Implementation of wide-screen and high definition television in the context of digital broadcasting

Implementation of wide-screen and high definition television in the context of digital broadcasting Volume 1 - Final report December 9, 2004 Vincent Létang Robert Taylor Richard Womersley L Atrium 6, place Abel Gance F92652 Boulogne Billancourt Cedex Tél. : 33 (0)1 46 94 45 22 Fax : 33 (0)1 46 94 45 99 E-mail : contact@bipe.fr www.bipe.com EUROSTRATEGIES 2004

Table 1 INTRODUCTION...3 1.1 Context... 3 1.2 European Commission action and the objectives of the current study... 7 1.3 Eurostrategies approach... 9 2 WIDE-SCREEN TELEVISION...11 2.1 Current situation throughout Europe... 11 2.2 Broadcasters views and behaviour facing wide-screen opportunities... 20 2.3 How far does wide-screen household penetration depend upon wide-screen broadcasts?... 23 2.4 Conclusions on wide-screen... 25 2.5 Recommendations on wide-screen TV... 27 3 HIGH-DEFINITION TELEVISION...29 3.1 Current situation... 29 3.2 The pivotal question of a chicken-and-egg transition... 30 3.3 Production and reception components start to switch HD... 31 3.4 Broadcasting side: the bandwidth bottleneck?... 32 3.5 Conclusions on HDTV... 37 3.6 Recommendations on HDTV... 38 4 CASE STUDIES AND BEST PRACTICES...40 4.1 HDTV: The come back of HDTV in France and the HD Forum... 40 4.2 HDTV : Navarro, a co-operation to switch from film to HD in TV production... 45 4.3 HDTV : HD-1, the first European HDTV channel... 49 4.4 HDTV : SES-Astra, HDTV as the next frontier... 52 4.5 Wide-screen : the UK Wide-screen Forum... 55 4.6 Wide-screen and HDTV: HBS and the 2006 milestone in sports production... 60 Deliverables of the Eurostrategies Study : Vol 1 : Main report (this document) Vol 2 : Annexes - Country reports - Technical aspects - Interviews conducted - Bibliography Vol 3 : Executive Summary EUROSTRATEGIES 03/12/2004 2

1 Introduction 1.1 Context 1.1.1 A new phase in the roll-out of digital TV The roll-out of digital television in European markets is still a process which is largely driven by pay-tv systems and services. But this market is giving signs of maturity in some EU countries 1, and there is anyway a limit to the penetration of digital TV which is achievable under a subscription-based system, offering premium or multi-channel TV. The aim of providing universal access to digital television will require other, complementary ways to convert households who will remain reluctant to sign up for premium services. This means that digital television either pay or free-to-view - will have to publicise and advertise its features to convince consumers to acquire the necessary equipment to receive it. Wide-screen pictures can be one of these features and improvements from traditional analogue 4:3 TV. Figure 1 : The three-step road to all-digital television Digital TV penetration 100% 3. Planned-forced conversion of remaining consumers (policy-driven) Penetration limit for pay TV (about 50%) 1. Automatic conversion to digital for pay TV subscribers (industry-driven) 2. Spontaneous adoption of free digital TV by consumer equipment (market-driven) Time Today Source: BIPE (Digital Switchover in the Member States) Market conditions have indeed changed from the time of the EC-funded wide-screen TV action plan (1993-1997). Some chicken-and-egg problems which led to market failure have now been solved thanks in part to the advent of DVD players. In the absence of wide-screen broadcasting in most Member States, there were few incentives for consumers to buy widescreen TV sets. DVD now ensures there is a plentiful supply of wide-screen content. Home video, through DVD mainly, has been a major driver for the adoption of wide-screen sets. Home video indeed, is predominantly used to watch feature films, and these are predominantly in native wide formats. Avoiding letterbox or picture reduction, wide-screen sets improve the home video experience. 1 In March 2003, only 15% of French non-subscribers said they were likely to subscribe to cable or satellite in the future. They were still 20% one year before (source: Ipsos). EUROSTRATEGIES 03/12/2004 3

There is market evidence that all new audiovisual features (DVD, wide-screen sets, home cinema sound systems) create cross incentives. In France, for instance, DVD player owners are three times more likely to be subscribers to digital TV, and five times more likely to own a home cinema sound system. Figure 2: DVD-players owner are more frequently pay-tv subscribers 40% 35% 30% 25% 20% 15% 10% 5% 0% Home cinema DVD players owners All households Digital TV Source : Médiamétrie Source: Eurostrategies from Mediametrie data If DVD players are to reach a similar maximum penetration level to VCRs (75% to 80% of households), which is likely, then a majority of households will spontaneously add wide-screen displays to their audiovisual equipment. Then, with a large installed base, digital pay-tv operators will have a greater incentive to offer wide-screen broadcasts to their subscribers. This means not only films (to match the DVD experience), but also live sports, documentaries and eventually all programming, including news and current affairs and talk-shows. This will allow them to stand out even more from analogue free-to-air channels, and may help them to attract subscribers who had not been convinced hitherto by the available multi-channel offering but might be interested by the comfort of wide-screen while watching movies. Many consumers buy DVD players because they are aware that DVD is superior to VHS in many aspects (image quality, sound quality, language choice, chaptering, attractive bonuses ), and because it has become as cheap as a VCR. Then they decide they also need better sound equipment to enjoy the full DVD potential, as well as a wide-screen receiver to fully enjoy the viewing experience (most DVDs are optimised to be played on wide-screen sets), and why not a large, flat display 2. Generally speaking, public expectations for quality rise through exposure to DVD quality. Then consumers figure out that their wide-screen set can be valuable for ordinary TV viewing too, as long as there are sufficient wide-screen broadcasts to be viewed. If digital TV operators (whether pay or free-to-view) offer wide-screen broadcasts, it can be an incentive for a wide-screen owner to adopt digital TV. 2 In the UK, the whole family of new screens (Large flat displays, whether LCD, Rear Projection or Plasma, which happen to be almost automatically wide-screen) accounted for 19% of all TV sales in May 2003, versus 7% in May 2002. Ten years ago 21 screen segment was dominant ; today 28-inch is the largest sector and 32-inch and 36-inch become more and more important. EUROSTRATEGIES 03/12/2004 4

