A Digital Transition Policy for New Zealand Broadcast Television

The NZTBC believes that the transition from analogue television distribution to digital television distribution presents both the greatest opportunity and the greatest challenge to the viability of the free to air television industry in New Zealand. This is an industry, which plays a large part in the lives of many New Zealanders, is a major funder of employment in the creative arts and information business and performs a central function in our society.

We are committed to the ongoing provision of information and entertainment via free to air television to New Zealanders. We are convinced that the place of FTA television as the leading provider of these services to New Zealanders in their homes can be retained provided that a viable transition programme is formulated by broadcasters and distribution companies within a sound regulatory environment.

Why Digital?

The transition to digital is being driven primarily by these factors:

- The desire for a better quality signal which impacts on both production technology, transmission technology and domestic equipment

- The more efficient use of radio frequency spectrum or transmission capacity

- The ability to add new services with potentially new revenue streams and to expand existing revenue streams.

In some countries spectrum allocation for the digital transition has been provided to FTA broadcasters in return for meeting certain targets while in others auctions have been held to raise revenue for public sector use.

The difficulties with Digital

Going digital can be compared with the changeover from black and white to colour television except that is much more challenging for the broadcasters and viewers. Digital is different because it introduces new business models, which are leading to conflicts in the marketplace and in public policy.

These battles in the marketplace may be healthy but they will be corrosive as some investments work and others do not.

The key revenue streams in the television industry - advertising and subscriptions -will be hotly disputed.

One instance is the possibility of multiplexing commercials so that an advertiser can deliver commercials for different products to different households, simultaneously, within the same commercial slot in a programme. This is done by linking the selection of the commercial and product to digital data about that household. The ability to make that selection will be controlled by the owner of the box in the home and, as a result, revenues are likely to go the way of the box owner rather than the broadcaster. This box owner or broadcasting distribution undertaking (BDU) may not be the broadcaster but another entity. In New Zealand, these boxes are mainly owned by Sky TV with its 31 per cent penetration of the country's households.

For now, decisions are required of the Government and of industry, which will partly determine some of these events and be determined by them. Once the digital decisions are made, then the transformation of the business can occur.

For the FTA industry the transition raises major issues over costs and benefits. Now virtually every New Zealand home receives its FTA signal via a roof-mounted VHF and/or UHF aerial with some use of internal aerials. Almost a third of homes also subscribe to Sky TV via either a UHF aerial and analogue set top box or via a Direct to Home (DTH) satellite dish and digital set top box. Another small number of homes receives Telstra Saturn Pay TV via cable and a set top box.

The FTA industry faces a major investment in the creation of an industry based broadcast distribution undertaking able to provide digital FTA signals and all the associated ancillaries to all households. This approach has occurred in the United Kingdom and the USA.

A Digital Transition Plan

The onset of the digital transition raises questions over the ongoing viability of the FTA television industry, particularly at a time when profitability is under severe pressure. The transition needs to be handled with great care based on experiences in Australia, the US and UK, where very different experiences have occurred.

If it is to be successful for consumers then they need to be convinced it is going to add some value to their viewing experience. For the FTA industry, the emphasis is very much on the consumer and we consider that a rollout must be based on some simple principles so the plan is:

- Market-driven with agreed business rules
- Gradual
- Flexible

New Zealand broadcasters are committed to a DTV rollout plan, which achieves the following outcomes:

- Helping broadcasters maximise audiences and revenues from all sources, as an absolute precursor to the shift to the digital age.

- Promoting a public policy framework that enables a commercially viable transition to digital television.

- Ensuring all New Zealanders can receive all existing free to air television channels in both an analogue and/or digital format (simulcast) from the start of the digital switch on date until material uptake has been achieved. This will come about through industry agreement rather than Government legislation.

- Creating open access agreements so that viewers ideally need a single receiver to access digital television signals.

- 'Plug and play' availability of digital television in cooperation with manufacturers.

- The provision of programmes in digital format.

- The introduction of digital enhancements to free to air television.

- Ensuring the adoption of DVB, non-proprietary technical standards.

- Amending copyright law so that free to air television companies has unfettered rights of ownership of their broadcasts.

