the transition to digital television jérôme adda university college london marco ottaviani london...
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The Transition to Digital Television
Jérôme Adda
University College London
Marco Ottaviani
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 TVTV 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 upgrade)
• 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
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
Q3, 1998
Q4, 1998
Q1, 1999
Q2, 1999
Q3, 1999
Q4, 1999
Q1, 2000
Q2, 2000
Q3, 2000
Q4, 2000
Q1, 2001
Q2, 2001
Q3, 2001
Q4, 2001
Q1, 2002
Q2, 2002
Q3, 2002
Q4, 2002
Q1, 2003
Q2, 2003
Households
Analogue satellite Digital satellite FTA satellite Analogue cable Digital cable Digital terrestrial ADSL
50%
BSkyB digitised satellite platform in 3 years
Cable 2/3 digitised
Digital Terrestrial (DTT) is progressing…
Business PolicyIn 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
Cable Terrestrial Satellite
Interactivity + – –
Portability – + –
Bandwidth ++ – +
Investment ideal for small
catchment area
ideal for medium-
size catchment
area
ideal for large
catchment area
Comparison of Delivery Platforms
Talk Plan
1. Digital televisionDigital television
2. Business and public policy problem
3. ModelModel
4. Data and resultsData and results
5. Effects of policies on viewers’ incentivesEffects of policies on viewers’ incentives
Terrestrial TV: Public Policy• DTT uses radio
spectrum, a publicly owned resource – government act as “owner” and aims at solving economic coordination problem
• Social role of television [Public Service Broadcasting]
• Political importance of pluralism in media/information markets [legislation on concentration in media ownership]
LIMITED SPECTRUM UNIVERSALITY
Terrestrial Spectrum Constraint
Limited amount of spectrum [e.g., 368MHz in UK] that can be used for analogue & digital TV
• Population coverage of DTT [to 2/3] is limited until analogue switched off
• Power of DTT is limited until switch off, requiring often additional investment on antenna
Trade off between number of analogue and digital channels and population 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 televisionDigital television
2. Business and public policy problemBusiness and public policy problem
3. Model
4. Data and resultsData and results
5. Effects of policies on viewers’ incentivesEffects of policies on viewers’ incentives
Purpose of Model
Model
• built to predict numbers of viewers who adopt different TV platforms
• over time
• depending on exogenous market and policy parameters
Framework for considering policy effects
Illustration: Toy Examplet=1,2A & D available in t=1,2Viewer with• at, benefit from analogue• bt, incremental benefit from
digital• st, cost of switching to digitalPayoffs:
AA: a1+δ a2
AD: a1+δ (a2 + b2 – s2)
DD: a1+ b1 – s1 + δ (a2 + b2 )
DD
b1
b2
s1–δs2 s1
s2
AD
AA
DD
b1
b2
s1–δs2s1
s2
AD
AA
Laissez Faire vs. First Best
s2 + (CD–CA)
t=1,2
A & D available in t=1,2
Free to air broadcaster
• CD cost of digital transmission
• CA cost of digital transmission
Social payoffs:
AA: a1 – CA +δ (a2 – CA)
AD: a1 – CA +δ (a2 + b2 – s2 – CD)
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
• X is vector of platform attributes
• p is vector of prices of each platform
• is preference shock with extreme value distribution, capturing idiosyncratic variation in consumer preferences
jt
,),,( jt
jt
jt pXpXju
Dynamic Problem
A viewer enters period t with platform i, and then chooses platform j from a choice set It
The value is defined recursively as:
where ct(i,j) is cost of switching from platform i to j, with ct(i,i)=0
jiViV tIjt t,max)(
)(,),,(),( 1 jVjicpXjujiV ttt
Two Phases1. Post-switch phase (S):
• Analogue not available
• Stationary problem with value function VS(i, p, X)
2. Pre-switch phase (A): • Viewers can choose analogue
• Viewers expect that analogue will be switched off in period t (conditional on not having been switched off earlier) with probability
• Value function is:t
jVjVpXjiujiV Stt
Att
A 1)1(),,,(,
III St
}{AIII At
Talk Plan
1. What is digital television?What is digital television?
2. Why should we economists care?Why should we economists care?
3. Purpose of our modelPurpose of our model
4. Data and results
5. Effects of policies on viewers’ incentivesEffects of policies on viewers’ incentives
Data• 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?What is digital television?
2. Why should we economists care?Why should we economists care?
3. ModelModel
4. Data and resultsData 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 coverage
• 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 AnnouncementThe 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
Reason:• 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 PoliciesIf 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
Effect on consumer surplus of (expected) analogue switch off at
different dates
Impact on consumer surplus
(£ billions)3 -4.354 -3.865 -3.486 -3.127 -2.828 -2.649 -2.3610 -2.0211 -1.7912 -1.5713 -1.3714 -1.1815 -1.0116 -0.8317 -0.6718 -0.5219 -0.38
Switch-off period
ConclusionFocused 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