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WHY JAPAN IS FACING A DELAYED DIGITAL D-DAY

If you think the picture for high-definition TV is blurry in the U.S., take a look at what's happening in Japan. Once leaders in the field, Japan is now in the unfamiliar role of playing catch up. What happened? A combination of placing bets on the wrong technology, national pride, and bureaucratic bumbling. But while Japanese TV viewers may not be enjoying latest, greatest thing in electronics as quickly as they once expected, at least a few of the country's consumer electronics giants stand to cash in on the transition, however slow, to digital TV worldwide.

Starting in 1964, Japanese engineers began striving to create crystal-clear TV images through analog technology. By 1984, Japan impressed the world with its analog system when it broadcast the Los Angeles Olympic Games in HDTV. But 10 years later, Japan's Ministry of Posts & Telecommunications (MPT) finally admitted what had become obvious to many industry observers: The country's HDTV system, developed over a 20-year period at a cost exceeding $1 billion at the time wouldn't make the grade in the digital age. Known as MUSE, the hybrid analog/digital system nurtured by NHK (the public Japan Broadcasting Network) and Japan's major electronics makers had been left behind by all-digital systems developed in the U.S. and Europe.

Japanese electronics companies had backed the government's MUSE development program on the assumption that the Japanese system would prevail. The HDTV fiasco represented yet another example of policy mishaps on the part of bureaucrats. By harnessing industry and injecting public funds into R&D, they figured Japan would be able to determine the course of digital TV. Even in the late 1980s, when American engineers achieved advancements in digital compression technology, Japan elected to go its own way. That was a strategic mistake because by 1993, U.S. and European companies decided to back an all-digital standard.

JUNKYARD-BOUND. So it's no surprise that Japan is still behind today. NHK continues to conduct test satellite broadcasts in Hi-Vision, a MUSE-based technology that requires the purchase of Hi-Vision TV sets capable of converting analog to digital (a system few consumers have invested in). The system will be scrapped when Japan converts to full digital broadcasting, though this is still years away.

After a year of drawn-out debate, the MPT announced last May that it would delay the start of terrestrial digital-TV services by three years, to 2003. Even then, only those TV broadcasters in the biggest urban centers of Tokyo, Osaka, and Nagoya would be required to comply with digital broadcasting. Other areas in Japan have until 2006 to comply, while experimental broadcasting would begin in the Tokyo area only in 2000. Still, broadcasters will be free to beam both analog and digital signals up to 2010, the final target date for full digital broadcasting. For that reason, the MPT is encouraging makers to develop dual-signal TV sets to ease the shift to digital TV.

The MPT originally planned for a year 2000 launch to help Japanese electronics makers maintain a place in the race to develop digital-TV technology. But it ended up bowing to the demands of private-sector broadcasters, who have balked at the cost of converting their studios, estimated by the MPT to total some $8.3 billion.

What's the status of HDTV in Japan today? There are two formats: the "interlaced" 1080i with multiple scanning lines and the "progressive" 720p with comparatively fewer scanning lines (see "Defining Terms on High Definition"). Hi-Vision currently uses the 1080i format. It delivers excellent picture images but gobbles up bandwidth, according to Noritaka Sato, a senior coordinator for TV systems in Matsushita Electric Industrial's Semiconductor Systems Engineering Dept. The 720p favored by U.S. broadcasters delivers images almost as good as 1080i but uses less bandwidth and thus permits standard-definition TV to be beamed on the same channel. Japan hasn't decided yet which format to use, and opinion is divided. With Hi-Vision sets already out on the market, it is possible that Japan will go 1080i route.

HUGE MARKET? It's still not clear which digital-TV format the government will choose. In the meantime, Japanese electronics makers are hanging their hopes on the promising U.S. market where test broadcasts are set to begin shortly. That may be overoptimistic, point out analysts, considering the technical and content hurdles that remain to be overcome. Then there's the possibility of an economic slowdown. Masami Fujino, senior analyst with Jardine Fleming Securities Ltd. in Tokyo, notes that Sony has been predicting low consumer demand for digital-TV products in the U.S. for the next three years. "But a downturn in the U.S., combined with a higher yen, could further dampen the digital-TV market," she says. "Who is going to buy a $9,000 digital TV in these times? A trader on Wall Street may not even be able to buy one." That could prolong a conversion to full digital for some years to come.

But eventually, all broadcasting will surely be digital. And that means a huge market to replace all the color sets in the world today, already the biggest consumer product market in terms of value. Sony (SNE) now commands a 9% share, while Matsushita (MC) takes 8%. If Sony can raise its share to 15%, says Hitoshi Kuriyama, a top-ranked industry analyst at Merrill Lynch Japan, digital TVs will become one of its best-selling products. Kuriyama and Fujino both believe that Sony and Matsushita are the only companies capable of dominating the global digital-TV industry. That explains why Microsoft's Bill Gates has been wooing both companies, hoping to have his Microsoft CE in place as the operating system for the home digital-video system.

Where does that leave the other Japanese electronics makers? Far behind. Major all-around electronics companies like Toshiba and Hitachi, both of which announced huge losses in their forecasts for the first half of fiscal 1998, face tough times. If they hope to take part in the digital-TV revolution, they have to invest heavily and be prepared to wait years for a payback. The question is: Can they afford to do so? Almost all the other big names in the sector, including NEC (NIPNY), Sanyo (SANYY), and Sharp, have negative cash flows because of share-price losses, mounting debts, lack of access to capital, and falling sales amidst an economic crisis in Japan and Asia.

But there's little doubt that Sony and Matsushita are going to stay in the race. At this point, they have no serious competition with the exception of Philips (PHG), and Sony and Philips have a long history of cooperation. As Mitsuru Ohki, head of Sony's Broadcasting & Professional Systems division pointed out in an interview: "We need a new cash cow. We need a new market." Digital TV may be the answer -- eventually.

By Irene M. Kunii in Tokyo



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Updated Oct. 15, 1998 by bwwebmaster
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