The initial beneficiaries appear to be hardware manufacturers of converter boxes and digital television sets, as well as paid cable, satellite and telco providers. They are the only solution for an estimated 14 million households that solely rely on over-the-air broadcast signals (about 13% of all U.S households).
The retail market value of the digital transmission is expected to be a material $3.1 billion, although that is considered incremental to the $150 billion consumer electronics industry, according to Bernstein Research. Only $1.3 billion will be subsidized by the government's digital converter coupon program. An estimated 10% of the analog-only households will choose a pay TV provider as a digital TV solution. That should nearly double what otherwise would be the normal industry growth rates through 2009. The 900,000-plus new basic video subscribers to cable, satellite or telco will reverse otherwise declining growth rates.
However, digital conversion logistics will not be that cut and dry. An estimated 30 million domestic homes have at least one TV not equipped for digital signals. A study by Los Angeles-based market research firm Centris identifies gaps in the broadcast signals that could result in 6 million households with digital converters unable to receive the TV channels they do now. 80% of the country's estimated 117 television sets that are not connected to cable or satellite may need to subscribe in order to receive adequate digital signals after next year's conversion. Some low-power stations and translators will fall through the cracks.
All told, some basic television viewers are going to be unhappy in the aftermath. Because they are among the analog-only viewers, they are probably essential to the broadcast network's declining viewer base. Analog-only households rely mostly on basic broadcast TV and could be eventually lost to alternative options, like cable.
Indeed, the long-mandated conversion will likely be a change agent for altering viewing habits. And the big loser could be broadcast television. "Although not a doomsday situation, the shutdown of analog broadcast transmission cannot come at a more stressful time for a U.S. broadcast industry that is already facing structural headwinds," Bernstein analysts say. There will be disruption of a broadcast TV sector which has been under siege by a four-month writers' strike, acutely falling ratings and a weakening economy. "Initially, we would expect a high level of broadcast TV viewing declines, as consumers scramble to get converted."
It is difficult to know what kind of television the 14 million analog-dependent households prefer, how many are in the Nielsen television sample, or how many will have digital service for all of their home television sets after Feb. 17, 2009. Aggregate prime-time household viewers across 11 broadcast networks equal 32.8 million (26.4 million of which are from the Big 4 broadcast networks, Bernstein said.) Although a ratings disruption is a given at a low point for broadcast, long-run implications are manageable.
But the probability is that a relative few local stations will be prepared to fully capitalize on their digital capacity to generate new revenues. "On the local TV station front, the slow economy, coupled with an over-reliance on automotive advertising (which sourced 25% of local advertising dollars) has created a revenue model that rises only in political years," Bernstein said.
The firm began tracking the potentially dramatic impact of the conversion several years ago. At that time, a Bernstein report estimated that a potential loss of viewership and advertising dollars could come from the must-carry of local stations by cable, which still is fighting against the directive. The so-called Triple Must Carry obligation, transmitting local stations in analog format as well as both digital and high def formats, will create a capacity squeeze for cable operators for three years. But the squeeze will be tolerable if broadcasters do not reinvent their local franchise and revitalize their ties to grassroots consumers, advertisers and content. Too much local TV station momentum rides on biannual election ad revenues and on dissipating ad spend by the weakening auto and other core categories. Broadcast TV stations have lost too much of their viewership base to cable networks, which is sure to be (finally) followed by advertising pricing and revenue shares. So, TV broadcasters should be eagerly pursuing new digital revenues. Yet only a relative few are.
That is the wild card in the fallout of digital conversion that will determine just how disruptive it will be to broadcast TV. That is the real story of the digital conversion. It will be the digital divide that separates media willing to reinvent itself in interactive ways from those that do not. An interesting footnote to the digital conversion is that broadcast television damage control could be masked by the offsetting cable, film and Web businesses owned by the Big Four networks' media conglomerates. However, like the analog signals that will be handed over to the winner of the wireless auction, once the grassroots traditions of broadcasting are gone, there is no going back.