FTC Staff Comment Before the Federal Communications Commission In the Matter of Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service

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BEPORIC TBB
FEDERAL COIDlUlIl:CAfiOllS COIJIUSSIOR
DSHIJ1G'fOII, 	DC 20554.
V920002
COMMISSION AUTHORIZED
- 	'. 	.
'. 	~s co_eDt represents the views of the staff of the Bureau
of 	BcOnom.C8 	of 	the 	Pederal 	!'rade 	Co 	i88ion. 	!'hey. 8%8- 	not
necessarily the v!eva of the Co 	ission or those of aDy'individ11al.
CIJ 	i ssioner. 	Inquiries regarding thi8 co.-ent sbolild be directed
to David Beiffen 	(202-326-2027) of the ~ta Bureau of Bcoua.ies.
In the Katte~ of 	. ) .
)
Advanced Television Systems 	)
and Their 	Impact uPQn U./, .. 	)
Bxisting.Television·Broadcast· )
SSrriee .... 	. 	".. )'

· Executive Summary
This 	comment 	of 	the 	staff 	of 	the 	FTC's 	Bureau 	of 	Economics
addresses some of the issues raised by the FCC's Notice of Proposed
Rulemaking 	(NPRM) 	related 	to 	the 	introduction 	of 	advanced
television 	(ATV). 	The 	comment 	analyzes 	these 	issues 	from 	the
standpoint of economic efficiency, competition, and .the enforcement
of 	the 	antitrust 	laws. 	It 	does 	not 	discuss 	other 	policy
considerations 	raised 	in 	the 	NPRM 	or 	in 	statements 	submitted 	by
respondents 	to 	the 	NPRM.
ATV 	represents 	a 	technological 	improvement 	over 	conventional
television 	(NTSC). 	At this 	time, 	however, 	there 	is 	no way 	to know
whether 	the 	benefits 	from 	these 	improvements 	will 	exceed 	their
costs, 	which 	include 	the 	opportunity 	costs 	of 	the 	spectrum
allocated 	to ATV. 	Because 	this 	is 	uncertain, 	economic 	efficiency
might 	be 	served 	by 	regulations 	and 	regulatory 	actions 	regarding
spectrum use that consider market 	forces. 	In particular, 	economic
efficiency might 	be 	served by 	retaining 	at 	least 	a 	portion of 	the
current 	NTSC 	band 	for 	NTSC 	use.
We also suggest that the FCC allow broadcasters more time 	for
facility construction and greater flexibility in simulcasting. 	The
proposed 	rules, 	which 	make 	the 	award 	of 	a 	license 	contingent 	on
constructing ATV 	facilities 	within two years of receiving a 	permit
to 	construct, 	would 	encourage 	construction 	but 	may 	result 	in
excessively rapid 	or 	inappropriate 	construction. 	We 	suggest 	that
the FCC consider lengthening this period, 	because the prospects for
ATV broadcasting are uncertain. 	Mandating simulcasting of ATV and
i
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NTSC programs or establishing a 	date after which NTSC broadcasting
will 	terminate 	may 	not 	produce 	an 	economically 	efficient 	result.
Rather, 	economic 	efficiency 	would 	likely 	be 	promoted 	by 	allowing
broadcasters 	to 	determine 	the 	mix of 	ATV 	and NTSC 	broadcasts.
Finally, 	efficiency 	considerations 	suggest 	that 	the 	FCC
allocate ATV licenses 	in a way that minimizes the cost of doing so.
Allocations 	based 	on 	financial 	qualifications 	or 	expected
viewership 	may 	not 	minimize 	cost 	because 	these 	criteria 	tend 	to
encourage 	firms 	to 	spend 	significant 	real 	resources 	in 	pursuit 	of
licenses. 	Unless 	the 	process 	of 	transferring 	authorizations 	is
costly, 	it 	is 	likely that broadcast 	licenses within a 	given region
of 	spectrum 	will 	ultimately 	come 	to 	be 	owned 	by 	those 	who 	value
them most 	highly, 	regardless 	of 	the 	initial 	allocation.
ii
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MM Docket 	No. 	87-268
BEFORE THE
FEDERAL COHHUHICATIONS COHHISSION
WASHINGTON, 	DC 	20554
In 	the Matter of 	)
)
Advanced Television Systems 	)
and 	Their 	Impact 	upon 	the 	)
Existing Television 	Broadcast 	)
Service 	)
Comment of 	the 	Staff of
The Bureau of 	Economics 	of
the Federal Trade Commission*
January 	31, 	1992
I. 	Introduction
The 	staff 	of 	the 	Bureau 	of 	Economics 	of 	the 	Federal 	Trade
Commission 	(FTC) 	appreciates 	this 	opportunity to 	submit 	a 	comment
in 	response 	to 	the 	Federal 	Communications 	Commission 's 	(FCC's)
Notice of Proposed Rulemaking 	(NPRM) 	on regulatory policies for the
introduction of advanced television 	(ATV). 	This NPRM is the fourth
in 	a 	series 	of 	FCC 	actions 	intended 	to 	articulate 	a 	regulatory
approach 	to 	ATV. 	Specifically, 	this 	NPRM 	seeks 	information 	that
will 	assist 	the 	FCC 	in developing policies 	related 	to 	the 	initial
allocation 	of 	ATV 	spectrum 	and 	the 	regulation 	of 	the 	transition
from 	conventional 	broadcasting 	(NTSC) 	to ATV.
* This comment represents the views of the staff of the Bureau
of 	Economics 	of 	the 	Federal 	Trade 	CODIIDission. 	They 	are 	not
necessarily the views of the CODIIDission or those of any individual
Commissioner. 	Inquiries regarding this comment should be directed
to 	David Reiffen 	(202-326-2027) 	of 	the 	FTC's 	Bureau of 	Economics.
1
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be 	served 	by
guide 	new 	ATV
Our 	analysis, 	which 	is 	based 	on 	economic 	efficiency
considerations, 	suggests 	that 	the 	FCC 	consider
1) 	Whether 	the 	interests 	of 	viewers 	might
allowing 	market 	forces 	more 	latitude 	to
permittees' 	decisions 	regarding 	facility 	construction 	and
ATV/NTSC 	simulcasting.
2) 	Whether 	the 	interests 	of 	consumers 	might 	be 	served 	by
regulations and regulatory actions regarding spectrum use that
consider 	market 	forces. 	In 	particular, 	economic 	efficiency
might be served by retaining at least a 	portion of the current
NTSC 	band 	for 	NTSC 	use.
3) 	Whether 	using 	comparative 	hearings 	to 	award 	permits
initially may be 	unnecessarily costly.
The basis 	for 	these suggestions 	is discussed in the 	following
sections. 	This 	comment 	does 	not 	discuss 	other 	policy 	issues 	and
considerations 	raised 	in 	the 	NPRM.
II. 	Expertise of 	the 	Staff of 	the Federal Trade Commission
The 	FTC 	is 	an 	independent 	regulatory 	agency 	responsible 	for
maintaining 	competition 	and 	safeguarding 	the 	interests 	of
consumers. l In 	response 	to 	requests 	by 	federal, 	state, 	and 	local
government 	bodies, 	the 	staff 	of 	the 	FTC 	often analyzes 	regulatory
or 	legislative 	proposals 	that 	may 	affect 	competition 	or 	the
efficiency of 	the economy. 	In the course of 	this 	work, 	as well 	as
1 	15 	U.S.C. 	sections 	41-59.
2
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in 	anti trust 	and 	consumer 	protection 	research, 	nonpublic
investigations, 	and 	litigation, 	the 	staff 	applies 	established
principles 	and 	recent 	developments 	in 	economic 	theory 	to
competition 	and 	consumer 	protection 	issues. 	The 	FTC 	staff 	has
previously submitted comments 	to the FCC on matters concerning the
allocation of 	spectrum 	in general, 	and on ATV 	in particular. 2
III. 	Background on Advanced Television and the NPRH
According to the NPRM, ATV refers to any television technology
that 	provides 	improved 	audio 	and 	video 	quality. 	Six 	ATV 	systems
are 	currently 	under 	consideration 	by 	the 	Advisory 	Committee 	on
Advanced 	Television. 	The 	goal 	of 	the 	Advisory 	Committee 	is 	to
recommend 	one 	of 	the 	six 	as 	the 	standard 	for 	ATV. 	With 	one
possible 	exception, 	the 	six 	systems 	will 	not 	be 	compatible 	with 	,
2 ~ Comments 	Qf 	the 	Staff Qf 	the 	Bureau Qf ECQnQmics 	Qf 	the
Federal 	Trade 	CQmmission, 	Advanced 	TelevisiQn 	Systems 	and 	Their
Impact 	Qn 	the 	Existing 	TelevisiQn 	BrQadcast 	Service, 	Review 	Qf
Technical 	and 	OperatiQnal 	Requirements: 	Part 	7 3-E, 	TelevisiQn
Broadcast StatiQns, 	ReevaluatiQn Qf 	the UHF Television Channel 	and
Distance 	Separation 	Requirements 	Qf 	Part 	73 	Qf 	the 	CQmmissiQn's
Rules, 	MM DQcket No. 	87-268 	(September 1,1988). 	See also CQmments
Qf 	the Staff of the 	Bureau QfEcQnQmics 	and San FranciscQ RegiQnal
Office 	Qf 	the 	Federal 	Trade 	CQmmissiQn, 	Amendment 	Qf 	the
CQmmission's Rules With Regard to the Establishment and RegulatiQn
Qf New Digital AudiQ RadiQ Service, 	GEN Docket No. 	90-357 	(January
25, 	1991); 	Comments 	Qf 	the Staff Qf 	the Bureau Qf ECQnQmics 	Qf 	the
Federal Trade CQmmissiQn, 	Amendment Qf Part 74 Qf the CQmmissiQn's
Rules CQncerning FM TranslatQr StatiQns, 	DQcket NQ. 	88-140 	(August
15, 	1988); 	Reply CQmments Qf 	the 	Staff Qf 	the Bureau Qf ECQnQmics
Qf 	the 	Federal 	Trade 	CQmmissiQn, 	RevisiQn 	Qf 	RadiQ 	Rules 	and
PQlicies, 	MM DQcket 	NQ. 	91-140 	(September 	5, 	1991).
3

