July 5, 1999

Will This Machine Change Television?

By BILL CARTER

new, innocuous-looking consumer electronic device known as a personal video recorder is not much different in nature from the video cassette recorder, and very few of them have been sold to date.

	This ReplayTV personal video recorder has a 30-second skip button that allows viewers to bypass commercials. Some are predicting such machines will have a big impact on the TV industry.

And yet, an increasing number of executives at television networks and advertising agencies have their ears nervously on alert, wondering if the tiny rumbling noise now coming from this machine is really the first, faint echo of a seismic event, one that will reshape the economic landscape of the television industry.

They are also wondering if the best approach may to be co-opt these machines, adopting them for their own purposes by going into business with the companies selling them.

Little has been said publicly about the coming of the PVR, and several senior executives at broadcast networks and big advertising agencies said in interviews they knew little or nothing about the machine. But for those who have looked into PVR's and what they can do now and have the potential to do, the reactions ranged from acknowledgment that significant changes are coming to predictions of nothing less than the end of conventional television as it has existed for a half century.

Certainly the executives at the two companies pushing this new technology, ReplayTV and Tivo, are not hesitant to predict a dramatic impact from their machines, which use the equivalent of a computer hard disk and are able to store between 14 and 30 hours of television programs and record many shows at the same time. The machines do not permit viewers to build libraries of shows, but they can be hooked up to existing VCR's to make copies.

Table A Tale of the (No) Tape A comparison of the two leading competitors in the market for personal video recorders.

"We just think everything is going to change," said Michael Ramsay, the president of Tivo. "This is revolutionary change. It's a massive play."

Certainly, the machines have the potential to give people broad control over their television viewing, by organizing schedules of shows according to personal choice and taste. That means viewers could watch what they want when they want, not bound by the timetable of any continuous network schedule. And by making it far easier to skip commercials, the new machines could threaten the main revenue stream for most commercial networks.

Because ReplayTV and Tivo are both still seeking investors, it's not surprising that they are making grand forecasts. What's remarkable is that numerous network executives seem to agree with them. As Robert A. Iger, the chairman of Walt Disney's ABC Group, put it, "Replay and Tivo will have an impact on the business that is really significant."

And from the advertising side, Bruce Benson, the executive vice president of corporate strategy for Young & Rubicam, said: "I think it will absolutely change the habits of people watching television. If it gets penetration, it will create a dramatic shift in this business."

The most dramatic assessment of the potential for ReplayTV and Tivo has been made by Josh Bernoff, a media analyst for Forrester Research. Bernoff, who issued a full report on PVR's earlier this year, said, "I declared the end of network television."

In his report, Bernoff predicted that in 10 years 80 percent of homes would have a PVR, that viewing of commercials would be cut in half, that without ad revenues to cover production costs most quality programs would be sold by studios or even program creators to viewers on a pay-per-view basis, and that free network channels, bereft of big advertising revenue, would be left with what he called "the dregs" of programming.

Not every assessment is nearly so dire. Indeed, some network executives see potential new revenues in the machine through specialized paid programs recorded during off hours or on new digital channels. And some question whether ReplayTV and Tivo, in predicting revolution, are misreading how viewers watch television: as either passive lumps not sure what they want until they notice that it is on, or as reflexive hunters for new, unanticipated viewing alternatives.

A Fundamental Change for TV? YES Viewers will watch more recorded shows than live shows. Viewers will skip almost all commercials. Networks will not be able to afford the best entertainment programs. Shows will be filled with product placements instead of commercials. NO Viewers are too passive to select a lot of shows to record. Viewers will still like to surf channels, not watch recorded shows. Networks will still be the best place to produce series. Networks and advertisers will adapt as necessary to save free televison.

The channel surfer watching two or three programs more or less simultaneously will not be served by a machine offering choices in playback mode.

Garth Ancier, the president of NBC Entertainment, who uses a ReplayTV machine in his home, said: "I'm not finding a radical shift in the way I view. I tend to like to explore a lot on my own."

Another question might be the installation, which involves hooking the machine to a cable box, a VCR, a television and a phone line. Even by Tivo's estimates, the process takes almost an hour to accomplish.

Still, Ancier conceded that many of the machine's implications "scare the heck out of me." Tom Freston, the chairman of Viacom's MTV Networks, said: "I hate to think about Replay and Tivo. We kind of like the world the way it is now."

Benson of Young & Rubicam said, "I think conventional television, while not quite dead, is going to do a slow death here."

The reason Tivo and ReplayTV are stirring this kind of impassioned reaction is they open the possibility for viewers to vastly expand the selection of programs they can watch, by adding a host of choices they themselves select, while at the same time making it easier than ever to avoid the commercials.

The PVR records programs easily off live television and from a vast menu of selections that the machine itself organizes for the viewer through an automatic wee-hours-of-the-morning phone call made to a company service center to download program-listing information. Compared to a videocassette recorder, the PVR makes it easy to record a show during an interruption. If the phone rings, you can push record, and when you return, rewind and pick up the show where you left it while the rest of the show is still being recorded.

