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The July 9, 2002 Issue Provided by System Dynamics Inc.
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Goodbye to Analog: Our Digital Destiny

An old saying tells us that the only certain things in life are death and taxes. But when we focus in on the things that are becoming inevitable in the broadband home, there are two different driving forces: connectivity and digital.

Connectivity is an important aspect of the broadband home -- it's all about the benefits to everyday people as big pipes connect their homes to the rest of the world and allow the devices within the home to communicate with each other and the outside. But the other aspect is WHAT is being connected -- that's where digital comes in. As content and devices move from analog to digital, it becomes easier and more cost effective (at least in theory) for the devices to communicate with one another and to use the same networking and communication technologies to share their information.

We've been living with the transition to digital consumer electronics for some time now. Let's examine where we are in the replacement of analog by digital. In the realm of music, we've seen the demise of vinyl (analog) records and the acceptance of (digital) CDs. We've seen the emergence of various digital compression schemes like MP3 and WMA and their ability to be "ripped" from CDs, downloaded over the Web, and written by consumers on MP3 players and recordable CDs (CD-R). This has led to a number of issues regarding intellectual property and copyrights which are still being unravelled.

VCRs versus DVDs --> Click for larger pictureIn movies, the transition from (analog) VCRs to (digital) DVDs is well underway. DVD players were introduced in Japan in '96 and their US sales first surpassed those of VCRs in September 2001. By April 2002, US DVD player sales outstripped those of VCRs almost 2 to 1.

Sales of digital still cameras are predicted to exceed those of conventional, film-based (reloadable, non-disposable) cameras in the year 2002 in North America. While film cameras still vastly outnumber digital cameras, digital camera penetration in online households is growing particularly fast. US Internet-connected households reached 33 percent in 2001, and is projected to reach 60 percent by year-end 2002 (InfoTrends Research Group, Inc surveys).

Ad from NY Times --> Click for larger pictureIn the same way, digital camcorders are rapidly displacing older analog camcorders in consumer homes.

The digital transformation of radio is also under way. Internet radio has come to net-connected PCs and is starting to influence the design of home radios. Next generation digital radio broadcasts are happening. In the US, Sirius Satellite Radio and XM Satellite Radio have introduced digital radio, delivering up to 100 channels of music, talk and news. WorldSpace is already broadcasting in Africa and Asia.

The transition to digital in the TV world has been more problematic and is likely to proceed more slowly due to the enormous installed base of analog delivery systems (broadcast and cable) and receivers - both TV sets and VCRs.

There is a slow but steady trend of migrating the TV delivery systems from analog to digital. Those consumers getting their TV from satellite are already receiving a digital signal. Terrestrial broadcast and cable are overwhelmingly analog and are moving to digital much more slowly. Since the situation varies between countries we'll concentrate this section on what's happening in the US.

While traditional broadcast networks originate much of the TV content, very few U.S. homes receive their TV programs directly from local broadcast stations. Well over 80 percent of US homes receive television programming via satellite or cable -- for them, broadcast stations are just another set of channels in the bewildering universe of choices. Most cable operators offer digital services and have increased their overall penetration of digital subscribers to about 20% (although some operators have significantly higher penetrations). But most of the program content delivered to the digital set-top boxes is still analog; digital channels represent only a small fraction of the total.

As a key element of its drive for (digital) high-definition TV, the US gave broadcasters new digital channels in exchange for a promise to return the old analog channels in the future so the spectrum could be reused. Year end 2006 is the scheduled date when 1500 broadcast TV stations are scheduled to cease analog broadcast and continue only in digital. However, "safeguard" provisons in the transition plan make that date a mirage - the coupling of digital with high definition has resulted in very pricy TV sets and very low penetration to date.

Digital TV set purchases have been hampered by high prices, little content, and lack of compatibility between today's digital TV receivers and current generation cable set-tops. Cable operators don't want to prematurely devote too much channel capacity to bandwidth hungry high-definition video content, when the viewing audience is still very small.

FCC Chairman Powell recently exhorted all the players - broadcasters, cable operators, equipment manufacturers - to work together to accelerate the move to high definition. This may help to break the logjam and put the migration on a faster track. However, there are few incentives to do so and also few punishments for postponing the transition. The FCC has announced consideration of rules imposing sanctions on broadcast stations that miss deadlines for DTV transition. These would include losing their digital license if they appear to be acting in bad faith. However, we would expect the usual protests from lawyers, lobbyists and others to drag out any such proceedings.

Netting it out, the transition to digital for TV is inevitable, but the timing and path by which the scenario plays out in the US is still unclear.

Our presentation at BTC2002 included a graphical representation of the transition from analog to digital. Please visit ( www.broadbandhomecentral.com/presentations.html#btc2002 ) to view or download our presentation.

In our article on CES in BBHR 1/21/2002 we wrote about how many of the devices being shown were built with communications capability. Earlier we wrote about how home networking is increasingly enabling the interconnection of these devices.