Modelling the Adoption of Digital TV: Economics and Policy for the Digital Switch-over

Elad Harison, Groningen University
Nicola Matteucci, Polytechnic University of Marche

Abstract

Digital switch-over is receiving a growing attention world-wide. Its importance is not limited to the business sphere. There is also a strong public rationale in promoting a fast and efficient switch-off of the analogue signal. Digital transmissions are more efficient, and free up valuable portions of the TV spectrum that can be profitably used for other TLC and multimedia services. The transition to digital proves particularly difficult in the terrestrial platform (DTT). First, DTT features as the incumbent platform in most countries, so that during the switch-over, transmissions are necessarily simulcast (in analogue and digital). Moreover, coordination problems are likely to arise, both from the supply-side (among broadcasters) and in the market (between broadcasters and viewers). While the first type of problem can be tackled with centralised spectrum management, the market coordination appears more difficult to work out. In particular, since network markets typically display “chicken-egg” coordination failures, broadcasters and viewers need to align their strategies and incentives. Typically, broadcasters want to invest in DTV only if there is a sizeable audience developed, to justify their investment. On the other side, viewers refrain from switching to digital if the new services do not pay-off, in terms of better technology and more attractive content. Consequently, Governments, Antitrust and Regulatory Bodies have designed a variety of initiatives to guide the transition and to easy coordination: additional spectrum slots, compulsory deadlines for the analogue switch-off (sunset dates), investment incentives and consumer subsidies. However, because of the novelty of the problem, the policy-maker needs sound guidance, since some instruments may jeopardise the market and stifle emerging competition. One additional reason for caution is that a policy-neutral approach to digital switch-over and multiplatform competition needs to be guaranteed, as stated in the EU NRF. We construct a simulation model of a market of heterogeneous users and firms to analyze the switch-over process from the analogue platform and the adoption of digital TV (henceforth, DTV). The paper identifies the relationships between different degrees of content variety and market dynamics (in terms of the analogue and digital market shares). The switching costs and the variety of content (both in the “traditional” analogue and in the “advanced” digital platforms) are the key-variables affecting the rate of diffusion of DTV and the duration of the transition to digital broadcasting. The model can provide instrumental policy tools as it assists in evaluating the most appropriate deadline for the switch-off, the role of the switching costs (and thereby the optimal subsidization policy) and the trade-off between the price and the offered contents (for broadcasters). A few empirical policy cases are then examined (mostly from US and EU) and confronted with the theoretical predictions of the model. Implications for regulatory efficacy and effectiveness are drawn. Finally, the paper derives useful lessons regarding the DTV market structure, the competition between broadcasters (in terms of price and product differentiation) and the possible emergence of monopolies in the digital and analogue markets.