Ruling Could Boost DVR Penetration

‘Network’ Service Worries Advertisers, Content Providers

By Brian Steinberg, Special from Advertising Age

By letting viewers skip ads, digital video recorders already have gnawed away at the system media conglomerates have used for decades to score billions of dollars in ad revenue. Now the DVR is primed to become a phenomenon on the order of a locust—with the ability to multiply rapidly and do even more significant damage.

The U.S. Court of Appeals for New York last week overturned a ruling that had blocked Cablevision—and, by extension, other cable providers—from making use of a “network DVR” that would allow it to run a massive video-storing operation from a single location rather than installing individual DVRs in each subscriber’s home. Utilizing the technology, consumers can record programs through their remote control without a new set-top box, conceivably turning every TV in the house into a machine that records TV shows—and can skip past the ads that support them.

“With the stroke of a pen, the U.S. Court of Appeals has opened the door to a massive increase in the penetration of DVR capabilities,” wrote Bernstein Research analyst Craig Moffett in an Aug. 4 research note. “In short order, effective DVR penetration could now jump to north of 60% of cable households (that is, all digital cable subscribers) with an even larger increase in DVR outlets per home,” he added.

Those numbers are cause for more than passing concern. Approximately 26 million homes, or 23.4% of all TV households, had DVRs at the end of the first quarter of this year, according to Interpublic Group’s Magna. IMS Research, an Austin, Texas, market-research firm, estimates that nearly 30% of new digital set-top boxes and DVRs were installed in 2007 in a home with at least one other set-top box already in operation.

Already, advertisers have pushed for the switch to “commercial ratings,” under which they pay for the number of viewers who see their ads, not the TV shows where they air.

A study of 1,000 TV consumers in the U.S., Europe and Asia conducted by management-consulting firm Oliver Wyman found 85% of DVR owners are currently skipping at least three-quarters of advertisements. Two-thirds of TV viewers reported they would not be willing to watch any ads at the beginning of a program in order to watch uninterrupted, and 85% said they would not be willing to pay anything to remove all commercials.

There are still a number of hurdles before Cablevision could roll out a DVR service to consumers. But should the U.S. Court’s decision stand—many expect the nation’s big media conglomerates involved in the suit, such as Turner Broadcasting, 20th Century Fox, CBS, ABC and NBC, to appeal—DVR subscriber growth could be more robust in the years ahead. Magna has recently forecast that approximately 43.5 million subscribers would have DVRs by the end of 2012, accounting for about 37% of TV households overall.

The media companies’ objection to Cablevision’s video storage technology is that they believe it infringes on their exclusive rights to air and reproduce the content in question. Those companies that create the content want to maintain a level of control over when and how it is viewed, in order to be able to monetize it by selling advertising against it.

The media conglomerates have tried everything short of sending workers into residences in the night with a wrench and welding tools to keep the paradigm-shifting DVR technology from worming its way further into consumer life. Walt Disney’s ABC has made hit shows like “Desperate Housewives” available for cable providers’ video-on-demand offerings, but only in exchange for the cable company disabling viewers’ ability to fast-forward. Time Warner Cable has introduced features that let viewers “start over” on a favorite show, but again, the tradeoff is they must watch the ads that accompany it.

None of this has weaned consumers, now accustomed to watching shows as they wish, from their ad-skipping addiction. “They don’t want to watch commercials, but they won’t pay to not watch commercials,” said John Senior, a partner in the media and entertainment practice at Oliver Wyman. Consumers, he believes, are already saying, “If given the opportunity to skip [ads], I will, using devices. Otherwise, I will just walk away.”