Right now, New Zealand appears to be making a fundamental change in the way many homes receive their television signals. The introduction of nationwide DTH satellite transmission by Sky TV with its ownership of the set top box has led to the delivery of digital signals to 267,000 homes. Sky is continuing to move quickly to grow the DTH digital Pay TV business. Telstra Saturn has a cable based Pay TV/BDU operation in Wellington and Christchurch and is building out in Auckland. It has up to 25,000 homes installed.

In the UK, Australia and the US and a number of other countries, DTV is delivered via a wireless terrestrial signal using UHF spectrum (DTT). This platform has not yet been introduced in New Zealand although wireless terrestrial is the delivery platform for all analogue television.

A significant issue for public policy are the factors, which will, led to the creation of a DTT platform in New Zealand. The Council would argue that the transition policy above provides the foundation for a decision to allocate spectrum for that possibility.

The Role of Public Policy

1. Free to Air Television

The factors guiding public policy need not change significantly because of the introduction of digital technology into television. It will continue to be in the interests of public policy to ensure that free to air television broadcasters have thriving businesses which can make the greatest contribution to specific television policies such as the growth in New Zealand programming. FTA television broadcasters provide a major role in the New Zealand broadcasting system by:

- Making the biggest contribution to New Zealand programming

- Providing New Zealanders with a sense of shared experience

- Providing free service.

The regulatory regime, which exists in New Zealand, has been the basis for significant growth in the FTA industry in the past decade. Public policy in future needs to enable FTA broadcasters to retain their leadership because of:

1. The significant investment in local infrastructure and innovation.

2. The widespread benefits of nationwide digital broadcasting (one to many) systems across many fronts including greater choice, educational opportunities and commercial growth.

3. The considerable increase in opportunities for expression by New Zealanders as a result of increased television channels.

4. It is an economic and creative enabler for the knowledge economy.

Therefore, the following public policy principles and regulations are needed:

- Support of the industry's commitment to open access.

- The allocation of UHF spectrum at no charge for any terrestrial digital distribution system is made only to the existing free to air operators in recognition of the investment by existing operators and the small size of the New Zealand market. No new free to air television operators will be provided with spectrum during the period of simulcast and digital transition.

The term 'open access' is increasingly in use as a major driver of behaviour in the transition. A Canadian Association of Broadcasters definition of open access is useful to consider as the basis for New Zealand use. The CAB said that it meant:

FTA broadcasters must be assured that all data related to the video and/or audio part of their content is carried by the BDU. "Carrage" additionally implies that any software distributed by the BDU for use in set top boxes will correctly interpret data offered in standard format; and the BDU will not inhibit access from the receiver to online sites operated by the broadcaster. Only one standard for the delivery of interactivity should be used.

In effect, open access provides the basis for the consumer being able to buy one set top box or integrated television set (IDTV) which can receive all digital signals, whether they be pay or FTA only plus any ancillary information. This situation is impossible technologically at present but could well occur within five years.

2. Pay Television

In the case of pay television, some additional market driven policy issues come in to play. It would be the expectation that these matters are agreed without the need for public regulation.

They are:

- Agreement to open access

- Agreement to maintaining a competitive marketplace by preventing a BDU, either through the lack of standardisation or through its ability to act as gatekeeper, from exercising undue preference

- Agreement to one standard for the delivery of interactivity

- Agreement to carrying all FTA signals including regional television stations.

A Way Forward for the Transition

Many matters need to be addressed in detail in the transition. Some will be commercial, others will be technology. Specific digital issues can be grouped under six main headings:

1. Consumer acceptance
2. New Zealand content
3. Commercial value issues
4. The need for standards
5. Copyright issues
6. Timing of the transition

1. Consumer acceptance

Digital television will not exist unless there is broad based consumer acceptance. Over 97 per cent of NZ homes have a television set and most of them have more than one. It took ten years for people to move from colour to black and white. Going digital is a more difficult proposition for the consumer so extraordinary efforts are required to make the transition consumer-friendly.

Pricing will be a key part of the equation for consumers followed by ease of use and the functionality of the set top box. New Zealanders adopt new consumer items quickly but they are very conscious of the balance of price and value.

Consumers nationwide will also expect to receive the advantages of digital transmission so there is a necessity to achieve total geographic coverage of the nation.

2. New Zealand content

The major investment by New Zealand's FTA television broadcasters in the production and distribution of New Zealand programmes cannot be allowed to be threatened by the digital transition. This ongoing investment will be sustained only if existing FTA broadcasters are allowed full access to the potential of other revenues from ancillary services and they can rely on free access to spectrum.