If we consider a DVD-player owner, he/she might not see the point of taking out a digital pay- TV subscription. If he/she is a moviegoer, renting DVDs might be a better option, and make more economic sense. It may well be that DVD equipment may reduce the appeal of the multichannel/pay-per-view offerings in pay digital television. DVD drives 16:9 sets, but it could inhibit premium TV appeal. One could say the same of PVRs and VoD, which reduces the value of multi-channel bouquets and premium channels. This creates an even bigger necessity for broadcaster and pay TV operators to address widescreen set owners (who are frequently already DVD-equipped) with wide-screen broadcasts. Wide-screen could (should) become an element of competition between pay-tv players (i.e. satellite vs. cable vs. DTT, as there is now one actor per delivery mechanism in each country), and between pay and free-to-air television (in the battle for audience share). The following figure illustrates the positive impacts. Figure 3 : Systemic relations between audio-visual equipments and services DVD players/recorders Home cinema sound systems Flat displays Wide-screen TV sets Digital TV Wide-screen or HD broadcasts Core of the study Digital quality Multichannel & Premium programming (often PayTV) Interactivity & DVR functions Source: Eurostrategies 1.1.2 Wide-screen and digital TV Now that home video equipment has largely solved the chicken-and-egg problem, there seems to be no further major obstacles to developing wide-screen programming for television broadcasts. The installed base exists; wide-screen is a feature with clear viewer appeal. A virtuous circle could start. Wide-screen format should be able to play its role in the cluster of digital TV technologies, contributing to drive analogue broadcasters and consumers to an all-digital television future. EUROSTRATEGIES 03/12/2004 5

Several obstacles might remain, however, which could reduce the pace of wide-screen market development and its impact on digital TV development. The first is the absence of competition. After business failures and mergers, most European countries are now experiencing a monopoly situation in digital multi-channel television by satellite. Most consumers can subscribe to one satellite operator or one cable operator, depending on their location; only a minority of some consumers really have a choice. Moreover, digital platform and digital channel publishers are frequently controlled by the same operators as free-to-view terrestrial channels, which potentially reduces the competition between pay-tv and free-to-view television for audience share. Then operators may hesitate to make the necessary investments to offer more wide-screen programming, in a context where there is no direct competitor left to fight for market-share. Besides, the market is nearing saturation. Additional subscribers are becoming increasingly expensive to acquire in marketing terms. The absence of competition can be a cause of market failure. Without competition, the supply side fails to offer what consumers want or need (in our case wide-screen programmes). If this happens, incentive regulation can be a remedy. The second involves incorrect views on wide-screen (especially broadcasting costs). The European Commission suggests in the terms of reference for the present study that there are still misperceptions over costs among industry players, due to bad or out-of-date - information. If this is true, then this misinformation and the absence of competition could combine to create a strong barrier to further wide-screen development. Misinformation and incorrect views can also cause market failure: decision makers overestimate costs and underestimate potential profits. In this case, again, policy actions are needed. If these potential remaining obstacles are identified in individual national markets, the policy remedies will not necessarily be the same. When competition is too weak for market forces to fully play their role, policy options may include regulatory obligations like Such-and-such public broadcaster must dedicate x% of broadcasts to wide-screen format, or Digital channels must commit themselves to dedicate y% of broadcast to wide-screen format to qualify for a licence (e.g. on DTT platform). When there is a problem with information on costs or wide-screen appeal, policy options should start by disseminating accurate information among market players. And this information should include, of course, best practices from implementation policies in other countries. When other specific obstacles arise in one market (e.g. technological problems like signalling systems or standards issues) then specific answers should be suggested. National Regulatory Authorities (NRAs), for one, should play a role in promoting good conduct and encouraging innovation in an incumbent-dominated FTA market or in a possibly single player pay-tv environment. EUROSTRATEGIES 03/12/2004 6

