Digital Broadcast Television Transition: Estimated Cost of	 
Supporting Set-Top Boxes to Help Advance the DTV Transition	 
(17-FEB-05, GAO-05-258T).					 
                                                                 
The digital television (DTV) transition offers the promise of	 
enhanced television services. At the end of the transition,	 
radiofrequency spectrum used for analog broadcast television will
be used for other wireless services and for critical public	 
safety services. To spur the digital transition, some industry	 
participants and experts have suggested that the government may  
choose to provide a subsidy for settop boxes, which can receive  
digital broadcast television signals and convert them into analog
signals so that they can be displayed on existing television	 
sets. This testimony provides information on (1) the current	 
distribution of American households by television viewing methods
and whether there are demographic differences among these groups;
(2) the equipment required for households to receive digital	 
broadcast signals; and (3) the estimated cost to the federal	 
government, under various scenarios, of providing a subsidy for  
set-top boxes that would enable households to view digital	 
broadcast signals. We developed estimates of the cost of a	 
subsidy for set-top boxes using data on household television	 
characteristics, expected set-top box costs, and varied 	 
assumptions about how certain key regulatory issues will be	 
decided.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-258T					        
    ACCNO:   A17857						        
  TITLE:     Digital Broadcast Television Transition: Estimated Cost  
of Supporting Set-Top Boxes to Help Advance the DTV Transition	 
     DATE:   02/17/2005 
  SUBJECT:   Broadcasting standards				 
	     Cable television					 
	     Comparative analysis				 
	     Cost analysis					 
	     Subsidies						 
	     Television and television stations 		 
	     Television broadcasting				 
	     Television equipment industry			 
	     Communication satellites				 
	     Cost estimates					 
	     Digital broadcasting				 

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GAO-05-258T

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Telecommunications and the Internet, Committee
on Energy and Commerce, House of Representatives

For Release on Delivery

Expected at 10:00 a.m. EST DIGITAL BROADCAST

Thursday, February 17, 2005

TELEVISION TRANSITION

 Estimated Cost of Supporting Set-Top Boxes to Help Advance the DTV Transition

Statement of Mark L. Goldstein, Director Physical Infrastructure Issues

GAO-05-258T

[IMG]

February 17, 2005

DIGITAL BROADCAST TELEVISION TRANSITION

Estimated Cost of Supporting Set-Top Boxes to Help Advance the DTV Transition

  What GAO Found

The three primary means through which Americans view television signals
are over the air, cable, and direct broadcast satellite (DBS). GAO found
that 19 percent, or roughly 21 million American households, rely
exclusively on free over-the-air television; 57 percent, or nearly 64
million households, view television via a cable service; and 19 percent,
or about 22 million households, have a subscription to a direct broadcast
satellite (DBS) service. On average, over-the-air households are more
likely to have lower incomes compared to cable and DBS households. While
48 percent of over-the-air households have incomes under $30,000, roughly
29 percent of cable and DBS households have incomes less than that level.
Also, 6 percent of overthe-air households have incomes over $100,000,
while about 13 percent of cable and DBS households have incomes exceeding
$100,000.

The specific equipment that each household needs to transition to DTV-
that is, to be able to view digital broadcast signals-depends on the
method through which the household watches television, whether the
household has already upgraded its television equipment to be compatible
with DTV, and the resolution of certain key regulatory issues. GAO
examined two key cases regarding the regulatory issues. The assumption for
case one is that cable and DBS providers would continue providing
broadcasters' signals as they currently do, thus eliminating the need for
their subscribers to acquire new equipment. In this case, only households
viewing television using only an over-the-air antenna would need to take
action to be able to view broadcasters' digital signals. The assumption
for the second case is that cable and DBS providers would be required to
provide broadcasters' digital signals to subscribers in substantially the
same format as broadcasters transmitted those signals. This would require
cable and DBS subscribers, in addition to over-the-air households, to have
equipment in place to be able to receive their providers' high-definition
digital signals.

If a subsidy for set-top boxes is only needed for over-the-air households
(case one), GAO estimates that its cost could range from about $460
million to about $2 billion, depending on the price of the set-top boxes
and whether a means test-which would limit eligibility to only those
households with incomes lower than some specified limit-is employed. If
cable and satellite subscribers also need new equipment (case two), the
cost of providing the subsidy could range from about $1.8 billion to
approximately $10.6 billion.

We provided a draft of this testimony to the Federal Communications
Commission (FCC) for their review and comment. FCC staff provided
technical comments that we incorporated where appropriate.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to report on our work on the potential cost
of providing a subsidy to consumers for the purchase of set-top boxes in
order to accelerate the transition from analog to digital broadcast
television. This transition-known as the DTV transition-offers the promise
of more programming options, interactive services, and highdefinition
television (HDTV). Moreover, the return of radiofrequency spectrum used
for analog broadcast television at the end of the transition will provide
many benefits to society, such as easing the spectrum scarcity facing
public safety first responders, engendering economic growth and consumer
value from spectrum redeployed to wireless services, and affording the
federal government revenues from the proceeds of a spectrum auction. To
facilitate the transition, the Congress and the Federal Communications
Commission (FCC) temporarily provided television stations nationwide with
additional spectrum so that stations could simultaneously broadcast both
an analog and a digital signal. Stations' analog licenses are mandated to
terminate in December 2006, or when 85 percent of households in each
market can receive digital broadcast signals, whichever is later.1 While
the purchase of digital televisions is steadily increasing, it
nevertheless appears unlikely that a sufficient proportion of households
will have digital television equipment in place by the end of 2006.