Users have found the machines especially good at organizing options for the increasingly busy and choice-laden viewer. Viewers can express preferences in programming, choose themes for programs to be recorded -- like Harrison Ford movies, all baseball games, every syndicated episode of "Seinfeld," programs about World War II -- and insure that every weekly original episode of a favored series will be recorded with just a single flick of a button.

Tivo even establishes viewer profiles and starts recording shows according to previous preferences (though Bernoff, the media analyst, conceded that a lot of cooking shows once turned up on his menu because he happened to watch one cooking show for 15 minutes.)

The machines, developed by the two Silicon Valley-based companies in only the last 18 months, take advantage of developments in both computer chip and disk drive technology. Both use a remote control and on-screen menu interface, which both call a "portal," to organize viewing options. And both require that the device be linked to the phone line so that it can make the call to the service center for listings, usually at 3 a.m.

Both concede that few units have been sold to date, mainly because they have been available only through specialized sales, like on the Internet. But they will soon be in electronics stores. The cost ranges from $499 to $1,499, depending on the system and the number of recording hours.

Tivo's machines are being built by Royal Philips Electronics of the Netherlands, ReplayTV's by Panasonic, a unit of Matsushita Electric Industrial of Japan. Both manufacturers have equity stakes. Other PVR makers, including Sony and Thomson's RCA, are expected to sign deals soon. In all cases the manufacturers are likely to soon begin building the devices into new TV sets.

Perhaps most important to the industry, both Tivo's and ReplayTV's units contain buttons that enable viewers to skip commercials far more easily than ever; ReplayTV's is a 30-second skip button. Tivo has a more conventional but very quick fast-forward button.

Both companies have recently moved to play down their commercial-skipping capabilities, largely because they are actively seeking partners in the industry.

In fact, the compromises may reach a point where the consumer's interests are sacrificed to the need for deep-pocketed industry partners. A senior PVR executive said his company had expressed a willingness to disable its commercial skipping capability in exchange for deals with networks and advertisers.

But Young & Rubicam's Benson conceded such a decision might lead to "tension between what the consumer wants and what the broadcaster and advertisers want." It also may draw competitors not so willing to align themselves with the television industry. Bernoff, the Forrester analyst, said he expected numerous entrants, including one major player, soon.

Tivo has already made an equity deal with NBC, a subsidiary of General Electric, and is courting other network partners. ReplayTV is talking with NBC -- a senior NBC executive said NBC would probably take a 5 percent stake in each company -- and other networks.

NBC initially passed on ReplayTV because its 30-second skip button seemed much less industry-friendly. Tom Rogers, the president of NBC Cable, said, "The Tivo model did not seem antithetical to advertiser-supported networks."

Executives from both companies are now overtly conciliatory to networks and advertisers. Ramsay of Tivo said: "We want to make the ads more relevant. We're trying to embrace the industry."

Layne Britton, the executive vice president of ReplayTV, said that the company, too, was seeking equity partners in the industry and added: "We're not trying to disenfranchise the networks. We have no incentive to build a business by destroying conventional television."

Presumably bringing in networks as partners will insure that some of the worst fears will not materialize. One fear of several network executives is that the two companies would make their own deals with advertisers so that a Coca-Cola commercial, say, imbedded in the machine's hard disk, would be placed on a specific show, like "Ally McBeal," when it is replayed on the PVR.

Ramsay said that within about a year the machines would indeed have the capability to insert their own commercials, "but we plan to do it in partnership with the network."

Britton said ReplayTV would look to sell advertising on its preview channel and that possibly the bottom third of a screen might be used for "banner advertising."

Tivo already has a deal with General Motors that could lead to customized advertising on the PVR. If, for example, the unit knows a home has a family of five, it could play a commercial for a GM van in the spot during an episode of, say, "E.R.," where GM has purchased the commercial time from NBC. But if the home is occupied by a 25-year-old man, it might instead play a Corvette commercial.

Networks foresee possible new revenue streams in the device, especially after they add digital channels in the future. Specialized programs could be offered on these secondary channels for fees -- programming ranging from customized ESPN highlights to episodes of some favorite series that had been censored on the broadcast networks.

Rogers of NBC said networks could customize promotions for the PVR's preview channels to build interest in an upcoming series. But he emphasized, "The network is still going to be the great creator of original first-run programming."

Several executives said advertisers would turn increasingly to product placements in programs. Even some network executives agree this is coming.

Benson of Young & Rubicam said that while advertisers had reason to be afraid, he was convinced that "consumers in the end will tolerate some level of advertising instead of paying the cost of all this entertainment."

Indeed, the prospect of a world of so much pay-per-view programming "is either anti-American or totally American, depending on how you look at it," Ancier of NBC said.

Among several others he remains skeptical that the industry will be shaken. They cited previous innovations that were supposed to alter television forever, like the VCR and video games. Britton of ReplayTV, perhaps seeking to tamp down some of the wilder speculation, said, "Television is an extremely resilient business."

But Ancier expressed a prevailing industry sense of uncertainty about issues ranging from how a younger generation will adapt to the device to what improvements will be made in the machines in coming years. He said: "I just don't know. It is still a fairly dumb machine. How smart is the interface going to get? Who knows?"

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