1.2 European Commission action and the objectives of the current study The European Union has been involved in promoting the development of wide-screen television market since the early 1990s. The Wide-screen Television Action Plan ran from 1993 and 1997. With a budget of 228m, it supported the production and broadcasting of wide-screen programmes by funding 50% to 80% of the additional cost generated by the format. The objective was to break the chicken-and-egg situation (no 16:9 programmes produced if no wide-screen sets to receive them and vice-versa). According to the evaluation study presented by IDATE 3 in November 2000, the wide-screen television market at the end of the Action Plan had achieved critical mass in only three countries (France, Belgium and the Netherlands). But wide-screen subsequently reached critical mass in the UK too 4. However, at end-2000, only 3.5% of European households were equipped with wide-screen receivers, with strong differences between countries (Netherlands 10%, France 5%, Germany 1%). At the time, the development of wide-screen broadcasting and wide-screen sets was minimised by a series of technical and economic obstacles: Lack of consumer awareness and hesitations due to a variety of systems and standards; Late availability and high prices of wide-screen sets in some countries; Lack of concerted promotion effort in the industry and along the value chain; Lack of involvement of some member states to support wide-screen television (and the Action Plan) at national level. Since then, the television landscape in the European Union has changed considerably. Wide-screen television itself, which has significantly developed, has now become a major issue for the development of digital television (DTV) over Europe, beyond its current adoption by the limited community of advanced television users (via digital Pay-TV or DVD). In this present situation, the European Commission has developed a two-phase strategy to resume promoting wide-screen TV, as a strong catalyst for the roll-out of DTV, and as a means of getting DTV into every European television household. Firstly, in early 2004, the Commission issued a Working paper 5 in order to assess actions to date at the EU level and to encourage member states to continue the process. Then in the second phase, the member-state authorities and market players should develop their own wide-screen actions, tailored to their specific contexts (maturity and obstacles in free-to-air TV, digital switchover, digital service diversity, home video and programmes industry). 3 Wide-screen TV Action Plan evaluation report (http://europa.eu.int/comm/information_society/evaluation/index_en.htm#169). 4 In November-December 2002, wide-screen colour sets accounted for 80% of the total market value in the UK. Since the beginning of 2003, more nearly 100% of sets larger than 28 sold in the UK are wide-screen (source : GFK). 5 The contribution of wide-screen and high definition television to the global roll-out of digital television. (http://europa.eu.int/information_society/topics/ecomm/useful_information/library/commiss_serv_doc/index_en.htm). EUROSTRATEGIES 03/12/2004 7

In the context of the second phase, the present study seeks to improve information and awareness concerning the role wide-screen television (i.e. wide-screen sets and wide-screen broadcasting) can play in the roll-out of digital television in each member state. It places particular emphasis on identifying the most suitable policy strategies and actions, and on encouraging policymakers and broadcasters to take relevant measures for the development of wide-screen television. Figure 4 : Objectives and rationale of the study Help develop DTV penetration beyond its current extent Encourage policymakers and broadcasters to use the wide-screen feature to achieve this top-level goal Improve their information and awareness on the potential of wide-screen to drive DTV Provide them with best practices and a toolbox of (regulatory) actions that may be efficient to overcome adoption obstacles in the various market contexts The Study deliverables (reports) The Brussels Workshop Source: Eurostrategies EUROSTRATEGIES 03/12/2004 8

1.3 Eurostrategies approach To achieve the objectives of the terms of reference, Eurostrategies applied the following methodology. Three different types of inputs were implemented to gather qualitative and quantitative information: In-depth interviews with all types of players 6. The following chart shows the variety of industry players involved in the value chain, who potentially play a role in the switch to wide-screen and/or high definition TV through their buying power or technical position. Eurostrategies interviewed specialists in most of these categories. In addition, Eurostrategies undertook about 80 interviews with players from all EU countries: (I) at least five-to-six interviews for each of the biggest markets (Germany, UK, France, Italy, Spain, Poland, The Netherlands and Belgium), (ii) interviews or questionnaires with regulators or public broadcasters in smaller countries. Lastly, Eurostrategies tried to meet not only technical managers but also people in charge of global policy/strategies within broadcasting organisation e.g. Market data: Eurostrategies has gathered Europe-wide data and local data for consumer electronics penetration rates (especially. for wide-screen TV sets), digital TV penetration, wide-screen broadcasting output, etc. When relevant data was insufficient, or unavailable, Eurostrategies made its own estimates. Desk research on local industry initiatives, and the promotion of wide-screen programming in TV-guides. Figure 5: General approach proposed by Eurostrategies Interviews with decisionmakers (industry players, policymakers) Desk research Market data Snapshot of views on wide-screen among players groups Overview of current and planned wide-screen implementation + Best practices Country profiles Report Workshop Source: Eurostrategies 6 See detailed list of the interviews in annex. EUROSTRATEGIES 03/12/2004 9

Figure 6: Players involved in the issue Semi-conductors manufaturers International programme rights buyers, DVD publishers Broadcast electronics Sports rightsholders and producers Programme producers Technical Service Providers Consumer electronics manufacturers Advertising Broadcasters Consumer electronics retailers Digital PayTV operators Transmission Service Providers Consumers Viewers Source : Eurostrategies Broadcaster Producer Figure 7 : Interviews completed Cable Operator Manufacturer, Retailer Regulator Audiovisual Service Provider FR 9 2 4 6 21 IT 4 1 1 6 UK 4 3 7 ES 2 1 3 6 DE 3 1 2 6 NL+BE 3 1 1 1 2 8 PO 2 1 2 5 Other EU 1 1 14 16 Europe 1 3 1 1 6 Total 29 4 2 11 23 12 81 Total Source : Eurostrategies EUROSTRATEGIES 03/12/2004 10

2 Wide-screen television 2.1 Current situation throughout Europe 2.1.1 Reception: wide-screen receivers The penetration levels of wide-screen TV sets in the European Union vary significantly from one country to another. The European average can be estimated at 20% at end-2004. EU member states fall into three main groupings. At the end of 2004, five countries were well above the average : UK (with some estimates as high as 40%), followed by the three Benelux countries and France. A second group of 11 countries had penetration levels between 10% and 20%. This group includes some big markets like Germany, Italy, and Spain and smaller ones like Portugal and Ireland. It is perhaps surprising to find the three Nordic Countries (affluent societies, prone to adopt new technologies) within this group at relatively low levels. The last group, with penetration below 10%, typically includes the countries with less advanced TV industry and below-average purchasing power. 16:9 screens in retail are more publicised within big, high-end segments (albeit 16:9 products also exist in small-size segments) ; so, just because this up segment is under-represented in low-revenue countries, 16:9 sets are less frequent in sales. But even in this group, growth rates in sales for the last two years indicate that market penetration is on track to reach 50%, at least for some of them, before the end of the decade. Figure 8: Penetration rate of wide-screen TV sets in European households (2004) 40% Penetration rate, in % Group 1 (Early Adopters / Leaders) 30% 20% Group 2 (followers) Group 3 (late adopters) 10% 0% United Kingdom Netherlands Belgium Luxembourg France UE 25 Austria Cyprus Germany Spain Malta Portugal Finland Sweden Ireland Italy Denmark Greece Czech Republic Slovenia Hungary Poland Slovak Republic Estonia Latvia Lithuania Source : BIPE from OMSYC data EUROSTRATEGIES 03/12/2004 11

