No pause in the battle between PVR makers: Microsoft drops out while TiVo, replay exchange charges

Cable World, Feb 11, 2002 by Richard Cole

A flurry of activity in the personal video recorder industry over the last few weeks has Microsoft exiting the hardware business, ReplayTV announcing ballooning sales and TiVo launching a legal reprisal against its rival.

The stakes are high-Forrester Research predicts sales of PVRs will jump from 800,000 currently to 42 million by 2006.

The stakes are also high for cable operators, who will have to decide whether to use PVR-capable boxes being developed by Scientific-Atlanta, Motorola and other set-top box makers or enter into deals with consumer product manufacturers, as AT&T Broadband has done with TiVo.

One entity operators won't be working with is Microsoft's entry in the PVR race, UltimateTV. Last month the Redmond, Wash.-based software giant announced it was breaking up its UltimateTV division and parceling out its 420 Silicon Valley-based employees among other sectors, including its newly created television services group.

UltimateTV struggled with the marketing of its boxes, selling only 50,000 or so, and may be left out in the cold if and when EchoStar takes over DirecTV, Microsoft's satellite TV client. EchoStar works with several box makers and is backing Moxi Digital, maker of a home-networking box developed by Steve Perlman, who had helped put Microsoft in the television business in the first place-by selling them his WebTV.

"That wasn't central to our decision, but it was one of the factors," says Erin Brewer, spokeswoman for Microsoft. "I think it's a tough market for independent set-top-box producers."

Brewer emphasizes, however, that Microsoft will continue t6 provide service and software for its UltimateTV product.

UltimateTV's hardware engineers will move to Microsoft's Xbox operation, but Brewer insists that move is not a sign that the game console is a Trojan horse that will morph into a television set-top box.

"Their hardware expertise is going into lowering the price of the platform," she says. "In the long term, it remains to be seen what will happen, but in the next year or two they have to establish themselves as a game console."

One prominent analyst agrees with Microsoft that retail is an uphill market for PVR companies. Forrester's Josh Bernoff, who coined the term PVR, says Microsoft's exit strengthens the hand of cable operators and satellite broadcasters. "The fact is that the retail route here is extremely difficult," Bernoffsays. "The success of these devices will come from cable and satellite operators putting this in the hands of consumers, not selling them on retail shelves."

He points to the TiVo-AT&T deal as a "harbinger of things to come," but says in the long run, PVRs will be integrated into set-tops.

In the meantime, however, TiVo and ReplayTV continue to sell PVRs. ReplayTV-owner SonicBlue crowed about its sales during its earnings conference call with securities analysts last week.

ReplayTV sales--which hit about 5,000 for the Christmas season--are expected to double sequentially every quarter in 2002, company executives said during the call. But the company is also hedging its retail bet.

Last year ReplayTV licensed its technology to Motorola, which is expected to begin rolling out boxes with ReplayTV PVR functionality later this year.

And, says ReplayTV CTO Andy Wolfe, the company is also looking to partner with a cable operator to get its PVRs into homes, just as TiVo has with AT&T Broadband.

"We are involved in discussions with every major cable company in terms of bidding on that business," Wolfe says.

How successful that strategy will be is not yet known. TiVo spokeswoman Rebecca Baer says her company will not break out its AT&T sales, and the operator also declined to comment.

There has been little love lost between TiVo and ReplayTV. Last week TiVo responded to a ReplayTV program guide patent suit against it by filing one of its own, charging SonicBlue with violating its broad PVR patent.

Analyst Bernoffdoubts that the suits will have a material effect on the business, saying they are normal in the early development of a new industry.

The controversy over the ReplayTV 4000, with its commercial-skipping and program-sharing features, recalls the unsuccessful efforts by cable operators and others to stop the video cassette recorder in the 1980s, and Bernoffsays it is unlikely to stall PVR development.

ReplayTV CEO Ken Potashner emphasized to investors last week that despite the lawsuit filed by programmers, no injunction has yet been sought to stop ReplayTV's sales. He noted that the company had won its lawsuit with the music industry over its Rio MP3 players.

"Some of our products have brought capability to consumers that are being perceived as a threat by TV networks and others," Potashner said, but insisted ReplayTV had been "thoughtful" about what features it has included in its PVR. Recorded programs can be sent only once to a limited number of people, for instance. But Potashner also gave another possible reason the injunction request has been slow in coming.

"We also expect to announce business partnerships with the content owners and with several of the folks that are currently suing us today," the CEO said. "We bring great new technologies that will launch new business opportunities for them, and it's a matter of their embracing these new technologies for mutual benefit."