DVR Ignites Set-Top Box War

Apr 19, 2004  •  Post A Comment

We’ve been through the cable franchising wars, battles for network carriage and the dogfight over the price of programming. Now get ready for the cable set-top box wars.
For many years the choice for cable consumers who wanted more than just basic service was an analog box or a more sophisticated analog or digital set-top box. Then along came TiVo nearly four years ago, initially offered as a stand-alone or by satellite TV operators as part of their service.
That was quickly followed by a flurry of other similar digital video recording devices that could be built into the set-top box, some of which began to be used by cable operators. The DVR quickly became one of the hottest tickets in television. A report by Strategy Analytics estimates that there will be 71.5 million DVR units worldwide by 2008, a pace almost equal to the rapid rise of the VCR.
That is a significant change. Martin Yudkovitz, president of TiVo, said many cable operators did not see initially the importance of the DVR. “They just saw a fancier VCR,” recalled Mr. Yudkovitz, a former NBC executive.
That changed when they saw the success that DirecTV has had offering Tivo in its box, Mr. Yudkovitz said. He said the DVR cut churn and increased revenue per unit by “significant margins.”
Time Warner Cable has already made DVR-equipped set-top boxes from Scientific-Atlanta available to 98 percent of its “footprint,” in 30 of the 31 markets it serves. About 369,000 customers to date have opted for the boxes, a take rate of about 5 percent, said Time Warner Cable spokesman Keith Cocozza.
“Time Warner is very happy with their DVR deployment,” said Yankee Group analyst Adi Kishore. “Time Warner has historically rolled out [technological] applications more quickly than other MSOs.”
Comcast, which conducted a test of DVR deployment in its Alexandria/Arlington, Va., systems, found a 10 percent take rate, Comcast spokesman Chris Ellis said.
Time Warner customers are being offered the boxes at several price points, going up to $9.95 a month, similar to what Comcast is charging in the Washington metro area.
Comcast, the nation’s largest multiple-system cable operator, has been slow to come to market with its DVR product despite competitive pressure from satellite and an enormous economic incentive. If its test proves out and 10 percent of Comcast’s 21 million subscribers opt for a DVR, that would provide more than $200 million a month in incremental revenue. No wonder cable operators, like consumers, love the DVR and hate delays in deploying it.
The deployment goes to the heart of the battle between the two primary manufacturers of set-top boxes. Right now, Motorola and Scientific-Atlanta split the box business. Motorola is in the lead with a market share of about 55 percent. Revenue overall has been dipping because prices for standard boxes have been falling, another reason why higher-priced DVR-equipped boxes should be a godsend for the manufacturers.
However, Motorola has been criticized by some in the business for being late in developing a DVR-ready set-top box, for charging a high price for that box, and for offering a unit with only a single tuner. A model from Scientific-Atlanta that has been available for almost two years allows consumers to record two shows at once.
“Both Motorola and Scientific-Atlanta should have had boxes out there four years ago when DVR first hit,” opined John Dolak, a spokesman for Sony Electronics, which is attempting to expand into the set-top box field. “There is no initiative to innovate when you have a locked-up market.”
MSOs such as Adelphia and Comcast that have been at least partly reliant on Motorola equipment acknowledge that they are behind Time Warner, but tend to brush off the significance. Asked whether Comcast has an issue with Motorola, Mr. Ellis said: “I couldn’t characterize our position on that. We’re rolling out Motorola boxes, and that’s about it.”
Comcast currently uses Motorola equipment in 90 percent of its systems and Scientific-Atlanta Explorer boxes in the remainder.
“[Scientific-Atlanta] was out there first, but I am not sure it’s been an issue,” said Adelphia spokesman Paul Jacobson. “Motorola is working to provide boxes as soon as possible.”
Lower Prices Sought
Meanwhile, cable operators, stung by the long lead with DVR enjoyed by competitors EchoStar and DirecTV, are demanding lower prices from their box suppliers, with more features that will give them a competitive edge.
Part of the blame for the slow rollout by Comcast goes to Comcast. First, the company was busy with other matters, including converting systems to digital and rolling out video-on-demand services. Second, Comcast has not been happy with the costs involved, despite the potential for a future financial bonanza from DVR fees.
“You have to balance the revenue [from the cost to the consumer of DVR boxes] against capital expenditures,” a source close to Comcast said. “These boxes are very expensive.” He put the cost at well north of $300 per unit. “We are not hitting the sweet spot yet. We are working with our suppliers to drive the cost down.”
Motorola doesn’t concede that it was late to market, offering the explanation that Comcast wasn’t ready to deploy DVR technology because it was focused on VOD.
“Why is the company 11/2 years behind Scientific-Atlanta?” asked Motorola’s Bill Park. “We weren’t late to market. Our customer, Comcast, had a different priority with VOD and HDTV.”