existing 	televisions. 3 Because 	NTSC 	and 	ATV 	cannot 	be 	broadcast
on 	the 	same 	channel, 	to 	encourage 	ATV 	broadcasting 	the 	FCC 	has
tentatively determined that it will 	allocate a 	portion of spectrum
so 	that ATV broadcasts 	can be 	transmitted on 	6 Mhz 	channels. 	For
the 	purposes 	of 	our 	analysis, 	we 	assume 	that 	the 	FCC 	will 	choose
one 	of 	these 	six systems 	to 	be 	the 	industry 	standard and 	allocate
spectrum 	for 	ATV. 4
The 	issues 	dealt 	with 	in 	the 	NPRM 	primarily 	relate 	to 	the
initial 	allocation of 	ATV channels 	and permits 	and 	the 	transition
from NTSC to ATV broadcasting. 	With regard to the initial award of
ATV 	permits, 	the 	FCC 	proposes 	to 	limit 	the 	initial 	pool 	of 	ATV
permittees 	to 	current 	NTSC 	broadcasters 	and 	those 	with permits 	or
pending NTSC permit applications. 	The ATV permits would be awarded
in 	addition 	to 	current 	NTSC 	licenses. 5 At 	the 	same 	time, 	the 	FCC
proposes 	to 	suspend 	application 	of 	the 	television 	multiple
ownership 	rule, 	so 	that 	a 	broadcaster 	could 	temporarily 	hold 	an
NTSC 	and an ATV permit or 	license 	in the 	same 	broadcast area. 6 To
3 In 	what 	follows, 	we 	assume 	the 	chosen 	system 	is 	not 	,
compatible 	with NTSC 	televisions.
4 In previous comments, 	FTC staff has pointed out that market-
based 	approaches 	to 	standard 	selection 	may 	serve 	consumers'
interests 	better 	than 	administrative 	decisions. 	~,~,
Comment, 	Digital 	Audio 	Radio 	Service, 	Ope 	cit. 	note 	2, 	or 	our
previous 	Comment 	regarding ATV, 	Ope 	cit. 	n. 	2.
5 The proposed rules would prohibit a 	party that holds both an
NTSC 	and 	an 	ATV 	license 	from 	transferring 	one 	without 	the 	other.
See NPRM 	at 	7.
6 Specifically, 	47 	CFR section 73.3555 	prohibits 	the 	award of
licenses 	for TV broadcast stations that result in two stations with
overlapping grade B contours. 	This 	section also 	limits 	the number
of 	licenses 	that 	one 	owner can control 	nationally.
4

the 	extent 	that 	additional 	ATV 	frequencies 	could 	technically 	be
allotted after awards 	to all eligible broadcasters 	have been made,
the 	FCC 	proposes 	to 	allow 	other 	firms 	to 	apply 	for 	ATV 	permits.
After 	three 	years, 	incumbents 	would 	lose 	their 	advantage 	in
applying 	for 	permits. 	In 	addition, 	the 	FCC 	proposes 	to 	allow 	two
years 	between 	the 	issuance 	of 	a 	construction 	permit 	and 	the
completion 	of 	construction, 	after 	which 	the 	ATV 	license 	would 	be
forfeited. 7
It is anticipated that for most broadcast areas, 	there will be
enough ATV frequencies to designate one frequency for each eligible
licensee. 	In 	some 	areas, 	however, 	there 	may 	not 	be 	enough
frequencies 	for 	all 	eligible 	licensees. 	Even 	if 	sufficient
spectrum is 	available certain frequencies may be preferred by some
applicants, 	because 	frequencies 	are 	not 	homogenous. 8 For 	either
5
With 	regard 	to 	the 	transition 	from 	NTSC 	to 	ATV, 	the 	FCC
qualifications 	or 	expected viewership.
,
The 	FCC 	envisions 	requiring 	NTSC
8 For 	example 	VHF 	frequencies 	may 	be 	preferred 	to 	UHF
frequencies, 	and 	lower VHF 	frequencies 	may be 	preferred to 	higher
ones.
7 	This 	two-year 	period 	is 	the 	same 	as 	the 	FCC 	applies
generally.
proposes some alternatives. 	These alternatives 	include lotteries,
first-come/first 	served, 	and 	administrative 	reviews 	of 	financial
envisions 	that 	ATV 	broadcasts, 	if 	successful, 	will 	eventually
replace 	NTSC 	broadcasts.
reason, 	there must be some mechanism to award permits, 	and the NPRM

licensees 	to 	surrender 	their 	authorizations 	at 	some 	date. 9 As 	no
new 	NTSC 	licenses 	will 	be 	issued 	once 	the 	assignment 	of 	ATV
licenses 	is 	complete, 	it would 	thus 	appear 	that 	NTSC 	broadcasting
will 	completely 	cease 	after 	some 	date. 	The 	FCC 	seeks 	comment 	on
,
how 	to 	choose 	the 	date 	for 	surrender. 	Proposed 	al ternati ves
include standards based on ATV penetration rates 	(either market-by-
market 	or 	national) 	and 	a 	fixed 	date.
During the 	transition period, 	most 	broadcasters 	will 	operate
an 	NTSC 	station 	and 	an 	ATV 	station 	in 	the 	same 	market. 	The 	FCC
proposes mandating that a 	minimum percentage of 	the programming on
a 	broadcaster's ATV channel 	also be simulcast on its NTSC channel.
It 	also 	would 	consider 	mandating 	a 	minimum 	amount 	of 	ATV
broadcasting.
IV. 	Initial Allocation of ATV Licenses
.~..
A. 	Issues 	Related 	to 	the 	Initial 	Allocation of 	Licenses
for 	ATV 	broadcasting 	by 	utilizing 	more 	intensively 	the 	spectrum
According 	to 	the 	NPRM, 	the 	FCC 	plans 	to 	provide 	the 	spectrum
available spectrum would be obtained by using frequencies currently
set 	aside 	because of 	so-called UHF 	taboos. 10 In 	addition, 	some 	of
,
Some 	of 	the 	additional
9 If 	the NTSC 	licensee did not already have an ATV license, 	it
would 	be 	permitted to 	apply 	for 	one 	at 	that 	time 	- 	assuming 	there
are 	some 	unallotted 	frequencies.
10 	UHF 	taboos 	are 	restrictions 	about 	the 	use 	of 	frequencies
within 	close 	geographic 	proximity. 	For 	example, 	if 	UHF 	stations
( continued ... )
currently 	dedicated 	to 	VHF 	and 	UHF.
'.: ~
6

