MSOs Offer New Cable-DVR Set-top
Boxes to Digital Customers

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By Alan Breznick

Alan Breznick, a veteran business journalist, is editor of Television A.M. and Cable Datacom News.

Hoping to match the torrid pace set by satellite TV providers, cable operators are scurrying to roll out digital video recorder (DVR) service in large and small markets throughout the U.S. Over the past few months, one MSO after another either has started deploying the new cable-DVR set-tops en masse or has unveiled plans to start doing so soon.

In a league of its own, Time Warner Cable has led the way into DVRs, also known as PVRs (personal video recorders) because they enable viewers to record, pause, rewind and fast-forward even live TV programs according to their personal tastes. The nation's second largest MSO has brought cable-DVR set-tops into 30 of its 31 divisions, with its large Houston cable system the sole exception. In its third quarter earnings report, Time Warner said it had already installed more than 250,000 DVR boxes in digital cable homes, up 67% from 150,000 at the end of the second quarter.

"We're pretty sure we have the most deployed," says a Time Warner spokesman. "We expect to launch in Houston early next year."

But Time Warner, while the clear MSO pioneer in introducing DVR service, is far from alone anymore. In late October, for instance, Cox Communications announced fresh DVR launches in six of its biggest markets-San Diego, Santa Barbara and Humboldt, Calif., Phoenix, Las Vegas and Cleveland. With the launches and its earlier debuts of DVR service in Gainesville, Fla. and northern Virginia, Cox aims to offer its newest digital premium product to 35% of its more than 10 million homes passed by the end of the year (2003).

"We'd like to expand the rollout as [fast] as we can," says John Hildebrand, vice president of multimedia technology for Cox. "We think it's a pretty strong product for people interested in TV."

Likewise, Comcast Corp. is racing to make DVR service available to all of its 7.3 million digital cable subscribers by the close of 2004. Since the spring, Comcast has introduced service in about half a dozen markets-northern Virginia, New Jersey, Charleston, S.C., Albuquerque, N.M. and Panama City, Sarasota and Fort Myers/Naples, Florida.

"We're very pleased," says Page Thompson, vice president of marketing for new video products at Comcast. "We plan to roll it out aggressively over the next year."

The pace is likely to pick up further by the spring as other major cable operators join the DVR parade. Besides Cox and Comcast, such leading MSOs as Charter Communications, Cablevision Systems Corp., Insight Communications Co., Mediacom Communications Corp. and Adelphia Communications have all announced plans to launch DVR service in much of their regions by the end of 2004.

Adelphia, for example, intends to begin 30-day to 60-day DVR marketing trials in as many as six to eight markets by early next year and then quickly shift into full commercial launches of the premium product. In late October, the MSO introduced DVR service along with high-definition TV (HDTV) service in its first trial market, Buffalo, N.Y.

"We are very positive about the technology," says Matt Emmons, director of advanced video products for Adelphia. "We're committed to deploying the product."

As a result of this enthusiasm, orders for new advanced digital cable set-tops with DVR capability are streaming into the major cable set-top box manufacturers.

In September, Charter alone announced the order of 100,000 broadband media centers with advanced DVR, HDTV and DVD player features from Motorola Inc. The MSO planned to start introducing the new digital media centers in its Rochester, Minn. market before the end of the year (2003).

Just a month later, Scientific-Atlanta reported that it shipped 177,000 of its Explorer 8000 DVR set-tops in its first fiscal quarter ending Sept. 30, up 12% from the previous quarter.

The DVR set-tops amounted to nearly 20% of S-A's total digital set-top shipments in the summer quarter. S-A, which has the early PVR edge on prime set-top rival Motorola, said it had already shipped a total of 563,000 of the popular Explorer 8000 boxes.

Why are cable operators, who have been leery of DVRs and their ability to skip commercials for years, plunging so heavily into the devices now? Take a good look at the competition. Satellite TV providers have been promoting DVR service heavily for some time, incorporating the capabilities into their digital set-tops and packaging the two pay services together.

Thanks to these efforts, DirecTV and EchoStar now account for the lion's share of the 2.5 million to 2.8 million DVRs that have been installed in U.S. homes so far, according to Yankee Group estimates. In late October, EchoStar gleefully announced that it had just sold its 1 millionth DVR unit.