Jay Gamble, senior VP of the Washington Metro/Virginia area for Comcast, said the 1 million-plus customers in his service area are split between Motorola and S-A boxes, with about 55 percent having Motorola.
The mixture is a result of various acquisitions. Comcast, he said, will not comment on what equipment it will offer long-term, but he indicated that Comcast has very big expectations for DVR. Results so far indicate that customers primarily like it to help them navigate through the hundreds of channels on offer and to be able to watch what they want when they want it, he added.
Robert Van Orden, Scientific-Atlanta’s VP of strategy and product planning for subscriber networks, noted that his company began distributing its double-tuner DVR boxes in August 2002. The S-A unit offers an internal interactive program guide, a capability that is not part of Motorola’s DCT-6208. More than 825,000 S-A units have been shipped so far. The Motorola boxes use existing on-screen programming guides.
A Motorola spokesman, Paul Alfieri of the company’s Broadband Communications Sector unit, said the absence of an IPG in Motorola’s DVR box is not a problem because “operators like flexibility. They may want the flexibility to upgrade to a whole new IPG. Operators know their customers best.”
Several operators and programmers dispute that claim, however, saying Motorola’s IPG problem remains an issue.
What is clear is that the introduction of DVR into the set-top box marketplace should result in an improved year for the manufacturers. That shot in the arm comes none too soon for Motorola. According to the most recent 10-K filing, the BCS unit’s net sales declined by 16 percent in 2003, with sales of digital set-top boxes decreasing to $911 million from $1.3 billion in 2002. Motorola shipped 4.9 million such boxes last year, down from 5.9 million in 2002, a decline of 17 percent.
`Overall Decline’
In its SEC filing, Motorola stated that this decline was “consistent with the overall decline in the set-top box industry, and the segment retained its leading market share in North America,” about 55 percent. So far, partly because the BCS unit is only a smaller subsidiary of a company focused on mobile telephony, Motorola stock has been stable, recently selling close to its 52-week high of about $18 a share.
Because Scientific-Atlanta was quicker to deploy DVR, its 2003 results look a little better. The company shipped fewer digital set-top boxes than in 2002, slipping from 3.4 million to 3.2 million, but since its DVR-equipped boxes sell for more, that slippage was of
fset. Overall, sales were off 10 percent last year.
Motorola’s delays in deploying DVR catch the cable industry at a technological crossroads. Middleware technology, called conditional access overlay, is being developed by Sony and others. The Sony product, Sony Passage, allows operators to use cable boxes that are of different manufacture than that used at the cable headend by giving operators the ability to add a second set of encryption keys to the programming stream.
Heretofore, cable operators were mostly prohibited from switching box suppliers. Now, they can do whatever they want. However, some industry sources said last week that Sony cable boxes, deployed by Cablevision Systems, have proved problematic. Although Cablevision has switched out some Sony boxes, Sony spokesman John Dolak said the MSO still uses some of them.
Another industry source said the middleware technology is “very expensive,” and that some in the industry believe “Sony missed the boat.” Mr. Dolak dismissed those remarks, saying the product is offered at a “minimal” cost.
“We want an open competitive environment in which to operate,” he said.
If Sony Passage or another such product proves effective, the potential is enormous. Now, 40 percent of Motorola’s set-top box business comes from Comcast. If Comcast were to avail itself of the middleware technology, it could put a dent in Motorola’s BCS division at a time when new Motorola CEO Ed Zander is trying to shake up a company some disparage for the slow pace of its R&D.
Comcast announced in February that it had completed a successful test run of the Sony Passage equipment but declined to comment last week. If it were to switch out even some of its huge network to other boxes, the impact on Motorola would be significant.
A top executive at a major system operator said middleware allows far more flexibility for operators than has been previously enjoyed, and that MSOs intend to take advantage of it.
“Do Motorola and Scientific-Atlanta feel good about this situation?” the executive asked last week. “No, but guess what, guys, the market will open up and you will have to compete.”
TiVo’s Mr. Yudkovitz is unimpressed by the Scientific-Atlanta and Motorola DVR-equipped boxes. He said operators approached his company and asked for a DVR with very sophisticated search software that could combine keyword searching of television with keyword-compatible Internet video, all fully integrated.
“What cable is doing in the next 12 months is just a stopgap measure,” Mr. Yudkovitz said.
DirecTV is expected to continue to upgrade its offering. It has quickly deployed TiVo DVRs to its customer base at a price of $4.95 a month, which is waived for premium subscribers. DirecTV spokeswoman Jade Voline said her company supplies TiVo DVRs to about 750,000 customers out of a total customer base of 12.2 million. Those customers have much more choice than cable subs, with various DVRs with up to 120 gigabytes of storage space offered, from Philips, RCA and Samsung, among other makers.
EchoStar Communications Corp. said in September that it had hit 1 million customers for its DVR product, which is available to all new customers for a $4.98 monthly fee.