It is important to bear in mind, that 16:9 sets are frequently high-end products and serve as principal sets or living room sets. However, although the share of LCD or plasma wide-screen sets is growing, the majority of widescreen sets sold today are still CRT models, with a starting price in some EU countries of 300-400. Affordability is no longer, therefore, a major obstacle to wide-screen access. In the future, the growth of CRT 16:9 sets will continue, but at a slower rate than that for LCDs or plasma screens. By the end of 2004, all countries had an estimated penetration of between 3% and 37%. On the basis of current sales projections, expected penetration levels are expected to be between 40% and 75% in 2010 (see next chart). Broadcasters sometimes argue that their programmes have to address all the TVs in the home, not only the principal set, and that secondary sets (which account for a significant share of viewing today) remain predominantly 4:3. This is true for the time being; but with the average lifespan of a TV being 7 to 10 years in the EU, the first 16:9 sets acquired in the early 2000s are going to be replaced as main sets between 2007 and 2010. Many will be transferred to other rooms in the house and to second homes - which will then be equipped with 16:9 sets too. EUROSTRATEGIES 03/12/2004 12

Figure 9 : Penetration rate of wide-screen TV sets (2003-2004) Country 2003 2004 United Kingdom 28% 37% Netherlands 28% 34% Belgium 26% 33% Luxembourg 25% 32% France 21% 28% UE 25 14% 20% Austria 13% 19% Cyprus 12% 17% Germany 11% 17% Spain 11% 16% Portugal 10% 15% Malta 10% 15% Finland 8% 13% Sweden 8% 12% Ireland 7% 11% Denmark 7% 11% Italy 7% 10% Greece 5% 8% Czech Republic 5% 7% Slovenia 5% 7% Hungary 5% 7% Slovak Republic 4% 6% Poland 4% 6% Estonia 3% 5% Latvia 3% 4% Lithuania 2% 3% Source : Eurostrategies EUROSTRATEGIES 03/12/2004 13

Figure 10: wide-screen sets penetration rate in European Union (25 countries) 60% 50% Penetration rate Forecast 40% 30% 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source : Eurostrategies from OMSYC data Figure 11: Wide-screen set penetration rate evolution (1996-2010) 80% 70% Penetration rate Forecast NL FR DE 60% 50% 40% HU IT GR 30% 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source : Eurostrategies based on OMSYC estimates EUROSTRATEGIES 03/12/2004 14

2.1.2 Production and broadcasting : wide-screen output Here we must monitor separately: Wide-screen transmission of wide-screen programmes, which is delivered through digital TV or analogue PALplus. This is sometimes referred to as native 16:9 or full 16:9 ; The broadcasting of wide-screen programmes in 4:3 with letterboxes. As at mid-2004, the output of wide-screen broadcasting remained low in Europe. Beyond the UK, the Netherlands, and Belgium the number of «full 16:9» channels is extremely low. There are two 16:9 channels in France (Canal+ 16:9 and CineCinema), 1.5 in Italy (Sky Cinema 16:9 and Sky Sports 3), none in Spain. Letterbox output Beyond full 16:9 broadcasts and channels, the supply of letterbox programmes can match 16:9 sets owners and create an incentive to others, as the viewer is enabled to zoom into the letterbox image to fill the entire screen (though losing resolution). Letterbox can accustom consumers to cinema-style screen, including for other genres, in a transition period, but it should not be a substitute for real wide-screen broadcasting (as is happening in France or Italy). It is hard for manufacturers and retailers to sell wide-screen sets on the premise that people will get better quality if image resolution is worse than in 4:3. 16:9 letterbox programming accounts for a minority of output on 4:3 channels. Nevertheless the growing output of 16:9 programmes leads to a growing percentage of letterboxes on air for several genres: cinema of course, but also documentary, primetime TV fiction and even some talk shows. Fiction in particular, is more and more broadcast with thin letterboxes, in 14:9 aspect ratio. This ratio is a good compromise for mass market free-to-air channels because : Among 4:3 TV owners, thin letterboxes reduce the level of discontent among the widescreen-averse and gives a cinema look to TV fiction; It allows 16:9 TV owners to zoom into the picture and fill their screen, with a slight loss of definition. Free-to-air channels, and commercial ones especially are extremely cautious with their audience. If a channel like TF1 has increased on purpose the output of letterbox fiction, it is not to please directors of photography, but only because they think it globally increases consumer satisfaction and potential audience. Advertising Advertising production, having big financial possibilities, is often said to pioneer future trends in production (new aesthetic approaches, special effects, new equipments etc). If this is true, one must admit that 16:9 aspect ratio seems to have already won the battle for acceptance. In the UK, ITV advertising switched to wide-screen as early as 2000. All ITV ads now are 16:9. In Belgium, the bulk of advertising shown on the two channels of the main commercial broadcaster VTM are in 16:9. On 4:3 generalist channels in Italy or France, 25% to 50% of EUROSTRATEGIES 03/12/2004 15

