DVRs Critical for Cable

The digital video recorder (DVR) is increasingly the pivot on which turns the decision to sign up with cable or a satellite service. It may also forever change the basic business structure of the broadcasting industry.

Once a fringe product for deep-techies, DVRs, like the pioneering TiVo, are on their way to becoming as commonplace as VCRs. Satellite services saw the advantage to the technology early; both Echostar and DirecTV have seen their subscribership swell due not only to an increased availability of high-definition programming, but also because they provided DVRs as part of their packages.

Cable companies like Comcast, Cablevision, and Charter Communications are beginning to get into the DVR business too, perhaps too late in the game to recapture viewers lost to satellite, but not too late to retain the subscribers they still have or to recruit new ones. Once perceived as a threat, the devices are now seen as essential competitive tools. Two years ago, Comcast CEO Brian Roberts was warning his colleagues that DVRs were a threat to their businesses. Today, he's pushing the devices as a value-added part of Comcast services, according to an April 26 analysis in The Wall Street Journal.

Cable's move to provide DVRs—something consumers clearly want, once they perceive the benefits—risks undermining the advertising revenue at the foundation of the television broadcasting business model, because many DVRs allow users to skip forward in 30-second bursts, the length of a typical commercial. That ability could make some advertisers balk at renewing expensive contracts. On the other hand, the growth of "Google-like" technologies could enable more efficent spending for advertisers, letting them get better results with smaller expenditures by reaching highly qualified consumers.

The total market penetration of DVRs is still small—about 3.5 million out of a total of about 85 million television households in the US, but is growing rapidly. Cable companies subsidize the initial cost of the devices and earn the money back by charging their customers an extra $10 or $12 per month for DVR-enhanced service.

In the long run, that addendum may not be sufficient to offset lost sales to advertisers. About 16% of Time Warner's revenue comes from advertising. If a substantial portion of that were lost, monthly cable rates ultimately may double to compensate for the loss, according to some analysts.

Would subscribers freed from the tyranny of advertising pay that much? Cable providers think they would, to the enormous fortune of companies like Scientific-Atlanta, Motorola, and General Instruments, that make most of the set-top boxes in use today.

The DVR movement also benefits companies like Maxtor, Inc., maker of the hard disk drives incorporated into other manufacturers' products. DVRs are an easy bet for cable companies, the manufacturers they buy from, and the subscribers they serve because video-on-demand, the server-based alternative to DVRs, is fraught with technical problems solved by placing the video archive in the customer's home.