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April 1, 2018

DigitalTelevision – a home entertainment bonanza for consumer electronics industry -eventually

byTim O’Keefe July 1999

With the introduction of digital televisionin 2001, Australian consumers will commence a spending spree on a diverse rangeof home entertainment products that by 2010 will have totalled an estimated$15.3 billion in sales for the consumer electronics industry. This will be $8billion more than what the consumers would have otherwise spent in an analogenvironment.

However, the consumer electronics industrywill have to ride out the early transition period where there may even be a fallin the total dollars spent on consumer electronics. If prices of digitaltelevision receivers and devices remain relatively high (compared to analogproducts) and if the consumer proposition for conversion to digital is unclear,consumers will delay purchasing either analog or digital television products.

The Transition Period

On 1 January 2001 Australia’s ten millionanalog television will not be made redundant. In fact analog television sets areexpected to continue outsell digital television sets until 2006.

The reasons for this continued popularity ofanalog sets are the Government’s digital television conversion scheme, pricerelativity and product availability.

To protect the viewers interests, thegovernment has required the free to air television networks to simulcast analogand digital signals until at least December 2008. So until the analog signal isturned off the consumer will be able to avoid any investment in digital homeentertainment products.

The other government policy that will dampendemand for digital television receivers is the restriction imposed on commercialfree to air services forbidding commercial free to air services providing one ofthe key selling points of digital television – multi-program streaming (or assometimes referred to “multi-channelling”).

Demand for television receivers is pricesensitive. Until at least 2006 analog television receivers will be considerablycheaper than digital television receivers. Initially the price of a digitaltelevision set could be three to four times the price of the similarly sizedanalog set. Around 70% of all televisions sold in Australia last year had aretail price of between $350 and $1,200. This compares to the expected price tagof $5,000 for an integrated digital receiver in 2001.

The offerings of new and exciting digitalbroadcasting and datacasting services will increase as the market penetration ofdigital receivers grows. But the growth in market penetration will be reliant onthe products being offered. It is the classic chicken and the egg conundrum. Thebroadcasters will be required to transmit a yet to be determined number of hoursin High Definition, but there is no requirement to provide other digitalservices.

With these factors in mind the consumerelectronic suppliers could be easily tempted to continue to push the sale andmarketing of analog televisions. The suppliers’ greatest fear is consumerprocrastination. If this takes hold of the market they will see their $700million annual Australian sales fall.

It will be an imperative of the locally basedsuppliers of home entertainment products to take two critical steps:

1.Introduce a low priced scalable interoperable digital television receiverset top box into the Australian market to enable consumers to enjoy some of thedigital television experience on their current or new analog television set.

2.Train the retailers and the provide consumers with information on thepresent and future benefits of digital television – High Definition,multi-view, wide screen, multi-channel digital pay-tv services, datacasting andmobility – and product details.

Taking these two steps will shorten theconsumer transition period and enable suppliers to bring forward the benefits ofthe digital home entertainment bonanza

The Low Priced Digital Receiver Set TopBox

The digital receiver set top box could be aconverter box that simply allows the display of digital signals on an analogscreen. However it would also be the first stage of the investment in a modulardigital entertainment system so when the budget permits the consumer can replacethe analog set with a new digital screen.

The price of the basic set top box needs tobe kept low but would be capable of adding optional features (eg a modem).

One of the key features of the digitaltelevision system chosen in Australia is its capability to be interoperablebetween delivery platforms – terrestrial, satellite, cable and MDS. Theability to use the same set top box to receive satellite pay tv services willgreatly enhance its value and market demand while providing production costefficiencies to keep the price low. Maximising the opportunities ofinteroperability by working to an agreement on consistent transmission standardsfor the free to air and pay tv operators should be a goal for the consumerelectronic equipment suppliers.

For the consumer electronics equipmentmanufacturers the set top box is in a market with marginal profits. The set topbox may require specific components to meet the Australian market – such asprocessing HDTV signals and Dolby AC-3 surround sound. This will further limitthe returns on the sale of these receivers.

To keep the cost of manufacture and transportdown the suppliers may want to manufacture the set top box in Australia. Themost cost efficient way would be under contract and each of the suppliers wouldfix their brand to the box. The value in this arrangement for the suppliers isthat they are limiting their manufacturing exposure to the entry point receiverbut are able to up-sell the consumer to their higher margin components – egdigital screens.

Retailer Training and Consumer Information

This will be critical to the success of theintroduction of digital television in Australia. The retailers are the frontline in this battle to win the consumer over to digital television. Theretailers ability to inform the consumer on the full range of digital productsfrom the low priced set top box to the HDTV home theatre package will becritical to the successful transition from analog to digital television.

The equipment suppliers, the free to airbroadcasters, the pay tv operators, internet service providers and datacastersshould be involved in providing consistent information to the consumer ondigital broadcasting. Even though some of these groups have different agendasfor capitalising on the benefits of digital broadcasting, all have a common goal– to increase the market penetration of digital television receiver units intoAustralian homes.

Penetration of Digital TelevisionReceivers into Australian Homes

If Australia is able to provide consumerswith a low cost entry point into the digital television environment (with anup-gradable digital receiver set top box) that is also interoperable so the samebox can access a range of pay tv services and is able to give the retailers andconsumers consistent information on the transition to digital television, wecould have the highest rate of home penetration of digital television in theworld.

With digital television home penetrationprojected to be just over 50% in 2008, it has been assumed that the Governmentwill be forced to extend the simulcast period beyond 2010 and, if it has notalready done so, lift some of the restrictions on the free to air broadcastersand datacasters.

With these factors in play, I have projected21% of Australian homes would have access to digital television by 2005 growingto 78% by 2010.

Digital Broadcasting will be a bonanza forthe consumer electronics industry. There will be a period of transition whichwill bring with it some uncertainty for the consumer and therefore the retailersand suppliers. However with proper planning and a coordinated approach toconsumer information, the consumer uncertainty will be limited and the supplierswill enjoy healthy returns earlier.