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A Cable Lifeline for DVR Technology

Melissa Gerstein is anything but your typical early adopter of technology. For one thing, she's female. And at 26, as a research assistant at the National Academy of Sciences in Washington, D.C., she earns far less than the geeky male techies who swarm to the latest gizmos. Nevertheless, in February, Gerstein became one of the first cable customers in Fairfax, Va., to sign up with cable operator Cox (COX) for its new digital video-recorder (DVR) service -- a product that has long held promise of kicking off a TV revolution.

DVRs -- at first glance, souped-up VCRs that record to a hard drive -- make it easier for viewers to catch their favorite shows. You can record an entire season of your favorite program with the click of a single button -- or record two programs airing simultaneously on different channels while watching a third program live. "I'd heard of [DVRs], but I thought they were pretty expensive," says Gerstein. "Getting the service through Cox was easy, so I thought, 'Why not give it a try?'"

After years of false starts and hyped projections, DVRs may at long last be moving into the mainstream. Locked in a battle for high-end customers, cable operators, who control nearly 70% of the pay-TV market, are bundling DVR capability into digital set-top boxes. That makes it easier and less expensive for customers to test the service -- and less appealing for them to switch to satellite, which has been offering these capabilities for a while. Satellite giants DirecTV (in partnership with DVR pioneer TiVO (TIVO)) and EchoStar (DISH) already have 1 million subscribers to their respective integrated DVR services.

SOMETHING TO WATCH. Now, the more established and well-known cable companies are getting in on the action. As of Apr. 1, Cox offers DVR service in Gainesville, Fla., and Fairfax, Va. Time Warner Cable, which began rolling out the service in August, offers it in 15 of its 34 cable systems. Research firm International Data Corp. (IDC) projects the number of DVR homes will double in 2003 from 1.5 million to 3 million. By 2006, 20 million American homes will use DVRs to help tame the 200-channel universe.

What a welcome development for DVR evangelists, especially considering the spate of bad news in recent months for DVR companies: On Mar. 6, TiVO announced that in the fourth quarter it had added just 114,000 new subscribers -- 10% short of what investors expected. Three weeks later, SonicBlue (SBLU), parent company of No. 2 DVR manufacturer ReplayTV, filed for Chapter 11 bankruptcy, leaving its 100,000-plus customers in the lurch. Some DVR users started wondering if the greatest TV technology since the VCR would simply disappear.

Not if the cable guys have anything to do with it. Putting DVR functionality into standard set-top cable boxes eliminates the customer's upfront hardware costs -- between $250 and $500 for a TiVO or Replay. It also lowers the monthly subscription fees. TiVO asks subscribers to pay $12.95 per month for access to the digital program guide, or $299 for a lifetime subscription. Though prices vary by area, cable operators charge as little as $4.95 per month as part of a larger bundle of services and lease the hardware for free.

KEEPING CUSTOMERS HAPPY. Satellite operator EchoStar requires subscribers to buy a more expensive satellite receiver for $149.95 but charges no monthly fee for the program guide. "I always buy the newest thing out there, but I had a problem with TiVO and Replay," says Joseph Russell, a systems administrator at the University of Florida in Gainesville and a self-professed technology geek. "You had to pay a ton of money upfront for a hard drive that was rapidly becoming outdated," considering how quickly storage becomes bigger and cheaper.

Russell now subscribes to the $9.95 per month Cox DVR service. He pays nothing for the 80-gigabyte hard drive in his set-top box. And Cox promises to swap out the box if newer, improved hard drives become available.

From Cox and other cable operators' perspective, keeping customers like Russell happy is a top priority. His cable bill is nearly $100 a month -- and he has been a satellite customer, nemesis of the cable companies, in the past. After a rocky 2002, when the top cable operators saw their stocks drop by as much as 30% due to slowing subscriber growth and investor fears about accounting irregularities, offering services that will keep customers loyal is essential. "Cable operators need to find new ways to compete for high-end consumers who subscribe to premium programming," says Greg Ireland, an analyst with IDC.

COMPLETE WITH ADS. Even this early in the game, DVR appears to be a winner. After just six months on the market, Time Warner Cable has signed up 12% of its customers in Rochester, N.Y., says spokesman Mark Harrod. That's good news for DVR technology, which has spread largely via word of mouth -- and for Time Warner. After years of expensive investment upgrading to digital transmission lines, cable operators are eager for services that will quickly generate profits. In general, cable companies amortize set-top boxes after five to seven years. Selling DVR service for $9.95 a month can cut that time in half, says Lydia Loizides, an analyst at Jupiter Research.

And unlike DVR pioneers, cable operators won't find themselves locked in a battle with media companies who fear the technology could undermine traditional advertising business models. Neither Time Warner nor Cox offers the controversial "commercial-skip" feature that landed SonicBlue in legal hot water by allowing viewers, with the click of a button, to eliminate all ads in recorded programs. (Before it filed for bankruptcy on Mar. 24, SonicBlue said it was coughing up $3 million a month for legal fees.) "As a service provider, we don't want to make it too easy for customers to avoid advertising," says Lynne Elander, vice-president for video product development at Cox.

The compromise doesn't bother DVR fans. With digital fast forward, DVR users can blaze through a typical 1 1/2-minute ad segment in about 30 seconds. But the real power of DVRs, customers say, is the ability to make better use of the hundreds of channels they already receive. "I don't watch TV anymore," says Joseph Russell. "I watch recorded TV."

As for Gerstein, she records the entire season of popular TV series such as Six Feet Under and The West Wing, and she watches episodes at her convenience. She's also discovering programming she might never have seen otherwise, such as late-night HBO comedy Da Ali G Show. It's one more example of how DVR technology finally may be ready for prime time. By Jane Black in New York

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