In order to spur households' adoption of the digital equipment necessary
for the transition, some have suggested that the government provide a
subsidy to certain households to purchase a device, known as a set-top
box, that can receive digital broadcast television signals and convert
them into analog signals so that they can be displayed on existing
television sets. This device would enable the household to view digital
broadcast signals without purchasing a digital television set; such sets
currently sell at considerably higher prices than traditional analog
television sets. Aiding in the deployment of set-top boxes may enable the
transition to end sooner than it might otherwise by increasing the number
of households that can view digital broadcast signals.

1Additional requirements include (1) television stations affiliated with
the four largest national networks (ABC, CBS, Fox, and NBC) are
broadcasting a DTV signal and (2) the technology to convert a digital
signal for use on an analog television set is generally available.

At the request of this subcommittee, we have examined (1) the current
distribution of American households by television viewing methods and
whether there are demographic differences among these groups; (2) the
equipment required for households to receive digital broadcast signals;
and (3) the estimated cost to the federal government, under various
scenarios, of providing a subsidy for set-top boxes that would enable
households to view digital broadcast signals. In addition to information
provided in this testimony, we are conducting additional work on the DTV
transition, subsidy options, and administrative approaches for
implementing a subsidy program, and will provide a more detailed study for
the Committee and the Subcommittee later this year.

While a subsidy for set-top boxes may be one policy option to spur the
transition, there are other policies that might do so as well. In our
statement today, we provide cost estimates for a possible subsidy program
under various scenarios. We note, however, that in providing these cost
estimates, GAO is taking no position on this policy option. We are merely
providing, as requested by the Committee and the Subcommittee, cost
estimates for such a program.

To address the issues we will discuss today, we purchased data from
Knowledge Networks, a survey research firm that had conducted a consumer
survey on household television characteristics. The survey provided the
responses of 2,471 randomly selected American households and covers such
topics as the method each household uses to view television (e.g., cable,
over the air), how many television sets they have, and whether they have
set-top boxes for digital cable service. The survey also provides
information on an array of demographic characteristics for each household.
These data were collected between February and April 2004. The response
rate for Knowledge Network's survey was 47 percent. The relevance of the
response rate for the study's findings is discussed in appendix I.2 Using
a 95 percent confidence interval, all percentage estimates from the survey
have margins of error of plus or minus 6 percentage points or less, and
all cost estimates based on the survey data have margins of error of plus
or minus 16 percent or less. To assess the reliability of these survey
data, we reviewed documentation of survey

2Because we did not have information on those contacted who chose not to
participate in the survey, we could not estimate the impact of the
nonresponse on our results. However, distributions of selected household
characteristics (including presence of children, race, and household
income) for the sample and the U.S. Census estimate of households show a
similar pattern.

procedures provided by Knowledge Networks and questioned knowledgeable
officials about the survey process and resulting data. We determined that
the data were sufficiently reliable for the purposes of this testimony. We
also contracted with Knowledge Networks to recontact some of respondents
to its survey to ask additional questions that GAO developed. 3 Because
the number of recontacted households for the additional questions
requested by GAO was small, the findings for these questions are not
generalizable to a larger population. To gather information about the
likely costs of set-top boxes, we interviewed several consumer electronics
firms and experts.

The estimate of the potential cost of a subsidy that we are providing
should not be interpreted as the cost of a government program. In
preparing these estimates we discussed the nature of our work with
Congressional Budget Office (CBO). If the Congress considers legislation
for a set-top box subsidy program, the CBO will, based on the specifics of
the law, prepare an estimate of the cost of the program. We conducted our
work from August 2004 to January 2005 in accordance with generally
accepted government auditing standards.

We provided a draft of this testimony to the Federal Communications
Commission (FCC) for their review and comment. FCC staff provided
technical comments that we incorporated where appropriate.

In summary:

o  	The three primary means through which Americans view television
signals are over the air, cable, and direct broadcast satellite (DBS). We
found that 19 percent, or roughly 21 million American households, rely
exclusively on over-the-air transmissions for their television viewing; 57
percent, or nearly 64 million American households, view television via a
cable service; and about 19 percent, or about 22 million American
households, have a subscription to a DBS service.4 We recognize that
others have estimated a

3The additional questions were related to why the household chose to view
television as they currently do and whether they are likely to make
changes in the viewing methods in the near future.

4These percentages do not add up to 100 percent because (1) between 1 and
2 percent of American households do not have a television, (2) about 1
percent of households receive television service through other means, such
as a wireless cable system, and (3) the numbers reported here do not
include close to 3 percent of households that reported having a
subscription to both cable and DBS.

lower value for the percent of households relying on over the air

television. 5 Our results were derived from a survey of over 2,400

households, from which we estimated with 95 percent certainty that

between 17 and 21 percent of households rely on over the air television.

