Cable '04: To Each His Own

DVR owners, watching what they want, when they want, are changing the face of TV programming.Tim Hanlon's wife enjoys making scrapbooks, so, just for kicks, she put the term "scrapbooking" in her TiVo profile as one of the programming genres she would like the digital video recorder to tape for her. She didn't expect much from it except the occasional HGTV program, so she was surprised when a QVC segment was recorded. She had never really watched the home shopping channel before, but one of its saleswomen was peddling a cool-looking little stamp with interchangeable magnetic letters, something she thought she could use. Though she'd never bought a thing off TV in her life, she purchased it. Later, she told her husband she would never had known the craft tool existed if it weren't for TiVo. In effect, Mrs. Hanlon created her own on-demand niche network of all the things she likes, with the DVR hard drive acting as a channel where everything she wants is available at any time. "By 2008, content won't be about TV anymore," says Hanlon, senior vp/director of emerging contacts for Starcom MediaVest Group. "More than a one-TV world, it will become a one-video world and media will be more than broadcast and cable but also video-on-demand and broadband and tape-delayed TV. I fully expect our conversations in the future to be about video, not television."The industry has been clucking about this brave new world since 1999 when the digital revolution appeared to be in full swing and TiVo and other DVR (also called PVR, or personal video recorder)manufacturers started pushing their wares. Tech analysts, awed by these gadgets, bought the companies' lines and predicted the DVR would sell like hotcakes, reaching more than 40 million homes by 2004. Well, it hasn't quite played out like that. There were slightly more than 3 million homes equipped with DVRs at the end of 2003, according to the Consumer Electronics Association, but DVR penetration is growing at a faster clip than it has in previous years. Echostar Communications' Dish Network is leading the market with its inexpensive DVR Dish Player, of which more than 1 million have been deployed. DirecTV is not far behind with 700,000 DVR subscribers, which include the TiVo and Ultimate TV service. In total, TiVo has more than 1 million DVRs out there, including stand-alone boxes. And with News Corp. Chairman Rupert Murdoch vowing to put a less-expensive DVR into every DirecTV home, cable operators, feeling the heat of the competition, are getting far more focused on incorporating DVR software into its set-top boxes and marketing the service to subscribers. With five of the top six cable operators working on it, cable's DVR penetration may surpass satellite operators by next year, according to Jupiter Research. Comcast Communications began testing DVR service last year. By the end of this year, all of its 7.7 million digital subscribers will have DVR capabilities. Time Warner Cable launched its DVR service in 2002. By the end of last year, there were 369,000 TWC DVRs, representing 10 percent of their digital subscriber base. Charter Communications has committed to deploying 100,000 Motorola Broadband Media Centers, including high-definition, DVR and DVD capabilities, to a couple of its markets. Cox Communications, with more than 6 million total subscribers, has made DVR service available in 10 markets, including San Diego and Phoenix, and Cablevision is rolling out DVR services this year to its cable subscribers in New York. "Cable's involvement will drive DVR penetration," says Aditya Kishore, a media and entertainment analyst for The Yankee Group. "Consumer awareness is growing and starting to pique a lot of interest." The Yankee Group projects that there will be an estimated 13 million DVRs in U.S. households in 2005, which represents 12 percent of all U.S. households. Morgan Stanley projects 12.3 million DVR homes and Deutsche Bank sees about 14.4 million. Traditionally the most bullish about predictions, Forrester reports that there will be almost 18 million DVR homes by the end of next year. "I don't play the numbers game anymore. All you need to know is that it is going up," says Hanlon. With the myriad projections (see chart below) that have been thrown out there, it is hard to rely on numerical data—it mostly comes from manufacturers anyway—but the DVR momentum is hard to ignore when you talk to consumers. Going by the word on the street, those people who have a DVR can't imagine life without it. The churn rate of DirecTV customers who subscribe to the TiVo service is less than 0.5 percent. When Time Warner Cable launched its DVR service in New York City last year, subscribers were wrapped around the block on a Saturday to get one.The bottom line is that DVR usage is set to explode in the next few years. So, what is the impact on programmers and advertisers? Though it has been discussed again and again over the past five years, a lot of questions remain about how it will be used because there are still so few people who have the technology right now. "The TV model as we know it is stressed by this technology, but you still don't know how many, how quickly or how people will use them," points out Jack Wakshlag, head of research for Turner Broadcasting Systems. "Does TiVo make people watch more TV? Maybe, but we don't know. We don't know how much of total viewing will be time-shifted and we don't know how many commercials will be skipped."Conventional wisdom is that the DVR device allowing consumers to fast-forward through commercials will erode the very foundation of the TV business because it relies so heavily on ad revenue. After all, the million-dollar 30-second spot helps pay for the series' $100 million dollar cast. Advertisers spent an estimated $54 billion in television last year, according to TNS Media Intelligence, and such windfalls of cash are in jeopardy every time a DVR user presses the 30-second skip button on the TiVo remote control. About 50 percent to 75 percent of television commercials are skipped by consumers using DVRs, according to most reports, but programming executives don't view the proliferation of DVRs as the apocalypse anymore. "I used to be very dismissive of TiVo, but now I watch everything that has been recorded," said John Hendricks, chairman and CEO of Discovery Communications. " I think people are getting more comfortable with it."According to a Time Warner Cable survey of its DVR subscribers, ad-zapping ranks fairly low among the reasons consumers like the service. More important is time shifting and being able to watch what you want when you want. Moreover, recent research conducted by market research firm C Cubed indicates that DVR users actually watch more TV because they can fit it into their schedule better.In its first Commercial Viewing Report, TiVo reported that event programming, sports, news and reality shows were not tape-delayed as often and therefore had higher commercial viewing. Less-pressing programming like sitcoms were often tape–delayed and had lower commercial viewing.Hendricks has no doubt there will be several ways people will get their content, and one of the options will be on- demand, via the DVR or otherwise. "People want to watch what they want to watch when they want to watch it. I know my family does," says Hendricks. "But we have to keep our ad revenue intact. We are in constant talks with agencies, and we will bring all of our company assets to the table." Programmers like the Discovery Networks, The Scripps Networks and ESPN have been very forward-thinking about finding marketing solutions that go beyond 30-second spots, including product integration on-air and off-channel stunts.It is believed that the industry will better understand DVR usage when Nielsen Media Research begins to measure viewing patterns in households with the technology next year. But Starcom's Hanlon says he doesn't believe ratings will shed any light on the matter. "The question is not when people are watching, but how people are watching," he says. "The definition of reach has to change. A rating isn't the measurement of the future. Perhaps the value of content will be determined by the number of subscribers?"As an advertising consultant, Hanlon encourages his clients to think outside the box when it comes to buying time on TV as it is defined today. For example, with the further fragmenting of audiences between DVRs, video-on-demand, TV and the Web, he says he thinks programmers and advertisers should facilitate getting the consumer what he wants to watch. Perhaps in the form of a navigational aid or a long-form commercial with content they might want? After all, TiVo can track and report the viewing habits of viewers whom marketers want to reach. The makers of a magnetic alphabet stamp made one more sale last month because their infomercial "accidentally" got in front of a scrapbooking aficionado. No doubt there are a lot of people out there who programmed the word "car" into their TiVo profile. "TV will continue to niche," Hanlon says. "The good news and the bad news is that there will be more viewing choices."

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Cable '04: To Each His Own

Megan Larson

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