advertising spots are shown letterbox. One legacy reason is that films are shot in 35mm and cinema aspects ratios (1.77, 1.85), but this was always the case. The new thing is that the cinema aspect has become fashionable and modern and therefore interesting for branding purposes. Many advertisers (but not all of them) now accept the recommendation from advertising agencies to produce and broadcast a commercial spot in wide format. There are signs of this beyond advertising. In Italy, the free-to-air information channel La Sete, uses letterboxes on purpose, to give this look to its talk shows, knowing perfectly that most viewers only have 4:3 sets. Most European broadcasters just adapt to their advertising clients requirement; nevertheless, the British example shows that they can also encourage advertisers to make the leap without upsetting their market. Sports On the other hand, two key contents, news and live sports, are still produced and broadcast almost exclusively in 4:3 almost everywhere in Europe. The UK and Belgium (Flanders) being the main exceptions. Letterboxes are out of the question for live sports, so that it has to be covered by: double shooting (two sets of cameras) which implies considerable technical and financial problems; single shooting with 16:9 cameras and cameramen trained to keep the core of the action (incl. of course the ball) within a 4:3 frame. Option two was for long considered too risky, and option one too costly. Since the advent of digital TV, major sports events have been only partially shot in 16:9. For instance, the football World Cup 1998 had double shooting for a selection of matches, and these images had little distribution in Europe beyond an ad hoc premium channel on the DTV platform TPS. That is why the decision from HBS to produce the whole 2006 World Cup in 16:9 HD is a major milestone 7. It eliminates the necessity for simulcasting a second feed, which is unsustainable in the long term for reasons of cost and technical inferiority compared with the main feed. 7 See case study on HBS. EUROSTRATEGIES 03/12/2004 16

Figure 12: Snapshot of wide-screen broadcasting and programming across Europe Free-to-air generalist channels Approx share of WS programming BBC 1 & 2 (digital, full 16:9) 90% ITV (digital, full 16:9) 80% VRT (Flemish PSB) (PALplus) 90% VTM (Flemish commercial) (PALplus) > 50% ARD (PALplus) 8% 3Sat (PALplus) 14% Arte (LT) 20% Publieke Omroep (Netherlands Public Broadcasting) (PALplus) 17% Pay Premium Channels Approx share of WS programming Canal+ 16:9 France (digital, full 16:9) 90% CinéCinéma France (digital, full 16:9) 100% Sky Movie 16:9 UK (digital, full 16:9) 100% Sky Cinema 16:9 Italy (digital, full 16:9) 100% Specific ad hoc HD channels HD-1 (digital) 100% Letterbox output in 4:3 broadcasting Approx share of WS programming France 2 & 3 (France) About 10% (films, some drama, 20% of ads) Canal+ (France) 37% (films, documentaries, not sports) La Sete (Italy) >50% TF1 (France) 0% (TV guides) but probably 20% (cinema + primetime fiction) Source: Operators, Eurostrategies estimates, TV guides EUROSTRATEGIES 03/12/2004 17

2.1.3 Very varied situation across Europe The following chart summarizes the situation of reception and broadcasting throughout the 25 EU countries. Country UK 16:9 sets penetration (end 2004) 38% (more than 2m 16:9 set sold annually since 2002) Netherlands 35% (48% of all TV sold in 2003) 16:9 output and initiatives Broadcasting : early involvement from pubcaster. All BBC output in 14:9 LB on analogue, and full wide-screen on digital (incl. DTTV). All ITV advertisements widescreen since 2000. Several wide-screen channels on Sky. Policy : UK Wide-screen Forum all-industry led useful initiative Broadcasting: significant amount of pubcasters analogue programming (about 17% schedule, 260 h per month) in wide-screen through PALplus. Non-involvement of commercial broadcasters Policy: 16:9 implemented and monitored by Publieke Omroep. Next step: migration to digital cable and DTTV. Luxembourg 32% Broadcasting: No WS broadcast from the main local channel Belgium 33% Broadcasting: VRT, the Flemish pubcaster, produces 100% of its own programmes in 16:9 and broadcasts them in PALplus since the end of 2002 (about 15% on RTBF).Commercial broadcaster VTM provides bulk of programming and advertising spots in 16:9 France 28% (21% of units sold in 2003, 37% among 24 + sets) Broadcasting: several DTV wide-screen channels in late 90s now extinct ; today 2 WS channels in Canal+ Group Production: Significant part of primetime fiction produced WS and broadcast 14:9 letterbox. Policy : No public monitoring, no further implementation foreseen from TV players. Austria 19% Broadcasting: No channel broadcast in 16:9. Very few letterbox programming Policy: Public broadcaster ORF remains committed to 16:9 and is upgrading equipment for wide-screen. Spain 17% Broadcasting: no DTV wide-screen channels after Canal+ Panoramic stopped ; Production : 4 :3 dominant incl. For football. Policy : No further implementation foreseen. Cyprus 17% Broadcasting: No channel broadcast in 16:9. Little letterbox programming Policy: no monitoring of broadcasting, no specific wide-screen plan. Germany 16% (16% of units sold in 2003) Broadcasting: early implementation from pubcasters with PALplus, but slipped back to letterbox since then. Production: the 2006 Football World Cup in Germany will be entirely produced in 16:9 : big driver for broadcasting and equipment. Policy : both public broadcasters are committed to 16:9 development Malta 15% Broadcasting: No channel broadcast in 16:9. Little letterbox programming Policy : no monitoring of broadcasting, no specific wide-screen plan. Portugal 15% Broadcasting: No channel broadcast in 16:9. Little letterbox programming Policy : no monitoring nor specific policy is lacking but there is no specific wide- EUROSTRATEGIES 03/12/2004 18

