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WORKING PAPER SECTION 8 PAYING FOR A DBS-A SYSTEM-SERVICE If reliable, easily used, and sufficiently low-cost spacewave receivers were placed on the market and programs were sufficiently attractive, the listening public could be expected to acquire the surface segment in numbers large enough to defray all costs (engineering, production, distribution, and capital) of bringing them to market. There now are 1.4 billion radio receivers in the world; about one-fourth can receive shortwave programs. In the United States alone more than one billion radios were sold over the past 37 years; more than 50 million radios were sold in 1983. If the private sector were confident that large numbers of today's government shortwave audio broadcasters and their listeners would want a DBS-A service, if reasonable political assurances that the frequency assignments and orbital slots required to allow sensible system operation would be available were foreseen, and if the political and financial assurances given by government broadcasting entities concerning use of the service were sufficiently encouraging, there is little reason to doubt that it could command the capital, talents, energies, and facilities required to provide an adequate service within a decade. If the regional space segments of the DBS-A service were acquired by some or all of the governments themselves, and if they were to provide the required investment capital, the annual cost of this capital should be lower since government borrowing interest rates tend to be lower than private sector rates. There also would be no need for relatively more costly equity capital. The total system cost and the per-channel cost therefore, might be lower. But such apparently lower financing costs would be offset, at least to some important extent, by the absence of taxes otherwise paid by the private sector on net revenues and the seemingly inherently higher costs paid by governments in the acquisition of high-technology assets, especially space technology assets--at least in the U.S. In considering how the space segments might be financed, it is useful to reflect upon their presumed absolute cost in a broader relative context. The figures used here will be those associated with a very high capacity UHF, FM, Standard Service, i.e., $500 million for initial acquisition, and $100 million per year for the total of annual amortization, profit and O&M charges; these should be understood to be within a factor of two of the eventual real ones. Setting aside any consideration of the BIB-RFE/RL, the acquisition cost of the VOA's HE (and MF) surface-based broadcasting modernization and expansion program presently underway is expected to be $~.8 billion, and this is for the U.S. alone. The equivalent 30-year amortization charge at the U.S. government's present average borrowing cost to finance the national debt, lO to ll percent per annum, would be $200 million per year. Along with the VOA OSM charges (including the cost of fuel to provide electricity) - 57 - WORKING PAPER

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WORKING PAPER for operating its U.S. and overseas broadcasting plants, probably approaching $200 million per year after its modernization and expansion program is completed, the actual total annual U.S. cost of ownership thus would probably exceed $400 million. Again, these would be U.S. costs alone, not worldwide costs that, in total, are probably lOX as great. The replacement cost of the surface-based HE plants owned by the over 120 countries now engaged in shortwave audio broadcasting is probably more than $10 billion (i.e., a cost commensurate with that of the world's estimated 400 million HE receiver population). If annual amortization and O&M charges amount to 20 percent of this cost, the world's total cost of ownership today approximates 82 billion per year. All of these numbers are so much higher than the DBS-A system-service acquisition and ongoing costs estimated here that with a decade's sensible planning, sensible regional strategies for system-service acquisition, and sensible cost-sharing arrangements, these costs should not burden the government broadcasters, the system-servic~ developers and producers, or the listening public. Indeed they suggest that over the longer term it should be much less expensive to use the Earth's space than its surface and ionosphere for worldwide audio broadcasting. It could also be noted that the revenue received by Intelsat (with 109 countries as members) in 1984 for maintaining and operating its international, long-haul, space~based communications system-service was over 6400 million--an amount commensurate with, but greater than, that expected to be derived from a global DBS-A service. From this additional perspective, the absolute level of annual space-related costs and revenues should not create concern. All of the cost of financing the initial acquisition of a DBS-A system-services's space segments, of course, need not be borne by the governments using them. Indeed, conceptually, they need not be burdened with paying for them at all. In principle the cost of the space segments, inasmuch as they can be expected to cost only five percent of the cost of the associated initial surface segments, could be financed with a charge of only $] to $2 to be included in the price of each individual DBS-A UHF skywave receiver, i.e., five percent of the average retail price of the receivers. Setting aside consideration of the funds that could be generated by a cost add-on to the initial replacement of the receiver stock, the add-on included in annual receiver sales could be an ongoing source of funds that could help meet the annual cost of space segment ownership. ~If the world's stock of receivers designed for listening to broadcasting, worldwide, were continually replaced at a 5 to lO percent per year rate (i.e., if they had an average useful lifetime of lO to 20 years) and if the worries population growth, longevity, and personal income growth increases on average at a total rate of 2 to 4 percent, then average annual receiver sales, worldwide, could approximate ($10 billion)~7-14%) = approximately $] billion per year, i.e., about lOX the total estimated annual DBS-A system-service cost. This estimate gives no consideration to any additional sales induced by the greater quality and reliability of reception and the - 58 - WORKING PAPER