On average, over-the-air households are more likely to have lower incomes

compared to cable or DBS households. While 48 percent of over-the-air

households have incomes under $30,000,6 roughly 29 percent of both cable

and satellite homes had household incomes less than or equal to that
level.

Also, only 6 percent of over-the-air households had incomes over $100,000,

while about 13 percent of cable and satellite households had incomes

exceeding $100,000. Additionally, non-white and Hispanic households are

more likely to rely on over-the-air television than are white and non-

Hispanic households.

o  	The specific equipment needs for each household to transition to DTV-
that is, to be able to view broadcast digital signals-depends on certain
key factors. First, the method through which a household watches
television and whether it has already upgraded its television equipment to
be compatible with digital television, will factor into the equipment
needs of the household. Additionally, certain regulatory decisions yet to
be made by FCC will play a role in determining some consumers' equipment
needs. We examined two key cases regarding the regulatory decisions.

o  	In case one, we assume that cable and DBS providers would continue
providing broadcasters' signals as they currently do, thus eliminating any
need for their subscribers to acquire new equipment. That is, cable
providers would initially "downconvert"7 broadcasters' high-definition
digital signals to an analog format before they are transmitted to their
subscribers. Similarly, DBS providers would initially downconvert
broadcasters' high-definition digital signals to a standard-definition
digital format before they are transmitted to their subscribers. This
enables the signals to be viewed on subscribers' existing televisions

5In its most recent report on video competition, FCC found that number of
households subscribing to a multichannel video provider, such as a cable
or DBS company, was approximately 85 percent of television households,
thus implying that about 15 percent of television households rely on
over-the-air television. The methodology employed by FCC differed from the
household survey used to prepare our estimate.

6For a family of four, the poverty level is just under $19,000, so the
$30,000 income level would correspond to about 160 percent of the 2004
poverty level for a family of four. The cutoff for eligibility for food
stamps is 175 percent of the poverty level.

7The word "downconvert" means to take a signal in a given format and
transform it into a lower-resolution format.

sets. In this case, only households viewing television using only an
over-the-air antenna must take action to be able to view broadcasters'
digital signals.

o  	In case two, we assume that cable and DBS providers would be required
to provide broadcasters' digital signals to subscribers in substantially
the same format as broadcasters transmitted those signals. Because some of
the broadcasters' digital transmissions are in a high-definition digital
format, the second case would require cable and DBS providers to transmit
the signals in this format to their subscribers. To be able to view these
signals, cable and DBS subscribers would need to have equipment in place,
or to acquire new equipment, that can receive their providers'
high-definition digital signals. The second case would also require, as
does case one, all overthe-air households to acquire new equipment.

o  If a subsidy for set-top boxes were needed only for over-the-air

households, we estimate that its cost could range from about $460 million
to about $2 billion. The subsidy cost varies depending on the price of the
set-top boxes and whether a means test-which would limit eligibility for
the subsidy to only those households with incomes lower than some
specified limit-were employed. However, if cable and satellite subscribers
also needed new equipment and the subsidy provides some support for these
households as well, the overall cost of the program would grow. We
estimate that in this case, the cost of providing the subsidy could range
from about $1.8 billion to over $10 billion, depending, again, on the
price of the set-top boxes and whether a means test were employed.

The United States is currently undergoing a transition from analog to
digital broadcast television. With traditional analog technology, pictures
and sounds are converted into "waveform" electrical signals for
transmission through the radiofrequency spectrum, while digital technology
converts these pictures and sounds into a stream of digits consisting of
zeros and ones for transmission. Digital transmission of television
signals provides several advantages compared to analog transmission, such
as enabling better quality picture and sound reception as well as using
the radiofrequency spectrum more efficiently than analog transmission.
This increased efficiency makes multicasting-where several digital
television signals are transmitted in the same amount of

  Background

spectrum necessary for one analog television signal-and HDTV8 services
possible.

A primary goal of the DTV transition is for the federal government to
reclaim spectrum that broadcasters currently use to provide analog
television signals. The radiofrequency spectrum is a medium that enables
many forms of wireless communications, such as mobile telephone, paging,
broadcast television and radio, private radio systems, and satellite
services. Because of the virtual explosion of wireless applications in
recent years, there is considerable concern that future spectrum needs-
both for commercial as well as government purposes-will not be met. The
spectrum that will be cleared at the end of the DTV transition is
considered highly valuable spectrum because of its particular technical
properties. In all, the DTV transition will clear 108 megahertz of
spectrum-a fairly significant amount. In the Balanced Budget Act of 1997,
the Congress directed FCC to reallocate 24 MHz of the reclaimed spectrum
to public safety uses. Since the terrorist attacks of September 11, 2001,
there has been a greater sense of urgency to free spectrum for public
safety purposes. The remaining returned spectrum will be auctioned for use
in advanced wireless services, such as wireless high-speed Internet
access.9

To implement the DTV transition, television stations must provide a
digital signal, which requires them to upgrade their transmission
facilities, such as transmission lines, antennas, and digital transmitters
and encoders. Depending on individual station's tower configuration, the
digital conversion may require new towers or upgrades to existing towers.
Most television stations throughout the country are now providing a
digital broadcast signal in addition to their analog signal. After 2006,
the transition will end in each market-that is, analog signals will no
longer be provided-when at least 85 percent of households have the ability
to receive digital broadcast signals.

