SPEECH BY REED HUNDT
                                 CHAIRMAN
                     FEDERAL COMMUNICATIONS COMMISSION

                INTERNATIONAL RADIO AND TELEVISION SOCIETY
                            NEW YORK, NEW YORK

                        (AS PREPARED FOR DELIVERY)

                             NOVEMBER 21, 1995

                                     
                      DIGITAL TV:  WE CAN WORK IT OUT


     Thank you very much for inviting me back again.  

     It was 20 years ago today that I started law practice in L.A.  While being a lawyer
has gone in and out of style, it beats lots of other careers by a mile.  And it prepared me
well for an act I didn't know I was waiting for: the Federal Communications Commission.  

     During the two years since I've been Chairman we've been working 8 days a week
and, of course, many a hard day's night.  Everything has revolved several times in the
communications revolution since I've had the job as Chairman except the fact that it's the
best job in Washington you don't have to get elected to.  

     (You did say you wanted a revolution, didn't you?  Don't we all want to change the
world?)

     The will to change, after all, is America's biggest competitive advantage as we enter
the 21st century.  I could go on about how the FCC needs to change, but let it be.  

     I'll settle for identifying the twin guideposts for our decisions.  We should be for
private competition in communications and public benefits from communications.  We should
pursue both with unrelenting intensity.

    Let me repeat.

    We should be the most procompetitive, market-trusting, investment-encouraging, and
economically savvy FCC ever.

    And we should also be the most consumer-aware, people-oriented, and children-
friendly FCC in history.

    What I'd like to talk to you about today is how a deregulatory, market-oriented FCC
should think about the digital television plan that the present Commission inherited. 

    Yesterday, we received a boxload of comments in our digital TV proceeding.  Of
course I haven't had time to read or react to them yet, but at first blush a lot of us were
startled to see industry asking for an unprecedented level of regulatory micromanagement of
digital broadcast.  I'll come back to this later.

    To pursue an overall agenda of private competition in communications and public
benefits from communications, we have assembled at the FCC what I consider to be the best
communications policy group in the world.  We have tried to base our decisionmaking on
facts, law and economics, and to bring our debates into the openness of the court of public
opinion.  

    Our record of accomplishment is long and getting longer.  We have repealed PTAR,
killed fin/syn, proposed eliminating network/affiliate rules, promised to relax ownership
caps, jumpstarted the wireless cable industry, and eliminated the chronic backlog of license-
transfer applications.

    We have gone for the first time to pure price caps as an option for LECs and
eliminated counterproductive out-of-date tariff regulations on AT&T.  We're joined at the hip
with the United States Trade Representative in the Negotiating Group on Basic
Telecommunications, fighting for open communication markets as the Vice President urged
in his now famous Buenos Aires speech in 1994 calling for a Global Information Initiative.  

    We have revolutionized the arcane and protracted spectrum licensing procedures by
using auctions:  they are fast, fair, and efficient.  As a result we've kicked off the largest
investment in a new technology in history -- the $50 billion investment in PCS.  And in PCS
and elsewhere we've moved toward spectrum flexibility -- allowing the market, not the
government, to decide the best use of spectrum.

    The most important decision we made in the PCS process was our refusal to dictate to
businesses the specific uses of the airwaves.  The commitment to flexibility is what will give
this new technology the greatest prospects for economic success.  

    I  care passionately about these deregulatory steps.  If the United States is to lead the
world in the 21st century information economy, the country must today make the right calls 
in communications policy.  The fundamental maxim should be to trust markets and deny
special interests special competitive advantages.

     I am also firmly committed to a deregulatory, market-oriented approach in defining
clearly, at last, the meaning of the public interest.  That is why I feel so strongly that we
should eliminate vague rules that enrich lobbyists and allow for unaccountable ad hoc
decisionmaking.  And we should replace them with clear, unambiguous, concrete and
tradeable duties for those who use the public property of the airwaves.  

    How does the FCC's digital television plan stack up to our twin goals?

    In 1987 the FCC initiated a plan for force-marching the eminently successful
American broadcast industry and its 100-million-home audience from analog to so-called high
definition television.

    Wasn't it Metternich who said no plan lasting longer than six months is worth having? 
We need to ask whether the FCC's digital television plan proves the point.

    The FCC's plan was first developed in response to the Japanese industrial policy of
promoting of high-definition television.  Most observers call Japan's policy a flop. 
Nevertheless, the FCC has continued to pursue its own high-definition scheme.  Under the
original proposal, each of the nation's existing TV stations would be given an additional 6
MHz chunk of spectrum.  