the 	new 	frequencies 	will 	be made 	available 	by 	reducing 	co-channel
separation 	( geographic 	distance 	between 	stations 	on 	the 	same
frequency) . 	The 	reduction 	in 	co-channel 	separation, 	and 	to 	a
lesser extent the use of UHF taboo 	channels, 	will be made possible
by 	using 	more 	sophisticated 	and 	expensive 	broadcasting 	and
receiving equipment.
Although 	the 	precise 	number 	of 	additional 	stations 	in 	each 	,
market has not yet been determined, 	FCC feasibility studies suggest
that 	the 	majority of 	NTSC 	broadcasters 	will 	be 	eligible 	to 	obtain
ATV 	"t 	11	permJ.. 	s. 	In 	some 	areas, 	particularly 	the 	northeast, 	there
may be more existing NTSC broadcasters 	than new ATV permits, 	while
in 	others 	the 	number 	of 	ATV 	permits 	available 	will 	exceed 	the
number 	of 	eligible broadcasters.
The 	NPRM 	raises 	several 	questions 	in 	regard 	to 	the 	initial
award 	of 	ATV permits:
(1) 	How should ATV permits be awarded in cases where there are
fewer 	new 	stations 	than eligible 	licensees?12
10 ( ••. continued)
located within 75 miles of one another are 15 channels apart, 	there
tends to be some picture image interference between them. 	Hence the
FCC 	requires 	a 	minimum 	separation 	of 	75 	miles 	for 	frequencies 	15
channels 	apart. 	Other 	taboos 	require 	minimum 	20 	mile 	separation
for 	facilities 	2,3,4,5 	or 	8 	channels 	apart, 	and 	60 	mile 	minimum
separation 	for 	facilities 	7 	or 	14 	channels 	apart. 	See 	OET
Technical 	Memorandum, 	FCC/OET TM88-1 	(August, 	1988).
11 	OET 	Technical 	Memorandum, 	FCC/OET 	TM89-1 	(December, 	1989)
at 	6, 	10-11.
12 NPRM at 	13.
7
,

( 2 ) 	In 	cases 	where 	there 	are 	more 	ATV 	frequenc ies 	than
initially-eligible 	licensees, 	how 	should 	the 	remaining 	ATV
permits 	be 	awarded?13
(3) 	How 	should 	specific 	frequencies 	be 	designated 	among 	the
class 	of 	eligible applicants?14
(4) 	What 	limits 	should 	be 	placed 	on 	the 	time 	given 	eligible
firms 	to 	apply 	for ATV permits 	and to 	construct 	facilities?15
B, 	Principles 	of 	Efficient Allocation of 	Initial 	Permits
Economic 	theory 	predicts 	that 	if 	valuable 	items 	are 	to 	be
awarded, 	individuals 	will 	make 	expenditures 	in 	pursuit 	of 	them. 16
These 	expenditures 	can 	take 	the 	form 	of 	paYments 	that 	are 	purely
economic 	transfers 	(such 	as 	application 	fees), 	and 	those 	that
involve expenditures of real resources 	for goods and services 	(such
as attorneys and consultants, advertisements in trade publications,
and reduced productivity of individuals while seeking permits). 	In
the 	former 	case, 	there 	is 	no 	social 	loss 	since 	the 	loss 	to 	one
party 	is 	exactly 	equal 	to 	the 	gain 	to 	the 	other, 	while 	in 	the
latter 	case 	there 	is 	a 	social 	cost,because 	real 	resources 	are
expended. 	Only in the 	latter case are goods 	and services 	provided
in 	exchange 	for 	the 	expenditure; 	thus, 	the 	gain 	(profit) 	to 	the
13 NPRM 	at 	7 	and 	13.
14 NPRM 	at 	9.
15 NPRM 	at 	8.
16 For a 	general discussion of these 	issues 	see Gordon Tullock
"The 	Welfare 	Costs 	of 	Tariffs, 	Monopolies, 	and 	Theft," 	5 	Western
Economic 	Journal, 	p. 	224, 	(1967).
8
,

recipient is less than the loss 	(total payment) 	to the party making
17
the 	payment.
There 	are 	three 	implications 	of 	this 	principle. 	First,
economic 	efficiency is 	advanced when 	the 	amount 	of 	real 	resources
used to obtain the initial award of a 	permit is minimized. 	Second,
whatever methods 	are used to award permits 	initially, 	if transfers
are 	permitted, 	then 	efficiency 	considerations 	also 	require
minimizing 	the 	cost 	of 	transferring 	authorizations. 18 	Third,
licenses should be well-defined, 	giving licensees the 	incentive to
act 	in ways 	that 	maximize 	the value 	of 	their 	authorizations. 19
The NPRM's 	proposal 	to 	designate 	new ATV permits 	to 	existing
NTSC 	broadcasters, 	permit 	holders 	and 	applicants 	would 	appear 	to
have the potential for minimizing social cost. 	As explained above,
excess 	social 	cost 	occurs 	when 	firms 	spend 	real 	resources 	in 	an
attempt 	to 	increase 	their 	chances 	of 	obtaining 	a 	permit. 	The
'.:.
'.:-" "
incentive 	to 	spend 	resources 	for 	this 	purpose 	appears 	limited
17 	Previous 	FTC 	staff 	Comments 	to 	the 	FCC 	have 	noted 	that
economic 	efficiency 	is 	promoted when permits 	are 	awarded 	in 	a 	way
that 	minimizes 	the 	social 	cost 	associated with 	allocating 	them 	to
their highest valued use. 	For example, 	~ Comments 	cited in note
2, 	particularly Comment, 	Digital 	Broadcast Radio 	Service, 	pp. 	12-
18.
18 If channels 	are initially allocated to their highest-valued
use, 	transferring authorizations will 	not be an issue, 	unless 	use-
values 	change.
19 The idea of establishing a 	transferrable property right to
a 	portion 	of 	spectrum 	dates 	back 	at 	least 	to 	Coase 	(R. 	H. 	Coase
"The 	Federal 	Communications 	Commission" 	Journal 	of 	Law 	and
Economics, 	2 	(1959), 	p.1). 	We 	have 	.noted 	in 	previous 	staff
comments 	that 	an 	auction 	for 	licenses 	would 	be 	one 	way 	to 	create
such 	a 	property 	right 	at 	minimum 	social 	cost. 	We 	recognize 	that
the FCC lacks 	statutory authority to grant ownership interests 	in,
or 	conduct 	auctions 	of, 	unallocated 	spectrum.
9
,

