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Ready For Prime Time

The personal video recorder has suffered a checkered history since the technology hit the market two years ago, accompanied by all the heady hype for which the late '90s will be remembered. Analysts predicted that the PVR would spread like a contagion, revolutionizing the television industry by empowering consumers to skip commercials with the click of a button. But consumers generally gave the first PVRs a pass, and television networks now have more to fear from dwindling ad budgets than disruptive technologies like the PVR.

That doesn't mean the PVR won't dramatically affect the creation and consumption of TV programming. Changes won't take place right away, however, and they won't be the changes originally forecast. Sales of stand-alone PVRs will continue to lag well behind pre-bust projections; the underlying technology will nevertheless become a common feature in digital cable and satellite TV services over the next half-decade. And revolutionary hyperbole to the contrary, ad-skipping technology need pose less a threat of a coup d'├ętat to the advertising industry than a deserved challenge to adopt new strategies. In fact, it could possibly even offer advertisers the opportunity to increase efficiency and revenue.

The PVR was first introduced to the public at the Consumer Electronics Show in January 1999, when two companies-TiVo and ReplayTV-simultaneously demonstrated devices that were essentially a VCR with the powers of a PC. Through an onscreen interface, or interactive programming guide, the PVR made the chore of recording TV as easy as downloading an MP3. Both TiVo and ReplayTV required customers to subscribe to services that would update programming guides nightly via a phone line, and a user could simply scan the guide and hit record when passing over any desired show, regardless of when it was scheduled to appear. Neat stuff. But the most enticing feature was its ability to pause, fast-forward and rewind live television. Because PVRs temporarily recorded whatever the user was watching at any given time, a user could fast-forward past the ads, making all programming commercial free. Replay's "QuickSkip" button even enabled viewers to jump ahead by, no accident, 30-second intervals.

Understandably, the PVR has sent successive shock waves throughout the TV industry, which is built almost entirely on exactly the commercial institution the PVR now promises to quick skip. Early market research indicated they have every reason to fear. Once consumers overcame the learning curve attendant in the technology, the vast majority-88 percent by one estimate-used their devices to skip commercials. A more recent survey conducted by Statistical Research, Inc., revealed a phenomenon equally distressing to networks, so-called "time-shift television," in which PVR users stopped watching scheduled television altogether, making concepts such as prime time and the advantage of lead-in programming obsolete.

If this phenomenon were to spread through the mass market, it would have dire consequences for the networks, whose advertising rates are based on the daypart, or time slot, in which a show appears. TV was built on the notion of scheduling. Without it, networks will no longer be able to command ad rates based purely on a dependable prime-time audience. Hits like Malcolm in the Middle reached mainstream audiences because it premiered following one of Fox's most reliable draws, The Simpsons. Search engines will become the leveling agent, replacing simple proximity as the method through which people get programming.

But before PVRs can turn the industry upside down, they have to actually make their way into American homes. There are roughly 100 million television-viewing households in the United States. To date, PVRs are currently used in less than 500,000 of them. After disappointing sales, Replay was acquired by Rio MP3 player maker SONICblue in February. For its part, TiVo says it has surpassed the 200,000 mark. Microsoft has recently entered the arena with its UltimateTV, which is installed in select DirecTV satellite receivers, but it's too soon to determine whether sales will outperform those of TiVo or Replay.

How did such a promising technology fail to win the hearts and wallets of America? One obvious reason, says Lydia Loizides, an interactive TV analyst with technology research firm Jupiter Media Metrix, is that the boxes are simply too expensive; they range from $400 for boxes with smaller hard drives to $600 for the Phillips TiVo recorder which can hold 60 hours of programming. That doesn't include the service, which costs another $10 per month for both TiVo and UltimateTV. Loizides hardly thinks the PVR will go the way of the 8-track, however. "We're very bullish on PVR-like functionality showing up on set-top boxes [for cable and satellite services]," she says. "It's simply another feature [that gives a] reason to upgrade service."

This is already how Microsoft has chosen to market its PVR, as just some of the few, great things you can do with UltimateTV (the service also features Web access). And in what may well prove to be a life-saving deal for TiVo, AOL Time Warner has tapped the Silicon Valley startup to incorporate its PVR technology in an AOL TV set-top box. The communications behemoth is by any account serious about deploying the technology to its substantial base of subscribers. Last month, AOL Time Warner announced the creation of a new interactive TV division, and said it could have between 6 million to 8 million digital set-top boxes in homes by the end of next year. Scientific Atlanta, Motorola, Panasonic and Zenith have all announced that they will add some element of PVR functionality to upcoming models of set-top boxes for digital cable.

Which neatly illustrates the outcome of the predicted war between PVR makers and the TV establishment. The revolution ended before it began, in negotiated settlement, with TV presciently realizing that, in lieu of beating 'em, it was better to join 'em. AOL Time Warner isn't about to cannibalize its own revenue from one of its own divisions, broadcast network the WB. ABC, CBS and NBC have taken investment positions in PVR companies. As Loizides points out, "Everyone made similar doomsday predictions when VCRs hit the home, and it didn't destroy the TV business model. Cable operators don't want to upset the programmer, who doesn't want to upset the advertiser. That's the food chain of revenue." The media conglomerates will just need to figure out the new way to make money.

