• by Diane Mermigas , September 9, 2008

The digital television transition that unofficially kicked off Monday is a frustrating and abiding reminder of the legacy albatross that is strangling media in an interactive age.

The government has mandated that the broadcasters serving 96 million TV households in the U.S. forfeit their analog signals by Feb. 17, 2009, even though an estimated 9 million TV homes will lose reception. At least 17% of all TV households and an estimated 38 million of the country's nearly 300 million TV sets only get over-the-air broadcast. These second or third TVs will require a converter box or Pay-TV connection to provide service. That is potentially a whole lot of non-functioning TV sets--numbers barely offset by the video streaming of television programs on computers and other alternative screens.

The absurd irony to this much-ballyhooed leap into the future is that the consumers and consumer electronics industry are in catch-up mode, and broadcasters barely have their digital wits about them.

At the dawn of a new interactive age in which empowered consumers are reliably connected through nearly every electronic device but their TV sets, America's mass-media pastime is barely keeping up. Digital TV--intended to open the door on interactive commerce and content--is a transition in name only. The reality is that the majority of TV households will not have armchair interactive digital capabilities for some time. That means broadcasters that could use supplementary funds to offset as much as a 9% ad revenue decline in 2009 will not get it. Belo, Univision, Telemundo, Sinclair Broadcast Group and ABC have the highest exposure to over-the-air stations in the top 100 markets.

The test transition in Wilmington, N.C. that began this week is not considered representative because of its high 93% pay-TV penetration, compared to 85% nationwide. A Lehman Brothers report forecasts that the switch could bode well for smaller electronics retailers like Radio Shack, and small equipment providers like Audiovox. Cable operators could add 1.6 million new subscribers (generating $1.8 billion in new revenue), and DirecTV and Dish satellite networks could add 1 million new subscribers valued at about $500 million, evenly split between the two.

Although pay TV providers would pick up 2.6 million new subscribers worth $2.5 billion, nearly half of those new dollars will be needed to cover installation costs. Basic cable networks owned by Disney, Scripps, NBCU, Viacom and Turner can expect an aggregate boost of only about 2% in sales--mostly a fraction of 1 percent of parent company revenues.

However, the big losers are broadcast TV stations and their affiliated networks that invested millions to build digital facilities before they had an ROI business model.

Although only a relatively small portion of the U.S. population is likely to be adversely impacted by this change, any disruption is bad for a troubled television business. In the Midwest--where a large number of over-the-air households are--many people will have technical difficulties in the winter, in the middle of sweeps.

Such legacy issues, while no one's fault, are the reason that digital interactivity will not pay off anytime soon. Broadcasters, cable operators, consumer electronics suppliers, content producers, advertisers and others need to catch up--fast.

In fact, the consumer's transition to becoming a digital TV household can be fraught with mechanical problems. Many consumers may not realize until after the switch that some of their additional TV sets are not equipped for digital transmission, since many so-called digital TVs are actually monitors. The analyst team at Lehman discovered that they need to purchase an antenna just to determine whether some of their home TV sets required a converter.

Consumers in general are receiving different advice from salespeople at outlets such as Best Buy and Circuit City, grappling with the realization that there is "no single reliable source of information." Plus, they are experiencing delays in receiving the $40 government-issued coupons to apply to the purchase of converter boxes. Even utilizing the NTIA's Web site www.DTV2009.gov headlined "It's Easy" did not make a confusing situation much better, Lehman said.

Although an estimated $1.5 billion has been earmarked for the digital coupon subsidy program, coming from the nearly $20 billion the federal government raised in its recent 700MHz auction, there is no indication who will fund the other attendant conversion costs. The most disconcerting economic impact will be to local and national broadcasters--which may experience ratings and advertising-related disruptions, all because of trouble qualifying their digital TV universe.

Once the conversion is complete, just transmitting the same old TV signals in digital will not make the underlying interactivity available, which eventually will be the foundation for an entirely new economic business model. To accomplish that mission, producers of content and advertising will need to begin thinking, planning and executing in digital interactivity--a process that can take years. In July, Lehman Brothers lowered its ratings on the entertainment sector, including broadcast corporate parents such as News Corp., Disney, and CBS. Lehman is concerned that the "structural shift created by ubiquitous technological change that materially impacted the music industry" could also disrupt the core economic models of most of film and TV content.

The in-house disruption is already underway in about one-third of all TV homes that are equipped with DVRs that already fast-forward through commercials--broadcasters' revenue backbone. Until now, paramount revenue concerns have focused on the recessional squeeze on ad spending and the gradual GDP-decoupling of the 16% of all U.S. advertising dollars that go to television. As Feb. 17 approaches, there is growing concern about how many TV sets domestically can make the digital leap at all.