Wednesday, March 25, 2009

DTV and easy money...for whom?

Told ya...

But there was an even bigger motivating factor: money.

The Bush White House, with the support of many Republicans, was pushing for tax cuts for wealthy Americans. They hoped to find a way to make up for the deficit of funds the U.S. Treasury would receive. The administration was also interested in finding new sources of revenue to help reduce the USA's growing deficit.

The solution: a spectrum auction.

By selling airwaves that had been given to broadcasters - free of charge - decades earlier, lawmakers figured they could raise $10 billion, at least. The spectrum could penetrate walls and other obstacles, making it ideal for wireless broadband and public safety communications.

"Digital TV coupon program hampered from the start"


Leslie Cauley

March 24th, 2009


"Do you really think this will work?"

The question, posed by consumer advocate DeAnne Cuellar, was directed at Tony Wilhelm of the Commerce Department's National Telecommunications and Information Administration. It was February 2008, and Wilhelm, head of consumer education, had just explained the digital TV coupon program to a group of consumer advocates that included Cuellar.

The program, core to the government's plan to turn the USA into an all-digital TV market, offers $40 coupons — two per household — toward converter boxes that turn digital signals into analog. TVs that use antennas must have a converter; otherwise, they'll go dark once the switch happens. Cable and satellite TV customers aren't affected.

Cuellar, director of the Texas Media Empowerment Project in San Antonio, was concerned that the $1.34 billion program would run out of money before the nation's neediest — the poor, elderly and disabled — could apply. For many, she pointed out, free TV is their only connection to the outside world.

Wilhelm told her not to worry.

"He said most coupon programs have low redemption rates, so he didn't expect many people to use or even want financial assistance", Cuellar recalls.

She says Wilhelm cited grocery store coupons — for cereal, cleaning products and such — which have average redemption rates of 10% or less. "They were confident that everything would be fine."

Cuellar's recollection of the exchange is shared by two other people who attended the private briefing: Chris Murray, senior counsel for Consumers Union, and Gene Kimmelman, vice president of international policy for the same group. Wilhelm says he does not recall the meeting or the exchange.

As it turned out, everything was not fine. NTIA exhausted its budget just 10 months later, forcing Congress to scramble to keep the program afloat.

The coupon program "was supposed to help everyone who was losing a piece of equipment that was perfectly functional — their (analog) TV," says Kimmelman. "Instead, at every stage — from the drafting of the (DTV) bill to actual implementation — this program was set up to fail."

As envisioned by Congress, digital TV was supposed to give "free" TV, a fixture in U.S. living rooms for more than 50 years, a much-needed face lift. Instead, the program got so bogged down that lawmakers, in the midst of dealing with an epic financial crisis, had to run to the rescue.

Why did the program go off the rails so badly?

Interviews with more than a dozen current and former NTIA officials, consumer advocates, White House personnel and others suggest a combination of factors. Among them: bureaucratic bumbling, penny-pinching, NTIA's narrow interpretations of provisions in the DTV bill, and relentless warring about money between Republicans, who wanted to spend as little as possible on the DTV transition, and Democrats, who had concerns about funding from the start. Some sources would speak only on the condition of anonymity because they're not authorized to comment publicly and fear retribution from current and former employers.

Demand was seriously underestimated.

"There were so many hurdles and detours (for consumers) that the chances of the program working successfully were very small right from the beginning," says Rep. Ed Markey, D-Mass., former chairman of the Subcommittee on Communications Technology and the Internet, which has congressional oversight of NTIA.

NTIA's assumptions about the popularity of the coupons proved woefully off target. As of March 18, more than 54.2 million coupons had been requested, and 25.7 million redeemed. Average redemption rate to date: 55.7%.

The agency's miscalculations came into play in dramatic fashion in late December. In a conference call with reporters, Meredith Baker, then acting director, said NTIA was effectively out of money and would have to put consumers on a waiting list. Within days, more than 100,000 requests had piled up. By February, there were more than 4 million, and thousands of requests were pouring in daily.