From posterity's perspective, the most revolutionary feature of digital TV may not be its ability to divorce programming from the clock or pause the more licentious scenes from Sex and the City. It's that it can track exactly when the user performs these functions, or any other, and report that info back to command central. And that's a big leap forward from the industry's current system of monitoring consumer behavior, the Nielsen rating system, whose undependable results were until recently the dark secret of the industry. "The whole idea of rating is rooted in a world where you assume people watch a TV program," says Josh Bernoff, an analyst with Forrester Research. "It doesn't account for channel surfing, or picture-in-picture. It certainly doesn't account for people skipping commercials."

Of course, data mining isn't strictly a function of the PVR. As analog television begrudgingly gives way to digital television and set-top boxes become both sophisticated and ubiquitous, companies will acquire the ability to collect and utilize a vast database of viewer behavior, organized in exacting detail. The knowledge gained by advertisers and networks about who is attracted to what kind of programming and products will dwarf what they know now. The real value of that information will be in how they use it. "Advertisers don't care how many people watch a program, they care about who watches the ads," says Bernoff. "The same digital technology that is making it possible to skip commercials is making it possible for advertisers to develop a much richer relationship with consumers."

Companies will exploit these relationships through targeted advertising and one-to-one marketing. Advertising is a remarkably blunt instrument. Consumer data could give it the properties of the scalpel. As Bernoff points out, Rogaine doesn't care if 99 percent of viewers are sick and tired of its commercial-it just wants the one percent that desires more information. If networks knew which TV viewers were going bald, they could direct the Rogaine commercial to that one percent 100 percent of the time. Or at least that's the idea.

Crucial to making a targeted campaign work will be a digital device's ability to deliver a bigger pitch-think infomercial-at the click of a button. Other systems of ad delivery in the works include "bumpers," unskippable ads inserted by the service operator and banners displayed on the on-screen programming guide. "If the expectation is that the normal 30-second spot will be zapped, the flip side is that there are other applications these PVRs may offer that have yet to be explored," says Bob Flood, director of electronic media for the international media buyer Optimedia International. The logical end of the technology is so-called "television commerce." Assuming a cable or satellite subscriber already has his or her credit card on file with the service provider, the television becomes, within this reasoning at least, the ultimate shopping mall, one tailored to the individual's hobbies, interests and tastes.

Needless to say, Brave New Television won't emerge unfettered by regulation. Privacy advocates have already raised Cain over the intrusive direction in which digital TV seems to be headed (see sidebar). And it won't emerge as a major market force any time soon. "It's certainly not going to be pervasive over the next few years," says Adi Kishore, a media and entertainment specialist with The Yankee Group. "I think it's going to be at least 2004 before you're going to see widespread changes." Such a storehouse of information about viewer behavior could also have radical effects on programming, says Bernoff. In a topsy-turvy world of massive PVR adoption, he says, niche shows will become more attractive ad vehicles for many advertisers than mass audience shows. "Martha Stewart may only attract 100,000 viewers, but if all those people decide they'll buy something from her advertisers, that's much more valuable than 10 million people watching Friends like a lump on the sofa." Or for that matter, 10 million people skipping the ads altogether.

In this sense, the development and adoption of PVR functionality may more accurately be seen as evolutionary than revolutionary. Pitching a mass audience has become an increasingly dubious prospect since the advent of cable TV. "Media," Bernoff says, "will continue to nichify. Programs that attract mass audiences become less valuable, and programs that attract specific audiences will become more valuable." As evidence, he points out that what constitutes a boffo rating for network show today would have barely been deemed competitive 20 years ago. The audience has already fragmented. Customization of programming and advertising through digital technology will only be finishing off the job.

To this degree, cable may have a leg up over the networks, says Artie Bulgrin, vp of research at ESPN. "I think from the perspective of a cable network, PVRs are going to offer a great opportunity to increase the exposure of a lot of great programming that currently viewers are either unaware of or can't watch because of the daypart they are broadcast in." Which is exactly how the economics of a PVR entertainment world pay off handsomely. Since finding and recording any program on any channel is as easy as entering "fly fishing," or say, "Begonia cultivation" in a search bar, production companies can make cheap creative, lease space at 4 a.m. on any broadly carried cable network and guarantee a very specific audience to a very specific advertiser.

There's a lesson to be learned about how "disruptive technologies" disrupt. VCRs and cable television, first heralded as technologies sure to bring down the studio system, merely increased studio earnings. Likewise, as communications companies like AOL Time Warner move to co-opt PVR technology, we can expect established players to retain control over distribution channels. Le TV est morte, vive le TV.


Jeff Howe, Brandweek. September 10, 2001

Copyright © 2001 ASM Communications, Inc.. All rights reserved.