screen channel or wide-screen broadcasts. Sweden 13% Broadcasting: One public service channel in wide-screen. Policy: No public monitoring, no further implementation foreseen from TV players. Finland 13% No wide-screen channel, but significant letterbox programming on pubcaster YLE Ireland 11% Broadcasting: No WS broadcasting beyond that of Sky. Very little LB output Policy : No public monitoring, no further implementation foreseen from TV players. Italy 11% Broadcasting: 1.5 WS channel on Sky Italia (cinema, football). No further implementation foreseen. Production: significant among of wide-screen (incl. ads). Football in 4:3 except some major events (double prod) Policy : No further implementation foreseen. Denmark 10% Broadcasting: No channel broadcast in 16:9. Policy: No public monitoring, no further implementation foreseen from TV players. Greece 8% Broadcasting : No channel broadcast in 16:9. Policy : no monitoring nor specific policy. Czech Republic 7% Broadcasting: No channel broadcast in 16:9. Policy : no monitoring nor specific policy Hungary 7% Broadcasting: No channel broadcast in 16:9. Policy: no monitoring of broadcasting, no specific wide-screen plan. Slovenia 7% Broadcasting: No channel broadcast in 16:9. Policy : no monitoring of broadcasting, no specific wide-screen plan. Poland 6% Broadcasting: TV Polonia, the public broadcaster s satellite service, transmits some 16:9 output in PALplus. Policy : no monitoring, no clear policy to go further. Latvia 4% Broadcasting: No channel broadcast in 16:9. Policy: no specific wide-screen policy Estonia 3% Broadcasting: No channel broadcast in 16:9. Policy : no specific wide-screen policy Lithuania 3% Broadcasting: No channel broadcast in 16:9. Little letterbox programming Policy : no monitoring nor specific policy is lacking but there is no specific widescreen channel or wide-screen broadcasts. Slovakia 3% Broadcasting: No channel broadcast in 16:9. Policy : no monitoring of broadcasting, no specific wide-screen plan. Source : Eurostrategies EUROSTRATEGIES 03/12/2004 19

2.2 Broadcasters views and behaviour facing wide-screen opportunities 2.2.1 Drivers and incentives For all the broadcasters that we have interviewed, 16:9 is clearly considered to be the future default aspect ratio of television. All broadcasters think that, in the long term, nearly all TV programmes will be produced and broadcast in 16:9 and that they will have to follow the trend. Few broadcasters question the idea that 16:9 is globally an improvement of television experience. Broadcasters all say they are aware that wide-screen set penetration is now rapidly growing. British and Dutch and Belgian best practices have shown that it is possible to migrate to 16:9 without upsetting the public. The proactive policy from the BBC and, to a lesser extent, from ITV and the Dutch and Belgian public broadcasters, can be considered as «best practices». While one country, the UK, has incorporated a 16:9 dimension into its digital switchover, the others, Netherlands and Belgium, have developed analogue wide-screen TV (PALplus) given that decisions on digital TV are essentially in the hands of cable operators in these countries. The intention is to carry wide-screen over to digital. Both approaches are sustainable. It must be noted that it is precisely these three countries where the penetration of 16:9 TV sets is the highest in Europe. The degree of causality between the amount of 16:9 broadcasting offered and 16:9 set penetration may be difficult to quantify, but the former has no doubt played some role in the latter. Manufacturers, for one, strongly support this notion. The DVD revolution is often mentioned as a key factor but we can observe that due to dramatic price drops, DVD penetration is now strong everywhere in Western Europe while 16:9 screen penetration continues to vary sharply. The next chart illustrates this. The wide-screen output or offer is estimated qualitatively, from Eurostrategies survey. Figure 13: Relation between wide-screen broadcasting and wide-screen equipment 40% 16:9 TV set (households penetration) 35% 30% 25% 20% 15% 10% 5% ES MT PT SE DK CZ GR HU EE LV SK SL LT FR CY IT IE FI PL AT DE UK LU BE NL 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 16:9 broadcasting Source : Eurostrategies EUROSTRATEGIES 03/12/2004 20

