DVRs: The Second Coming of Digital?

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There's a little bit of giddiness when you talk to some of the marketing folks from MSOs that have launched digital video recorders. First, on a personal level, they show the same enthusiasm as most TiVo owners — and presumably direct-broadcast satellite DVR subscribers — where the DVR ranks right up there with Rogaine and Viagra as products that lead to life-changing experiences. They are converts and preach the gospel quite well.

But DVR mojo — without a business model for fast consumer uptake — will get you nowhere, other than a listing in a hall of fame category for well-loved products that faded from view.

Cable, though, seems to have found a new reason for customers to subscribe to, or stay in, the digital package. DVRs, as a low-cost option — somewhere between $4.95 and $9.95 a month — could find the bull's-eye that TiVo never could hit.

Consider Time Warner Cable. The MSO has 150,000 DVR subscribers, with the vast majority paying the lower $4.95 monthly rate, because they were already digital subscribers. Monthly run rates have increased in 2003 over 2002.

What's more, Time Warner executives say some DVR markets have already surpassed 15% penetration and will likely hit 20% by year-end (see story, page 6A). That's an astounding ratio for a product that's barely been in the market a year. It rivals some of the early numbers produced with cable modems.

The penetration rate tells a number of tales. First, TiVo had a great idea, but a tough business model for consumers, especially in a struggling economy. Politicians may not want to hear it, but parts of the country remain in a recession of sorts. There have been lots of the job layoffs, or consumers working in jobs for lower pay. Wage growth has slowed for many workers, especially compared to insurance and other costs.

The simple fact: average Americans could not afford TiVo. They can, however, afford between $5 and $10 a month to be able to record anything that comes across their TV screen.

A cable DVR makes cable service more valuable. Consider the average subscriber, who may not be happy with rate increases but continues to subscribe nonetheless. Perhaps they feel they don't get sufficient value from their service because they can't watch everything, or they miss three to four programs a month they would really like to see. A low-cost DVR allows them that flexibility to get more out of their digital-cable service.

It's also interesting to see the intersection of DVRs with video-on-demand and HDTV. The latter tends to appeal to an upscale audience — not surprising, given the up-front cost of TV sets. DVRs are much cheaper. One doesn't have to earn $100,000-plus a year to afford a DVR. Even households with annual incomes of $25,000 can afford a DVR.

DVRs are also seen as appealing to the active television watcher, while VOD is described as more passive. "I'll look through the menus and see what they got" type of mentality, versus "I know I want to record this episode of Sex and the City
or this NFL game."

Bottom line: Different technologies and services can appeal to various types of consumers. But all three serve to backstop digital penetration at a time when cable badly needs it.

I can recall listening to Comcast Corp. president Steve Burke several years ago in the early days of the MSO's VOD rollout and getting the feeling it wanted to almost redefine digital as a great VOD platform, and not just more niche programming channels. It was a smart strategy.

Today, that strategy has been augmented by the launches of DVR and HDTV. They all need a digital set-top, and soon there will be a single digital box that can handle all three.

"It starts to fulfill a lot of promises," said Kevin Hill, director of marketing for video services at Cox Communications Inc. — most notably, the promise that "digital" was more than just more niche programming channels.

DBS beat cable to the digital punch, promoting better pictures and more channels. Cable followed with a me-too strategy that worked well — for a period of time. But digital needs a booster shot. Defining digital as the option to get DVR, VOD and HDTV, in various combinations, gives MSOs a sound strategy to match their competitors.

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