Meeting the Digital TV Deadline - BusinessWeek Online
<<Special Report January 28, 2008, 12:01AM EST
Meeting the Digital TV Deadline
With the analog-to-digital changeover a little more than a year away, owners of rabbit-ear sets must decide: a new set, pay TV, or a converter box
by Olga Kharif
The picture has been going out on Tom Gilbert's quarter-century-old rabbit-ear Sony (SNE) TV set for years. But what finally forced the Los Angeles resident to purchase a new TV is the prospect that before long, he could lose the signal to many of his favorite channels.
Gilbert and millions of U.S. consumers like him have just over a year to get ready for the government-mandated switch to digital TV from the less efficient, decades-old analog system. Federal officials say the upgrade will free big chunks of valuable broadcast airwaves for public safety providers, such as police departments, and for consumers will provide a sharper, more vibrant picture. Come Feb. 17, 2009, some 1,760 stations will cease sending analog signals and begin broadcasting in digital format only. Only community-based broadcasting will remain available in analog.
To ensure uninterrupted program viewing, people like Gilbert who still use antennas to pick up a signal will have to buy a new digital TV, get an analog-to-digital converter, or buy a subscription to a cable or satellite TV service. "The TV was so old, and it wasn't digital anyway, so I decided it was time," says Gilbert, who bought a TV set by Dynex, a Best Buy (BBY) brand.
Sales Fueled by Fear
Some 13.5 million U.S. households, or 12% of the total, will have to make similar decisions in the next 12 months, which will fuel a demand boom for digital TVs, converters, or subscription services. The extra purchasing will be welcome news to a consumer electronics industry bracing for a recession—a time when consumers will defer nonessential purchases. "Most things that you'd go into an electronics store for can wait," says Arnie Berman, chief technology strategist at Cowen & Co.. "But there's a deadline associated with this. It's unprecedented. If people don't do something, they won't be able to watch television."
Government subsidies will help goose sales of the converter boxes that translate digital signals back into analog signals legible to old TVs. The National Telecommunications and Information Administration (NTIA) is giving away as many as two $40 coupons per household to buy government certified converters. Among those approved by NTIA are devices from EchoStar (DISH), Philips (PHG), which owns the Magnavox brand, and Venture Electronics, which distributes RCA-branded machines. The NTIA received requests for 2 million coupons the first week it started accepting requests.
By mid-February, the earliest converter box models from a variety of makers including LG will go on sale in some 15,000 U.S. retail stores. The Consumer Electronics Assn. (CEA) estimates manufacturers will sell 25 million converter boxes, typically for $50 to $70 apiece, during the transition. Households that have several TVs will have to buy multiple boxes.
Retailers Strategize
Many consumers probably will take the same route as Gilbert, opting for new TVs. Stephen Jorge, vice-president of sales for Venture Electronics, estimates 20% of affected households may purchase TVs instead of the types of converters his company distributes. The CEA expects an 18% gain in TV unit sales this year, to 31.8 million units—compared with a 15% increase in 2007—when makers like LG were on a roll (BusinessWeek.com, 1/16/08). Savvy electronics retailers are likely to steer consumers toward new TVs when they come in looking for a converter. Some stores may offer credits toward a new TV to consumers willing to forfeit their $40 converter vouchers, Cowen analysts say. Target (TGT) and Best Buy wouldn't comment on their retail strategies, but more TV purchases obviously would benefit manufacturers like Sony, Samsung and Philips.
Some retailers and manufacturers may even benefit as confused consumers seek to replace TVs that already receive digital signals or are connected to a cable service. "The consumers' knowledge is not that clear, so there might be more people who upgrade their TVs," Jorge says.
Another group of companies that could get a boost from the digital conversion includes cable, telecom, and satellite TV providers. Electronics retailers likely will try to bundle added services, such as cable TV packages, to hardware purchases. About 15% of the households affected by the transition will subscribe to a pay-TV service to avoid buying any new gear, Jorge estimates.
Leaving Out the Little Guy
That said, in the face of an economic contraction, some consumers may eschew high-priced deals that include hundreds of channels, gravitating instead toward basic cable packages. That would limit the potential benefit for Comcast (CMCSA), DirecTV (DTV), Verizon Communications (VZ), and others. As many as one-third of consumers with older TVs may simply opt to watch video on computers and chuck the TV altogether, says Tim Herbert, the CEA's senior director of market research. In those cases, "There's not as much urgency to take care of the situation," he says.
Any buying boom also presupposes the conversion goes off without a hitch—not a given. The Community Broadcasters Assn., which represents several thousand smaller stations that offer local programming or rebroadcast larger stations' programs in rural areas, is threatening legal action. Its member stations aren't required to convert to digital transmission. So people with older TVs could still receive those stations' broadcasts after the February, 2009, cutoff. The problem is that TVs equipped with most of the new converter boxes certified by the NTIA won't receive programming from stations operating in the analog format, says Greg Herman, the association's vice-president for technology and an owner of 15 small stations that broadcast in Oregon.
"We are barely surviving," Herman says. "And this blow would probably destroy the industry." Herman is trying to negotiate a resolution that would require the government to post a warning label on converter boxes. Meanwhile, millions of owners of outmoded TVs have some buying decisions to make in 2008. >>
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