Transition to Digital Television

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					The Transition to Digital Television

      Jérôme Adda              Marco Ottaviani
University College London   London Business School
                Talk Plan

1.   Digital television
2.   Business and public policy problem
3.   Model
4.   Data and results
5.   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
• 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
                     Digital Terrestrial (DTT) is progressing…
use    8,000,000
                                                          Cable 2/3 digitised

                       BSkyB digitised satellite
                       platform in 3 years
                Q3   Q4   Q1   Q2   Q3   Q4   Q1   Q2     Q3   Q4   Q1   Q2   Q3   Q4   Q1   Q2   Q3   Q4   Q1   Q2
                ,    ,    ,    ,    ,    ,    ,    ,      ,    ,    ,    ,    ,    ,    ,    ,    ,    ,    ,    ,
                19   19   19   19   19   19   20   20     20   20   20   20   20   20   20   20   20   20   20   20
                98   98   99   99   99   99   00   00     00   00   01   01   01   01   02   02   02   02   03   03
        Analogue satellite          Digital satellite           FTA satellite                Analogue cable
       Digital cable                Digital terrestrial         ADSL
                  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 1998-
        2002, bankrupt 2002
    –   Now platform run by Freeview, subscription free
  Comparison of Delivery Platforms
                  Cable       Terrestrial    Satellite

Interactivity       +             –             –
Portability         –             +             –
Bandwidth          ++             –             +
Investment       ideal for     ideal for     ideal for
                   small     medium-size       large
                catchment     catchment     catchment
                    area         area           area
                Talk Plan

1.   Digital television
2.   Business and public policy problem
3.   Model
4.   Data and results
5.   Effects of policies on viewers‟ incentives
    Terrestrial TV: Public Policy
•   DTT uses radio         • Social role of
    spectrum, a publicly     television [Public
    owned resource –         Service
    government act as        Broadcasting]
    “owner” and aims at    • Political importance
    solving economic         of pluralism in
    coordination problem     media/information
                             markets [legislation
                             on concentration in
                             media ownership]
Terrestrial Spectrum
Limited amount of spectrum [e.g.,
   368MHz in UK] that can be
   used for analogue & digital
• Population coverage of DTT         Trade off
   [to 2/3] is limited until        between number of
   analogue switched off
                                    analogue and
• Power of DTT is limited until     digital channels
   switch off, requiring often
                                    and population
   additional investment on
   antenna                          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.   Digital television
2.   Business and public policy problem
3.   Model
4.   Data and results
5.   Effects of policies on viewers‟ incentives
            Purpose of Model
• built to predict numbers of viewers who adopt
  different TV platforms
• over time
• depending on exogenous market and policy

Framework for considering policy effects
        Illustration: Toy Example
A & D available in t=1,2
Viewer with                      b2
• at, benefit from analogue
• bt, incremental benefit from        AD
   digital                                      DD
• st, cost of switching to       s2
AA: a1+δ a2
                                           s1–δs2    s1   b1
AD: a1+δ (a2 + b2 – s2)
DD: a1+ b1 – s1 + δ (a2 + b2 )
        Laissez Faire vs. First Best
A & D available in t=1,2                b2
Free to air broadcaster
• CD cost of digital transmission             AD
• CA cost of digital transmission                       DD
Social payoffs:              s2 + (CD–CA)
AA: a1 – CA +δ (a2 – CA)
AD: a1 – CA +δ (a2 + b2 – s2 – CD)
                                                   s1–δs2    s1   b1
DD: a1 + b1 – s1 – CD + δ (a2 + b2 – CD)
              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
• 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):
      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.   What is digital television?
2.   Why should we economists care?
3.   Purpose of our model
4.   Data and results
5.   Effects of policies on viewers‟ incentives
• 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.   What is digital television?
2.   Why should we economists care?
3.   Model
4.   Data and results
5.   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
• 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
• 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 low-
     income families or old viewers
Increased DTT Quality
Launch of Free „Basic‟ Satellite
                         Switch-off Impact on
                         period      consumer
                                    (£ billions)
                         3             -4.35
Effect on consumer       4             -3.86
surplus of (expected)    5
analogue switch off at   7             -2.82
                         8             -2.64
different dates          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
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

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