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WORKING PAPER increased variety of programming made possible by the global introduction of such a new system-service. Perhaps there could be an intermediate arrangement, i.e., cost-sharing between the broadcasters and the listening public. Such an arrangement could encompass the common-user broadcasting service entity (or entities), developing and testing especially low-cost Basic and Standard Service spacewave receiver models, and assisting in their local production in countries interested in doing so--especially in countries with modest financial resources for the purchase of foreign goods. It is also important to appreciate that over 40 percent of the total global need for HE broadcasting supports national, i.e., domestic services in approximately 100 countries and, of course, a high-capacity, flexible, DBS-A system-service could also easily be used to provide such national audio broadcasting. Brazil, for instance, will employ two "Brasilsat" satellites in geostationary orbit to provide itself with national voice and television transmission services; and 22 Arab countries will use their "Arabsat" satellites to interconnect themselves with voice, data, and television channels. The importance and value of using space-based transmitters to provide national direct broadcasting services is described usefully and persuasively in a recent United Nations study.36 This study notes that space technology could be employed by the world's educational community "...not only to educate the young, but also to provide a continuing source of information knowledge and know-how to the adult population," would be "...particularly "valuable] in remote rural areas," and "...could fulfill many needs in diverse fields, including school education, health, family planning, nutrition, agriculture, teacher training I,] and agriculture Lands health extension worker training." It also could be used for U...continuing education for already trained workers, such as doctors and nurses, to keep their skills and knowledge up to date." While the bulk of the United Nations study is focused upon the use of television, it speaks specifically to "...the role of broadcast radio..." and notes that for "...educational purposes, audio services may be cheaper than television services, particularly when program costs are considered in addition to the cost of hardware." The U.N. report also observes that "television has proven less effective than radio for some subjects and purposes and even counter-productive on occasion" and concludes that "because of the high cost of television services or because television may not the best medium for a particular education objective, audio services warrant consideration." (This video-audio cost differential can be two 36. "The Feasibility of Using Direct Broadcasting Satellites for Educational Purposes and of Internationally or Regionally Owned Space Segments," United Nations General Assembly, Committee on the Peaceful Uses of Outer Space (COPUOS), A/AC. 105/341; November 16, 1984. - 59 - WORKING PAPER

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WORKING PAPER orders of magnitude. "... your entire "advertising] campaign of five fabulous 60-second radio commercials will cost less to produce than one second of some TV commercials."- The low marginal cost of employing the kind of system-service outlined here--one designed to meet global audio broadcasting needs and expected to be paid for by the governments using it for this purpose--should allow, and indeed prompt, very low-cost experimentation, demonstration, and on-going use for national-domestic educational and other purposes. Note, particularly, that the peak demand for the capacity of the worldwide system-service outlined here would occur during the early morning and evening listening hours, where news and entertainment programs predominate. Therefore much, perhaps most, of the capacity would thus be available for educational and other purposes during the day's "working" hours and could be provided at a low marginal cost. The small, low-cost, easily used and transported spacewave audio receivers also should obviate concern for their initial acquisition and continuing O&M costs, and eliminate the necessity for employing sophisticated community receivers with their attendant scheduling and O&M costs, and problems. Program redistribution, for example, simply would not be needed. And the additional revenues generated from this additional service could offset system costs. A recent European Space Agency study, considering the provision of domestic direct audio broadcasting services via space transmitters within African countries that have low and average Gross National Products (GNP) per capita, noted that these countries spend 0.1 to 0.5 percent of their GNP on broadcasting. ~ Because the GNP for all of the countries of Africa recently totalled $400 billion, this suggests that this continent alone could support domestic (national) DBS-A services within an annual revenue stream of $400 million to 52 billion dollars per year. And, if the same broadcasting expenditure rule of thumb were to apply to Central and South America's GNP of 5700 billion, the annual revenue stream envelope there would be $700 million to $3.5 billion. An essentially new and potentially quite important element also could be introduced into worldwide audio broadcasting through the provision of DBS-A interconnected regional system services: that of its widespread use by the private sector in addition to traditional use by the government sector. Today there is little private use of HE shortwave audio broadcasting. Such shortwave broadcasting is for the most part seen as a way for governments to conduct public diplomacy, i.e., "government advertising." There is reason to imagine that with the availability of a fine DBS-A service, 37. "Creativity--Effectiveness, Aesthetics and Morality," Edward A. McCabe, Vital Speeches of the Day; August i, 1985: pages 228-232. 38. It is not clear to the author whether these figures encompasses television as well as radio broadcasting. - 60 - WORKING PAPER

