DVR: $6 Billion Ad Skip or False Alarm?

By the end of next year, if current trends continue, digital video recorder (DVR) users will be fast-forwarding through $6.6 billion worth of TV commercials. That's well above this year's $2.4 billion "skipping" rate.

By the end of next year, if current trends continue, digital video recorder (DVR) users will be fast-forwarding through $6.6 billion worth of TV commercials. That's well above this year's $2.4 billion "skipping" rate.

The bigger bite reflects the expectation that the long-hyped DVR growth curve will climb substantially--possibly crossing the 10-percent U.S. household penetration level by the end of 2005.

On the other hand, while many new DVR owners expect that commercial skipping will become their favorite DVR feature, most of them quickly revert to typical viewing behavior. According to a private study by ABC and ESPN this summer, when new DVR users incorporate the device into their TV routines, they continue to watch commercials. The ABC/ESPN research also confirmed that placement of a commercial within an advertising pod--especially the first spot--may be the most critical factor in the emerging on-demand video environment.

These seemingly contradictory views about how commercials fit into the DVR world are part of a much larger introspection now beginning about the role of the set-top devices vis-ˆ-vis cable's video-on-demand services. The potential to waste several billion dollars of skipped commercials is part of the gamble advertisers now take when they spend $42 billion annually for broadcast TV and $16 billion for cable channels.

VOD and DVRs provide new tools for, respectively, viewers "choice" and "control" over their TV experience. Although headlines and online chat groups fret about the future of DVR pioneer TiVo and about Comcast's true commitment to VOD, in reality these facilities continue to rollout at a predictable rate.


"Predictable" here means a realistic, measured installation pace that fits consumer appetites--not the explosive overnight boom that the wishful thinkers predicted amid the hype when the products were introduced.

As it turned out, TiVo's original success, such as it was, came from its alliance with DirecTV, creating an all-digital viewing and storage experience.

The satellite television company surely benefited from TiVo. Among the values: TiVo-equipped customers churn at 0.5 percent annually, compared with overall DirecTV churn of 1.5 percent.

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With the transfer of DirecTV into News Corp. hands, TiVo's connection is being severed, but the DVR presence may grow. NDS, News Corp.'s technology arm, has long been developing DVR technology, which will go into future DirecTV receivers.

More significantly, NDS has been working on customized advertising features for its DVR products--raising the opportunity for skip-deterrence in future digital receivers.

Meanwhile, the DVR message is finally sinking in at cable TV MSOs. The cable companies postponed their DVR introductions, despite cajoling from their main suppliers, Motorola and Scientific-Atlanta, both of which have offered set-top boxes with built-in DVRs for several years.

S-A has achieved modest penetration, thanks to scattered installations by its biggest customer, Time Warner.

Now MSOs are ready to make the DVR plunge.

"Despite a three-year head start, satellite TV providers will lose their DVR edge over cable companies by 2006," according to Parks Associates, a Dallas research firm. The company forecasts that more than half of all deployed DVRs will come from cable MSOs by the end of 2006. Taking a conservative position, Parks predicts that about 16 million integrated cable/DVR STBs will be in place before 2008.

No matter when the DVR adoption level hits the hockey-stick upturn, the fundamental issue for cable and satellite providers as well as for terrestrial broadcasters centers on how viewers use DVRs for commercials. This situation is particularly crucial for MSOs (especially Comcast, Time-Warner, Cox and Cablevision Systems) and Rupert Murdoch's News Corp., all of which own sizable stakes in advertising-supported program networks. They have to be cautious about enabling viewers to bypass advertising.

The DiMA Group (which takes its acronym from Digital Marketing and Advertising: ) has been interpreting this impact as part of its mission to develop processes through which networks, advertisers and equipment suppliers can handle the new DVR and VOD challenges. DiMA's estimate of the $6.6 billion skipped commercials in 2005 is part of its larger analysis of the on-demand environment.


By aggregating and evaluating research from multiple sources, DiMA foresees a future in which most on-demand homes have both set-top DVRs and cable-delivered VOD--an arrangement that may further complicate the ad market. DiMA expects that VOD, which has been slow to take off but is now enjoying a significant bump, may flatten toward the end of this decade. That is, fewer homes will use only VOD and not a DVR (see chart on p. 50).

With so much rhetoric and venom swirling around the DVR-advertising conundrum, it is stunning that so little attention is focused on the new ad skills that will be needed to present information in the combined VOD/DVR environment. DiMA's blunt evaluation paves the way to a positive understanding of the new world and of evolving opportunities, such as "Ads on Demand," a little-discussed ancillary of the VOD juggernaut.

Despite the conflicting forecasts about how consumers will use their DVR and VOD options, one message comes through distinctly. The potentially wasted $6.6 billion for skipped commercials next year is merely a threat to the way that TV has worked in the past. It's the price for learning how TV will operate in the future. Wise programmers, advertisers and media owners should be absorbing these lessons as they calculate how to maneuver through the emerging, inevitable on-demand environment.