For David Smith, the way to use new digital channels was an easy call.
The president of Sinclair Broadcast Group had two choices: Sinclair could spend up to $300 million to give its 29 stations stunningly clear pictures in anticipation of high-definition television (HDTV). Or it could slice each channel into four or five, increasing revenues by adding viewers, delivering data and selling programming.
The second choice, also known as "multi-casting," was the way to go, Smith said. "My costs to do HDTV are staggering, and I'm not going to get any more money from the car dealer on the corner because I have a prettier picture."
And Sinclair wants a piece of the cable industry's $30 billion a year in revenues from subscription programming. "This will clearly be a great business opportunity," Smith said.
Baltimore-based Sinclair, which runs WBFF-TV Fox-45 and WNUV-TV Channel 54 in Baltimore, announced its decision last week. Experts called it a proclamation of what some broadcasters have been whispering for months: Multi-casting beats HDTV any day.
If other broadcasters follow suit, the consequences could be huge. Broadcasters could become stronger rivals to cable and satellite TV companies, and the advent of HDTV could be slowed, some experts say.
"The key to making HDTV work was to have it being done by the stations," said Robert McChesney, a journalism professor at the University of Wisconsin in Madison. "Then [TV] set manufacturers would start making the sets. Eventually, prices would go down."
Owners of the nation's roughly 1,600 television stations nationwide are expected to decide this year how to use their new digital channels. The Federal Communications Commission in April said it would award the channels to help stations convert programming from analog to digital signals -- a transition that will take about nine years.
During the transition, they will do so on both analog and digital channels.
The stations also will be required to continue broadcasting their current "free" programming.
Network affiliates in the nation's top 10 markets have to begin digital programming by the end of next year. Stations in smaller markets will follow, with stations in the top 30 markets -- including Baltimore -- required to make the switch by the end of 1999. When the transition is complete, stations will be required to surrender their analog channels to the federal government.
Critics including the public interest group Common Cause and Senate Commerce Committee Chairman John McCain called the FCC's granting of the digital channels a huge giveaway. They said an auction of the airwaves would have drawn $20 billion to $70 billion.
Mark Buse, a top McCain aide and policy director for the Senate Commerce Committee, said broadcasters said they needed the spectrum for HDTV.
McCain, among others, predicted the stations would use the spectrum instead to make money. "Unfortunately, it looks as though that prediction is coming true, spearheaded by Sinclair," Buse said.
HDTV not required
But Sinclair said the required conversion to digital programming will cost millions and that the commercial success of "multi-casting" is far from a sure thing. In no way, say Sinclair executives, are stations required to advance HDTV.
"In fact, unless I've been in a time warp, we're still in a capitalist society, and how the spectrum will be used is a business issue," said Nat Ostroff, Sinclair's vice president of new technology.
Sinclair owns or operates 29 television stations and 33 radio stations nationwide and reaches 15 percent of American television households. It also has a pending deal to buy six television stations and 24 radio stations of Heritage Media Group.
The digital spectrum allows the transmission of a single channel with the startlingly clear images on HDTV. The Cadillac of digital programming, HDTV requires television sets that are expected to cost between $2,000 and $5,000 when they first appear on the market.
Alternatively, compression of digital signals allows broadcasters to fit three to five channels into its bandwidth of spectrum that now accommodates one -- "multi-casting."
Consumers would get pictures with quality similar to today's direct-satellite broadcasts. They would pay a onetime fee, perhaps $100, for a set-top converter box.
The switch to digital programming will carry a cost not only for consumers but also for broadcasters -- and an especially high cost for stations that pursue HDTV.
At a minimum, stations must invest in digital transmitting equipment -- an investment that Sinclair puts at $1 million per station.
On top of that, HDTV will cost at least $10 million per station -- 10 times the roughly $1 million additional cost per station for multicasting, Smith said.
"Why would I do HDTV when I can spend $30 million and become a multichannel enterprise?" he said.