The length of the transition period needs to be industry led so that they can judge how to use cross-promotional techniques and ensure they do not lose the analogue signal too early.

3. Commercial Value issues

The FTA television marketplace in New Zealand is one of the most competitive and least profitable in the world. The value of all existing operators is threatened by the fragmentation, which will increasingly result in a digital world. (See Appendix). It is central to securing the future of the FTA television industry that no new operators are provided with licences to enter the market during the transition.

An issue for the future is also whether digital transition makes it easier for Australian broadcasters to enter the New Zealand market at will and compromise the viability of the industry.

4. The Need for Standards

The acceptability of appropriate industry standards for television receivers, set top boxes and software will be a plank in the transition. These are largely industry led standards and need to be encouraged by governments.

5. Copyright Issues

There will be a need for FTA television broadcasters to have the backing of the law so that no BDU can retransmit any FTA signal.

In a digital world, programmes are able to be copied in a way so that each copy is as good as new. Protection technologies need to be put in place without delaying the production and transmission of digital programmes.

6. Timing of the Transition

In the UK, the Government has said it wants the transition to be over between 2006 and 2010. In the US, the government has laid down it must be complete by 2006. These deadlines are driven by a desire to achieve a spectrum swap plus leadership as digital nations.

New Zealand has no need for urgency for spectrum reasons but its ability to progress as a digitally wired nation is an issue. Only incentives to existing broadcasters and consumers to invest are likely to speed up what could be a slow process.

Appendix One

Background Issues to the Introduction of Digital Television

This report on the background issues draws on work undertaken in New Zealand and draws on international reports, particularly the work of the Canadian Association of Broadcasters. It is organised in three parts to illustrate the variety of outcomes, which could occur in New Zealand's free to air (FTA) television broadcasting environment as new technologies roll out and business opportunities arise.

They are:

1. Key Impacts - a description of the events and trends, which are involved in the digital future.
2. Probable outcomes - the way these trends will impact on the broadcasting world and what sort of world might result.
3. Lessons for the Future - the way policy frameworks need to be set to respond effectively to these events and trends and how industry might respond.

1. KEY IMPACTS

There is no doubt that the next ten years will see an increase in choice, a growth in communications and therefore real pressure on the viability of the traditional business model for FTA television broadcasting. This will be brought about primarily by the introduction of digital television. Already we are seeing the reduction in audiences as PayTV and the Internet impact and the consequent loss of profitability causes real issues for television broadcasting. We may well see the reduction of traditional physical barriers to television channels crossing the Tasman.

Public policy needs to adapt to these changing requirements, particularly if New Zealand's future as a nation is to be enlarged, rather than diminished.

The Viewer as citizen/consumer

Most people see themselves first, as citizens of New Zealand, rather than consumers. As such, they expect television to play a significant role in informing and entertaining people in the nation. Television operators accept this role but consider that governments must provide resources to meet these expectations if it is evident they cannot be delivered by the normal operations of the market.

Free to air television is a widely accepted business model with viewers used to paying for the service through watching television commercials. The challenge for our industry will be maintaining support amongst viewers for this source of revenue.

The future will increasingly see a battle for the time and attention of people.

Marketing, branding and promotion will drive viewers in certain directions. Choice and variety of platforms - television, radio, Internet, mobile telephony - will lead to an emphasis on cross-promotional opportunities. These synergies across media will lead to horizontal integration as companies seek to control their brands within one company. This could be one of the drivers of the new business model for broadcasting.

For television, the power of the electronic programme guide (EPG) as a key promotional tool driving viewer behaviour has yet to be tested fully but its potential is evident. It is clear that a highly successful EPG would also provide a significant advertising opportunity.

Research about the behaviour of viewers is going to be a vital tool also. Advertisers will want to know a lot more than the current research model provides. They will want to know who is actually buying the product and how that links back to whether they watched or experienced an advertisement.

In theory, and maybe in practice in a few years, the digital set-top box could become the bar-code scanner of the New Zealand consumer.

Television will become bundled with other service provision so those viewers will be able to watch television in one corner of a screen and experience the Internet on the same screen. No one is saying that behaviour will necessarily be widespread but it is useful to note that consumers are infinitely adaptable to meet their entertainment needs. Video games did not exist ten years ago and are now the single biggest selling consumer device. A 1999 US study from Paul Kagan Associates and Showtime Networks in the US found 23 million US households with a personal computer and a television set in the same room. The same study found that in 80 per cent of these households, people were simultaneously watching television and using an on-line service.