8HD television provides roughly twice as many lines of resolution,
creating a television picture that is much sharper than traditional analog
television pictures. HD television can also provide CD-quality sound and
is in "widescreen" format, with display screen ratios similar to a movie
theater.

9Some of this spectrum-24 MHz-has already been auctioned.

  Americans Watch Television through Three Primary Modes

The three primary means through which Americans view television signals
are over the air, cable, and direct broadcast satellite (DBS).
Over-the-air broadcast television, which began around 1940, uses
radiofrequencies to transmit television signals from stations' television
towers to households' television antennas mounted on rooftops, in attics,
or directly on television sets. Over-the-air television is a free service.
Cable television service, a pay television service, emerged in the late
1940s to fill a need for television service in areas with poor
over-the-air reception, such as mountainous or remote areas. Cable
providers run localized networks of cable lines that deliver television
signals from cable facilities to subscribers' homes.10 Cable operators
provide their subscribers with, on average, approximately 73 analog
television channels and 150 digital television channels. In 1994, a third
primary means of providing television emerged: direct broadcast satellite
(DBS). Subscribers to DBS service use small reception dishes that can be
mounted on rooftops or windowsills to receive television programming
beamed down from satellites that orbit over the equator. Like cable, DBS
service is a subscription television service that provides consumers with
many channels of programming. When the Congress enacted the Satellite Home
Viewer Improvement Act of 1999, it allowed DBS carriers to provide local
broadcast signals-such as the local affiliate of ABC or NBC-which they had
previously not generally been able to provide.

Over-the-Air Households. We found that 19 percent, or 20.8 million
American households, rely exclusively on over-the-air transmissions for
their television viewing. We recognize that others have estimated a lower
value for the percent of households relying on over the air television.
Our results were derived from a survey of over 2,400 households, from
which we estimated with 95 percent certainty that between 17 and 21
percent of households rely on over the air television. Compared to
households that purchase a subscription to cable or DBS service, we found
that exclusive over-the-air viewers are somewhat different
demographically. Overall, over-the-air households are more likely to have
lower incomes than cable or satellite households. Approximately 48 percent
of exclusive over-the-air viewers have household incomes less than
$30,000, and 6 percent have household incomes over $100,000. Additionally,
nonwhite and Hispanic households are more likely to rely on over-the-air
television than are white

10When cable service first emerged, it was simply a service that provided
a wire-based delivery of broadcast, or traditional television stations'
signals, but by the late 1970s, cable operators began to provide new
networks that were only available through a pay television service, such
as HBO, Showtime, and ESPN.

and non-Hispanic households; over 23 percent of non-white households rely
on over-the-air television compared to less than 16 percent of white
households, and about 28 percent of Hispanic households rely on
over-theair television compared to about 17 percent of non-Hispanic
households. Finally, we found that, on average, exclusive over-the-air
households have 2.1 televisions, which is lower than the average for cable
and satellite households.

We asked the survey research firm to recontact approximately 100 of the
respondents who exclusively watch television through over-the-air
transmission to ask additional questions, including the primary reason the
household does not purchase a subscription video service.11 Forty-one of
these respondents said that it was too costly for them to purchase a
subscription video service, and 44 said that they do not watch enough
television to warrant paying for television service. Most of the
recontacted households seemed unlikely to purchase a subscription service
in the near future. Only 18 of the recontacted households said that they
would be likely to purchase a subscription video service in the near
future, and another 10 said that they might do so.

Cable Households. We found that 57 percent, or 63.7 million American
households, view television through a cable service. On average, cable
households have 2.7 television sets. Sixteen percent of cable households
have at least one television set in the home that is not connected to
cable but instead receives only over-the-air television signals. Of the
cable households surveyed, roughly 29 percent had household incomes of
less than or equal to $30,000, and about 13 percent had incomes exceeding
$100,000. We also found that 44 percent of the cable homes have at least
one set-top box. Of those cable subscribers with a set-top box, about 67
percent reported that their box is capable of viewing channels the cable
system sells on "digital cable tiers," meaning that the channels are
transmitted by their cable provider in a digital format. A subset of these
"digital cable" customers have a special set-top box capable of receiving
their providers' transmission of high-definition digital signals.

Because the existence of a set-top box in the home may be relevant for
determining what equipment households would need to view broadcast digital
television signals, we asked the survey research firm to recontact
approximately 100 cable households that do not have a set-top box to ask

11The actual recontacted number was 102.

questions about their likely purchase of digital cable tiers-which require
a set-top box-in the near future.12 First, we asked the primary reason why
the household did not currently purchase any cable digital tiers of
programming. Fifty-one of the recontacted respondents said that they did
not want to bear the extra expense of digital tiers of cable programming,
and 33 said that they did not watch enough television to justify
purchasing digital cable service. Only 9 of the recontacted respondents
said that they would be likely to purchase digital cable service in the
near future, and another 9 said that they might purchase such service in
the near future. Finally, we asked these respondents whether they would be
reluctant to change their service in any way that would require them to
use a set-top box. Of the recontacted respondents, 37 said they would be
very reluctant to change their service in a way that would require them to
use a set-top box, and another 38 said that they would be somewhat
reluctant to do so.

