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Understanding exactly what this technology offers, and how it changes TV viewing habits, will be essential for anyone who uses this media channel to reach consumers.

Research indicates that most consumers would be willing to view a few minutes of targeted advertising in exchange for saving a few bucks.

When ReplayTV and TiVo first rolled out their digital video recorders (DVRs) in the summer of 1999, industry observers gravely predicted the technology — which allows users to pause, fast-forward, and rewind live television — heralded the imminent demise of the television-advertising model. One industry analyst went so far as to predict that the DVR would “become the most successful consumer electronics product in history,� projecting that 800,000 DVRs would be installed in U.S. households by 2000, and 3.6 million by 2001. The advertising industry naturally took note, fearing that commercials would soon be zapped en masse, and effectively scuttle the $50 billion TV advertising industry.

But something funny happened on the way to the market. By the end of last year, consumers had purchased fewer than 350,000 DVRs, representing a penetration of less than 1 percent of TV-viewing households. A host of factors contributed to the failure of the technology to catch on with consumers, but none is expected to be a permanent barrier to eventual widespread adoption. In fact, despite such slow growth, analysts across the board still predict that DVRs will achieve a critical mass in the coming years. An April 2001 study by the Yankee Group, a Boston-based technology research and consulting company, predicts that at least 20 million homes will adopt DVRs by 2005. In other words, the 30-second spot hasn't been granted a full pardon, just a stay of execution. The basic technology behind DVR is here to stay, and it will radically change the way advertisers get their message to consumers.

While DVR technology is still immature, some research into the demographics and viewing behavior of DVR users, and potential users, has already begun. It's hardly surprising that forward-thinking advertisers, agencies, providers, and programmers are already planning for a TiVo world by devising alternative marketing strategies. Understanding exactly what this technology offers, and how it changes TV viewing habits, will be essential for anyone who uses this media channel to reach consumers.

On the face of it, there isn't much difference between a DVR and a VCR. Like a VCR, a DVR allows users to record and play back TV programming. DVRs, however, are vastly easier to program, and provide a user-friendly interactive programming guide (IPG) for navigation, channel surfing, and the like, that is regularly updated through a phone line. A DVR can even learn to anticipate viewers' tastes and record programs that fit their profiles, as well as collect those preferences for future marketing applications. By far, the most popular — and controversial — feature of DVR technology is its ability to pause, fast-forward, and rewind live TV, allowing viewers to skip commercials.

TiVo and Replay originally marketed their products as stand-alone devices, like a VCR. Market data, however, suggests that consumers are hardly thrilled to have yet another box and additional wires under their TV. Now manufacturers are moving away from this model and toward one that integrates DVR technology into an existing set-top box that provides cable or satellite TV service. Last December, Replay announced it would stop making and marketing its own set-top boxes and license its technology to other manufacturers, and in February, it was bought by MP3-player maker SONICblue. TiVo has struck crucial deals with providers like DirecTV, AOL Time Warner, and Comcast Cable to integrate its software into those companies' set-top boxes. Naturally, Microsoft isn't letting the grass grow under its feet either, and will also offer its new DVR technology, UltimateTV, via DirecTV set-top boxes. Most of these services are still in the testing phase, but with 80 percent of U.S. households getting their TV through cable or satellite, the fact that these industry giants are investing in the technology bodes well for impressive DVR penetration in coming years.

Ultimately, consumer demand will either make or break the technology's success. Until recently, there has been little data on who buys DVRs, who would like to, and how exactly consumers use the technology. So far, it's the proverbial young, well-educated, early adopters who are signing on. According to a study conducted by the Yankee Group and the Satellite Broadcasting and Communications Association, the most likely buyers of stand-alone DVRs are between the ages of 18 and 34, with interest declining precipitously with age. Households making between $35,000 and $50,000 also show the greatest inclination to purchase stand-alones at their current cost of $299, plus $9.95 per month for IPG service. Interest in integrated DVRs is even greater across all age and income groups, again confirming that the future of the technology lies in convergence. In their report, Yankee Group analysts advise DVR manufacturers to court the early adopters first to develop a strong consumer base: “These households will then play a role in promoting the product/service by word-of-mouth, as has been the case with consumer electronics products historically, and allowing for the broader adoption of the service.�

To be ready for the eventual mass adoption of DVRs, some researchers and advertisers are making efforts to understand and prepare for the ways the TV viewing habits of the masses are likely to change. In the spring and fall of last year, Statistical Research Inc. (SRI) commissioned researcher John Carey of Greystone Communications, a telecommunications research company, to conduct a small, 10-home sample “ethnographic� study to determine how DVRs are changing consumers' TV viewing behavior. The results, while not statistically authoritative, offer interesting and somewhat surprising insights. While Carey found that DVRs profoundly alter television viewing behavior, and indeed pose a threat to current ad models, the changes are not as sweeping as might be imagined, and in fact might open the door to new branding opportunities.

The most significant finding, perhaps, is that in all the homes Carey observed, respondents reported a better quality viewing experience. “The DVR offers people so much control over the programming, they can really find what they want and watch it at their convenience,� says Carey. Because of this, DVR users stop “listening� to their televisions and become more active viewers. Carey even uncovered a rather heartwarming trend: Families tend to watch programs as a group more often, since they can record a show and schedule a time to watch it together.

