TV Goes Digital, Japan Yawns

CS and BS satellite, digital terrestrial and cable broadcasting -- is it all just a load of BS?

The confusion is understandable. For one, there is the distinction between broadcast satellite (BS) and communication satellite (CS). While technically similar, they differ in legal terms. BS programming reaches a broad audience of unspecified users and faces the same restrictions on content as terrestrial broadcasting. CS programming targets specific users and therefore faces fewer restrictions on content. CS spectrum also offers greater capacity and thus more channels than BS.

Then there is the distinction between digital broadcasts and digital TVs. Since there were only about 200,000 households equipped with digital tuners or digital TV sets with built-in tuners when BS digital broadcasting began, about 80 percent viewed the BS digital programs through cable TV on ordinary TV sets.

What does digital TV offer? First, digital broadcasts can offer higher-quality images than analog broadcasts. Because digital signals can be compressed, more information can be transmitted. Second, because of this compression, more channels can be broadcast. Lastly, if an uplink is established, interactive services such as television banking are made possible. The former Ministry of Posts and Telecommunications (MPT) had set a deadline of 2010 to phase out analog broadcasts and go completely digital. Terrestrial digital broadcasts are slated to start in 2003 in major metropolitan areas.

Nomura Research Institute estimates that the audience with access to digital broadcast programs will reach 24 million households (a market exceeding ¥1 trillion) in 2005, consisting of 12.5 million households for BS (¥507.8 billion), 6.08 million for CS (¥278.1 billion), 5.4 million for CATV (¥308.7 billion), and 5.75 million for terrestrial broadcasting (¥266.3 billion). (See chart at right, and Statistics, page 48.)

Interactive TV
The main selling point of BS digital has been high image quality. But few consumers have ponied up the money for hardware to appreciate it (around ¥70,000 for a tuner or ¥400,000 for a TV set with built-in tuner). Even public broadcaster NHK's analog high-definition TV (called Hi-Vision), which predated digital broadcasting, never became successful because of the high prices of high-definition TV sets. The main selling point of CS digital is the greater number and variety of channels available. But the problem has been finding enough quality content to fill those airwaves. Programming on the boob tube in general is full of junk, and this is no less true in Japan.

The TV industry has therefore pinned its hopes on the interactive potential of digital TV. Engineers and marketers alike are dreaming up useful (and some not so useful) ways to exploit the medium, such as interactive quiz shows and television commerce (t-commerce) using the familiar remote control. However, consumer surveys and flops in past interactive TV attempts suggest that "time-shifting," i.e. watching what they want when they want it, would be the most attractive feature. Video-on-demand may thus hold the most promise, at least from the consumer's point of view.

The merger between America Online (NYSE: AOL) and Time Warner (NYSE: TWX) in the US has drawn investor attention to the convergence of TV and the Internet. In fact, AOL launched its interactive cable TV service, AOLTV, last June in trial cities. In Asia, Hong Kong-based Pacific Century CyberWorks (NYSE: PCW) also introduced its interactive channel Network of the World (NOW) last June. PCCW entered Japan last year with its acquisition of software developer Jaleco (7954), which was renamed PCCW Japan.

Although TV is now competing with PCs, video games, and mobile phones for leisure time, the nearly 100-percent penetration rate of TV sets in Japanese households makes the prospects of interactive TV worth thinking about.

Satellite
With the introduction of BS digital broadcasts, the number of BS channels expanded from four to ten. BS digital programming is provided for a fee by NHK (Japan Broadcasting Corp.) and by WOWOW (Japan Satellite Broadcasting), and for free by the BS affiliates of the five main terrestrial broadcasters.

CS digital broadcasting, on the other hand, had already begun in 1997 as a pay service through two platforms, SKY PerfecTV! and DirecTV. When DirecTV (run by US-based Hughes Electronics) announced last March that it would bow out of Japan, SKY PerfecTV! (operated by Sky Perfect Communications) absorbed its subscribers and became Japan's sole CS digital broadcasting platform.