DBS Households. We found that about 19 percent, or 21.7 million American
households, have a subscription to a DBS service. These households have,
on average, 2.7 television sets. About one-third of these households have
at least one television set that is not hooked to their DBS dish and only
receives over-the-air television signals. In terms of income, 29 percent
of DBS subscribers have incomes less than or equal to $30,000, and 13
percent have incomes exceeding $100,000.

One important difference between cable and DBS service is that not all DBS
subscribers have the option of viewing local broadcast signals through
their DBS provider.13 Although the DBS providers have been rolling out
local broadcast stations in many markets around the country in the past
few years, not all markets are served. DBS subscribers in markets without
local broadcast signals available through their DBS provider usually
obtain their local broadcast signals through an over-the-air antenna, or
through a cable connection. This is important to the DTV transition
because how households with DBS service view their local broadcast
channels will play into the determination of their requirements to
transition to broadcast DTV. We therefore requested that the survey
research firm recontact approximately 100 DBS customers to ask how

12The firm actually recontacted 102 such households.

13While cable providers are generally required to provide the local
broadcast signals in each market, DBS providers are required to provide
all local broadcast stations in markets where they provide any of those
stations.

  Households' Equipment Needs for DTV Transition Will Depend on their Mode of
  Television Viewing and Current Equipment Status, and Will Also Be Affected by
  Regulatory Decisions

they receive their local broadcast channels.14 We found that when local
channels are available to DBS subscribers, they are very likely to
purchase those channels. Well more than half of the DBS subscribers who
were recontacted viewed their local broadcast channels through their DBS
service. Nearly one-fourth of the recontacted DBS subscribers view their
local broadcast channels through free over-the-air television. As DBS
providers continue to roll out local channels to more markets, the
percentage of DBS subscribers relying on over-the-air transmissions to
view local signals will likely decline.

The specific equipment needs for each household to transition to DTV- that
is, to be able to view broadcast digital signals-depends on certain key
factors: the method through which a household watches television, the
television equipment the household currently has, and certain critical
regulatory decisions yet to be made. In this section we discuss two cases
regarding a key regulatory decision that will need to be made and the
implications that decision will have on households' DTV equipment needs.

Before turning to the two cases, a key assumption underlying this analysis
must be discussed. Currently, broadcasters have a right to insist that
cable providers carry their analog television signals. This is known as
the "must carry" rule, and dates to the Cable Television Consumer
Protection and Competition Act of 1992. FCC made a determination that
these must carry rules will apply to the digital local broadcast signals
once a station is no longer transmitting an analog signal. In our
analysis, we assume that the must carry right applies to broadcasters'
digital signals, and as such, cable providers are generally carrying those
signals. DBS providers face some must carry rules as well, although they
are different in some key respects from the requirements that apply to
cable providers. For the purposes of this analysis, we assume that to the
extent that DBS providers face must carry requirements, those requirements
apply to the digital broadcast signals.

For nearly all cable subscribers, and more than half of the DBS
subscribers, local broadcast analog signals are provided by their
subscription television provider. This means that these providers capture
the broadcasters' signals through an antenna or a wire and retransmit
those signals by cable or DBS to subscribers. We make two disparate

                14They actually recontacted 102 such households.

assumptions, which we call case one and case two, about how cable and DBS
providers might provide digital broadcast signals to subscribers. We do
not suggest that these are the only two possibilities regarding how the
requirements for carriage of broadcast signals might ultimately be
decided-these are simply two possible scenarios.

Case One. In this case, we assume that cable and DBS providers will
continue providing broadcasters' signals as they currently do. This
assumption would be realized if cable and DBS providers initially
downconvert broadcasters' digital signals at the providers' facilities,
which may require legislative or regulatory action. That is, cable
providers would initially downconvert broadcasters' high-definition
digital signals to an analog format before they are transmitted to their
subscribers. Similarly, DBS providers would initially downconvert
broadcasters' highdefinition digital signals to a standard-definition
digital format before they are transmitted to their subscribers. In this
case, there would be no need for cable and DBS subscribers to acquire new
equipment; only households viewing television using only an over-the-air
antenna must take action to be able to view broadcasters' digital signals.
This case shares many attributes with the recently-completed DTV
transition in Berlin, Germany.

All over-the-air households-which account for approximately 21 million
households in the United States-must do one of two things to be able to
view digital broadcast signals.15 First, they could purchase a digital
television set that includes a tuner capable of receiving, processing, and
displaying a digital signal. The survey data we used indicated that only
about 1 percent of over-the-air viewers have, as of now, purchased a
digital television that contains a tuner. However, some large televisions
sold today are required to include such a tuner and by July 2007, all
television sets larger than 13 inches are required to include a tuner.
After that time, consumers who purchase new television sets will
automatically have the capability of viewing digital signals.
Approximately 25 to 30 million new television sets are purchased each year
in the United States. The second option available to over-the-air
households is to purchase a digital-to-analog set-top box. That is, for
those households that have not purchased a new television set, the set-top
box will convert the digital broadcast signals to analog so that they can
be viewed on an existing analog television set. Viewers with
digital-to-analog set-top boxes would

15Additionally, these households could also choose to subscribe to cable
or DBS service to eliminate the need to acquire additional equipment to
view a television signal over the air.

not actually see the broadcast digital signal in a digital format, but
would be viewing that signal after it has been downconverted, by the
set-top box, to be compatible with their existing analog television set.
Currently, simple set-top boxes that only have the function of
downconverting digital signals to analog are not on the market. More
complex boxes that include a variety of functions and features, including
digital to analog downconversion, are available, but at a substantial
cost. However, manufacturers told us that simple, and less expensive,
set-top boxes would come to the market when a demand for them develops.