Factoring in processing time — 4 to 6 weeks — wait-listed consumers had little hope of receiving their coupons in time to beat the DTV deadline, then set for Feb. 17. After a lot of haggling, Congress pushed back the DTV transition date by four months, to June 12. Lawmakers also included $650 million in new coupon funding in the stimulus package approved in February.

Ushering in a new era.

America's DTV plan has been a long time in the making. In 1996, the Federal Communications Commission and Congress started talking about ushering in a new era in TV broadcasting. Talk was spurred, in part, by the Telecom Act of 1996, which called for a transition to an all-digital TV format when most consumers had abandoned analog TV.

There were many potential benefits. Digital technology is far more efficient than analog, so broadcasters could squeeze more channels into the same space. Pictures would be sharper; colors, brighter.

But there was an even bigger motivating factor: money.

The Bush White House, with the support of many Republicans, was pushing for tax cuts for wealthy Americans. They hoped to find a way to make up for the deficit of funds the U.S. Treasury would receive. The administration was also interested in finding new sources of revenue to help reduce the USA's growing deficit.

The solution: a spectrum auction.

By selling airwaves that had been given to broadcasters — free of charge — decades earlier, lawmakers figured they could raise $10 billion, at least. The spectrum could penetrate walls and other obstacles, making it ideal for wireless broadband and public safety communications.

Many Democrats, including Markey, supported the auction plan, but they also had concerns. The transition, they pointed out, would idle as many as 70 million analog TVs. Democrats said it was only fair for the government to make sure the switch was cost-free for affected consumers.

Ultimately, the DTV bill passed with bipartisan support. It was signed into law by then-president Bush in early 2006.

NTIA, which oversees U.S. spectrum usage, was directed to implement the coupon program. Its budget: $1.5 billion, including $1.34 billion for the coupon program. That was far less than the $4 billion Democrats had requested but a lot more than the $400 million Republicans had initially proposed.

America's TV spectrum hit the auction block a year later, in January 2007. The sale raised $20 billion, about double what many had expected. The money was earmarked for a range of government uses, including $7.2 billion for deficit reduction.

According to two former officials who would not speak for attribution, NTIA's decision-making during this period was based primarily on two factors: the DTV switch date — Feb. 17, 2009 — and the coupon program's budget.

Many decisions boiled down to: "What money do we have, and how far can we make the money stretch?" one of the former officials recalls.

Against that backdrop, the agency made a number of pivotal decisions:

•Expiration rules. The DTV bill requires that coupons expire after 90 days. The bill is silent, however, about whether a household may reapply once coupons expire.

NTIA took the position that households could not reapply. After 90 days, expired coupons were reissued to other consumers. The agency's policy had the effect, over time, of limiting the number of people who could use coupons, Kimmelman says. One of the former NTIA officials says the decision was influenced by funding limitations.

•Definition of "households." The DTV bill states that each U.S. household may apply for up to two coupons, but does not define the word. As a result, NTIA was free to use its own discretion.

NTIA decided to use the U.S. Census definition — a single, residential dwelling where one family lives, with no shared dining or living facilities. The agency's decision eliminated broad swaths of America, including nursing homes, drug-rehab centers and residential hotels. People living in unconventional arrangements — such as ministers who maintain living quarters in their churches — were also out.

•P.O. boxes. Though the DTV bill is silent on this issue, NTIA decided that people who only used P.O. boxes, with no fixed address, weren't eligible for coupons. (Native American reservations were the exception.)

The former NTIA officials say this decision was driven, primarily, by concerns about fraud, which could have drained funds. The agency considered setting up a system for verifying the authenticity of P.O. boxes but decided that would have been time-consuming and expensive.

•Bulk mail. In the DTV bill, Congress instructed the agency to use the U.S Postal Service, but left the details up to NTIA. The agency decided to use bulk mail, which is far cheaper than first class but slower. Mail traveling first class arrives in days; bulk mail can take weeks.

The bulk-mail decision came under harsh criticism in late December, when NTIA ran out of funds and coupon requests started piling up.