because 	the 	only 	way 	to 	increase 	one I s 	chances 	of 	obtaining 	a
permit is to get one from an existing licensee 	(or permit holder or
pending applicant). 	Since obtaining an existing license primarily
involves 	an economic 	transfer, 	rather 	than 	an expenditure 	of 	real
resources, 	the 	proposed 	allocation 	scheme 	may 	tend 	to 	minimize
social 	cost. 20 	Further, 	as 	long 	as 	ATV 	authorizations 	may 	be
transferred, 	they 	should 	ultimately 	be 	obtained 	by 	the 	highest-
valued users.
A 	proposal 	to 	award 	ATV 	permits 	to 	all 	existing 	NTSC
broadcasters 	does 	not 	completely determine 	the 	initial 	allocation
'.
costs.
of 	ATV 	permits 	when 	there 	are 	more 	eligible 	licensees 	than 	ATV
market, 	a 	lottery 	would 	appear 	to 	pose 	limited 	administrative
When 	the	channels, 	or 	more 	channels 	than 	eligible 	licensees.
winning. 	Given 	the 	small 	number 	of 	eligible 	applicants 	in 	each
number 	of 	eligible 	applicants 	exceeds 	the 	number 	of 	channels, 	a
lottery 	among 	these 	firms 	would 	appear 	to 	minimize 	the 	extent 	to
which 	firms 	can 	expend 	resources 	to 	improve 	their 	chances 	of
20 Obtaining 	an 	existing 	NTSC 	license 	with 	the 	ultimate 	goal
of 	obtaining an ATV permit 	can be viewed 	as 	a 	transfer 	of 	the 	ATV
permit. 	As 	such, 	any 	resource 	cost 	associated 	with 	the 	transfer
should perhaps 	be viewed as 	a 	cost 	of 	permit 	transfer 	rather 	than
a 	cost 	of 	the 	initial 	allocation. 	The 	NPRM 	proposes 	to 	cease
issuing 	new 	NTSC 	authorizations 	since 	those 	authorizations 	would
have 	to 	be 	linked 	to 	ATV 	permits, 	and 	hence 	require 	a 	portion 	of
the ATV 	spectrum. 	The 	implication of 	our 	analysis 	is 	that 	such 	a
policy may well 	serve the beneficial goal of minimizing the amount
of resources devoted to obtaining new ATV authorizations. 	That is,
the policy prevents firms 	from spending real resources to obtain an
ATV 	permit 	indirectly 	(through 	first 	obtaining 	an 	NTSC 	license).
Once 	all 	of 	the 	available 	ATV 	licenses 	were 	allocated, 	however,
this 	particular 	rationale 	for 	not 	issuing new NTSC 	licenses 	would
appear 	to 	become 	obsolete.
10

By 	contrast, 	choosing 	among 	eligible 	firms 	on 	the 	basis 	of
financial 	qualifications 	or 	projected 	viewership 	may 	involve
significant costs. 	If permits are awarded on these criteria, 	firms
may 	be 	encouraged 	to 	hire 	attorneys 	and 	consultants, 	commission
studies, 	and incur other expenses, 	in the hope of surpassing rivals
,
or 	in 	meeting 	selection 	criteria. 	Further, 	significant 	FCC
21
resources 	could 	be 	expended 	in 	distinguishing 	among 	these
applications. 21
This 	is 	not 	to 	say that 	criteria 	such 	as 	expected viewership
or 	financial 	viability are 	irrelevant 	to 	the 	interest 	of 	insuring
the ATV frequencies 	are used most efficiently. 	Rather, 	we believe
that 	these 	considerations 	will 	directly 	affect 	the 	amount 	a 	firm
would 	willingly 	pay 	to 	acquire 	an 	ATV 	license. 	We 	recognize 	that
the 	FCC's 	rules 	would 	prohibit 	a 	broadcaster 	from 	profiting 	from
the transfer of a 	broadcast construction permit. 	That prohibition
means 	that 	one 	of 	the 	usual 	market 	incentives 	for 	transfer 	to 	a
higher 	valued 	use 	would 	not 	operate 	when 	transfering 	a 	permit. 22
But 	after 	a 	license 	is 	issued, 	a 	transfer 	at 	a 	profit 	becomes
An 	example 	of 	the 	potential 	resource 	costs 	of
administrative 	allocation 	of 	licenses 	can 	be 	found 	in 	the
discussion of the case of Alexander S. 	Klein, 	86 FCC 2d 423 	(1981),
in 	Notice 	of 	Proposed 	Rulemaking, 	Commission's 	Rule 	to 	Allow 	the
Selection 	From 	Among 	Competing 	Applicants 	for 	New 	AM, 	FM, 	and
Television Stations by Random Selection 	(Lottery), 	4 FCC Rec. 	2256
(1989) .
22 	A 	permit 	holder 	who 	decided 	that 	the 	prospects 	did 	not
justify 	further 	investment 	could 	transfer 	to 	someone 	else without
loss, 	but 	could 	not 	choose 	the 	transferee 	who 	valued 	it 	most
highly, 	as 	measured 	by 	willingness 	to 	pay, 	if 	that 	amount 	was
greater than the costs that the permittee has 	incurred. 	The permit
holder 	might 	conceivably 	complete 	construction 	and 	obtain 	a
license, 	then 	look 	to 	profit 	from 	a 	sale.
11
,

possible, 	so 	marketplace 	incentives 	would 	become 	important. 	As
long 	as 	the 	costs 	of 	transferring 	licenses 	are 	kept 	low, 	ATV
authorizations 	will 	tend 	to 	be 	acquired 	by 	those 	firms 	with 	the
highest expected viewership and financial stability. 	If a 	firm has
financial 	problems or low expected viewership 	it would not be 	able
to 	earn 	much 	from 	broadcasting. 	Self-interest 	would 	appear 	to
;" ..,
~. :
dictate 	transferring 	the 	license 	to 	a 	firm 	that 	places 	a 	higher
value 	on 	the 	license because 	it 	expects 	significant viewership.
Similar 	logic 	would 	apply 	in 	cases 	where 	the 	number 	of
eligible 	applicants 	is 	smaller 	than 	the 	number 	of 	ATV 	channels.
Here 	again 	there 	must 	be 	some 	allocation 	mechanism 	(assuming
license 	fees 	are 	not 	set 	at 	market-determined 	prices) 	for
distributing licenses. 	For the reasons discussed above, we believe
that 	administratively-chosen 	selection 	criteria 	may 	be 	an
unnecessarily costly means 	of 	accomplishing this 	allocation. 	But
here 	a 	lottery 	may 	not 	represent 	a 	significant 	improvement 	over
these administrative criteria. 	If 	the entry 	fee 	is 	small, 	a 	large
,
number 	of 	f · 	·11 	23 	k· 	th 	dm·· 	.	~rms 	w~ 	enter, 	ma 	~ng 	e 	a 	~n~strat~ve 	costs
unacceptably 	high. 	This 	suggests 	that 	if 	a 	lottery 	is 	used 	to
award permits when the number of ATV channels exceeds the number of
existing 	NTSC 	broadcasters, 	the 	filing 	fee 	should 	be 	significant
relative 	to 	the 	estimated value 	of 	the 	authorization. 24
23 	Evan 	Kwerel 	and 	Alex 	D. 	Felker, 	"Using 	Auctions 	to 	Select
FCC Licenses," 	FCC Office of Plans 	and Policy Working Paper No. 	16
(May 	1985) 	report 	that 	20,000 	applicants 	applied 	for 	Low 	Power
Television Licenses 	when auctions 	were 	held.
24 	We recognize that the 	fees 	charged are 	limited by statute.
12

C. 	The 	Timing of 	Facility Construction
The 	NPRM 	proposes 	adopting 	for 	ATV 	the 	same 	time 	limits 	for
constructing 	facilities 	as 	apply 	now 	to 	NTSC 	(two 	years 	after 	a
permit 	is 	issued). 	If 	application 	and 	construction 	is 	not
One 	motivation 	for 	delaying 	construction 	is 	the 	standard
incentive, 	because a 	licensee that chooses 	not to broadcast cannot
construction 	deadline 	chosen 	serves 	the 	goal 	of 	economic
,
Just 	as 	it 	is 	economically 	efficient 	(other
This 	Comment 	will 	first 	discuss 	potential 	welfare-
may be efficient to prevent license-holders from restricting output
one 	authorization 	in 	a 	geographic 	area 	does 	not 	have 	this
antitrust concern that firms with market power have an incentive to
right to obtain an ATV authorization. 	Assuming that. the time limit
does 	have 	an 	impact, 	there 	remains 	the 	question 	of 	whether 	the
ff .. 	25
e 	~c~ency.
decreasing 	reasons 	for 	delaying 	construction, 	and 	then 	discuss
potential welfare-increasing motivations for delaying construction.
restrict 	output.
reap 	any 	of 	the 	benefit 	from 	the 	higher 	advertising 	rates.
completed within this deadline, 	the NTSC licensee would forfeit its
things 	being 	equal) 	to 	increase 	a 	monopolist's 	output, 	so 	too 	it
(and increasing advertising rates) 	by delaying the 	introduction of
ATV 	broadcasts. 26 Note, 	however, 	that 	a 	broadcaster 	holding 	only
~~!~.
l~ 	Antitrust 	considerations 	imply 	therefore 	that 	construction 	time
25 Whether other policy goals are served by these limits is not
addressed 	in this 	comment.
26 	This 	is 	one 	justification 	from 	the 	standpoint 	of 	economic
efficiency 	for 	the 	current 	restriction 	on 	ownership 	of 	multiple
stations 	within a 	market.
13