Case Two. In the second case, we assume that cable and DBS companies would
be required to provide the broadcasters' signals to their subscribers in
substantially the same format as it was received from the broadcasters.
Because some of the broadcasters' signals are in a high-definition digital
format, cable and DBS subscribers-just like over-the-air households- would
need to have the equipment in place to be able to receive highdefinition
digital signals. There are several ways these subscribers could view these
signals:

o  	Cable or DBS subscribers would be able to view digital broadcast
television if they have purchased a digital television set with an
over-theair digital tuner. They would then have the capability of viewing
local digital broadcast stations through a traditional television
antenna-just like an over-the-air viewer. However, many cable and DBS
households may want to continue to view broadcast television signals
through their cable or DBS provider.

o  	Cable or DBS subscribers could purchase a digital television with a
"cable card" slot. By inserting a "card" provided by the cable company
into such a television, subscribers can receive and display the digital
content transmitted by the cable provider. Only very recently, however,
have cable-ready digital television sets-which allow cable subscribers to
receive their providers' digital signals directly into the television set-
come to the market. Similar televisions sets with built-in tuners for
satellite digital signals are not currently on the market.

o  	To view the high-definition signals transmitted by their subscription
provider, the other possibility for cable and DBS households would be to
have a set-top box that downconverts the signals so that they can be
displayed on their existing analog television sets. That is, any
downconversion in this scenario takes place at the subscribers' household,
as opposed to the subscription television providers' facilities, as in
case one. While all DBS subscribers and about a third of cable subscribers
have set-top boxes that enable a digital signal from their provider to be

converted to an analog signal for display on existing television sets, few
of these set-top boxes are designed for handling high-definition digital
signals. As such, if broadcasters' signals are transmitted by cable and
DBS providers in a high-definition format, not all cable and satellite
subscribers would need new equipment, although most would. In case two, as
in case one, all exclusively over-the-air households need a digital
television set or a set-top box.

  Cost of Federal Subsidy for Set-Top Boxes Varies Considerably, Depending on
  Several Factors

In this section we present the estimated cost of providing a subsidy to
consumers for the purchase of a set-top box that would be designed to
advance the digital television transition. The estimated subsidy costs
presented here vary based on (1) the two cases discussed above about
whether cable and DBS providers initially downconvert broadcasters'
digital signals at their facilities before transmitting them to
subscribers; (2) varied assumptions about whether a means test is imposed
and, if so, at what level; and (3) the expected cost of a simple
digital-to-analog set-top box. All of the estimates presented here assume
that only one television set is subsidized in each household that is
determined to be eligible for the subsidy.16

Means test. Imposing a means test would limit the subsidy to only those
households determined to be in financial need of a subsidy. A means test
would limit eligibility for the subsidy to only those households with
incomes lower than some specified limit. We employed two different levels
of means tests. The scenarios with means tests are roughly based on 200
percent and 300 percent of the poverty level17 as the income threshold
under which a household's income must lie to be eligible for the subsidy.
The poverty level is determined based on both income and the number of
persons living in the household; for a family of four the official federal
poverty level in 2004 was $18,850.

Set-top boxes. We provide estimates based on two possible price levels for
the boxes: $50 and $100. This range is based on conversations we had with
consumer electronics manufacturers who will likely produce set-top boxes
in the future. Set-top boxes for cable and DBS are often rented by

16In our final report that will be issued later this year, we will also
present scenarios under which more than one television set per household
is subsidized.

17See appendix I for a methodological discussion and assumptions
surrounding our determination of thresholds used to approximate the
poverty level.

subscribers, rather than purchased. Nevertheless, in cases where cable and
DBS subscribers need new equipment, we assume that the financial support
provided to them would be equivalent to that provided to over-theair
households.

Table 1 provides the cost of a subsidy program under the assumption that
cable and DBS providers downconvert broadcasters' signals at their
facilities in a manner that enables them to continue to transmit those
signals to subscribers as they currently transmit broadcasters' signals.
In this case, cable or DBS subscribers do not require any new equipment,
so only over-the-air households-approximately 21 million American
households-would need new equipment. As shown in table 1, there is
considerable variation in the cost of the subsidy program depending on the
level of a means test and the price of the set-top box.

Table 1: Estimated Cost of Set-Top Box Subsidy, Assuming Cable and DBS
Downconversion, only Over-the-Air Households Are Subsidized

Cost of subsidy, by estimated cost of set-top box (dollars in millions)
Assumption about means test Percent of over-the-air households eligible

Number of households

subsidized (in millions) $50 set-top box $100 set-top box

Means test at 50% of over-9.3
200% of the-air $463 $925
poverty level households (7.8 - 10.7) ($391 -$534) ($782 -$1,068)

Means test at 67 % of over-12.5
300% of the-air $626 $1,252
poverty level households (10.9 -14.1) ($545 -$707) ($1,090 - $1,415)

No means test 	All over-the-air 20.8 $1,042 $2,083 households (19.1 -22.6)
($954 -$1,130) ($1,907 - $2,259)

Source: GAO.

