Total Control - TiVo Inc. and ReplayTV digital recording equipment information - Statistical Data Included - Polling Data

American Demographics, July 1, 2001

Understanding exactly what this technology offers, and how it changes TV viewing habits, will be essential for anyone who uses this media channel to reach consumers.

Research indicates that most consumers would be willing to view a few minutes of targeted advertising in exchange for saving a few bucks.

When ReplayTV and TiVo first rolled out their digital video recorders (DVRs) in the summer of 1999, industry observers gravely predicted the technology - which allows users to pause, fast-forward, and rewind live television - heralded the imminent demise of the television-advertising model. One industry analyst went so far as to predict that the DVR would "become the most successful consumer electronics product in history," projecting that 800,000 DVRs would be installed in U.S. households by 2000, and 3.6 million by 2001. The advertising industry naturally took note, fearing that commercials would soon be zapped en masse, and effectively scuttle the $50 billion TV advertising industry.

But something funny happened on the way to the market. By the end of last year, consumers had purchased fewer than 350,000 DVRs, representing a penetration of less than 1 percent of TV-viewing households. A host of factors contributed to the failure of the technology to catch on with consumers, but none is expected to be a permanent barrier to eventual widespread adoption. In fact, despite such slow growth, analysts across the board still predict that DVRs will achieve a critical mass in the coming years. An April 2001 study by the Yankee Group, a Boston-based technology research and consulting company, predicts that at least 20 million homes will adopt DVRs by 2005. In other words, the 30-second spot hasn't been granted a full pardon, just a stay of execution. The basic technology behind DVR is here to stay, and it will radically change the way advertisers get their message to consumers.

While DVR technology is still immature, some research into the demographics and viewing behavior of DVR users, and potential users, has already begun. It's hardly surprising that forward-thinking advertisers, agencies, providers, and programmers are already planning for a TiVo world by devising alternative marketing strategies. Understanding exactly what this technology offers, and how it changes TV viewing habits, will be essential for anyone who uses this media channel to reach consumers.

On the face of it, there isn't much difference between a DVR and a VCR. Like a VCR, a DVR allows users to record and play back TV programming. DVRs, however, are vastly easier to program, and provide a user-friendly interactive programming guide (IPG) for navigation, channel surfing, and the like, that is regularly updated through a phone line. A DVR can even learn to anticipate viewers' tastes and record programs that fit their profiles, as well as collect those preferences for future marketing applications. By far, the most popular - and controversial - feature of DVR technology is its ability to pause, fast-forward, and rewind live TV, allowing viewers to skip commercials.

TiVo and Replay originally marketed their products as stand-alone devices, like a VCR. Market data, however, suggests that consumers are hardly thrilled to have yet another box and additional wires under their TV. Now manufacturers are moving away from this model and toward one that integrates DVR technology into an existing set-top box that provides cable or satellite TV service. Last December, Replay announced it would stop making and marketing its own set-top boxes and license its technology to other manufacturers, and in February, it was bought by MP3-player maker SONICblue. TiVo has struck crucial deals with providers like DirecTV, AOL Time Warner, and Comcast Cable to integrate its software into those companies' set-top boxes. Naturally, Microsoft isn't letting the grass grow under its feet either, and will also offer its new DVR technology, UltimateTV, via DirecTV set-top boxes. Most of these services are still in the testing phase, but with 80 percent of U.S. households getting their TV through cable or satellite, the fact that these industry giants are investing in the technology bodes well for impressive DVR penetration in coming years.

Ultimately, consumer demand will either make or break the technology's success. Until recently, there has been little data on who buys DVRs, who would like to, and how exactly consumers use the technology. So far, it's the proverbial young, well-educated, early adopters who are signing on. According to a study conducted by the Yankee Group and the Satellite Broadcasting and Communications Association, the most likely buyers of stand-alone DVRs are between the ages of 18 and 34, with interest declining precipitously with age. Households making between $35,000 and $50,000 also show the greatest inclination to purchase stand-alones at their current cost of $299, plus $9.95 per month for IPG service. Interest in integrated DVRs is even greater across all age and income groups, again confirming that the future of the technology lies in convergence. In their report, Yankee Group analysts advise DVR manufacturers to court the early adopters first to develop a strong consumer base: "These households will then play a role in promoting the product/service by word-of-mouth, as has been the case with consumer electronics products historically, and allowing for the broader adoption of the service."