limits 	could be 	longer for ATV permittees 	that do 	not 	also 	hold an
NTSC 	license 	in 	the 	same 	geographic 	area.
If the award of ATV permits occurs 	in the manner envisioned by
the NPRM, 	some ATV permittees will also own NTSC licenses, 	at least
temporarily. 	The NPRM 	specifically proposes 	waiving the 	multiple
ownership 	rule, 	allowing 	a 	licensee 	to 	operate. NTSC 	and 	ATV
stations 	in 	the 	same 	geographic 	area. 	While 	multiple 	ownership
,-
t 	poses 	a 	potential 	for 	an 	anticompetitive 	delay 	in construction of	~:,
~ 	ATV 	broadcast 	facilities, 	such a 	delay 	is 	by no 	means 	inevitable.	i-.~.
t:~
;: 	Just 	as 	not 	every 	horizontal 	merger 	reduces 	output, 	multiple
ownership 	would 	not 	necessarily 	lead 	to 	construction 	delays. 	In
the case of mergers, 	problems are likely to emerge when the merging
parties 	produce 	similar 	products, 	and 	there 	are 	relatively 	few
firms 	producing, 	or 	capable 	of 	producing, 	competing 	products.
Similarly, 	multiple 	ownership may 	lead 	to 	problems 	when 	there 	are
relatively 	few 	broadcasters 	in 	a 	geographic 	area 	and 	cable
penetration is low, 	but would become less of an issue as the number
of 	broadcasters 	grows 	and the 	extent 	of 	cable 	penetration rises. 27
When 	multiple 	ownership 	leads 	to 	an 	incentive 	to 	restrict
output, 	the restriction can take many 	forms. 	For example, 	in lieu
of 	delaying 	construction, 	a 	broadcaster 	could 	simply 	reduce 	the
number 	of 	commercial 	minutes 	available 	or 	reduce 	its 	expenditures
'.
on 	programming. 	Thus, 	rules 	that 	expedite 	construction 	may 	not
27 In 	our 	study 	of 	radio, 	this 	type 	of 	analysis 	led 	to 	the
conclusion that 	multiple 	ownership within 	a 	geographic 	area 	would
often not present antitrust problems. 	~ Reply Comment, 	Revision
of 	Radio 	Rules 	and 	Policies 	(op. 	cit. 	note 	2), 	pp. 	15-16.
14

..
prevent 	a 	broadcaster 	from 	employing 	alternative 	means 	of
restricting output. 	A more 	direct 	method of 	eliminating concerns
is 	to 	retain 	rules 	against 	ownership 	of 	multiple 	stations,
particularly 	in 	markets 	with 	relatively 	few 	broadcasters. 28 	Of
course, 	the 	potential 	gain 	from 	such 	an 	approach 	must 	be 	weighed
against 	the 	benefits 	resulting 	from 	the 	potential 	efficiencies
associated with the same broadcasters operating both an NTSC and an
ATV 	t 	t " 	29
S 	a 	1.on.
A 	second 	efficiency-related 	reason 	for 	mandating 	facility
construction 	is 	to 	mitigate 	the 	potential 	for 	coordination
failures. 	Coordination failures might arise because early adopters
of 	a 	new 	technology 	(e. g., 	purchasers 	of 	ATV 	sets) 	risk 	being
II stranded. II 	They might be stranded permanently, 	because the supply
of 	a 	complementary 	good 	is 	never 	forthcoming 	(e.g., 	ATV
broadcasting 	never 	becomes 	viable), 	or 	temporarily, 	because 	the
availability or price of the complement 	is 	less 	favorable 	than the
buyer planned 	(e.g., 	ATV broadcasting is delayed). 	Alternatively,
owners 	of 	the 	equipment 	used 	for 	the 	old 	technology 	(e.g., 	NTSC
television owners) 	might 	be 	stranded by the 	adoption of 	ATV.
To 	avoid 	the 	risk 	of 	purchasing the 	new 	technology 	and 	then
being 	stranded, 	many 	potential 	users 	may 	defer 	adopting 	the
technology 	until 	the 	complementary 	good 	becomes 	available. 	If 	a
28 This would entail allowing licensees to transfer their NTSC
and ATV 	licenses 	independently.
29 	As 	noted 	in our Reply Comment, 	Revision 	of 	Radio 	Rules 	and
Policies 	(op. 	cit. 	note 	2, 	pp. 	13-15), 	such 	efficiencies 	may 	be
substantial.
15
,

,
large enough number of consumers act in this manner, 	the innovation
may 	be 	delayed 	or 	never 	achieve 	consumer 	acceptance, 	despite 	the
fact 	that 	consumers 	in 	total 	would 	be 	better 	off 	with 	its 	prompt
adoption. 	Indeed, 	economic theory has 	shown that markets 	could be
characterized by this 	type 	of 	"excess 	inertia. "30 	This 	is 	not 	the
only 	outcome 	consistent 	with 	economic 	theory 	however. 	This
:~
literature also shows 	that unrestricted markets may lead to timing
of 	innovation 	that 	is 	economically 	efficient, 	or 	that 	is
characterized 	by 	excessively 	rapid 	innovation 	or 	"excess
momentum. ,,31 	Excess 	momentum 	would 	mean 	that 	adoption 	is 	too
~, 	rapid, 	in 	that 	the 	harm 	to 	owners 	of 	equipment 	used 	with 	the
existing technology exceeds 	the 	gain 	to 	sellers 	and purchasers 	of
the 	new 	technology.
If 	the 	potential 	market 	failures 	identified 	in 	these 	models
were 	thought 	likely 	to 	occur 	for 	television broadcast 	services, 	a
deadline 	for 	constructing 	facilities 	(or 	a 	minimum 	amount 	of 	ATV
broadcasting) 	might 	alert 	consumers 	about 	the 	availability of 	ATV
broadcasts, 	thus providing consumers with increased certainty about
the 	value 	of 	the equipment. 	In 	this 	way, 	a 	maximum 	time 	limit 	on
30 ~ 	Joseph 	Farrell 	and 	Garth 	Saloner, 	"Installed 	Base 	and
Compatibility: Innovation, Product Preannouncements, and Predation" 	,
American 	Economic 	Reyiew 	76 	(1986) 	pp. 	940-955, 	and
"Standardization, 	Compatibility, 	and 	Innovation," 	Rand 	Journal 	of
Economics 	16 	(1985) 	pp. 	70-83. 	These papers, 	and indeed virtually
all 	of 	the 	economic 	literature 	on 	compatibility 	and 	innovation,
make the simplifying assumption that economic efficiency is 	served
by having only one technology survive. 	As we noted in our Comment,
Digital 	Broadcast 	Radio 	Service 	(page 	29), 	dual 	standards 	may 	be
economically efficient. 	Whether a 	single standard is economically
efficient 	for 	television 	is 	by no means 	apparent.
31 	For 	example, 	~ 	ibid., 	Farrell 	and 	Saloner 	(1986) 	at 	947.
16