The new way of producing the international feed during the next football World Cup in 2006 (a 16:9 HD feed for all matches), is a powerful indicator, and will help broadcasters to make their move in one strategic genre: sports events. Besides, this will bring technical service providers (esp. OB vans) to upgrade their equipment in order to meet HBS requests. The new equipment acquired and know-how developed will have an effect beyond football and sports production. 2.2.2 Obstacles Though most broadcasters, when asked, say there are no structural obstacles to wide-screen production, most of them do very little to accelerate the process, and the words wide-screen or 16:9 are sometimes hard to find in their official documents or statements (annual report, strategic planning, etc). Beyond interesting initiatives (mainly from public broadcasters) in Netherlands, Belgium and the UK, most broadcasters are not proactive on 16:9. Free-to-air players consider they should not take the risk of irritating 4:3 viewers, as long as they are still a majority. Unlike ITV, most free-to-air players consider that they cannot impose 16:9 on their client advertisers. In their relations to producers, broadcasters are neutral and passive in the best of cases (asking for instance a 16:9 and a 4:3 master from their producers just in case), with no official broadcasting policy 8. In some other cases, they are clearly anti-16:9. Only for fiction, is the 16:9 aspect ratio considered acceptable for 4:3 viewers in letterbox, because of the «cinema aspect» (see the production section above). Though aware of a growing penetration of wide-screen TV sets, most broadcasters and regulators do not monitor it closely. There are exceptions. It is a sign of a lack of interest that broadcasters do not usually monitor the output of wide-screen (which is often letterbox) programming on their channels and their markets. When there are no official figures (i.e. everywhere except in the NL), Eurostrategies tried to estimate the amount and proportion of letterbox programmes, through interviews, analysis of TV guides or random viewing. TV guides are usually extremely poor or confusing when flagging programmes in 16:9; For instance, no distinction is made between real 16:9 and letterbox. Many broadcasters have a critical 50% penetration ceiling in mind, but they do not know when this ceiling is likely to be reached. As a matter of fact, when asked, their guesstimates are frequently below actual figures. And even when broadcasters have a clear vision of reception trends, they don t have a precise policy, at company level, on what to do and when, about 16:9. There is evidence of a lack of clear understanding at strategic level, and little effort sometimes to coordinate views inside the company between (i) technical departments, (ii) programme departments (esp. fiction and sports), (iii) marketing and publicity departments. Some 16:9 experiments or ventures did not last longer than the subsidies which funded them. Others, a minority, have done. As for digital platforms, 16:9-dedicated channels or 16:9 versions of existing channels are often not considered appealing enough to justify the additional cost of transmission. But, again, no broadcaster quoted any recent consumer research on this. There is sometimes a preconception that 16:9 cannot really be a competitive asset. 16:9 suffers from other issues that are considered to be more urgent, «hotter» or just more fashionable: move to digital, move to HDTV, ADSL TV, 5.1 home cinema sound, content strategies, marketing strategies. 8 When we buy documentaries, wide-screen format may be a «plus». But, on a general level, it is not a priority to buy and broadcast wide-screen programmes. We don t care, we don t influence our producers to use this format. (A Spanish Broadcaster) EUROSTRATEGIES 03/12/2004 21

In less affluent countries, such as the new member states, the switch to digital TV is a greater challenge due to the low quality of some infrastructures. Then 16:9 programmes and broadcasting are sometimes not on top of agenda. In any case, wide-screen set penetration is well below European average. Lastly, it is sometimes argued, particularly in France, that HDTV will «do the job» of making the switch to 16:9 (see next section). Beyond initiatives from some public broadcasters, it appears that no consistent national policies were adopted to follow up the EC Wide-screen Action Plan which took place in the 1990s. Despite their efforts, retailers and manufacturers haven t succeeded in convincing regulators and broadcasters to implement a real 16:9 policy. The Wide-screen Forum in the UK, that helped to build a common vision of the future of TV, had no real equivalent in other countries so far. Then there is the question of apparent consumer apathy (or at least consumer tolerance). In most countries, the penetration level of wide-screen TV sets far outstrips the amount of available wide-screen broadcasting offered to consumers. Yet the latter show a considerable degree of patience in accepting the status quo. Even in countries where consumers are generally outspoken, like Germany and the Netherlands, there seems to have been little organised complaint. Flat screens in particular are being purchased for their aesthetic appearance as for their ability to deliver 16:9 format broadcasting. How long with consumer patience last? German public broadcasters, for one, expect it to last long enough for the migration to 16:9 to be phased in with the transition to DVB-T. One problem here is a lack of research/consultation of consumers. In some cases, broadcasters do undertake some research (eg BBC or TVP in Poland). NRAs just passively accept what incumbent broadcasters tell them without undertaking any independent research. Even if they did, many would probably feel a need to protect - or overprotect - the average consumer, i.e. the 4:3 installed base. This inertia only encourages the status quo. 2.2.3 Relations between HDTV and 16:9 issues For some interviewees, HDTV postpones or reduces the relevance of the 16:9 issue. This is typical of broadcasters views in some countries like Italy or France. This view concerns commercial but also public broadcasters. They think that the combination of the now established purchasing patterns of consumer electronic equipment and HDTV broadcasting will lead naturally to 16:9 because: On the reception side, 16:9 has driven so far by DVD, design and high-end bundling (the fact that all high-end products are 16:9 on most markets), and these factors will continue to drive the purchase of 16:9 sets, with or without 16:9 broadcasting. Most flat screen TVs, that will be the next standard for living room sets, will be wide-screen. On the production and broadcasting sides, broadcasters like to stress that HDTV is a «native» wide-screen technology. There are already 16:9 source material and no technical difficulty to switch rapidly to a greater share of wide-screen production whenever required (equipment is wide-screen-ready). Thus, 16:9 will arrive automatically all along the technical and value chain, as a free rider, without needing to be the object of a particular policy or action. EUROSTRATEGIES 03/12/2004 22

