NIST GCR 03-859
Economic Impact of the Advanced Technology Program's HDTV Joint Venture

1. Introduction

Over the past half century, economists and other social scientists have convincingly demonstrated the importance of technological change in improving the standard of living. When a firm or an individual produces a technological change that improves the quality of a product or reduces the cost of making it, the overall level of economic well-being is increased. Likewise, when a new product or service is developed, the standard of living is improved as long as some consumers are willing to pay more than the costs of producing it. Established principles of welfare economics argue that the private level of investment in such innovations will be optimal in the absence of market failures or externalities; that is, if the innovator is able to fully appropriate benefits generated by the improvement.

In most cases, however, a portion of this economic benefit “spills over” to consumers or to other economic agents (Mansfield et al., 1977; Scherer, 1999), because the innovating firm or individual typically cannot fully recover the surplus created. If there is sufficient competition among producers, a “market spillover” may be created as prices fall to the point that the innovating firm can recover only a portion of its investments in research, development, or purchase of long-lived assets. In other cases, benefits may accrue to competitors and firms in related or unrelated fields, a phenomenon known as “knowledge spillover.”

1.1 GOVERNMENT’S ROLE IN SUPPORTING RESEARCH AND DEVELOPMENT

The situation for research and development (R&D) aimed at producing or improving private goods and services is quite different from the creation of scientific and knowledge, the goal of most basic and applied research. In the latter case, it becomes difficult or impossible for innovators to achieve the major portion of the benefit from their inventions. Standard welfare economics tells us that private markets will yield a sub-optimal level of these goods, leading to a lower than desirable level of technical progress.

To correct for this potential market failure, a large number of government organizations provide funding for research activities. These entities, including such giants as the National Science Foundation (NSF), the National Institutes of Health (NIH), and the Defense Advanced Research Projects Agency (DARPA), fund inhouse research activities, university research programs, and corporate projects and joint ventures. Governmental support for technology infrastructure and standards development is provided by the National Institute of Standards and Technology (NIST) and related organizations.

NIST’s Advanced Technology Program (ATP) was created in 1990 to promote the development of risky technologies where market failures or externalities are likely to lead to under-investment by private firms. ATP funds, on a cost-sharing basis, pre-commercial R&D into new technologies and process improvements where substantial spillovers are expected and where technical and investment recovery risks are high.

1.2 EVALUATING THE EFFECTIVENESS OF ATP PROJECTS

Since its inception, ATP’s Economic Assessment Office (EAO) has taken an active role in supporting evaluation of its funded projects, and to date, more than a dozen external assessments have been completed and shared with the public. These studies have measured the impact of the ATP on U.S. firms, industrial sectors, and the overall economy. The studies that ATP has conducted and funded include • real-time evaluations of project progress, using ATP’s project management teams and analysis of the data reported by the companies through the business reporting system;

• surveys of the participating companies to assess ATP’s effect on the companies’ decisions and success;
• project case studies that assess the costs and benefits of ATP’s investments in specific technologies or technology areas;
• general studies of how ATP funding leads to spillover benefits to beneficiaries other than the ATP award recipients; and
• models that link large-scale macroeconomic models with microeconomic project analyses.

Case studies are an important part of ATP’s economic analysis strategy. They provide an in-depth view of how ATP-funded technologies lead to economic benefits for the awardees, other companies, and consumers. Case studies also provide qualitative details about how ATP funding affects the investment decisions of companies and the success of the projects. Ideally, case studies provide credible quantitative estimates of the economic performance of ATP’s investments in these technologies.

1.3 ATP’S INVESTMENT IN DIGITAL VIDEO

The emergence of Digital Video (DV) technology is an excellent example of the potential for new products and services to improve the standard of living, and of ATP’s support for development of promising, high-risk technologies. DV offers opportunities to fundamentally improve the way information is exchanged, making it easier to access at lower cost and through the most effective media. It has the potential to enhance communications among individuals and organizations and can add to the enjoyment consumers derive from many forms of entertainment. DV includes all applications of digitized moving pictures (television, motion pictures, video, and animation), as well as extensions to these applications (Hermreck and Omidvar, 1997).