Notes: Ninety-five percent confidence intervals in parentheses.

Analysis based on the status of television households in 2004.

Table 2 provides the cost of a subsidy program under the assumption that
cable and DBS providers are required to transmit broadcasters' digital
signals in the same format as they are received. Under this scenario,
nearly all over-the-air households and most cable and DBS subscribers will
not have the equipment in place to view high-definition digital broadcast
signals. Although subscribers typically rent, rather than purchase,
set-top boxes, we assume that the same level of subsidy is provided to
these

households as is provided to over-the-air households to defray the cost of
having to obtain a new or upgraded set-top box from their provider.

Table 2: Estimated Cost of Set-Top Box Subsidy, No Cable or DBS
Downconversion, Subsidy Provided to Over-the-Air and Cable and DBS
Households

Cost of subsidy, by estimated cost of set-top box (dollars in millions)

Assumption about means test Percent of U.S. households eligible

Number of households

subsidized (in millions) $50 set-top box $100 set-top box

               Means test     31% of        35.1        $1,753         $3,506 
               at 200% of households    (32.7        ($1,633 -      ($3,266 - 
            poverty level              -37.5)          $1,873)        $3,745) 
               Means test     50% of        55.5        $2,775         $5,551 
               at 300% of households    (52.9        ($2,646 -      ($5,293 - 
            poverty level              -58.1)          $2,904)        $5,809) 
                 No means Nearly all       106.2        $5,312        $10,624 
                     test households                 ($5,257 -       ($10,514 
                                        (105.1 -       $5,367)      -$10,734) 
                                          107.3)               

Source: GAO.

Notes: Ninety-five percent confidence intervals in parentheses.

Analysis based on the status of television households in 2004.

There are two issues that stand as important caveats to the analyses we
have presented on estimated set-top box subsidy costs. The first is that
we based the majority of the analyses on survey results that provide
information on the status of American television households as of early
2004. Over the next several years, new households will be established,
some households might change the means through which they watch
television, televisions sets with integrated digital over-the-air tuners
as well as digital cable compatibility will be purchased, and some cable
and DBS households will have obtained set-top boxes capable of receiving
high-definition digital signals from their providers. Households' purchase
of certain new equipment could obviate the need for a subsidy for new
television equipment. For example, some households may purchase a digital
television set with an over-the-air tuner and begin to view digital
broadcast signals in this manner; some large televisions sold today are
required to include such a tuner and by July 2007, all television sets
larger than 13 inches are required to include a tuner. In time, these
factors could

have the effect of reducing the cost of a set-top box subsidy because
fewer households would need to be subsidized.18

The second caveat to these analyses is that these subsidy estimates do not
include any costs associated with implementing a subsidy program. If the
federal government determines that it would be worthwhile to provide this
subsidy, the subsidy would need to be administered in some fashion, such
as through a voucher system, a tax credit, a mail-in rebate, government
distribution of equipment, or some other means. Any of these methods would
impose costs that could be significant for the federal government and any
other entities involved in administering the program. Such costs would be
difficult to estimate until a host of decisions are made about how a
subsidy program would be administered.

As I mentioned earlier, our work on the DTV transition continues, and we
will provide more information in a report later this year. We will discuss
various ways that a subsidy program might be administered and provide some
analysis of the benefits and drawbacks of these various methods. We will
also provide a discussion of how information regarding the DTV transition
and any associated subsidy program might best be provided to the American
people.

Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions you or other Members of the Committee may have at
this time.

Contact and For questions regarding this testimony, please contact Mark L.
Goldstein on (202) 512-2834 or [email protected]. Individuals making
keyAcknowledgments contributions to this testimony included Amy
Abramowitz, Dennis Amari, Michael Clements, Andy Clinton, Michele Fejfar,
Simon Galed, Eric

18As we mentioned above, if at a later date the Congress considers
legislation for a set-top box subsidy program, the CBO will, based on the
specifics of the law, prepare an estimate of the cost of the program.

Hudson, Catherine Hurley, Bert Japikse, Sally Moino, Karen O'Conor, and
Madhav Panwar.

Appendix I: Methodology for Use of Survey Data Regarding Television Viewing

To obtain information on the types of television service and equipment
used by U.S. households, we purchased existing survey data from Knowledge
Networks Statistical Research. Their survey was completed with 2,375 of
the estimated 5,075 eligible sampled individuals for a response rate of 47
percent; partial interviews were conducted with an additional 96 people,
for a total of 2,471 individuals completing some of the survey questions.
The survey was conducted between February 23 and April 25, 2004.

The study procedures yielded a sample of members of telephone households
in the continental United States using a national random-digit dialing
method. Survey Sampling Inc. (SSI) provided the sample of telephone
numbers, which included both listed and unlisted numbers and excluded
blocks of telephone numbers determined to be nonworking or business-only.
At least five calls were made to each telephone number in the sample to
attempt to interview a responsible person in the household. Special
attempts were made to contact refusals and convert them into interviews;
refusals were sent a letter explaining the purpose of the study and an
incentive. Data were obtained from telephone households and are weighted
by the number of household telephone numbers.