    The idea was that broadcasters would use the new spectrum to transmit just one signal
that would be simultaneous and identical to the analog signal, except for its high resolution,
or so-called "high definition."  

    This high resolution picture would presumably be so attractive that Americans would
naturally elect to purchase new high-definition televisions.  Then standard NTSC TVs would
be abandoned and today's analog spectrum could be returned to the public and used for other
purposes.

    Therefore, the scheme was labelled a transition, and the new spectrum was called a
second channel.

    It turns out that the engineering consortium called the Grand Alliance has invented
something more than a prettier picture.  Instead it has discovered a wondrous digital genie in
a bottle.  Maybe you want to broadcast multiple signals of higher resolution than today's
NTSC signal, or dozens of audio signals, or software packages, or thousands of pages of
text, or a pair of very high resolution movies.  The digital genie can grant all of these wishes
within the 6 MHz that was originally thought capable of transmitting only one program.

    The digital genie has made the terms "second channel" and "high definition" historical
artifacts.  Their use constrains our imagination and confines our vision to the idea of a forced
transition from analog to digital spectrum.

    But is a government-mandated transition more of an expulsion from Analog Eden than
a pilgrimage to a Digital Promised Land?

    And does the audience want to go on this journey?  After all, none of the 250 million
analog TVs in the marketplace today can receive digital broadcast signals.  

    Viewers paid about $75 billion for these analog TVs.  Should we assume they will
welcome the extinction of analog broadcast?

    And will future purchases of analog TVs drive continued demand for analog
broadcast?  

    As NBC's Bob Wright has warned, an arbitrary transition could "disenfranchise tens
of millions of viewers and amount to as much as a $100 billion tax on consumers." 

    Some claim that consumers will be eager to replace their TV's with new digital
models.  Can we be sure that consumers will purchase tens of millions of digital TVs that
each cost between 15% and 50% more than analog TVs?  Maybe instead consumers will
regard the necessity of upgrading to digital reception as a multibillion dollar tax on what they
have always thought was free television. 

    Some of these questions have been lurking in the background for years.  

    But important and unanticipated developments in technology and the marketplace give
them new weight and also raise new questions about the FCC's plan.

    First and foremost, the marvelous new digital broadcasting standard that the Grand
Alliance engineers have invented (and the FCC's Advisory Committee has nurtured) is a
flexible, dynamic means of transmitting at least 18 different video formats for the digital
display of the future.  

    The magic of digital compression makes certain that the new standard will enable
broadcasters to show more than one program at one time in 6 MHz.  This will be true even
for a very high-resolution or high-definition display of movies or sitcoms.

    Second, at an accelerated and unanticipated rate American television viewers are
paying to receive broadcast signals through new transmission technologies.  It is quite
reasonable to estimate that in five years the combination of cable, wireless cable, telephony,
satellite, and other new technologies will account for 80% to 90% of American TV
reception.  Under these circumstances shouldn't we be asking if the conversion to digital
over the air broadcast is a far less significant issue than whether today's TV licensees can get
must carry rights over the new technologies?

    Third, it seems clear that the new technologies are converting to digital far more
quickly than anyone had expected, and they're doing it without a government-ordered
transition plan.  Moreover, cable and the others are providing customers set top boxes that
don't make analog TV's obsolete.  Instead the wave of boxes that will wash over TV land
will preserve the usefulness of analog TVs.

    For these and other reasons, ABC's Tom Murphy said just last week that the FCC's
plan represents significant costs with no clear upside for broadcasters in the early years.  

    How much will it cost a broadcaster in, say, Bismarck, North Dakota to build a new
antenna tower and to operate two towers and two transmission facilities at the same time? 
Won't it be a lot more than they can expect to receive in additional advertising revenues?
Won't digital transmission do little, if anything, to increase the total size of that TV station's
audience?

    And should the government order analog broadcasters to build digital transmitters
with money out of their own pocket?  Will it make sense for broadcasters to pay for digital
transmission through the airwaves in markets where people overwhelmingly watch
broadcasters' programs through cable or another new technology? 

    Some say that the FCC's plan is satisfactory because consumers will be eager to buy
digital receivers.  But Zenith's  Jerry Pearlman predicts that a full decade from now only
20% of the country will have purchased a high-definition display.  This isn't surprising since
the average analog TV price today is about $300, and a high-definition home theater display
such as Jerry is talking about would run well north of $2,000.