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WORKING PAPER government-sponsored public "advertising" could be joined by private commercial advertising. Recall, for instance, the earlier example of broadcasting to France: 4 hours of audio broadcasting could be delivered daily throughout France's 260,000 square miles at a charge for a Standard Service channel of $8,000 per year. The French population is somewhat over 50 million. Therefore, during these hours the French population could be served for ($S,000~/~365~4~60) = less than 10' per minute. If 0.1 percent of the population listens to a one-minute advertising message, the service cost for reaching these 50,000 listeners would be about ($0.~/~50,000) = 0.0002 cent each. The broadcast area throughout the world could be as great as 30 million square miles with a listening population of hundreds of millions, or as small as 10, 000 square miles, located essentially anywhere in the world, thus allowing a new and flexible focus to the commercial advertising business. Also, keeping in mind that the service cost estimate assumes that the system's space segments would not be used by governments, on average, for more than half of the hours per day, the potential for use by additional, nongovernment interests could be great. Indeed the DBS-A service would offer an opportunity for a new worldwide commercial advertising medium to develop, one whose character and dimension simply cannot now be imagined. If such a use occurs to any great extent, the additional gross revenue provided could be brought down directly to net income since the initial worldwide service pricing structure would be set to offset all system-service costs; this additional income could be applied against the basic system-service cost. It might be noted that private firms in the U.S. alone currently spend $20 billion/year for advertising, and that the 35 firms with the largest advertising budget, as a group, allocate over four percent of their budgets to radio broadcasting services. Thus there is the potential for attracting private revenues of truly significant amounts. If only one percent of today's U.S. private radio advertising revenues were spent using a DBS-A service, these revenues would approximate lO percent of the system-service's total annual financial cost. Provision of global paging and data broadcasting services, and the rapid relaying of newspaper master sheets by facsimile to many local printers (particularly during late-night "off hours") would become possible, and a narrow-band data distribution channel also could be included for national purposes. Broadcasting of sophisticated "compressed video" signals over the system-service's high quality audio channels also could occur in time. (And it should not escape notice that employment of a 3-foot diameter parabolic reflector surface receiving antenna, with a gain of 15 db, in principle could allow a video channel to be broadcast using the space segment capacity normally provided for 60 of its i,000 audio channels.) That such private interest in using space for commercial broadcasting is far from conjectural is attested to by the beginning of satellite broadcasting in conjunction with surface commercial cable television systems in Europe. There a TV channel, called Sky Channel, uses a transponder on an - 6l - WORKING PAPER

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WORKING PAPER in-space communications satellite to broadcast TV programs which carry advertising. The channel already is being received by 3 million of the lOO million European television households now on cable. And a leading U.S. advertising agency estimates that European advertisers alone would spend at least $] billion per year televising there if current government restrictions were removed. However, consideration of how the se~f-interest of many countries, organizations, and institutions could be sorted out to allow such possible private use is well beyond the purposes of this paper and the competence of its author. For any introduction of private advertising into an arena so far exploited by government "advertising" alone would require the solution of a new array of problems on a nation-to-nation basis, and could be attended by complex economic, political, and cultural concerns. Public services could be expanded, also. Emergency storm and other warnings, for example, could be broadcast to small, specific areas or to an entire nation without requiring the listeners to have special receivers of the type now employed in the U.S. to receive weather infor~nation. Agriculture information could be provided directly to individual farmers in developing countries (such as that generated by the Developing Countries Farm Radio Network in Canada) and could be disseminated with sharp audience/location focus and great efficiency. Historically, the space technology/space applications area often has been burdened by scientists and engineers devising solutions to presumed problems and then being unable to see such solutions satisfactorily demonstrated in a real world context.39 In contrast, this is one societal area where there are clearly important objective problems seeking solutions, and important opportunities to be grasped, that now appear amenable to technological solutions. All-in-all, the possibilities for developing, acquiring, and financing regional and worldwide DBS-A system-services now appear quite encouraging--indeed, even intriguing--always assuming that they are envisioned by persons with sufficient imagination to consider the creation not only of new technology but of innovative institutional arrangements for so doing. 39. See, for instance "Growing the next Silicon Valley," Roger Miller and Marcel Co^te', Harvard Business Review, July - August, 1985, pages ll4-123. The authors observe that "...most government laboratories and universities are poor incubators of ...high-tech products. Usually ~t hey do not] have any significant contact with the marketplace...its needs, its organizations, or its people...." - 62 - WORKING PAPER