• by Paul Gough , August 19, 2003

Time Warner Cable and Cox Communications are aggressively rolling out digital video recorders (DVR) in markets nationwide, but the MSOs' plans don't for the moment include serving TiVo-like ads to subscribers.

Beyond the commercial-skipping capability that gives advertisers and agencies pause, DVRs offer the possibility of addressable and long-form ads that can be served directly to the user's hard drives. That possibility is already a reality at TiVo, which has agreements with entertainment companies and automakers for its so-called Showcases. Yet two MSOs speeding deployment of DVRs in their markets are focusing more on it as a way to keep customers from defecting to satellite than pulling more ads from Madison Avenue. Time Warner Cable so far has no plans to serve ads in its DVR system, although the capability exists in the Scientific Atlanta Explorer 8000 DVR it uses.

"We're always looking at new and innovative ways of presenting advertising and also meeting our customers' needs, but currently we're not serving ads," said Time Warner Cable spokesman Keith Cocozza.

Time Warner Cable has deployed DVRs in 28 of its 31 divisions since rolling out the service in Rochester, N.Y., in July 2002. There were 150,000 Time Warner subscribers nationwide with DVR as of June 30, with the number poised to explode when New York metro region becomes comes online within weeks.

"We expect to have a full-blown launch in early fall," said Suzanne Guiliani, a spokeswoman for Time Warner Cable of New York City. The MSO has about 1,200 DVRs in testing, mostly in New York City but also Mount Vernon, N.Y., and Bergen County, N.J.

Atlanta-based Cox has DVR service in place in two of its markets, Gainesville, Fla., and northern Virginia near Washington, D.C., with plans to have them available to 30% of its total households by the end of the year. Cox doesn't serve ads via its DVR yet either but "we are actively exploring that opportunity," said spokeswoman Erin Lambermont.

Scientific Atlanta's Explorer 8000 has the capability to serve TiVo-style ads. But Dave Davies, the company's director of marketing, said it's up to the individual MSOs if they choose to make use of that part of the technology.

The fact that neither has so far doesn't surprise Robert Aksman, an analyst at BrightLine Partners in New York. He said it's far more important for Time Warner Cable and Cox to gain an advantage in its never-ending battle against satellite TV competitors Dish Network and DirecTV. Both Dish and DirecTV offer their own DVRs, and DirecTV offers a TiVo enhanced service by subscription.

"It's almost a competitive equalizer at this point. Just to keep up with satellite and match satellite, it's a necessity," Aksman said. Some cable companies, particularly Comcast Corp., have been pushing VOD as a point of differentiation against satellites. But the VOD libraries aren't large enough to keep a viewer's attention, and they're not likely to expand enough anytime soon because of high storage costs and relatively small windows for VOD release of movies. DVRs enable a viewer to control programming they're already watching, not just the limited VOD offerings, Aksman said.

And there's the cable industry's huge investment in digital cable, estimated at more than $70 billion in the past five years or so.

"It's a huge amount of money, and with all the Wall Street concerns about cable finances and cable company revenue models, the MSOs are under significant financial pressure from the Street and investors to make this investment pay off," said Jon Swallen, senior vice president and director of media knowledge at Universal McCann.

For some MSOs like Comcast, it's a focus on VOD or SVOD services. For others, like Time Warner Cable and Cox, it's a move toward DVRs and other services like broadband Internet access that are possible because of the digital cable investment. Or it's a mixture of these services along with local phone service. But it's still too early to tell what will catch fire as the next VCR or CD, and what will end up on the dustbin of history like the Betamax or eight-track tapes.

"If you look across the different MSOs and you look at the different testbeds that these MSOs are running over different products, services and offerings, what you see is an industry that is very much in search of a successful formula. There clearly is no single pattern emerging about digital offerings and new digital platforms from the MSOs," Swallen said. There's a lot offered but they all cost money to test and deploy.

"The MSOs, they all have access to the same menu [of services], the combination of what might be optimal for video," Swallen said. "The fact that no single application, no single item on the menu has emerged as the proverbial 'killer app' is very telling."

At the end of the day, it's out of the hands of the cable operators. They have built it; will anyone come?

"It's not about what MSOs are pushing out there to consumers. It's about whether consumers will open their checkbook and adopt, making use of these services," Swallen said. "The final arbiter is the consumer and what it is that the consumers want, are willing to pay for, are willing to use." The keywords still remain consumers' choice, convenience and control.

Whether the DVR will stand the test of time also isn't clear. For all the industry's prognostication about what DVRs in general and TiVo in particular will do to ad-supported TV, it's fallen short so far. Only about 1% of TV households have some sort of DVR.

"For the average consumer, it doesn't really register. There's not a lot of name recognition," Swallen said. "There's no branded offering out there and, more importantly, there's no significant marketing going on behind a branded offering."

Aksman said marketing - or lack of it - has been one of the major inhibitors to DVR penetration. Where TiVo and Replay have had trouble getting consumers to pay $300 to $700 for another box along with a monthly or lifetime subscription fee on top of the cable or satellite bills, the new generation of DVRs being rolled out by satellite and cable does away with the investment in the DVR itself. Only a monthly subscription fee, between $5 and $10 depending on level of cable, is required. Only digital cable subscribers can get the DVR.

"As far as positioning goes, now that we have price out of the way, it's really up to Time Warner as far as marketing goes in terms of how they position it and market it. It's up to them to make it take off," Aksman said. DVD and VOD have had trouble communicating their brand attributes to consumers.

"They don't get how it's different than a VCR," Aksman said.

Swallen doesn't think a comparison to a VCR can advance the DVR's cause. VCRs have 85%-90% household penetration but studies have shown that only a small portion of usage is for recording shows off television. It's primarily used as a playback device, as is the DVD.

"Word of mouth obviously is very strong on these products, but word of mouth still travels slowly and word of mouth still has a tough time justifying the cost of the hardware and the cost of a monthly subscription fee in order to achieve the maximum potential," Swallen said.

Aksman, who has one of the testing devices through Time Warner Cable in New York, said the presence of a large-scale DVR service in New York City would hit home on Madison Avenue.

"TiVo to them might still be this third-party technical company that people have to buy. To see your cable operator right here in your home offering this service, all of the sudden, it's a lot more real," he said.

Swallen said that while DVRs give consumers the ability to control or avoid advertising, that capability has always been there, from walking away from the TV to the remote control and the VCR. He thinks consumers will continue to be exposed to TV commercials.

"From some of the early research we've seen, the sky is not falling and the sky is not likely to fall anytime soon," he said. "It has a lot of people concerned and is certainly worth tracking over time. But it's not the two-ton gorilla right now that a lot of people think it is."