He said the excitement about HDTV -- the rectangular screen and almost three-dimensional images -- was driven by the engineering side of the business. "But once you get beyond the engineering side, it gets to be the business issue: Where's the money?" Smith said. "What do you push through the pipeline that makes you the most amount of money and provides the most benefit? HDTV doesn't do it."
Patrick Talamantes, Sinclair's director of corporate finance, puts more simply. "The jokes won't be any funnier in high definition," he said.
Other station owners are having similar thoughts. Of the major networks, Walt Disney Co.'s ABC network said it's leaning toward multiple channels, while Westinghouse Electric Corp.'s CBS Inc., General Electric Co.'s NBC and News Corp.'s Fox Broadcasting haven't announced their plans.
"There's a lot of head scratching going on with the new alternatives and options available," said Dennis Wharton, a spokesman for the National Association of Broadcasters. In addition to maintaining its current programming, Sinclair said it plans to sell subscription channels such as those available on cable. The company said the multi-casting also will include high-speed transmission of data to business and home computers. Sinclair is anticipating five channels per station and possibly more with improvements in compression technologies.
Sinclair plans to demonstrate multi-casting in the Baltimore market in January and an additional test later next year in Las Vegas.
One example of how it might work: A Sinclair station that is an ABC affiliate might offer ABC's ESPN sports network on a subscription basis through a set-top converter box.
"This is the first opportunity in the history of television for the broadcaster to become a multi-income business," Smith said. "We've been relegated to a one-level parking lot. Now we're a multi-level office building."
Challenge to cable
If all the stations in a single market made similar choices, broadcast could mount a challenge to cable.
"We could find six television stations providing at least 30 channels at a conceivably reduced rate compared to cable and direct satellite," said Talamantes, the company's corporate finance director.
Critics of the FCC's action say they have no problem with competition between the broadcast and cable industry. But they say broadcasters should have paid for the spectrum.
Buse said the broadcasters could have made the switch to digital programming with only one-third the spectrum they were actually awarded. He said broadcasters made the pitch for the additional spectrum so they could pursue HDTV.
Congress complied, in last year's landmark telecommunications legislation, and cleared the way for the FCC's action in April. "What you see is that the broadcasters might have sold Congress a false bill of goods," Buse said. "Instead of making the transition to HDTV, you may have only given broadcasters a couple of extra channels."
McChesney, the Wisconsin journalism professor, said Sinclair was likely the first of many broadcasters to announce intentions to multi-cast and forgo HDTV. "Multicast is no-risk and has a high up end," he said. "HDTV is high risk and low up end."
Broadcasters said multi-cast is no financial slam dunk. While touting the possibilities, Smith said Sinclair still has to invest millions to find strategies that will pay off in a competitive digital age. "The opportunity is there to make money," Smith said. "But we're paying for it by virtue of the fortunes we're going to have to invest and take the risk."
Wharton, of the National Association of Broadcasters, said Sinclair and other "multi-casters" will have to worry about programming costs. In some instances, multi-casting clearly won't make sense. "If you're NBC, why would you want to have four different channels on Thursday night, when Seinfeld is on?" he said.
John S. Reidy, a Smith Barney analyst, said Sinclair's choice of multi-casting is a nonevent for investors. "What no one sees yet is how you recover costs," he said.
He also said he viewed the announcement as far from final. "What if the NFL says I want you to broadcast in HDTV? You can't just write off HDTV," Reidy said.
But media observers said a rush to multi-casting will retard the growth of HDTV. "As long as you can get digital stations on converter, who will pay the extra money for high definition television?" Wisconsin's McChesney said.
Gary Shapiro, president of the Consumer Electronics Manufacturers Association -- a group that wants to push HDTV, said he's not worried. HDTV sets will be so superior that consumers will buy them, and they'll be able to get programming from cable and satellites.
He said Sinclair and other multi-casters run a dangerous risk: "Becoming the AM stations of the multi-signal world."
Pub Date: 8/17/97