As with all sample surveys, this survey is subject to both sampling and
nonsampling errors. The effect of sampling errors due to the selection of
a sample from a larger population can be expressed as a confidence
interval based on statistical theory. The effects of nonsampling errors,
such as nonresponse and errors in measurement, may be of greater or lesser
significance but cannot be quantified on the basis of available data.

Sampling errors arise because of the use of a sample of individuals to
draw conclusions about a much larger population. The study's sample of
telephone numbers is based on a probability selection procedure. As a
result, the sample was only one of a large number of samples that might
have been drawn from the total telephone exchanges from throughout the
country. If a different sample had been taken, the results might have been
different. To recognize the possibility that other samples might have
yielded other results, we express our confidence in the precision of our
particular sample's results as a 95 percent confidence interval. We are 95
percent confident that when only sampling errors are considered each of
the confidence intervals in this report will include the true values in
the study population. All percentage estimates from the survey have
margins of error of plus or minus 6 percentage points or less, unless
otherwise noted.

In addition to the reported sampling errors, the practical difficulties of
conducting any survey introduce other types of errors, commonly referred
to as nonsampling errors. For example, questions may be misinterpreted,
some types of people may be more likely to be excluded from the study,
errors could be made in recording the questionnaire responses into the
computer-assisted telephone interview software, and the respondents'
answers may differ from those who did not respond. Knowledge Networks has
been fielding versions of this survey for over 20 years. In addition, to
reduce measurement error, Knowledge Networks employs interviewer training,
supervision, and monitoring, as well as computer-assisted interviewing to
reduce error in following skip patterns.

For this survey, the 47 percent response rate is a potential source of
nonsampling error; we do not know if the respondents' answers are
different from the 53 percent who did not respond. Knowledge Networks took
steps to maximize the response rate-the questionnaire was carefully
designed and tested through deployments over many years, at least five
telephone calls were made at varied time periods to try to contact each
telephone number, the interview period extended over about 8 weeks, and
attempts were made to contact refusals and convert them into interviews.

Because we did not have information on those contacted who chose not to
participate in the survey, we could not estimate the impact of the
nonresponse on our results. Our findings will be biased to the extent that
the people at the 53 percent of the telephone numbers that did not yield
an interview have different experiences with television service or
equipment than did the 47 percent of our sample who responded. However,
distributions of selected household characteristics (including presence of
children, race, and household income) for the sample and the U.S. Census
estimate of households show a similar pattern.

To assess the reliability of these survey data, we reviewed documentation
of survey procedures provided by Knowledge Networks, interviewed
knowledgeable officials about the survey process and resulting data, and
performed electronic testing of the data elements used in the report. We
determined that the data were sufficiently reliable for the purposes of
this report.

Due to limitations in the data collected, we made several assumptions in
the analysis. Number of televisions and number of people in the household
were reported up to five; households exceeding four for either variable
were all included in the category of five or more. For the purposes of our
analyses, we assumed that households had no more than five televisions

that would need to be transitioned and no more than five people. Number of
people in the household was only used in calculating poverty, but may
result in an underestimate of those households in poverty.

Calculations of poverty were based on the 2004 Poverty Guidelines for the
48 contiguous states and the District of Columbia, published by the
Department of Health and Human Services. We determined whether or not each
responding household would be considered poor at roughly 200 percent and
300 percent of the poverty guidelines. Income data were reported in
categories so the determination of whether or not a household met the 200
percent or 300 percent threshold required approximation, and for some
cases this approximation may have resulted in an overestimate of the
number of poor households. In addition, income data were missing for 24
percent of the respondents. To conduct the analyses involving poverty, we
assumed that the distribution of those in varying poverty status was the
same for those reporting and not reporting income data. Comparisons of
those reporting and not reporting income data show some possible
differences on variables examined for this report; however, the income
distribution is very close to the 2003 income estimates published by the
U.S. Census Bureau.

To determine total numbers of U.S. households affected by the transition
and total cost estimates for various transition scenarios, we used the
U.S. Census Bureau's Current Population Survey estimate of the total
number of households in the United States as of March 2004. To derive the
total number of households covered by the various scenarios, we multiplied
this estimate by the proportions of households covered by the scenarios
derived from the survey data. The standard error for the total number of
U.S. households was provided by the Census Bureau, and the standard errors
of the total number of households covered by the scenarios take into
account the variances of both the proportions from the survey data and the
total household estimate. All cost estimates based on the survey data have
margins of error of plus or minus 16 percent or less.

In addition, we contracted with Knowledge Networks to recontact a sample
of their original 2004 survey respondents in October 2004. Households were
randomly selected from each of three groups: broadcastonly television
reception, cable television service without a set-top box, and satellite
television service. For each group, 102 interviews were completed,
yielding 306 total respondents (for a 63 percent response rate). To reduce
measurement error, the survey was pretested with nine respondents, and
Knowledge Networks employed interviewer training, supervision, and
monitoring, as well as computer-assisted interviewing, to

reduce error in following skip patterns. Due to the small sample size, the
findings of these questions are not generalizable to a larger population.

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