FCC Ruling Could Give MSOs Leverage

There is very little for broadcasters to like in the digital TV must carry rules issued by the Federal Communications Commission Jan. 18.

The decision basically said all cable operators must carry is a station’s "primary programming feed." It also potentially limits some of the new business opportunities broadcasters wanted to exploit with their spectrum.

The rules may give cable operators leverage to horse trade during the next round of retransmission negotiations.

For instance, operators could agree to carry one of the DTV secondary channels, or even team up with the broadcaster in a virtual video-on-demand business, in exchange for allowing access to a next-generation cable set-top box equipped with a hard drive.

All the evidence suggests the mass market (as opposed to the earliest adopters) wants as much functionality and features in a single set-top box, and since in more than 70% of all households, that is the one provided by the cable operator, it’s a valuable chip in the negotiations.

Stations had hoped the FCC would grant must carry status to both the analog and digital TV feeds, but the rules state only a broadcaster that returns its analog spectrum and converts to digital will be granted must carry.

The order is another nail in the coffin of the station digital multiplexing concept, which some broadcasters had hoped to use to transmit multiple channels. At one point, ABC had even considered pooling bandwidth to launch a basic package directly competitive with cable. Both Congress and the FCC want stations to use their spectrum primarily for HDTV.

By protecting only the "primary feed," stations will have much less motivation to split their 19.4 megabits/sec. (Mbps) of bandwidth into multiple standard definition feeds.

However, some broadcasters, hungry to find new revenue to offset the cost of upgrading to digital, are unlikely to be deterred by the new rules.

Compression technology allows a 1080i-format feed to be compressed into 14 to 15 Mbps of spectrum and future codecs may get it down to 10 to 12 Mbps. Some stations have been talking about doing both a 1080i (or 720p) and a 320p-480p second channel within their bandwidth or even delivering two 720p signals — though cable operators would only be required to carry one.

Even if stations concentrated on a single, 1080i HDTV signal, it still gives them 4 to 7 Mbps in primetime and potentially the entire 19.4 Mbps during overnight hours to download data and other content.

Even at 4 Mbps, that’s enough bandwidth to deliver 1.7 Gigabytes of data an hour, or the equivalent of 8 to 9 DVDs’ worth a day.

Several companies, including iBlast and Geocast, have already been formed to exploit this bandwidth resource, and reports emanating from the recent ABC affiliates meeting at NATPE in Las Vegas last month suggest the network is considering creating pay services and movie downloading offerings.

By combining their extra bandwidth with a storage device (similar to a TiVo or Replay box) plus some form of robust digital rights management, TV stations are in what we’ve dubbed the "virtual VOD" (VVOD) business — facilitated by the fact many of the station groups’ parents also own movie studios.

Combine a DTV feed with a hard drive and DVD burner (low cost versions should be available within 2 years), and broadcasters could be in the movie, music and game library publishing business.

Based on the prototypes we’ve seen, many of the new devices which will feed off DTV data streams are being designed with integrated or small form factor antennas which can be electronically tuned to specific channels for maximum efficiency.

Stations also are looking at various Web and e-commerce applications for the spectrum, though the new FCC rules specifically state cable operators don’t have to carry those services.

The petitions for reconsideration of the rules are already being drafted by Washington law firms, and court challenges are also likely.

The potential challenge should translate into greater motivation for cable operators to move aggressively with their own VOD deployments.

Larry Gerbrandt is a senior analyst/SVP at Paul Kagan Associates.