DVRs make the programming and recording of live TV so user-friendly that so-called “time-shifting� of programming becomes a daily experience. This renders the mechanisms by which networks create advertising “environments� powerless, as people will now watch prime-time shows in the daytime, or vice versa, without any idea of what programming originally surrounded the show. DVR consumers actually watch more recorded than live programming, according to the study.

As for DVR's much-vaunted capacity to zap commercials, Carey discovered that with a few exceptions, people use the fast-forward mechanism to select the commercials they most wanted to watch. In other words, well-produced commercials, or more to the point, commercials that are relevant to the viewers' psychographic profile and interests, retain an audience, and probably a more receptive one at that. Ironically, DVR users are less likely to channel surf than they do when watching a standard TV. “People have been zapping commercials since the remote control,� says Artie Bulgrin, vice president of media research for ESPN. “From an advertisers perspective, if people are able to control what and when they watch, the relevance of the ad will become very important.� In fact, Carey found that many DVR users like the feature that allows them to download ads they find interesting.

DVR users do express dissatisfaction, however, with some of the recorder's features that have been thought to be the most promising for advertisers. Early efforts at customized advertising — in which ads are pushed directly to individual subscribers based on their demographic profile — were not well received by the participants in Carey's study. Users are also decidedly nonplussed with the “thumbs up/thumbs down� feature on TiVo, in which TiVo recommends possible viewing options. “It basically didn't work,� says Carey. “It recommended shows in which the viewer had no interest.�

Obviously there are still many kinks to work out, but in the meantime, TiVo, et al are busy trying to position themselves less as a threat to programmers and advertisers, and more as an opportunity. They're doing this by creating new marketing models and inviting advertisers to participate in the development of others. TiVo, for one, has formed an “advertising advisory board� that gives members access to “TiVo's new advertising concepts,� as well as the company's research and user data. “I wouldn't say we're scared of DVRs,� says Sam Souritou, director of media research for global ad agency Lowe, Lintas & Partners. “They're a curiosity. But we're definitely discussing what our options will be when they really take off.�

Miller Brewing Company — a subsidiary of Phillip Morris Inc. — signed a one-year agreement with TiVo to take part in its charter advertising program. “It's really more of a learning opportunity for us,� says Miller spokesman Scott Bussen. “We want to get a better understanding of where the technology is going.� While Bussen declined to mention any specific ad strategies in the works, he says: “If what we discover points to new opportunities, we're ready to adapt.�

The application that is furthest along in development is customized advertising, but Souritou has his doubts about the cost-effectiveness of this strategy. “It depends on how big the niche is. Making creative isn't cheap, and if you're only reaching 50,000 customers, what's the point?� Another idea in development takes advantage of the fact that DVR users spend so much time using IPG functions, like the programming menu, pause, and fast-forward or rewind buttons. These “interstitial moments� create sponsorship opportunities. Gemstar-TV Guide, the market leader in providing IPGs, already sells “panel� ads that appear on the menu.

An additional branding strategy would involve giving consumers a cut on their subscription fee in return for viewing fixed “bumpers� inserted by the cable or satellite operators. Derek Minno, CEO of Jovio, one of several companies already developing this technology, says his company's focus group research indicates that most consumers would be willing to view a few minutes of targeted advertising in exchange for saving a few bucks on their cable or satellite service.

To get around the “ad-zapping� and overall commercial clutter, many advertisers are returning to the TV show sponsorships and product placements of yesteryear. Some, like Reebok, have already seen increased success with such shows as Survivor, and experts predict the number of advertisers participating will only grow as DVR penetration, and time-shifting control, increases. ABC has already sold “sponsorships� to Fortune 500 companies for its highly anticipated reality show, The Runner, a program in which the protagonist will try to cross the country without being identified. So far Pepsi has been the only advertiser to commit to the show, scheduled to air this fall. But ABC plans to sell sponsorships for everything from the runner's pants to his cell phone to the restaurants in which he sneaks his meals. (For more on The Runner, see Democritic, page 56.)

The main players, from advertisers to network execs, all seem to agree that there is still some time to kill before the 30-second spot is retired. Most believe that DVR technology won't achieve anything approaching critical mass for at least another few years. But they also agree on DVRs inevitability. The technology will catch on and steam roll until it achieves ubiquity in American homes. Stay tuned.

GOTTA HAVE IT

A greater percentage of consumers of all ages and income groups are interested in integrated DVR technology over stand-alone devices. But twice as many 18- to 34-year-olds are interested in integrated DVR than are 50- to 64-year-olds (30 percent versus 15 percent).

INTEREST IN

STAND-ALONE DVR
WILLING TO

PURCHASE AT $299
INTEREST IN

INTEGRATED DVR
WILLING TO

PAY $10/MO.
HOUSEHOLD INCOME
Less than $35K 16% 12% 25% 21%
$35K-$50K 20% 15% 25% 17%
$50K-$75 18% 14% 25% 17%
$75K+ 18% 10% 24% 17%
AGE
18-34 27% 19% 30% 21%
35-49 15% 14% 26% 19%
50-64 17% 8% 15% 9%
65+ 4% 3% 11% 7%
Source: Yankee Group; Satellite Broadcasting and Communications Association (SBCA)

ZAP ATTACK

As DVR functions begin to be integrated into satellite receivers and cable set-top boxes, the Yankee Group projects that DVR penetration will grow to 880,000 by the end of this year, and to 20 million by 2005.

Source: Yankee Group

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