Mass Rollout of DVR Technology Stuck on 'Pause'

[Gregg Lengling]

By Michael Hiltzik, Times Staff Writer


Three or four years ago, in the heyday of gotta-have-it technology, scarcely a week would pass without a clutch of Silicon Valley executives trooping through our offices to demonstrate one or another hot new gizmo. In all that time, only once did I ever see something I thought would take the world by storm.

That device was a DVR, or digital video recorder.

It worked by diverting a TV signal onto a hard disk, like the one inside the average personal computer, before passing the image to the TV screen. This process enabled viewers to exploit the disk's storage capacity to view live TV with VCR-style pause, rewind and replay functions — and, given sufficient delay, to skip obliviously through commercials, all without videotape. The electronic services designed to work with the boxes also allowed viewers to schedule off-hour recording of shows with unprecedented ease.

It was the greatest thing I'd ever seen demonstrated in an office cubicle, a device you had to check out only once to understand its potential to revolutionize the television experience.

At the time, the technology was being developed by two competing companies, TiVo Inc. and ReplayTV Inc., that harbored great hopes for it. (The latter had given us the demonstration.) As a ReplayTV executive told me then: "Five years from now, all TV will be watched from a hard disk."

This forecast sounded plausible at the time not only because we were in an era when the spread of great technology seemed to operate under its own organic logic, but also because the device was so compelling. Television network executives, contemplating a world where viewers could zip through commercials with the flick of a remote, talked about DVRs the way music executives would soon be talking about Napster: with utter fear.

Yet here we are in 2003, the executive's prediction has only a year or so to run, and it must be said that the revolution is way behind schedule. Far from being an indispensable household appliance, the DVR remains a device of cliquish partiality.

The best estimates are that over the last four years, only about 1.7 million DVRs have been sold to U.S. consumers (out of 105 million TV-viewing households). Digital video recorders are not exactly a flop, but the number of users has probably failed to keep pace with the number of newspaper stories that quoted TV executives fretting that mass commercial-skipping might destroy the business model of broadcast television.

The purest picture of DVR growth comes from the financial records of TiVo, the Alviso, Calif.-based company that markets the leading player and earns most of its revenue by charging a subscription fee for its programming guide and other services delivered through its box. (ReplayTV, now owned by Santa Clara, Calif.-based audio-video gadget maker Sonicblue Inc., has about one-sixth of TiVo's installed base.)

This month TiVo released its 2002 results, showing that it had quintupled revenue, cut its chronic losses roughly in half and registered a 64% gain in subscribers, to 624,000. TiVo presented these results cheerily, but fourth-quarter subscriber growth came in almost 10% shy of what investors expected, and TiVo's stock price fell sharply.

The figures also disclosed a sharp slowdown in the rate of subscriber growth; the gain in 2002 was less than half the 154% surge the year before, although the absolute numbers were about the same. Among other things, the performance renewed questions about how long TiVo may last as a going concern, even if DVRs eventually become as common as, well, television sets.

The sluggish diffusion of TiVo machines and other DVRs makes for a worthwhile study in what it takes to get even a great technology into consumers' hands. Technology gurus tell us that to spread rapidly, a new technology has to do something new at an acceptable price, or take on a tedious task more efficiently or cheaply than existing solutions.

Sometimes the process looks easy: Consider the DVD player, which hit the 1.7-million mark in sales (i.e., where DVRs are today) within 24 months of its introduction in 1997. There are now an estimated 45.5 million DVD players in U.S. homes, and they continue to sell at an average rate of 1.7 million units per month.

It's only fair to note that Michael Ramsay, the affable Scot who is TiVo's chairman and chief executive, contends that this is a false comparison. The notion that the rollout of DVRs has been sluggish, he says, is a bum rap. "It's wrong to think this is going slowly," he says. "It's actually going really well. But we're conditioned to think that if a product category is hot, it will take off like a bat out of hell."

The pace of DVR sales is deceptive, according to Ramsay, because they are still relatively expensive contraptions; even the cheapest TiVo can cost nearly $600, including subscription fees. (These run $12.95 a month or $299 for the life of the unit.) On a kind of dollar-per-sales-rate basis, he contends, the devices are matching the growth rate of DVDs.

"If you line up the historical data on DVRs," Ramsay tells me, "you'll find they're tracking DVDs almost exactly at the same price points." In other words, DVDs sold at the same rate as TiVos back when they, too, cost $600. By that measure, he argues, TiVo is a success.

"Never in my wildest dreams did I think we'd be at this stage with this technology" by now, Ramsay says.

But such a buoyant assessment brings up some issues that go to the heart of TiVo's quandary. To start with, DVD players are easy to comprehend ("They play movies that look really good!"), easier to operate than VCRs and, most important, cheap. The DVD player never spent much time at the $600 price point; I've seen perfectly serviceable units recently advertised for $49.99.

TiVo has none of these qualities. Although it can do things that everyone appreciates in the abstract — such as pausing, rewinding and one-touch recording of live TV — the power of these functions is hard to communicate by word alone. As any DVR owner knows (and I am writing from personal experience), you can talk about its virtues with the zeal of a biblical prophet, but your listeners will gaze at the ceiling and suck at their teeth in pure apathy. It isn't until you set somebody in front of one for an hour or two that they're hooked.

Then there's the price. Hard as it is to convince a friend that it's a pleasure to pause and rewind live TV, try adding: "And it costs only 600 bucks!"

That price is an obstacle comes as no surprise to Ramsay. Back in 1999, when TiVo first started shipping units, he told me that he thought the DVR would not become a mass-market technology until it was priced as a "$100 add-on," meaning an enhancement to satellite or cable set-top boxes. The closest it has come is the DirecTV satellite service, which offers TiVo as an enhancement to its receiver box for an additional $199.

"It's still a premium-priced buy," Ramsay acknowledges.

In the end, however, the main obstacle to the DVR's popularity may be the structure of the U.S. television industry, which is dominated by cable operators protecting regional monopolies. TiVo has tried to interest cable companies in adding its technology to their set-top boxes, but with notably little success.

Cable companies are typically cash-strapped and investment-averse. As competitors they strictly play defense; laying out millions to launch a technology for which customers are not clamoring — and sharing the revenue with another company — is simply not in their culture.

The converse accounts for why the most determined purveyors of DVR technology are satellite-TV companies, which are trying to use enhanced viewer functions to pry customers loose from cable. Roughly half of TiVo's subscribers buy its service via Hughes Electronics Corp.'s DirecTV, while EchoStar Communications Corp.'s Dish Network has installed an estimated 700,000 of its own DVRs in customers' homes.

DVR partisans still believe that infiltrating the cable universe is the key to finally reaching the technology's potential. TiVo's Ramsay says he has lately detected a little more interest among cable operators in TiVo's potential to deliver programs, promotions and other content directly to user boxes for their off-schedule viewing (complete with pause, rewind and fast-forward).

Others who have long predicted that DVRs would flood the marketplace are convinced that we are finally on the edge of the water. Think about this: It's possible, just possible, that five years from now, all TV will be watched from a hard disk.

Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at golden.state@latimes.com.