Even with all those limitations, however, consumers continued to clamor for the government's $40 coupons.

When the FCC conducted a citywide test of DTV in Wilmington, N.C., in the fall, NTIA received requests for almost 76,000 coupons — five times the number of over-the-air TV households that Nielsen said existed there. Part of that was due to the efforts of the FCC, which had blanketed the local market with public service ads leading up to the test.

According to one former government official, NTIA became concerned that the surge in media attention would result in artificially high coupon requests. For that reason, the same person says, NTIA groused when the FCC made plans to put a DTV clip-and-mail coupon request in AARP The Magazine, circulation 25 million.

The FCC placed the ad anyway.

Defending the NTIA.

The NTIA's Baker, who has since left the agency, declined multiple requests for an interview. She did send an e-mail to USA TODAY shortly after her resignation: "NTIA effectively and efficiently administered the program that Congress designed," she wrote.

However, in an interview with Communications Daily, a Washington-based trade publication, Baker had plenty to say. She blamed NTIA's penny-pinching ways, in part, on the White House's Office of Management and Budget, which is responsible for making sure federal programs adhere to their budgets.

In the interview, published Feb. 5, Baker makes it clear that money was a constant concern. NTIA "ran a very strict program because Congress gave us a very tight legislative package," she says. She cites the bulk-mail decision as an example of the agency "being sensitive to cost."

Said Baker, "We really tried to make this a bipartisan effort for everyone to know what we were doing, exactly what the numbers were, because it was Congress' program, and Congress was going to have to make changes if changes were to be made."

Baker's comments stand in contrast to NTIA's report to Congress last fall. In the Nov. 6 report, submitted on Baker's watch, the agency assured Congress that it had "sufficient funds" to meet its coupon obligations and could possibly "return as much as $340 million to the U.S. Treasury."

In the report, NTIA allowed that there were also "less optimal but possible" scenarios: that consumer demand could surge significantly, causing NTIA to exhaust its funds.

In that unlikely event, the agency noted, "NTIA will notify the Congress and address the matter as quickly as possible."

How many TVs?

NTIA, remarkably, never had a hard fix on how many TVs might be affected. When the DTV bill was passed, estimates varied widely, from a low of 20 million to more than 70 million. Republicans, who wanted to spend as little as possible on DTV, tended to embrace the smaller estimate; Democrats favored the higher one.

NTIA decided to do a little sleuthing on its own.

Since cable and satellite customers wouldn't be affected by the switch, NTIA figured they wouldn't request coupons in large numbers, one of the former officials recalls.

NTIA soon hatched a plan: It would ask cable and satellite TV companies to provide numbers of subscribers, by market, to the government. The agency planned to cross-reference those lists with U.S. population maps to come up with a guesstimate of the number and location of free-TV households.

The response from cable and satellite?

"They turned us down flat," the same source says. "They told us they considered that information to be confidential."

In the end, NTIA's predictions about coupon demand were based not on anticipated demand but on simple arithmetic. The agency took its $1.34 billion budget and divided it by $40, the face value of coupons. Total: 33.5 million.

That figure — 33.5 million — became NTIA's coupon cap. In reports to Congress, the agency said demand could ratchet as high as 50 million by the time the program shut down. To pay for the difference, the agency was counting on millions of people allowing their coupons to expire unused.

NTIA was silent about what happened to all the people who inadvertently allowed their coupons to expire. But the reality was this: They were flat out of luck.

On track for June?

What's the lesson here? Kimmelman says the DTV program underscores the folly of any government trying to bring about major cultural and societal shifts on the cheap.

"Programs designed to help people that are run by people whose only interest is minimizing cost are doomed to fail," he says.

The good news: "We now have an administration that wants this program to be successful," says Markey, the current chairman of the House Subcommittee on Energy and the Environment. As a result, he says, "I think we will finally have a successful transition" to digital TV on June 12.

As for NTIA, at the request of lawmakers, it is now sending out coupons via first-class mail. Congress has also directed the agency to allow households whose coupons have expired to reapply.

NTIA began processing those requests on Monday.

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