While BS is reserved for Japanese majority--owned companies, CS is open to foreign-owned companies. Sky Perfect was not allowed to broadcast using BS because its major shareholder, Sony, is over 50 percent foreign owned. However, with its greater capacity, CS also happens to be better suited than BS for interactive services. CS digital broadcasting consists of three categories of players: content providers (who produce and edit programs), broadcasters (who operate satellites), and platform companies (who handle customer services). In the case of terrestrial broadcasting, the content providers and TV broadcasters are usually one in the same. But in the case of CS digital broadcasting, the satellite operator, who is merely commissioned to relay content, undertakes the costly task of broadcasting.

The current sole CS platform company, Sky Perfect Communications (4795), went public on the Mothers market in October 2000. The company mainly handles customer services for its SKY PerfecTV! service and program uplinks to satellites. Sky Perfect commissions JSAT (9442), which went public on the Tokyo Stock Exchange in August 2000, as its broadcaster.

Asia's largest satellite operator, JSAT operates eight satellites, with almost half of revenues coming from Sky Perfect. JSAT's major shareholders include general trading houses and NTT Communications. For the fiscal year through March 2001, JSAT expects pretax profit to rise 59 percent to ¥9.2 billion.

Sky Perfect offers over 170 TV channels and over 100 radio channels via JSAT's 124° and 128° longitude communication satellites. Its programming strength is in sports, as evidenced by its exclusive CS broadcasting rights to the 2002 FIFA World Cup (Korea/Japan). SKY PerfecTV! had 2.5 million subscribers at the end of December 2000.

A new CS digital broadcast service using a communications satellite launched at the same 110û longitude as BS is scheduled to begin in the latter half of 2001. Two new types of tuners may help accelerate CS penetration: one that can receive 110°CS plus BS analog and BS digital, and another that can receive 110°CS plus conventional 124°and 128°CS.

Since its establishment six years ago, Sky Perfect has not been able to post a profit because of the high costs associated with acquiring subscribers. With promotional incentives, new subscribers can buy a tuner and sign up for SKY PerfecTV! for under ¥10,000. The company forecasts a net loss of ¥28 billion in the fiscal year through March 2001 and does not expect to turn a profit until after amassing a total of 3.5 million subscribers, perhaps by fiscal 2003. Sky Perfect's major shareholders include Sony, Itochu (8001), News Corp (NYSE: NWS), Fuji Television Network (4686), Hughes (NYSE: GMH), and JSAT.

The Japanese government has offered licenses to 18 companies for the new 110b°CS digital broadcasting, and Sky Perfect will face competitors in its platform services. One of these is a new company formed by Mitsubishi (8058), Japan Satellite Broadcasting, NTT DoCoMo (9437 or NTDMY), NTT Communications, and Nippon Television Network (9404).

Cable
Competing with satellite broadcasters is Japan's fragmented cable TV (CATV) industry. According to the former MPT's latest figures, at the end of March 2000, there were 686 cable operators serving 9.47 million households. Of the 311 commercial operators, 196 were in the black, although 236 companies were still burdened with accumulated debt.

Regulations, which were not eased until 1993, had prevented companies from owning more than one operator and limited them to operating channels only in their own local area. Apartment building landlords pose another problem as they often refuse to permit the installation of lines for cable television, let alone cable Internet. For apartment dwellers wanting pay-TV service, satellite is often the only alternative.

Local cable operators can only offer 20 to 60 channels, depending on their bandwidth capabilities. Because they cannot compete with satellite on the number of channels, cable companies in particular want to emphasize interactive services such as e-commerce. The advantage cable has over satellite is its uplink, which satellite currently lacks. Until satellite uplinking from the home is possible, Internet access and interactive TV services via satellite will have to rely on other forms of communication, such as plain old telephony service (POTS) or wireless.

Although they must digitize by 2010, many cable operators cannot afford the estimated ¥1 billion cost per station to switch to digital broadcasting. Consolidation in the CATV industry is inevitable.

