The DTV Converter Box (2007 Jul)

by Barry A. Liebling

In February 2009 broadcast television stations will cease sending out conventional analog signals and will switch to a digital format. The change, which is mandated by federal law, is supposed to enhance the quality of broadcast transmissions. Consumers who subscribe to cable or satellite services do not have to do anything and may not notice the switch. However, consumers who are watching television via the airwaves – using an antenna – will need a digital tuner. While nearly all new televisions have digital tuners, most televisions purchased more than five years ago do not. In the coming digital world if you want to use your old analog television with an antenna you will have to obtain a digital television (DTV) Converter Box.

The federal government, with the encouragement of various lobbying groups, has concluded that consumers cannot be expected to cope with the change on their own. Government intervention is necessary to assure that no viewer is left behind. The National Telecommunications and Information Administration, part of the Department of Commerce, is implementing a DTV Converter Coupon Program. Beginning January 2008 each household can request up to two coupons. A coupon is good for $40 toward a basic DTV Converter that will be sold by retailers in the $50 to $70 range. The coupons are not good for higher-end converters with enhanced capabilities.

What impact is the federal coupon program likely to have? Its official rationale is to make certain

that consumers are not disadvantaged by the analog to digital switch. But the program’s effect on consumers will be modest compared to the benefits that will accrue to retailers and converter box manufacturers.

Most consumers are already subscribing to a television service and will have no need for a basic converter. Some consumers who are using antennas might decide this is a good time to trade up to a new television with digital capabilities. To be sure, there are consumers who are satisfied with their older sets and will find a $40 coupon to be an attractive proposition. With two coupons a household can realize a net gain of $80.

The potential gains for retailers and manufacturers of DTV Converter Boxes is more dramatic. They will be receiving a $40 government subsidy for every eligible converter sold. From the buyer’s standpoint the retail purchase price of basic Converter Boxes will be reduced by $40, but the seller will get the full amount. In this scenario merchants will surely be able to sell many more boxes than if the coupon program did not exist. Furthermore, retailers and manufacturers will benefit by increased customer traffic. The coupons will induce some consumers to shop at retail establishments more frequently. More consumers looking around is likely to mean enhanced sales.

To a free market advocate the problem with the coupon program is not that consumers are getting discounts or that businesses are reaping profits. These are good outcomes in the right context. The spoiler is that the program is being funded by the government, paid for by tax dollars. We are all participants whether we like it or not. There certainly must be ways to help consumers adjust to the new digital world without resorting to government force. What private interests would be willing to fund a DTV Converter Box program?

Consider television broadcast stations. Since their revenues come from advertisers they have an incentive to have as many viewers as possible. If a broadcast station loses a viewer it costs the station money since the station cannot charge as much for an advertising spot. Broadcasters would calculate how much a lost viewer costs them and would seek economical ways of retaining viewers. It is in their direct self-interest to help antenna-bound people cope with the digital transition.

What about advertisers? They are always looking for ways to reach money-spending consumers. Many advertisers would be thrilled to have an opportunity to capture the positive attention of people who watch broadcast television. There are a host of advertisers in industries such as food, automotive, retailing, financial services, and health care that would jump at the chance to help viewers enter the digital television age. It would be possible, for example, for several advertisers to team up and co-brand inexpensive DTV converter boxes that could be labeled with the advertisers’ names. Consumers who prefer broadcast television would have a choice between buying a converter on their own or acquiring the less expensive – perhaps free – advertiser-sponsored converter.

You can expect partisans of federal funding to scoff at free market solutions. They would say that while private efforts may help broadcast viewers, government coupons will guarantee that they get converter boxes. But government action zealots fail to grasp the key ethical point. Voluntary action is essential, and coercion taints everything.

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