~ ..
•• '0
construction might solve the problem of 	"excess inertia". 	However,
there 	are 	alternative 	means 	of 	achieving 	this 	coordination. 	For
example, 	the 	firm(s) 	whose 	ATV 	system 	is 	chosen 	as 	the 	standard
will 	have 	the 	incentive 	to 	coordinate 	the exchange of 	information
among consumers. 	These firms could enter licensing agreements with
producers of broadcasting equipment 	(or integrate into production)
so as 	to encourage broadcasting under the new standard. 	Similarly
the 	selected 	firms 	might 	offer 	low 	prices 	for 	equipment 	to
consumers 	(by 	licensing 	agreement 	or 	integration) 	who 	opt 	to 	buy
sets 	at 	an 	early date 	(earning profits 	from 	later units).
It 	is 	not 	known 	whether, 	in 	real 	situations, 	specific
innovations would be characterized by excess inertia in the absence
of rules affecting timing. 	If adoption of the new technology would
be approximately correct, 	or even too rapid in the absence of 	such
rules, 	time 	limits 	on 	construction 	that 	are 	too 	short 	create 	or
exacerbate 	the 	problem. 32 There 	is 	no 	reason to 	anticipate 	a 	bias
in one direction 	in general. 	It would be difficult to 	apply these
theories 	to distinguish excess 	inertia from a 	properly functioning
market 	or 	from 	excess 	momentum 	in 	any 	particular 	context. 	For
instance, 	Farrell 	and 	Saloner 33 have 	an 	example 	where 	excess
momentum 	occurs 	when 	there 	is 	a 	large 	installed 	base 	of 	the 	old
technology 	and 	the 	new 	technology 	is 	less 	expensive 	than 	the 	old.
32 Similarly, 	private 	incentives 	to 	coordinate 	consumer
behavior may lead to excessively rapid adoption. 	~ Michael Katz
and 	Carl 	Shapiro, 	"Technology Adoption 	in 	the 	Presence of 	Network
Externalities," 	Journal 	of 	Political 	Economy 	94 	(1986), 	pp. 	822-
841.
33 	(1986) 	op. 	cit. 	note 	30, 	p. 	947.
17
,

(Conversely, 	in the example, 	excess inertia tends to occur when the
installed base 	is 	small, 	and 	the 	new 	technology 	is 	more 	expensive
than 	the 	old.) 	Since 	television 	technology 	is 	characterized by 	a
large 	installed 	base 	and 	a 	lower-priced 	older 	technology, 	the
theoretical 	example 	offers 	little 	guidance. 34 While 	the 	existence
of a market failure such as excess inertia is a 	necessahY condition
for 	construction 	time 	limits 	to 	increase 	efficiency, 	it 	is
,. 	difficult 	for 	policy-makers 	to 	determine 	if 	these 	problems 	are
likely 	to 	arise 	in 	a 	particular 	context. 	Finally, 	even 	if 	it 	is
r;.
determined 	that 	excess 	inertia 	is 	likely 	in 	a 	specific 	case, 	it
does 	not 	follow 	that 	the 	government-mandated 	timing 	will 	yield 	a
superior outcome 	(~, 	mandated 	timing could over-compensate 	for
the 	market 	imperfection). 35
Thus, 	although 	construction 	delays 	could 	be 	economically
inefficient 	(because 	of 	output 	restrictions 	or 	coordination
failures), 	delaying 	construction 	beyond 	two 	years 	could 	be
economically efficient. 	But, 	faced with the 	alternative of 	losing
its 	license, 	the licensee may undertake 	inappropriate or premature
34 	It 	is 	difficult 	to 	know how 	frequently, 	if 	ever 	the market
failures 	identified 	by 	the 	theoretical 	models 	have 	actually
occurred. 	Indeed, 	it would be 	difficult 	to 	even devise 	a 	test 	to
make 	such a 	determination.
35 	This 	is 	an 	application 	of 	a 	broader 	issue, 	which 	has 	been
raised 	by 	Demsetz 	(Harold 	Demsetz 	"Information 	and 	Efficiency:
Another Viewpoint," 	Journal 	of Law and Economics 	12 	(1969), 	pp. 	1-
22), 	among 	others. 	Demsetz 	pointed 	out 	that 	the 	relevant 	policy
comparison 	is 	not 	between 	the 	performance 	of 	an 	unconstrained
market 	and 	an 	omniscient 	policy-maker, 	but 	rather 	between
alternative 	imperfect 	institutions. 	The 	same 	type 	of 	information
failures 	that 	cause markets 	to 	fail 	to 	produce 	efficient 	outcomes
can undermine 	the 	efficacy of 	regulatory decisions.
18
,

investments 	to 	retain 	its 	ATV 	permit. 36 For 	example, 	recall 	that
to 	a 	large 	extent 	the 	frequencies 	to 	be 	awarded 	are made 	possible
by reducing co-channel separation. 	This reduction may require more
would 	be 	forfeited 	if 	facilities 	were 	not 	constructed 	within 	two
in 	facilities 	to 	broadcast 	under 	that 	standard. 	Later, 	the 	RCA
licenses 	to 	broadcast 	color 	television, 	and 	that 	these 	licenses
These
If 	so, 	allowing 	firms 	to
There 	may 	well 	be 	cost 	savings
Since 	the 	FCC 	initially 	chose 	the 	CBS 	system 	as 	the
licensees 	to 	complete 	construction 	within 	the 	time 	period
methods can then be used in subsequent construction. 	Requiring all
associated 	with 	learning-by-doing.
which 	methods 	of 	improving 	the 	signal 	are 	lowest 	cost.
sophisticated 	transmission 	equipment 	to 	achieve 	higher 	ratios 	of
contemplated by 	the 	proposed time 	limits 	may reduce 	the 	potential
for 	learning-by-doing.
experiment 	with 	alternative 	methods 	would 	allow 	firms 	to 	learn
desired 	to 	undesired 	signal. 37
A related problem is that in the short run it may not be clear
which investments are appropriate. 	To 	illustrate, 	suppose that 	in
the 	early 	days 	of 	color 	television, 	the 	FCC 	had 	given 	separate
standard 	for 	color 	transmission, 	broadcasters 	would 	have 	invested
system 	been 	constructed, 	either 	the 	construction 	would 	have 	been
system came to be regarded as superior. 	Had facilities 	for the CBS
years.
36 	For 	a 	discussion 	of 	the 	relationship 	between 	premature
innovation 	and 	the 	establishment 	of 	property 	rights, 	see 	Yoram
Barzel 	"The 	Optimal 	Timing of 	Innovation," 	50 	Reyiew 	of 	Economics
and 	Statistics, 	p. 	348 	(1968).
37 	~ 	OET 	Technical 	Memorandum, 	FCCjOET 	TM89-1 	(December,
1989) 	at 	5.
19

~.
wasteful, 	since 	conversion 	became 	necessary, 	or 	the 	RCA 	system
would 	never 	have 	been 	adopted, 	and 	the 	apparently 	inferior 	CBS
technology would 	have 	remained 	the 	standard. 38
In the case of ATV, 	the Advisory Commission may well select an
appropriate 	(i.e., 	economically efficient) 	standard. 	Nonetheless,
it is conceivable that technology will change, 	and a-standard other
than the one chosen will become preferred. 	It is also possible that
consumers will never buy a 	substantial amount of ATV equipment, 	so
that 	construction 	will 	never 	be 	warranted 	from 	an 	efficiency
standpoint. 	Even if the chosen standard is appropriate, 	permittees
should 	be 	in 	the 	best 	position 	to 	determine 	the 	timing 	of
,
construction 	that 	maximizes 	the 	value 	of 	the 	authorization. 	We
.'.
~':'
recommend, 	therefore, 	that 	licenses 	be 	awarded 	with 	a 	minimum 	of
ancillary 	conditions 	on 	their 	use, 	and 	in 	particular 	that 	time
limits 	placed on construction be 	relatively 	long.
v. 	Future Use of Spectrum for 	Broadcast Television
A. 	Alternatiye 	Uses 	of 	the 	Broadcast 	Spectrum
The 	NPRM 	envisions 	two 	distinct 	phases 	of 	ATV 	broadcasting.
Initially, 	there will be a 	transition period in which broadcasters
will operate both NTSC and ATV stations. 	During this period, 	it is
38 	In 	fact, 	the 	primary 	reason 	that 	facilities 	to 	broadcast
under 	the 	CBS 	standard 	were 	not 	constructed 	is 	that 	color
television sales were banned during the Korean War. 	~ Leland L.
Johnson and Stanley M. 	Besen, Compatibility Standards, Competition,
and 	Innoyation 	in 	the 	Broadcast 	Industry, 	RAND 	Publication No. 	R-
3453-NSF 	(November 	1986).
20
,

