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Subsidy For Analog TV Sets Debated As Digital Conversion Plan Coalesces

While digital TV penetration of U.S. households continues to increase, there will be 11.8 million holdout over-the-air TV households at year-end 2008—four months before Congress is expected to mandate the end of analog broadcasting. Those over-the-air households will have an estimated 31.2 million television sets, 22.8 million of which will be analog at year-end 2008, Kagan Research estimates.

More than 1,500 broadcasters are currently beaming digital signals covering nearly 100% of U.S. TV households, in parallel with analog transmissions. Last week, the Senate Commerce Committee recommended April 7, 2009, as the date to end analog broadcasting. The bill still needs approval of both houses of Congress. A deadline of December 31, 2008, was offered by the House while Senator John McCain's April 7, 2007, proposal was shot down in a 17-5 vote.

Whenever the ultimate deadline is reached, the Congressional Budget Office (CBO) estimates some $10 billion will be raised by auctioning off the reclaimed analog spectrum. Private estimates, however, peg the value of the upper 700 MHz band as high as $28 billion.

The spectrum is currently used by television broadcasters for UHF channels 52-69, but will be vacated as broadcasters transition to digital. Wireless carriers are expected to bid on the spectrum to use for their spectrum-hungry third-generation (3G) networks.

The 700 MHz band is beachfront property as it allows for the largest reach at the lowest cost. It is able to travel further, penetrate walls, dense foliage and other obstructions without the signal deterioration experienced with both 1900 MHz and 2400 MHz wireless transmissions. This makes the 700 MHz band ideal for delivering wireless broadband in both rural and urban markets. Thus areas that were once deemed unreachable will be able to obtain broadband service at a reasonable price.

To smooth the way for the transition, Congress will have to earmark funds for subsidizing analog-to-digital converters so holdout analog households can view digital signals. The Senate Commerce Committee bill sets aside $3 billion while a separate House of Representatives bill allotted just $990 million, or $830 million after administrative expenses. In both bills, the cost of the converters was pegged at $60/each with the subsidies covering only $40. That means the remaining $20 would have to be picked up by the consumer. Democrats, however, are calling for full subsidies rather than impose what is being termed a "TV tax."

Servicing over-the-air analog homes is only part of the equation. "In cable subscribing homes, we estimate there will be 88 million analog TV sets in 2009," notes Research Associate Patrick Johnson, who is lead contributor to Kagan's monthly newsletter Digital Television. "However, only a small slice of those sets are utilized for viewing over-the-air broadcasts. Given our projection that cable operators will ultimately be permitted to down-convert broadcast signals at the headend, the funds allotted in the Senate bill should be sufficient enough to cover just those analog TV sets exclusively reliant on over-the-air broadcasts." Down-conversion at a cable system's headend eliminates the need for in-home converter boxes for each TV set.

Kagan Research's soon to be released databook The State of High Definition Television 2006 forecasts that 17.2% of U.S. households will have at least one HD TV set by year-end 2005, with HD penetration reaching 80% in 2009.