Posted on 24-5-2002

Digital An Ad Killer
By AMY HARMON, NT Times 22 May 2002

Digital successors to the VCR that eliminate the frustration of recording
television programs have crossed a popularity threshold, raising alarm
among advertisers and TV executives who see the devices as a threat to the
economics of commercial television.

Digital video recorders, or DVR's, make it so easy to program and play back
shows — they do away with videotapes by storing 30 hours or more on a hard
disk — that their owners often choose to watch what is on the machine
rather than what is on TV. Ignoring the networks' painstakingly planned
schedules, they watch prime-time programs late at night and late-night
programs before dinner, often oblivious to the channel on which it
originally appeared. They also see fewer than half the commercials they
used to, compressing hourlong shows into 40 minutes as they fast-forward
through the advertisements that the television industry has long depended
on to pay for its programming and profits.

One in five people who own a DVR like TiVo or ReplayTV say they never watch
any commercials, according to a recent survey from Memphis-based
NextResearch. Numbers like that have provoked gloomy pronouncements from
industry executives. Some even come close to accusing habitual ad skippers
of theft. "The free television that we've all enjoyed for so many years is
based on us watching these commercials," said Jamie C. Kellner, chief
executive of Turner Broadcasting. "There's no Santa Claus. If you don't
watch the commercials, someone's going to have to pay for television and
it's going to be you."

But such admonishments appear unlikely to sway DVR owners. By recording the
shows they know they want to see, many say they have escaped the scourge of
channel-surfing and the empty sense of wasted time so often associated with
watching TV. Although sales of DVR's are still small compared with those of
other home entertainment devices like DVD players, analysts say the
remarkable enthusiasm they inspire makes their broad adoption only a matter
of time. "I can do e-mail and I can go on the Internet but I've never been
able to program the VCR," said Kay Friedman, 66, of Morton Grove, Ill., a
TiVo owner who takes special delight in waiting until 9:20 to watch "The
Practice" on Sundays so she can skip through the commercials even as it
records. "I'm hooked."

Dismissed until recently as too expensive and complex for the average
consumer to set up, DVR's are now a fixture in more than a million United
States households — about 1 percent of the total — a number expected to
grow to 50 million over the next five years, according to Forrester
Research . Fueling the growth are cable and satellite companies, who plan
to build DVR features into their set-top boxes, greatly simplifying the
set-up process. Cox Communications, Time Warner and Charter Communications
have already announced plans to make these services available to consumers
later this year. TiVo, which markets its own DVR and licenses its service
to others, costs $300 to $400, plus a $12.95 monthly fee. Sonicblue's
ReplayTV 4000 costs $699 for 40 hours up to $1,999 for 320 hours of
storage; the company said it expected sales to increase when it introduces
a lower-priced machine later this year.

Some advertisers are re-evaluating their buying strategies and demanding
new ways of measuring audiences. Steve Sternberg, director of audience
analysis for the advertising firm Magna Global USA, circulated a memo
recently that asked, "If an advertiser buys `NYPD Blue' on Tuesday night,
and 10 percent of its audience watches it on Friday after midnight, should
that audience be given equal value as the `live' prime-time audience?"

There is an important distinction, Mr. Sternberg said, between "zipping and
zapping": "When people switch channels, they are going from something to
something else. There are losses for one channel, but gains for another.
With fast-forwarding there are only losses."

Others are trying to turn the technology to their advantage. Coca-Cola has
paid for advertising that appears on the screen of a ReplayTV user when a
viewer pauses a program for more than a few minutes. Last week, Best Buy
announced that it would embed electronic tags visible only to TiVo users in
30-second commercials featuring the singer Sheryl Crow it is running on
MTV. Viewers can click on an icon to see 12 additional minutes of the Best
Buy "advertainment," while TiVo records the continuing MTV programming so
they can watch it later. "We need to start to understand how we're going to
have to reach our consumers with this new technology," said Mollie Weston,
a product manager for Best Buy's image advertising. "It is going to force
us to put advertisements out there that people are actually going to choose
to watch."

Because DVR's are connected by a phone or high-speed Internet line from a
viewer's home to a central server to get program schedules, some
advertisers envision downloading commercials aimed at individual people
based on information from databases compiled through other sources. Members
of Purina pet clubs might get pet food commercials, for instance, while the
owner of a BMW lease that is about to expire might get an advertisement on
the automaker's new convertible. "There's a lot of things that are going to
start to change," said Ira Sussman, director of research for Initiative
Media North America, an advertising buyer whose clients include Maybelline
and Home Depot . "We're going to have to start thinking more about the
importance of product placement within programs, placing more relevant,
highly targeted messages. But we see it as a glass half full." His research
reflected a less rosy picture for the television networks, however. "We've
found people recording programs and watching them on their own time are
often not realizing what network they're coming from anymore," Mr. Sussman
said. "That's a real brand equity that might be lost on the networks' part,
if you're trying to put something next to `Friends' but no one's watching
`Friends' live."

Much of the television industry's response to the new technology so far has
focused on a lawsuit that seeks to ban the sale of the newest version of
ReplayTV, which allows its customers to set it up to skip commercials on
playback automatically, without even requiring them to fast-forward. The
machine also allows its owners to send shows to each other over the
Internet. A group of media companies including Viacom Inc., the NBC
television network, the Walt Disney Company, AOL Time Warner Inc. and
Twentieth Century Fox has asked a federal court in Los Angeles to stop
Sonicblue from selling the device, saying it contributes to copyright
infringement. To win, they need to prove that the machine is fundamentally
different from the VCR, whose distribution was upheld by the Supreme Court
in 1984 after a similar challenge by the entertainment industry. Lawyers
for the companies now argue that the court's endorsement of consumers'
right to "time shift" television programming in the 1984 case was based on
the assumption that copyright holders would not suffer significant
financial damage as a result. Over the protests of privacy advocates, they
are demanding detailed information about which shows ReplayTV owners record
and which commercials they skip.

Sonicblue's chief executive, Ken Potashner, concedes that on average
ReplayTV users skip more than half the commercials. But he says it is up to
the networks and advertisers to come up with creative ways to persuade
viewers to watch. The ReplayTV machine records all the commercials, and
users must choose to set it to skip them automatically on playback. They
can always reset it if they choose. "What are they going to attack next,
the mute button?" Mr. Potashner said. "We've provided an efficiency
improvement for a consumer who is compelled to skip a commercial. What they
should do is work with us."

A victory in the companies' case against Sonicblue will not stave off the
fundamental shift in culture undermining their business, industry analysts
say. Consumers have embraced digital technology that allows them the
greatest flexibility in the way they shop, communicate and consume all
kinds of media — and it is not likely to be different in TV. "We've trained
people that you can buy things at 3 in the morning in the nude on the
Internet and make a call to anyone from anywhere on a cellphone, and the
idea that CBS is going to determine when I watch `CSI' flies in the face of
that trend," said Josh Bernoff, an analyst with Forrester Research. "TV
networks are going to have to figure out how to make money from a TV viewer
that is not nailed to the chair waiting for the commercial to end."