Such competition from the skies is likely to grow even more intense over the next few months. EchoStar, already the leader in the DVR market, is now handing out free DVR-enabled satellite TV receivers to its new customers. And News Corp. Chairman Rupert Murdoch, whose company has a pending deal to take over DirecTV, has promised to match that offer.

"Customers want it and our competitors provide it," Emmons says. "This is a good competitive positioning point for us."

Cable operators are also embracing DVRs now because consumer demand for the devices is finally taking off after years of lethargy. In mid-November, TiVo, the best-known DVR brand, reported that it sold a record 209,000 subscriptions to its DVR service in its fiscal third quarter ending Oct. 31, more than four times as many subscriptions as it sold in the same period a year earlier. About 150,000 of those new subscriptions came through DirecTV.

With the surge, TiVo passed the 1 million-subscriber landmark. Due to higher than expected consumer demand, the company boosted its sales projections for the fourth quarter, saying it now expects to add 325,000 to 375,000 subscriber during the prime holiday shopping season. TiVo also projected that it'll sell another 1.0 to 1.2 million subscriptions in its next fiscal year, which starts in February.

"It's becoming a more realistic mass market service," Emmons says.

Another reason for the headlong cable rush into DVRs is that the technology for putting the features into digital cable set-tops is now proven, ready and affordable. As noted earlier, S-A has already shipped more than half a million Explorer 8000 boxes to MSOs, with Time Warner accounting for the biggest chunk. S-A also has a more advanced version of the Explorer 8000 box coming out that can carry HDTV signals as well.

Motorola has gotten off to a later start than S-A, hampering such MSOs as Comcast that rely heavily on Motorola products. But the cable set-top king has begun shipping its first combined DVR-HDTV cable set-top and has a more advanced, dual-tuner version of the box in the works. Pioneer Electronics Inc. and other consumer electronics manufacturers are also developing cable-DVR set-tops.

"I think it's a matter of the technology maturing and the price point getting appropriate," Hildebrand says. "Now the hard drives have gotten cheap enough and reliable enough."

Indeed, Hildebrand notes that the DVR hard drives have proven to be more reliable than PCs so far. "We have not had mass failures," he says. "We haven't seen any [failures] to speak of."

One more key driver behind the accelerating DVR rollout is that cable subscribers love them. As the various market trials and early service launches have shown, customers swear by their DVRs, rather than at them, once they start using them.

"Customer satisfaction is just outstanding," Thompson says. "It's probably as high as we've seen for any product we've ever tested. We've seen steady growth in sales in every market."

Thompson declined to disclose Comcast's sales figures or satisfaction scores. But Time Warner reports that DVR penetration has already surpassed 10% of digital cable households in such initial markets as Green Bay, Wisconsin, and Albany, Syracuse and Rochester, N.Y.

Such customer fondness for DVRs, in turn, is helping cable operators entice digital cable subscribers and slash their sizable digital churn rates. In the Raleigh, N.C. metro area, for example, Time Warner has chopped its monthly churn rate by more than 50% since it introduced the premium product in April, reducing it from 4.1% to 1.8% among customers with DVRs.

"It's a sticky product," Emmons says. "The data from Time Warner is very promising."

Now that they know DVRs will sell, cable operators are tinkering with the right price for selling it. Currently, they're charging digital subscribers anywhere from no extra fee to another $10 a month for the service, depending upon what other video packages they take. Most often, customers pay an extra $9 to $10 a month, a few notches below the $12.95 monthly fee that TiVo typically charges its stand-alone box subscribers.

In some cases, MSOs are also charging higher rental fees for the DVR combination set-tops. In Adelphia's case, for example, subscribers must pay an extra $4 to $5 per month for the DVR box, on top of the $3.50 a month fee for a standard digital cable set-top.

Penetration goals are still fuzzy as well. In a forecast earlier this year, Kagan World Media projected that cable operators will install 1.3 cable-DVR boxes in 2003, 3.6 million in 2004, 6.7 million in 2005, 9.9 million in 2006 and 12.5 million in 2007.

But, citing the newness of the product, cable executives generally decline to discuss what kind of take rates they expect from their DVR service. "That's the big question," Emmons says. "I wish I could say."

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