At 	some 	date, 	however, 	firms 	would 	be 	required 	to 	". convert'
spectrum 	solely 	for 	the 	transmission 	of 	ATV 	broadcasts 	is 	a
date, 	NTSC 	broadcasts 	would 	only 	be 	permitted 	in 	"special
circumstances".40
,
After 	this
proposed 	that 	there 	be 	some 	mandated 	minimum 	amount 	of 	ATV/NTSC
simulcasting, 	and 	possibly 	a 	minimum 	amount 	of 	ATV 	broadcasting.
Providing spectrum for ATV implicitly results 	in spectrum not
being allocated to some other use. 41 Thus, 	the decision to reserve
entirely 	to 	ATV 	-- 	i. e., 	broadcast 	only 	in 	ATV". 39
~.
decision 	not 	to 	allocate 	spectrum 	to 	alternative 	uses. 	Economic
efficiency 	concerns 	would 	suggest 	that 	the 	allocation 	should 	be
guided by market signals, 	assigning spectrum to those 	individuals,
firms 	and 	government 	agencies 	who 	value 	it 	most 	highly. 42 	The
amount 	of 	spectrum 	allocated 	to 	competing 	uses 	could 	expand 	or
contract 	in 	response 	to 	changes 	in 	consumers' 	valuations 	of 	the
different 	outputs 	that 	can 	be 	produced 	with 	that 	portion 	of
spectrum.
39 	NPRM 	at 	19.
40 	Once 	ATV 	licenses 	have 	been 	awarded, 	no 	new 	NTSC 	licenses
will 	be 	issued. 	Broadcasters 	holding only NTSC 	licenses 	would 	be
permitted to 	apply 	for 	any vacant ATV 	license 	at 	that 	time.
41 Al though the spectrum to be allotted to ATV is not currently
used, 	it 	could be used 	for 	other purposes.
42 We 	recognize 	the 	current 	statutory framework 	requires 	that
radio 	spectrum be 	allocated 	to 	specific, 	identified uses.
21
,

B. 	The 	Use 	of 	Spectrum 	for 	ATY
The 	degree 	to 	which 	ATY 	will 	become 	successful 	is 	not 	yet
known. 	The primary drawback to ATY 	is 	that 	it 	is, 	and will 	likely
43
remain, 	quite 	expensive 	for 	consumers. 	Similarly, 	the 	broadcast
equipment necessary to provide ATY broadcasts 	appears 	to be rather
expensive. 44 Other emerging 	systems, 	such as 	some 	of 	the 	enhanced
definition television systems 	(EDTY) 	not under consideration, offer
a 	different 	price/performance 	mix 	than 	the 	ATY 	systems 	under
consideration. 	Some 	versions 	of 	EDTY 	can 	be 	broadcast 	over 	NTSC
frequencies and involve much smaller outlays for both consumers and
broadcasters 	than ATY. 45
This 	does 	not 	mean 	that 	ATY 	will 	not 	be 	successful 	with
consumers. 	High-quality, 	high-cost 	technologies 	have 	succeeded,
,
for 	example, 	in 	the 	home 	audio 	industry . 	compact 	disks 	( CDs)
represent 	47 	percent 	of 	album-length 	recorded 	medium 	unit 	sales,
43 	The 	current 	Japanese 	version 	sells 	for 	$30,000-35,000 	per
unit 	(Washington Post, 	11/26/91). 	Although the price will probably
fall 	as 	production 	increases, 	it 	is 	difficult 	to 	know 	what 	the
prevailing 	price 	will 	be 	ten 	or 	fifteen 	years 	from 	now. 	In
addition 	to 	the 	higher 	cost 	per 	set, 	buying ATY 	may 	entail 	other
switching 	costs 	(e.g., 	current 	VCRs 	and 	tape 	libraries 	may 	be
obsolete) •
44 	Five 	of 	the 	six 	systems 	under 	consideration 	are 	high
definition 	television 	(HDTY) 	systems. 	Studies 	by 	CBS 	and 	PBS
indicate 	that 	it would 	cost 	$1.5 	- 	$2 	million 	for 	a 	local 	station
to 	convert 	its 	operations 	to 	be 	able 	to 	transmit 	an 	HDTY 	network
signal 	(Communications 	Daily, 	October 	5, 	1990). 	The 	additional
cost 	to 	convert 	production 	facilities 	to 	HDTY 	would 	be 	$10-12
million.
45 One EDTY system would require receivers which sell 	for about
$300 more than NTSC receivers, 	while the cost to broadcasters would
be 	in 	the 	range 	of 	$10,000. 	(Communications 	Daily, 	September 	12,
1990) .
22

despite 	the 	facts 	that 	CD 	prices 	are 	50 	percent 	higher 	than
cassette tape 	prices 	and more 	than double vinyl 	album prices 46 and
that 	fewer 	than 	one-third 	of 	households 	with 	home 	audio 	systems
47
have 	CD 	players. 	The 	point 	is 	that 	the 	future 	value 	of 	ATV 	is
uncertain, 	so 	it 	is 	not 	clear 	that 	a 	market-guided 	outcome 	would
involve 	only ATV broadcasting.
C. 	The 	Future 	of 	NTSC 	Broadcasting
Even if ATV broadcasts become a highly-valued use of spectrum,
it 	does 	not 	follow 	that 	the 	spectrum 	allocated 	to 	NTSC 	broadcasts
should be 	reassigned 	to 	other uses. 	The 	value 	of 	NTSC 	broadcasts
to 	the 	remaining consumers 	may be more 	than 	sufficient 	to 	support
continued 	NTSC 	broadcasts, 	even 	if 	many 	consumers 	opt 	to 	buy 	ATV
,
receivers. 	Discontinuing 	NTSC 	broadcasts 	forces 	individuals 	to
buy ATV receivers 	in order to receive television broadcasts. 	Even
households 	that 	buy 	ATV 	receivers 	may 	still 	value 	NTSC
broadcasting. 	Since 	the 	average 	u.s. 	household currently has 	two
televisions,48 	many 	purchasers 	of 	ATV 	receivers 	will 	likely 	have
mul tiple 	sets. 	If 	NTSC 	broadcasting 	continues, 	some 	of 	these
viewers 	may 	wish 	to 	have 	one 	NTSC 	receiver 	(particularly 	in 	the
early years 	of ATV broadcasting when many NTSC televisions will be
in working 	order).
46 	Recording 	Industry 	of 	America, 	Market 	Research 	Committee.
Figures 	represent 	sales 	between January 	and 	June 	of 	1991.
47 Consumer 	Electronics 	u.s. 	Sales, 	Electronic 	Industry
Association, 	Consumer 	Electronic 	Group, 	June 	1991, 	p. 	25.
48 	Nielsen Media Research.
23
,

The 	proposal 	that 	NTSC 	broadcasts 	terminate 	at 	some 	future
date would be consistent with economic efficiency if 	it were known
that 	other uses 	of 	spectrum generate more 	value 	to 	consumers 	than
NTSC 	broadcasting. 	Whether 	this 	will 	be 	true 	at 	the 	specified
future 	date 	will 	depend on what 	alternatives 	exist 	at 	that 	future
date, 	and not necessarily on ATV penetration. 	That,is, 	efficiency
considerations 	imply 	that 	the 	proper 	allocation 	be 	based 	on 	the
value 	to 	consumers 	of 	the 	alternative 	potential 	uses 	of 	the
spectrum. 	A good way to reveal these values 	is through an auction,
whereby 	spectrum 	is 	allocated 	to 	users 	willing 	to 	pay 	the 	most.
While 	not 	a 	perfect 	measure 	of 	consumer 	value,49 	the 	willingness-
to-pay 	of 	various 	users 	represents 	a 	good 	approximation 	of 	the
value 	to 	society 	of 	using 	spectrum 	in 	that 	use. 	We 	recognize,
however, 	that 	the 	FCC 	lacks 	the 	statutory 	authority 	to 	conduct
auctions. 	To achieve economic efficiency, 	the regulatory mechanism
chosen for 	awarding permits 	should be based on the same principles
(i. e. , 	allocating 	spectrum 	to 	the 	highest-valued 	uses). 	In
addition, 	the 	allocation across 	uses 	should be 	flexible 	enough 	to
adjust to changes in consumers' 	valuations of the different outputs
produced 	by 	using 	the 	spectrum. 	A 	flexible 	approach 	could
accommodate the continued survival of NTSC broadcasting, 	perhaps at
a diminished level, if consumers valued such broadcasts sufficiently. so
49 	See 	our 	discussion 	of 	the 	potential 	discrepancies 	between
total 	value 	of 	a 	license 	and 	willingness-to-pay 	in 	our 	Comment,
Digital 	Audio 	Radio 	Services, 	pp. 	9-11.
50 	In 	a 	recent 	proceeding, 	the 	FCC 	proposed 	to 	allow 	market-
based 	mechanisms 	to 	allocate 	spectrum 	across 	uses, 	by 	allowing
( continued ... )
24

