Cable, TV Groups Respond to Digital Ultimatum

Within days of a challenge by Federal Communications
Commission chairman William Kennard to finalize cable-compatibility and copy-protection
standards for digital televisions by April, sources in the cable and
television-manufacturing industries were optimistic last week about reaching a compromise.

Speaking at the Consumer Electronics Show in Las Vegas 10
days ago, Kennard told consumer-electronics manufacturers they face government-imposed
standards if they don't reach agreements with cable operators first.

Kennard said he had already asked his staff to start
rulemaking proceedings so government standards would be in place in case the industries
fail to meet the deadline.

"Your industry has still not come forward with a
definition of a cable-ready digital television," Kennard told television
manufacturers at the CES, noting that the FCC has been repeatedly calling for such
standards since 1994.

Cable Television Laboratories Inc. president Richard Green
said last week that the cable industry would do its best to wrap up
digital-television-compatibility issues by April 1.

"I would prefer that the industries involved solve
this problem among ourselves," Green said in a speech to the Washington Metropolitan
Cable Club. "We are very close, and I want to convey to the chairman our pledge to
work very hard to achieve a completed agreement before April."

Green echoed the optimism of Consumer Electronics
Association president Gary Shapiro, who said at the recent CES that the CEA welcomes
Kennard's challenge, and it has been calling for standards for years.

"The technologies involved are pretty
well-understood," Zenith Electronics Corp. senior vice president of technology
Richard Lewis said. "It's a matter of getting our heads together and getting it

Consumers who bought first-generation digital-television
sets over the past 14 months won't be able to connect them to digital-cable boxes once
they're equipped for high-definition television, though, because vendors did not
incorporate the "IEEE 1394" two-way digital connectors that cable set-top
manufacturers plan to build into their boxes.

A number of movie studios also want to add a
copy-protection technology called "5C" to the 1394 interface before they'll
provide content such as pay-per-view movies in perfect digital formats.

Lewis said Zenith wants to make sure consumers are left
with the same kind of functionality in digital televisions that they've become accustomed
to with analog, such as the ability to copy programming for time-shifting purposes.

He predicted that the industry would initially endorse 5C
copy protection, then evolve to other standards incorporating smart cards in the future.

Although some television manufacturers have proposed other
copy-protection standards, Kennard gave a nod to the 5C standard in his speech, which also
seemed to endorse 1394 as the interface of choice for digital televisions.

"The 5C standard seems to be the most promising
copy-protection technology out there now," Kennard said. "We must not let the
naysayers stop progress toward a solution."

The FCC has the right and the legal duty to step in with
standards if the industries involved do not finalize them on their own, Kennard said,
referring to the digital-broadcast-television rollout as a "market failure."

Shapiro took issue with Kennard's apparently off-the-cuff
choice of words that were not in Kennard's prepared statements.

"Of course it has not been a market failure,"
Shapiro said, adding, "Retailers ran out of product" during the recent holiday
season because there was more demand than supply.

Kennard blamed the conflicting business interests of the
industry players for stalling the discussions. Broadcasters want as many cable-ready
digital-TV sets deployed as possible to create larger viewing audiences for their
advertisers, he said.

Cable operators are worried about transferring too much
control over technologies such as electronic programming guides to televisions, he added.

He told his CES audience that TV manufacturers "have
the purest of objectives -- they just want to sell equipment that works and that the
consumers can afford."

Kennard added, "When I talk to the cable industry,
I'll change that" last line.

On the issue of compatibility standards, Kennard estimated
that the industries were probably 90 percent of the way to an agreement, but he's not as
sanguine about copy protection.

Green said last week that digital-TV sets without the 1394
interface and 5C copy-protection standard will not only fail to work with cable boxes, but
also with other digital home-video equipment -- another potential cause of consumer anger.

Green added that cable is at an impasse with the CEA
because certain CEA members want to build TV sets without 1394 or 5C to trim unit costs.

Shapiro defended TV manufacturers, saying that they have a
right not to have their program guides stripped out in televisions hooked up to cable. He
added that the group doesn't think the 1394 digital interface needs to be incorporated in
every set.

"These are not new issues," Shapiro said,
"and we have resolved a huge number of outstanding issues. There are only two main
issues left."

Lewis said alternatives to the 1394 interface, such as a
VSB (vestigial sideband) remodulator, could also allow digital televisions to connect to
digital-cable boxes. "On the lower end, consumers shouldn't be burdened with paying
for features they don't need," he added.

Green said that while CableLabs disagrees with the CEA over
1394 and 5C, it can't force television manufacturers to include the standards. "We
have agreed to disagree on this matter," he said, "as long as the sets are not
marketed as 'OpenCable-compliant or compatible' or 'cable-ready' or other misleading

Sony Corp. has already said that it plans to build 1394 and
5C into its next-generation digital-television sets and digital-cable boxes, starting with
an order scheduled to ship soon to Cablevision Systems Corp. Through its interests in
Hollywood studios, Sony also supports the 5C copy-protection standard for content.

"There may be a small niche for digital televisions
without a digital interface in the future," Sony spokesman Rick Clancy said.
"But with 70 percent of American households receiving television over cable,
certainly, cable and satellite [compatibility] have to be addressed."

Per FCC mandate, digital-cable set-top boxes with HDTV
interfaces must be available for retail distribution by July. But top consumer-electronics
retailers Circuit City Stores Inc. and Best Buy admitted that it would likely be a year or
more before those stores start to carry them in any real volume.

Top executives at both retailers applauded Kennard's

"Certainly, it would be hard not to be in favor of
finalizing a standard for copy protection," Circuit City president Alan McCollough
said during a CES panel, adding that content availability is key to driving any new

Best Buy president Brad Anderson agreed. "Anyplace
where our industry does not give clarity to the consumer dissipates enthusiasm for a
product," he said. "We should be very proactive" in finalizing the