Japan's No. 1 and No. 2 cable operators, Jupiter Telecommunications and Titus Communications, merged last year. The surviving namesake, Jupiter Telecommunications (J-COM) postponed its Mothers IPO, originally planned for December 2000, due to unfavorable market conditions. Major investors include Sumitomo (8053), Liberty Media, and Microsoft (Nasdaq: MSFT).

Even though cable and satellite are seen as rivals, they are often partners offering complementary services. Many digital satellite programs are redistributed through CATV.

Ground
Terrestrial broadcasting is represented by NHK in the public sector and is led by five key stations in the commercial sector: (in descending order of dominance) Nippon Television Network, Fuji Television Network, Tokyo Broadcasting System (9401), Asahi National Network (9409), and Television Tokyo Channel 12 (unlisted). The five commercial terrestrial broadcasters are all subsidiaries of Japan's national newspaper corporations, respectively: Yomiuri, Sankei, Mainichi, Asahi, and Nikkei Shimbun. NHK collects fees directly from the public (avoiding the tax collector is a national point of pride), but the five commercial broadcasters rely on TV advertising revenues, which represent a third of domestic advertising expenditures and have been robust the past year.

For commercial terrestrial broadcasters, digital TV is a mixed bag. It is uncertain if advertising revenue from digital broadcasts will make up for the estimated ¥20-30 billion cost per company to digitize their networks. On the other hand, because BS covers the nation on a single channel, national broadcasting via BS digital costs about one-tenth that via conventional broadcasting infrastructure.

But by the same token, the five key stations must be sensitive to their relationships with their local affiliate stations, which could be rendered obsolete by this nationwide coverage. Although offering some free BS digital programs to counter the pay-TV services of cable and CS broadcasters, the terrestrial key stations have not broadcast all of their programs in BS digital format in order to preserve these affiliate relationships.

Of the major terrestrial broadcasters, probably TBS and Fuji TV are the most active in developing interactive TV programming. TBS leads an interactive TV service company called Tomo-Digi Corp. Fuji TV, a partner of Sky Perfect, is developing its own Internet and multimedia business.

It should be noted that the Japanese Radio Law limits foreign stakes in broadcasters to less than 20 percent, and most of the listed broadcasters are already approaching that maximum.

Other Players
In its deregulation negotiations with Nippon Telegraph & Telephone (9432 or NTT), the former MPT has dangled a carrot: permission to enter the broadcasting business. Although NTT has said that it has no interest in broadcasting, it has invested heavily in areas where the lines between broadcasting and communications blur.

NTT is hoping to be the missing (up)link for digital TV broadcasts. For example, last August NTT East, along with Sky Perfect, established a new company called Data Network Center to provide customer management services for broadcasting companies. With its services, charges incurred by the customer on interactive SKY PerfecTV! programs could be tacked onto the viewer's phone bill. However, as high local phone rates have stifled Internet use in Japan, consumers would unlikely find interactive TV services that rely on these same phone rates attractive.

Consumer electronics makers also stand to gain from digitization. The Japan Electronics and Information Technology Industries Association forecasts 63 million digital TV sets and tuners will be in use by 2010, when analog broadcasting is scheduled to end.

For the time being, manufacturers are focusing on digital TV tuners, which allow reception of digital broadcasts through regular TV sets, rather than the much more expensive digital TV sets. Because of high development costs, the only companies producing their own image-processing semiconductors for digital TVs are Matsushita Electric Industrial (6752 or MC), Toshiba (6502), Sanyo Electric (6764 or SANYY), and a joint venture between Sony and NEC (6701 or NIPNY). Matsushita and Toshiba also plan to collaborate with Sony and Hitachi (6501 or HIT) to develop semiconductors for the new 110°CS system.

Few consumers in Japan see the merits of digital TV. But like it or not, their TVs will be going digital within the decade. And interactive TV has its fair share of doubters. But then who would've guessed that "passive" viewers would ever order goods hawked on TV to the applause of an unnaturally enthusiastic studio audience?