D. 	MandatQ~ Simulcasting
While the NPRM proposes eliminating NTSC broadcasts after some
date, 	it 	also 	proposes 	to 	protect 	the 	value 	of 	existing 	NTSC
equipment 	up 	to 	that 	date. 	In part, 	the NPRM 	proposes 	to 	mandate
a 	certain percentage of 	simulcasting during the transition period.
Requiring 	simulcasting 	could 	be 	justified - on 	efficiency
grounds 	if 	broadcasters 	have 	an 	incentive 	to 	undersupply 	certain
types 	of 	programs 	for 	NTSC 	broadcasts. 	That 	is, 	absent 	mandatory
simulcasting, 	consumers would be ill-served as broadcasters choose
to offer "excess diversity" 	(compared to the economically-efficient
amount 	of 	diversity).
rt 	is 	true 	that ATV 	and NTSC 	have 	technological 	differences,
and without mandatory simulcasting broadcasters may tend to produce
programming which 	takes 	advantage 	of 	the 	comparative 	strengths 	of
each 	technology. 	Such 	specialization 	has 	come 	to 	characterize
radio programming. 	Because FM radio has superior sound quality, 	FM
stations 	have 	tended 	to 	specialize 	in music 	programming, 	while 	AM
,
stations 	have 	tended 	toward 	news/talk 	formats. 	If 	all 	FM
broadcasters owned AM stations and simulcasting was mandatory, 	they
would 	be 	faced 	with 	a 	choice 	of 	either 	broadcasting 	programming
ill-suited 	to 	one 	band 	or 	the 	other, 	or, 	in 	trying 	to 	produce
programming 	suitable 	for 	both, 	wind up with 	a 	product 	not 	ideally
suited 	for 	either.
50 ( ••• continued)
licensees 	to 	compensate 	other 	licensees 	for 	changing 	frequencies.
~ 	Amendment 	of 	Section 	2.106 	of 	the 	Commission I s 	Rules 	to
Allocate 	Technology 	Bands 	for 	Future Requirements, 	ET 	Docket 	92-9
(January 	16, 	1992).
25

In 	the 	case 	of 	television, 	the 	technological 	features 	of 	the
two standards may mean that certain programs 	(e. g ., 	sporting events
and 	feature-length 	films) 	are 	well-suited 	to 	ATV, 	while 	other
programs 	(such 	as 	news 	shows) 	would 	be 	better-sui ted 	to 	NTSC.
Separate programming could allow broadcasters to take advantage of
the 	comparative 	strengths 	of 	both 	types 	of. 	broadcasting,
potentially providing 	increased 	choice 	to 	viewers.
If 	broadcasters 	produce 	specialized 	programming 	in 	this
manner, 	some viewers without ATV receivers will be unable to watch
certain programming. 	On the 	other hand, 	mandating 	simulcasts, 	by
reducing programming diversity, prevents others from watching other
programs. 	Relative 	to 	the 	amount 	of 	simulcasting 	that 	maximizes
consumer 	welfare, 	broadcasters 	have 	no 	obvious 	bias 	in 	favor 	of
supplying 	too much 	or too 	little 	simulcasting. 51 It 	is 	clear 	that
the 	larger 	the 	number of 	the 	viewers 	without ATV, 	the 	smaller 	are
the 	rewards 	from 	broadcasting 	different 	programs 	on 	the 	two
formats. 	Hence, 	when ATV penetration is 	small, 	we would expect 	to
see 	broadcasters 	simulcasting 	even 	in 	the 	absence 	of 	mandatory
minimum 	amounts 	of 	simulcasting. 	As 	ATV 	penetration 	increases,
diversity 	becomes 	more 	valuable, 	and 	broadcasters 	will 	tend 	to
,
reduce 	the 	amount 	of 	simulcasting. 	A 	mandated \ amount 	of
51 The 	analysis 	in 	this 	Comment 	is 	based 	on 	economic
efficiency. 	Under 	this 	approach, 	if 	the 	loss 	to 	consumers 	who
prefer 	separate 	programming exceeds 	the 	gain 	to 	those 	without 	ATV
who 	prefer 	simulcasting, 	mandatory 	simulcasting 	should 	not 	be
imposed. 	We 	recognize 	that 	the 	FCC's 	concern 	in 	mandating 	a
minimum 	amount 	of 	simulcasting 	may 	include 	considerations 	other
than 	this 	tyPe 	of 	efficiency consideration. 	For example, 	minimum
simulcasting 	regulations 	may 	prevent 	certain 	consumers 	(those
without ATV) 	from being I shut-out' 	of certain types of programming.
26

simulcasting 	may 	prevent 	broadcasters 	from 	providing 	vi_wo" .. 	th$3
variety of 	broadcasts 	they would prefer.
VII. 	Conclusion
While ATV offers many technical improvements over NTGC, 	th.r.
is no way to know whether these improvements will be cOlt 	ju.tlrl~
for 	most 	consumers. 	Given 	this 	uncertainty, 	the 	FCC 	may 	wllh 	to
consider adopting more flexible rules regarding the introduction of
ATV 	than 	those 	proposed 	in 	the 	NPRM. 	Specifically, 	.fflel.ncy
considerations 	suggest 	that 	spectrum 	should 	be 	allocated 	to 	the
highest-valued users. 	It 	follows 	that 	a 	regulatory 	approaoh 	that
serves 	to 	allocate 	spectrum 	based 	on 	the 	value 	to 	different 	.nd
uses 	will 	tend 	to maximize 	consumer welfare.
Just as 	it 	is 	not clear how much spectrum to allocate 	to ATV,
so 	too 	it 	is 	unclear 	that 	NTSC 	broadcasts 	should be 	terminated 	by
some 	specified 	future 	date. 	NTSC 	broadcasting 	may 	remain 	an
efficient 	user 	of 	spectrum 	even 	after 	ATV 	gains 	considerable
acceptance.
Efficiency 	considerations 	also 	suggest 	that 	the 	FCC 	allow
broadcasters 	more 	flexibility 	in 	regard 	to 	facility 	con8truction
and simulcasting. 	Rules 	that make holding a 	license continoent on
constructing 	ATV 	facilities 	will 	encourage 	construction, 	but 	may
result 	in 	excessively 	rapid 	or 	inappropriate 	construction 	if 	the
deadline 	is 	too 	short. 	Additionally, 	efficiency 	considerations
would 	not 	necessarily 	require 	simulcasting 	of 	ATV 	programs. 	The
27
,

incentives 	of 	the 	viewing 	public 	and 	dual 	license 	broadcasters
appear 	to 	be 	sufficiently 	aligned 	to 	ensure 	the 	provision 	of 	the
mix valued most 	highly 	by consumers.
Finally, 	a 	consumer 	welfare 	standard 	implies 	that 	the
allocation 	of 	ATV 	licenses 	be 	made 	in 	a 	way 	which 	minimizes 	the
cost of doing so. 	Allocations based on financial qualifications or
expected 	viewership 	may 	not 	accomplish 	this, 	as 	they 	tend 	to
encourage 	firms 	to 	spend 	significant 	real 	resources, 	as 	well 	to
absorb 	as 	the 	resources 	of 	the 	FCC. 	Unless 	the 	process 	of
-;:
,-1
transferring authorizations 	is costly, 	it 	is 	likely that broadcast
licenses within a 	given region of 	spectrum will ultimately come to
be 	held 	by 	those 	who 	value 	them 	most 	highly, 	regardless 	of 	the
initial 	allocation.
28