The nation is changing. Fast growing diversity, Maori interests and the demography of age is impacting on what people do and what they want. The baby boomers born in the two decades after World War II have produced a new population bulge. These people, now aged 5 to 20, have different wishes and a different relationship with technology. They are at home with computers and the Internet.

By 2010, this new generation will dominate the key 18-49 demographic. As a result, we are likely to see different patterns of behaviour but it is certain that people between the age of 18 and 49 will continue to dominate consumer spending in the economy.

Going digital

The gradual move from analogue television delivery to digital television delivery poses the most fundamental change to the business model followed by television broadcasters since deregulation occurred in 1989. It is highly likely that, by 2010, we will see a very different television landscape.

Digital will bring improved pictures, better reception and higher quality sound. Along with that could be a change in the very nature of commercials on television and so the method by which broadcast television earns its revenue.

The emphasis is on gradualism yet the first step has already been taken in pay television and broadcast will follow suit. Confusion will reign for some time just as it did in the computing world before common standards came about and also with video recorders before the VHS format won through.

All television broadcasters have a vital interest in the result because none of them will be unaffected.

A large number of new digital devices and services will be on the market over the next decade. These include the personal video recorder, digital video games, linking devices bringing together the computer, television set and radio, MP3 music, new mobile telephony, digital cable, digital terrestrial television, digital satellite to the home and broadband.

All of these will be competing for revenues and therefore consumer support. These battles in the marketplace may be healthy but they will be corrosive as some investments work and others do not.

The key revenue streams in the television industry - advertising and subscriptions -will be hotly disputed.

One instance is the possibility of multiplexing commercials so that an advertiser can deliver commercials for different products to different households, simultaneously, within the same commercial slot in a programme. This is done by linking the selection of the commercial and product to digital data about that household. The ability to make that selection will be controlled by the owner of the box in the home and, as a result, revenues are likely to go the way of the box owner rather than the broadcaster.

For now, decisions are required of the Government and of industry, which will partly determine some of these events and be determined by them. Once the digital decisions are made, then the transformation of the business can occur.

Content and programming

The growth in channels and choice increases the competition for programming and the need for channel branding and brand-critical content. Broadcasters could well see themselves more as content providers who use all delivery technologies for their various branded channels.

Internationally sourced programming will sustain the profitability of the industry so rights ownership will be all-important.

The evolution of successful New Zealand made programming underlines the importance of ownership of rights to these programmes and that ownership will be a major area of competition. As fragmentation builds, audiences will follow well-loved programmes across platforms and broadcasters need to build schedules, which deliver on the public expectation of the brand of the channel. In that way, broadcasters can maintain trust and recognition and so commercial viability.

There will continue to be some types of New Zealand programming which will be unable to recover its costs in the small New Zealand marketplace. The funding for these genres will need to come from central government and the maintenance of that funding will be critical in the development of some key genres. The rights to this programming, whether partly or fully funded by the government, will become more critical in this brand-building process.

The sale of New Zealand programming internationally will provide an important incentive to invest in continuing productions. This is a long-term process with some significant successes apparent already which are reliant on good distribution channels, branding and commercially attractive product. It is critical that the public funding made available via New Zealand On Air is increased so that appropriate genres are available to viewers. There is no need to alter profoundly the funding model except to remove NZOA from ongoing ownership of equity in productions.

The model for free to air broadcasting will not change overnight but New Zealand programming needs to evolve so that rights ownership is clarified and export sales are given higher priority.

Broadcasters will want to invest in programming which sustains their brand and they will want ongoing participation in all aspects of the creation and distribution business.

Broadcast revenues

The most significant shift in revenues in television has occurred as a result of the onset of pay or subscription television. In 1989, there was no subscription television and all revenues came from advertising; in 2001, 42 per cent of the total revenues were from subscriptions and 58 per cent from advertising. If current trends continue, the subscription level could amount to 55 per cent of the total in 2005. In addition, advertising revenues could move towards subscription television as audiences increase. In the US, this trend has led to a major shift in revenue flows.

Within broadcast television, increased competition could lead to fragmentation of revenues.

