• by Diane Mermigas , August 27, 2008

If an estimated 20 million-plus homes find themselves without local television station reception when analog switches to all digital early next year, they will be lost to broadcasters that can ill afford to lose more viewers or ratings points.

In an interactive universe, these are target consumers that advertisers will be unable to reach and transact with on TV, PC, mobile phones or other digital devices. Such interactivity is intrinsic to local stations' ties to grassroots consumers who are seeking information, news, advertising and commerce in their own backyard. The Catch-22 is that stations must continuously produce compelling interactive content and advertising that local consumers can reliably receive. Collectively, we are a long way from that happening by February's digital conversion.

The ability for the consumer electronics industry and all related media and advertising partners to orchestrate a successful, inter-supported digital conversion that "will leave no TV set behind" is a critical precursor to the next big technological shift: transforming every TV into a powerful interactive device. Digital is not just about getting more HD channels--it's about opening the door to interactive content, communications and commerce. They are paramount to local TV broadcasters' financial solvency and delivering on the promise of a ubiquitous Internet-connected home.

To date, the focus generally has been on how to bridge the digital divide so that households are not without television service when the government-mandated digital adoption takes hold. Bernstein Research estimates the conversion will create nearly $4 billion in new market value for facilitating hardware and service companies. Never mind the lurking political pitfalls if nearly one-fifth of the nation's unconnected houses are not reachable in a national emergency.

Less attention has been paid to the hit to local and network broadcast ratings the disruption can cause--particularly trying to price and sell advertising in a non-election, non-Olympics recessionary 2009. The inability to reach or monetize 20 million-plus homes or more than 17% of all U.S. households matters.

At least 20 million households that solely rely on analog TVs generally are owned by older, tightly budgeted consumers; some remain unaware of the pending change. Another 15 million homes have secondary sets that rely on over-the-air analog signals. A recent survey by Leichtman Research Group warns that 34% of U.S. households are at risk of losing broadcast reception on at least one TV set without multichannel video service or equipment.

Nielsen Media reports 21% of its sample households are somewhat "unprepared" and another 9.3% are "completely unprepared" for the digital transition. Many experts are expecting the worst, saying it will be a consumer's nightmare. Others warn that it will be a 90-day-plus mess eventually ironed out with piecemeal solutions: cable and satellite service, converter boxes (in tandem with special analog antennas and $40 government discount coupons) and the Internet-connected devices that are rapidly becoming the video alternative.

Mastering the technical logistics is one thing. Leveraging and monetizing deeper, niche local content and advertising in every interactive venue is a TV must. The pressure is on from online personalized news and advertising aggregators--from the revolutionary new DayLife to Google's AdSense--to take over where TV stations drop the ball. The Internet TV audience will hit critical mass this year, reaching more than 52% of all Americans, eMarketer forecasts. With local television ad revenues growing more slowly than expected in a presidential and Olympics year, and forecast to plummet by as much as 9% in 2009, stations cannot afford to lose touch with their interactive constituents.

Lehman Brothers analyst Anthony DiClemente warns that the "at risk" group is slightly less than half of the average 28 million households that watch prime-time television each night and nearly twice the average 7 million to 8 million households watching the No. 1 broadcast networks each week--indicating a significant ratings and financial risk for broadcast television.

There will be disproportionate impact among markets, ethnic groups and demographics. An estimated 45% of CBS' total revenues are at risk, although the smaller NBC station group probably has "greater absolute exposure" because of its 16 owned-and-operated Telemundo stations levered to a disproportionately at-risk Hispanic community, DiClemente said.

Earlier this year, Nielsen Media said Minneapolis-St. Paul, Portland, Houston, Salt Lake City and Albuquerque still had one-fifth or more of their household markets unprepared.

Bernstein also warns that about one-third of the estimated 35 million to 50 million un-tethered televisions in Pay TV households used exclusively for gaming and DVD viewing also will be adversely impacted by the digital transition because they are not linked to a digital tuner, converter box or other conversion service. Come next February sweeps, the ratings and economic fallout from the digital transition could impact local TV broadcasters at precisely the wrong time in their economic and business life cycles.

As Bernstein concluded: "Welcome to the wild and woolly world of Digital TV transition." Editor's Note: This is the third in an ongoing series of columns exploring the issues, challenges and opportunities confronting local TV broadcasters over the next 18 months.