Manufacturers are divided over the question. A majority of manufacturers say that now is still the time to address the 16:9 issue now in SD. Yet some manufacturers back the scenario of a rapid switch to HDTV, which will bring the 16:9 dimension with it anyway. Broadcasters are also divided upon the timing and priorities, but some of them are actively preparing to migrate to 16:9. The time still needed to introduce HDTV and achieve a critical mass of programmes and the high price of HD receivers may mean that broadcasters are being optimistic when they consider that HDTV will do the job. Indeed, if they wait for HDTV, they may well miss the 50% ceiling of wide-screen sets penetration (which is somehow a leitmotiv) and leave home video publishers with their current monopoly on wide-screen video. Besides, it is likely that 16:9 homes will be a significant target for future HD services; the penalty for 16:9 owners is that they will need a more expensive decoder box with downconversion to SD. Nevertheless, it is very clear from our research that some countries are committed to bringing in 16:9 before moving to HD (e.g. German, Dutch and Belgian pubic broadcasters) while others will move to HD first. Both approaches are sustainable. 2.3 How far does wide-screen household penetration depend upon widescreen broadcasts? What percentage of household penetration can be achieved for 16:9 purely through DVD, without any 16:9 broadcasting? If we look at the past, wide-screen 16:9 sets did enjoy a good initial take up as early as 1999-2000, in countries where there was virtually no wide-screen broadcasts. Consumer electronics companies are lobbying in favour of more wide-screen content/broadcasts (e.g. in France, SIMAVELEC). They, at least, believe 16:9 broadcasts (and the promotion and publicity for them) are a necessary driver they need to achieve a faster and/or larger penetration for 16:9 sets. After all, not everybody is interested or equipped in home video, whereas virtually everybody has a TV set. And, indeed, 16:9 sets penetration happens to be particularly strong in the countries where 16:9 broadcasts are a reality (UK, Netherlands and Belgium) (see chart in previous section). There is no doubt that, ceteris paribus, 16:9 broadcast offerings help drive the purchase of16:9 sets. For instance, a recent survey by Premiere, the German pay-tv channel, found that the availability of Dolby Digital sound and 16:9 pictures was a prime one reason why subscribers bought pay-per-view content. Another question is how far home video alone can drive the 16:9 display market in the absence of dedicated wide-screen broadcasting? Currently consumer trends indicate that: (i) DVD players are going to be ubiquitous (even more than VCR) before long, (ii) (iii) (iv) Consumers are of course more likely to buy a 16:9 TV if they do have a DVD player, but the aesthetics of flat screen displays is another positive factor. in many countries where 16:9 broadcasts are non-existent, electronics manufacturers and retailers do promote wide-screen flat displays as the default (if not unique) platform for high-end products, CRT 16:9 sets continue to sell well in many countries. EUROSTRATEGIES 03/12/2004 23

For all these reasons, we tend to think 16:9 can take a significant share of the market for main sets without significant amount of wide-screen programmes. But the following chart shows that today, with similar DVD player penetration in 2003, Belgium has twice the wide-screen set penetration of Sweden, and the Netherlands has twice the penetration rate of Spain. This indicates, at the least, that there are other factors that explain and drive wide-screen penetration, and broadcasting is clearly one of them. Figure 14 : DVD penetration and wide-screen sets penetration across Europe 16:9 TV set penetration 40% 35% 30% BE NL FR LU UK 25% 20% 15% 10% 5% LT PL CZ HU EE FI GR IT IE PT SE DK AT ES DE 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% DVD player equipment Source : Eurostrategies from various sources EUROSTRATEGIES 03/12/2004 24

2.4 Conclusions on wide-screen 1. About 20% of European households have a wide-screen TV set. The penetration levels vary sharply from 5% (in some new member states) to 35-40% (UK and the Netherlands). 2. By 2008, the global penetration is expected to be close to 50% in EU-25, and beyond 70% in the most advanced markets. 3. Among the drivers pushing wide-screen sets have been the complementarity with DVD and the aesthetic appeal of flat screen displays. Manufacturers and retailers have also played a leading role in promoting high-end TVs wide-screen format sets with higher margins. 4. By contrast, wide-screen broadcasting remains low in Europe. The level is significant in the three or four countries in which broadcasters (PSB mainly) and regulators conducted a proactive policy: UK, Netherlands, Belgium and to a lesser extent Germany. In the first one, wide-screen has come with digital TV. In the latter three, wide-screen has come in analogue, through the PALplus technology, which was the only option available to broadcasters in Netherlands and Belgium since the move to digital depends on cable operators. 5. In the top three countries for wide-screen receiver penetration, we find the three countries where the output of wide-screen broadcasting is by far the more significant. This suggests that a supply of wide-screen broadcasts and their active promotion are also effective drivers for consumer awareness and equipment purchase. 6. In Western Europe, costs are no longer the main obstacle mentioned by broadcasters or producers to develop a 16:9 policy. In some new EU countries, affordability is a general problem, but is not linked to the introduction of wide-screen as such. For them, wide-screen is not on the agenda, as the next step is migration to digital TV. There seems to be a limited awareness of the fact that the technical chain (production, post-production, broadcasting) is ready and capable of switching to full or at least partial wide-screen at marginal costs 9. 7. The main obstacles are sometimes real, sometimes in players minds (especially those of broadcasters): reluctance to educate viewers to 16:9 (including through letterbox in the transition period) and take any risk before the 50% or 75% ceilings for wide-screen set ownership have been reached; prevalence of the idea that viewers won t like some genres in 16:9; scepticism about 16:9 transmission as a real competitive advantage either in free-to-air or pay-tv; general and vague ideas about the guaranteed arrival of 16:9 in the long term, as a free rider alongside HDTV, which would justify a wait-and-see approach in the short term in for SD 16:9; still some transition costs (no new equipment but training needed for cameramen, for sports production for example 10 ) ; 9 «TVP has two studios which are fully digital, and many digital cameras (Sony/Panasonic) fully capable of working in the 4:3 or 16:9 ratios»(a Polish Broadcaster). 10 «Although big sports events (Euro 2004 football, the Athens Olympic Games, the World Cup football in 2006) are drivers for innovation, sports coverage (and news) will be among the last types of programmes to move to wide-screen» (A Dutch Broadcaster). EUROSTRATEGIES 03/12/2004 25