Recognizing this potential for DV to offer broad-based gains to U.S. society through productivity gains and quality-of-life improvements to consumers, ATP developed and managed a focused program entitled “Digital Video in Information Networks” from 1995 to 2000. The goal of the program was to increase the number of successful DV projects and accelerate the development and diffusion of DV and multimedia information and entertainment services that can be delivered over an interoperable information infrastructure for commercial, government, and personal use.

1.4 THE HIGH-DEFINITION TELEVISION JOINT VENTURE

The economic relevance of the JV’s efforts was significantly enhanced by the Federal Communications Commission (FCC) decision to mandate conversion to DTV broadcasting. This decision requires studios at U.S. television stations to convert their operations from analog to digital systems. According to the FCC, “the digital transition will increase efficient use of the spectrum, expand consumer choice for video programming, and increase the amount of spectrum available for public safety and other wireless devices” (FCC, 2003a). Analog television broadcasting uses a larger portion of the spectrum because empty channels are left between each co-located broadcast signal to prevent those signals from interfering with one another. Digital broadcasting will allow the FCC to permit adjacent channel broadcasting, thereby freeing up portions of the spectrum for other uses. Digital broadcasting also allows far more information content in each channel, either providing much higher quality or multiple programs in a single broadcast “channel.”

This conversion has profound implications for the cost and organization of studio operations. Under the analog broadcasting paradigm, broadcasters replaced or upgraded their existing studio equipment on an as-needed basis. But the digital conversion entails a complete overhaul of studio equipment and operations as the technologies to manipulate and pass through digital signals are different from those required for analog.

The ATP co-funded HDTV JV led to new technological innovations that reduced the cost of the conversion to DTV broadcasting for most television stations and quickened the introduction of new digital studio technologies. Sarnoff Corporation, an R&D firm that was a central innovator in developing the DTV standard later adopted by the FCC, assembled a unique team and led that team to an ATP award to investigate new approaches to creating and operating digital studios.

The JV successfully developed new technologies for DTV broadcasting, particularly a system for processing compressed DTV signals and a new technology that enables more efficient operation of DTV transmitters. These technologies were subsequently commercialized by their developers and have entered into service at television stations around the country. In addition, the JV developed methodologies and new approaches to creating and organizing digital studios that have impacted global broadcasting R&D.

To quantify the economic benefit of the JV project, this analysis compares the actual situation of producers and customers of products embodying JV technologies to a hypothetical situation that would have existed in the absence of the JV. This analysis approach is known as a “counterfactual scenario.” The report develops a detailed counterfactual world and describes the conditions that would arise and presents evidence supporting the counterfactual. Specifying the counterfactual scenario is essential to determining the information that will be needed to estimate the social benefits of the JV project. Once the counterfactual is specified and data collected, this analysis employs economic theory and quantifies the JV’s benefits.

1.6 ORGANIZATION OF THE REPORT

The remainder of this report discusses the technology outcomes of the JV, describes how JV technologies impacted DTV conversion, and presents the quantitative results from an economic analysis of commercialized JV technologies. The report is organized as follows:

• Section 2 provides an overview of the JV and its members, presenting qualitative results on JV technology outcomes. Within the JV, each member was tasked with R&D of a constituent component of the hypothesized DTV studio of the future. This section concludes by leveraging the discussion of technology outcomes to identify those technologies whose economic benefits to society can be quantified.
• Section 3 presents the economic methodology for evaluating the quantitative success of the JV. This section discusses the technical and economic impact metrics that permit the evaluation of the JV relative to its counterfactual scenario.
• Section 4 presents the results of the quantitative analysis and calculates measures of performance. The JV is analyzed as a portfolio; therefore, the benefits of commercialized technologies are compared to the JV’s total costs. To evaluate the JV’s effectiveness, the analysis also calculates several measures of performance, including the benefit-to-cost ratio, social rate of return, and present value of net benefits.
• Finally, Section 5 of this report brings the analysis full circle: returning to the JV technologies, placing them in the broader context of their impact on the R&D activities of the broadcast equipment industry and the DTV conversion. The report concludes by looking forward to the potential benefits JV technologies may yield in the future.

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Date created: July 12, 2004
Last updated: July 13, 2004