    But what then will the other 80% of consumers use to watch television in ten years? 
Analog television receivers?  Cable only displays?  PCs that receive both analog and digital
video?  

    If the answer is that predictions in this area are impossible, then doesn't that make
even more questionable the notion that the FCC should "mandate HDTV" -- meaning that we
should require broadcasters to transmit some amount of programming at the highest-
resolution Grand Alliance format. 

    Yesterday a number of broadcasters asked the FCC to micromanage their businesses
by ordering each station to do fixed quotas of HDTV.  They say government should mandate
the highest resolution of the digital genie's 18 video formats because the purpose of the so-
called transition plan is to promote high-definition broadcasting.  

    But several months ago, the prominent broadcasters group, MSTV, urged us -- in
writing -- to let consumer demand, not government regulation, determine the amount of high
definition programming.  What's happened between then and now to make broadcasters
change their minds?

    A high definition quota is the same thing as a requirement that broadcasters devote a
very high percentage of their digital bitstream to just one of the Grand Alliance's 18 formats. 
It's the digital TV equivalent of ordering the New York Times to publish just one 22-page
section on high-gloss paper instead of the four sections in today's newspaper.  

    Putting aside the question of whether that's constitutional, does it make any sense?

    Perhaps the argument that the government should micromanage digital television by
ordering HDTV quotas is that we should have an industrial policy of encouraging the
purchases of high-definition home theaters.  

    But even an optimist like Zenith's Jerry Pearlman thinks that in 10 years only 20% of
the country will have home theater sets that display HDTV. So why should the government
order a quota of that particular format to be sent to 100% of the people?

    And if we want to promote any particular product, why not mandate quotas of digital
formats that are particularly appropriate for laptop computers?  If we're going to have an
industrial policy, at least that one would keep more of American consumers' money in this
country.

    Perhaps the purpose of an HDTV mandate is to encourage the purchase of digital TVs
that receive all of the Grand Alliance formats.  But isn't it possible that a tradeoff of more
programming choices in return for less than the highest possible resolution will provide much
greater encouragement?
    
    And isn't the real question simply this:  Why should the FCC substitute its judgement
for the judgement of the marketplace?  Is there any evidence of market failure?  Any
evidence that government action is necessary to provide public benefits that would otherwise
be denied?

    A fourth and final new development that should be part of any discussion of the
FCC's digital TV plan is our recent experience with auctions as a means of allocating
spectrum. 

    I believe the issue of expanding our auction authority to include, possibly, digital
broadcast spectrum deserves serious dispassionate study.  For this reason, I applaud
Congress' decision to include in the Reconciliation Act just sent to the President a provision
that would accomplish that goal by ordering the Commission to report on the use of auctions
to assign digital broadcast licenses.  

    Thinking through these questions reminds me of what Gary Cooper said when he
turned down the role of Rhett Butler in "Gone with the Wind":  "I'm sure glad it will be
Clark Gable falling on his face in that role instead of me."

    You never know what's going to be popular.

    At the beginning of the 1980s a fellow named Bill Gates supposedly said 640K of
memory ought to be enough for anyone.  

    Sometimes it pays to question one's own beliefs as history unfolds.

    In Bill Gates' case, reevaluating his opinion paid off in billions. 
    
    In raising questions here about the FCC's digital TV plan, I don't mean to suggest
that I have the answers.  I don't.  I raise these questions because so much is at stake for our
country in the communications revolution, and the consequences of policy mistakes can't be
underestimated.

    Nor can we recapture lost opportunities as we move into the digital era. 
Communications Daily recently paraphrased Congressman Jack Fields as saying the reason
he supports flexible use of the digital spectrum is because "it will give consumers more
choice, allow greater emphasis on children's programming and cultural affairs, and even
allow more 24-hour news broadcast channels."

    I hope his statement will help spark a serious discussion of how digital television can
best serve the public interest in the 21st century.

    I look forward to seeing this discussion unfold, through comments in our pending
digital TV proceedings.  Yesterday, the first comments for our pending rulemaking were
filed.  Reply comments are due in a month.  Other proceedings on the issues of the standard
and the allocation of licenses are teed up for early 1996.
  
    In all of these proceedings we will be pursuing the twin policies of private
competition and public benefits.  

    Despite the difficulty and enormity of the questions, I am optimistic that, if you try to
see it my way and I try to see it your way, we can work it out.

    Thank you.

                                   -FCC-