Transaction revenues may become significant over the next decade or two however it is impossible to pinpoint revenues now. A digital framework enables television to enter e-commerce directly if the prospects are attractive.

The changing business structures of television

The impact of the Internet and video streaming creates a series of unknowns for the television industry. The introduction of broadband may create another platform and television can benefit from that new distribution service while it could also lead to consolidation between telephone companies, television channels and Internet providers.

This consolidation process has happened internationally and is also occurring to some degree in New Zealand. Small regional stations are grouping together as are bigger media companies.

The debate over the future role of TVNZ and its distribution company, BCL, emphasises the need for balance in the public service role in broadcasting. TVNZ plays a uniquely powerful role in the broadcast television market in New Zealand, which means that the government needs to be acutely conscious of the importance of clearly distinguishing between its roles as a regulator and as a shareholder. If the government determines that its public service objectives in television can best be performed through its ownership of TVNZ television channels, then the rest of the industry can pursue their goals with more certainty. In its role as regulator, the government must ensure that its broader goals are achieved without being coloured by its ownership of the major television operator.

While public spending will continue to play a crucial role in the funding of certain genres of New Zealand content, the majority of locally made content is funded from advertising revenues. Any increase in local content must come at the expense of quality unless substantial additional public funding is made available.

International trade and foreign ownership issues

Technology will make cultural borders increasingly difficult to maintain and this creates both a challenge and an opportunity for New Zealand media companies. The freedom for foreign owned companies to invest in New Zealand media companies has provided significant offshore capital and expertise.

The popularity of New Zealand programme content provides a clear sign to all owners that commercial success will be improved by a commitment to appropriate levels of New Zealand content. By its commitment to free trade across all types of industries, New Zealand creates an example, which is designed to encourage other countries to open their borders to our products. Television programming needs to be one of those industries and we should resist efforts to close our borders to cultural imports.

Initiatives to grow and enrich New Zealand's culture can proceed hand in hand with a commitment to free trade.

The broadcasting value chain

The value chain in broadcasting is illustrated below. It is likely that each player will attempt to increase their position in the value chain. This is a natural reaction to uncertainty by reducing the risk of their position.

Broadcasters are intermediaries in the value chain. Their main advantage is that they provide advertisers with the best way to reach a mass audience. This may not be the case forever and broadcasters will focus on brand building and brand extension as the best way to preserve their advantage.

2. PROBABLE OUTCOMES

Up until now, this report had outlined how the New Zealand television broadcasting environment might be impacted by a range of issues. All of these factors will act together, rather than as independent instruments. The timing is difficult to predict but the outcomes could be as follows.

- Pay TV's share of audience and revenues will continue to grow and revenues from subscription will outstrip advertising for FTA by 2004.

- Electronic programme guides will be the key to ease of viewing

- International alliances will become more important

- A lot of television news will migrate to the Internet

- The digital transition issues will be difficult to resolve because of their complexity

- New Zealand content will plateau at existing levels on FTA television because of funding constraints

- As personal video recorders are widely used, more and more people will view as they wish, rather than as scheduled by the channel

- Niche channels will expand, some of them state supported

- Advertisers will globalise their advertising decision making increasingly.

3. LESSONS FOR THE FUTURE

For television broadcasters

- Multi-platform strategies will be central to the survival of New Zealand television - established brands must operate across all platforms

- Broadcasters must ensure they have access to new revenue sources to enable their business to continue

- Broadcasting is a value chain and all players will be jockeying hard for positions to control as much of the value chain as possible

- Alliances will be fundamental to growth and survival

For public policy

- A focus on the New Zealand community needs to be central to public policy development and the central role played by television broadcasting in helping shape our community

- The largely deregulated model needs to evolve into one which recognises clearly the role of the existing FTA television operators and their maintenance of that role in a digital age

- Contestability will be the lynchpin of the building of the New Zealand television production industry and the existing NZOA model needs to be retained with additional funding

- Content regulation is increasingly irrelevant. The assignment of rights to broadcasters and producers is the best way to build a growth oriented export television production industry

- Policy and funding should encourage export and strong New Zealand content

- Policy must recognise and manage gatekeeping during the digital transition.

Increasingly, timing will be everything. Broadcasters and policy makers need to fully understand the issues and recognise that a variety of digital television platforms is required and that change is already happening. What free to air television broadcasters do over the next decade will be determined by policy developed now for the digital future.

Published: Dec 13, 2001

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