
u( j, X , p)  X t  pt t ,
j
j
j
• X is vector of platform attributes
• p is vector of prices of each platform
j
•  t is preference shock with extreme value
distribution, capturing idiosyncratic variation in
consumer preferences
Dynamic Problem
A viewer enters period t with platform i, and then
chooses platform j from a choice set It
Vt (i )  max
jI t
Vt i, j 
The value is defined recursively as:
Vt (i, j )  u ( j, X , p)  ct i, j   Vt 1 ( j )
where ct(i,j) is cost of switching from platform i to
j, with ct(i,i)=0
Two Phases
1. Post-switch phase (S):
•
•
Analogue not available I t  I S  I
Stationary problem with value function VS(i, p, X)
2. Pre-switch phase (A):
•
•
•
A
Viewers can choose analogue I t  I  I  {A}
Viewers expect that analogue will be switched off
in period t (conditional on not having been
switched off earlier) with probability  t
Value function is:


V At i, j   u (i, j , X , p)   (1   t )V At 1  j    tV S  j 
Talk Plan
1.
2.
3.
4.
5.
What is digital television?
Why should we economists care?
Purpose of our model
Data and results
Effects 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.
2.
3.
4.
5.
What is digital television?
Why should we economists care?
Model
Data and results
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 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.
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 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 lowincome families or old viewers
Increased DTT Quality
Launch of Free ‘Basic’ Satellite
Effect on consumer
surplus of (expected)
analogue switch off at
different dates
Switch-off Impact on
consumer
period
surplus
(£ billions)
3
-4.35
4
-3.86
5
-3.48
6
-3.12
7
-2.82
8
-2.64
9
-2.36
10
-2.02
11
-1.79
12
-1.57
13
-1.37
14
-1.18
15
-1.01
16
-0.83
17
-0.67
18
-0.52
19
-0.38
Conclusion
Focused 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