Digital video recorders threaten to bring TV advertising to its knees

THE BALTIMORE SUN

HOLLYWOOD, Calif. - In the eyes of the television industry, Charlie Flint is the enemy.

His Beverly Hills apartment has not one but two TiVo digital video recorders. Flint records television shows - even when he and his wife are at home - so that when they watch them later, they can skip commercials. He persuaded his parents to buy their own digital video recorder, or DVR, so his sports-fan father could instantly review any play he wanted.

"Once you've used one, you can't imagine life without TiVo," said Flint, 36, a project manager for a company that builds Web sites. "It's life-altering."

Were Americans merely using DVRs to replay touchdowns, advertisers and television networks wouldn't be so worried. But studies have shown that at least 70 percent of today's estimated 6.5 million DVRs are routinely used for what's known as commercial avoidance.

With DVR use expected to grow tenfold over the next five years, the devices are threatening to bring the $60 billion-a-year TV advertising business to its knees.

By 2010, half the U.S. households with TV sets are expected also to have digital recorders, according to a recent Smith Barney report. The tipping point could come as early as 2007, the report said, when the television industry may lose as much as $7.6 billion - or about 10 percent of its annual ad revenue - as companies seek other ways of reaching consumers.

With little time to spare, advertisers and network executives have begun to scrutinize the habits of DVR users, those who subscribe either through industry pioneer TiVo Inc. or their cable providers. It's not just what they watch and record that's of interest.

The networks also want to know whether viewers can be persuaded to help pay for programming that they're now getting free.

Many executives believe the networks' very survival depends on viewers accepting what some might see as a radical idea: that the audience, not just advertisers, must subsidize the high cost of producing the shows that so many Americans love to watch. If they don't, executives say, the networks won't have the money to produce expensive shows.

"This new technology will transform the television business," predicted David F. Poltrack, CBS' executive vice president for research and planning.

Poltrack oversees Television City, a CBS research facility housed inside the MGM Grand in Las Vegas. He and his team have drawn on the cross section of Americans who vacation there to assemble a diverse database of 20,000 TV watchers.

Of those, several thousand have answered online surveys about their viewing habits. In addition, CBS has conducted in-depth focus groups with 211 adults from more than 30 states.

Some of Poltrack's findings were released Tuesday at a meeting of the Television Critics Association in Universal City, Calif..

Among them was the suggestion that consumers are receptive to an economic model that provides an alternative to DVRs.

In this scenario, viewers would pay $1 to see an episode of a favorite TV show on demand - much as music fans do when they download a song from Apple Computer Inc.'s iTunes music store.

Poltrack said there already was a market. He noted that most people tune in to see only 11 of a season's 22 episodes, even of favorite shows. With video-on-demand, "if you missed CSI at 9 on a Thursday night, you could call it up and watch it at 10," he said.

Right now, when viewers replay a show they have recorded on DVR (a service that typically costs $5 to $13 a month), the networks get nothing.

Under Poltrack's model, networks would negotiate to get their slice of the revenue pie from distributors - cable and satellite TV operators, Internet service providers and perhaps even telephone companies - which would pass those costs along to the audience.

What leverage would the networks have to make distributors share the wealth?

Poltrack's research shows that three-quarters of the programs that DVR users record are broadcast on ABC, CBS, NBC, Fox, WB and UPN.

This season, for example, the shows that top what Poltrack calls "the DVR play list" are, not surprisingly, television's biggest hits: ABC's Desperate Housewives and CBS' CSI: Crime Scene Investigation.

"The big challenge is, how do you create ... the revenue-sharing model that will work with all the parties?" Poltrack said.

There is disagreement in the industry about the ultimate effect of DVR technology. But one thing is certain, said Jon Nesvig, president of advertising sales for Fox Broadcasting Co.: "Any impact is not good news for us."

Even if much of the population fails to warm to DVRs, the devices have been embraced by an influential crowd: younger and technology-adept consumers with plenty of disposable income - the very audience that advertisers pay the most to reach.

As the networks continue to grapple with the coming DVR age, advertisers, too, are taking action to protect their interests.

"We're starting to think with a greater sense of urgency," said Peter Tortorici, president of Mindshare Entertainment, a newly formed division of Mindshare, a leading advertising agency.

His charge is to respond to DVRs' ad-zapping capability by developing scripted shows for the major networks. The idea is eventually to embed references to Mindshare clients, such as American Express Co., within the shows' story lines.

Stacey Lynn Koerner, director of global research integration for the ad-buying firm Initiative Media, has studied which shows TV viewers still watch live. Sports programming is the best bet for advertisers, given that fewer people want to watch a game whose outcome they already know.

Similarly, she said, shows that families tend to enjoy together, such as ABC's Extreme Makeover: Home Edition and Fox's American Idol, are usually watched in real time rather than in the playback mode.

"Viewers for these shows are attentive, and they don't switch channels as much, so they recall the advertising at a much higher rate," said Koerner, whose firm uses her research to advise its clients.

For his part, CBS' Poltrack said that if broadcasters could only hammer out a way to get their share of the profits, the digital age could solidify the networks' hold on audiences. When consumers have convenience and ready access, it turns out, they watch more TV.

Flint, the Beverly Hills Web site designer, recorded a show he never would have watched at its scheduled broadcast time: NBC's new psychic drama Medium, which is up against CBS' popular CSI: Miami.

"I'm now trying stuff that I never would have watched before. I'll give it a shot and set the TiVo, then watch the show later ... when nothing else is on," Flint said. "I'm watching probably 50 percent more TV than I used to."

The Los Angeles Times is a Tribune Publishing Newspaper.

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