• by Wayne Friedman , September 7, 2005

Digital video recorders might not take over the TV universe after all, as worried TV advertisers have threatened. DVR usage might end up looking more like HBO or Showtime, a pay TV channel that only gets into a third of U.S. TV homes.

A new study from Magna Global USA says that by the end of the decade, about 33 million homes will have a DVR--nearly a 30 percent penetration rate. But gains after will be tough to come by. The Magna Global study compares the usage of DVR with that of pay TV channels.

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Since pay TV's inception, channels like HBO or Showtime have barely climbed over a 30 percent penetration rate. That's because of churn. Because of the extra fees incurred to their cable bill, customers might typically drop or add the service on a month-to-month basis--just like pay TV. "DVR is going to be an add-on to the TV experience rather than a substitute for it," says Brian Weiser, vice president and director of industry analysis of Magna Global USA.

The problem comes from lower-disposable-income cable customers who are averse to paying more monthly fees for their in-home TV entertainment. A key indicator is that DirecTV currently gets only 7 percent to 8 percent of its new customers to also buy DVR service. "And that's the best opportunity to get them--as new customers," says Weiser.

Another indicator is that Time Warner Cable--one of the bigger cable operators offering digital cable with DVRs--has seen a growth rate of DVR buys drop from 67.3 percent in 2003, to 13.2 percent currently. Weiser says Scientific-Atlanta has noted that its new DVR consumers "are increasingly coming from the same population that is subscribing to HDTV services"--which means that other customers are buying DVR service at the same rate, or less than in previous periods.

"The only way DVRs should be able to get beyond that 30 percent level is to offer services for free--but even then, one has to question how frequently the service would be used after users have had the service for an extended period of time," says Weiser.

Currently there are 8.3 million DVR users at the end of the second quarter in 2005, and an estimated 11.2 million will have a DVR by the end of 2005. Potentially faster growth could come from so-called "network DVR" technology, said Weiser. That's where a cable operator could store programming at their head-end, and then forward it to consumers. This might be a cheaper way, as opposed to making consumers pay for a DVR box and monthly service.