Andre Farris used to be a network executive's favorite viewer. Young, single, and with disposable income to burn, the 34-year-old San Francisco real estate broker was the kind of upscale big-spender whom TV advertisers crave. But since last year, when he ordered a digital video recorder from satellite operator DirecTV (HS ), Farris has been mostly zapping through Madison Avenue's lures. Says Farris: "The commercials got on my nerves."
POWERFUL THREAT. With millions more viewers like Farris poised to sign up for DVR services, network executives have plenty to worry about these days. Already scrambling as younger viewers drift off to play video games and watch DVDs, they face a potentially even more powerful threat: Over the next several years, DVRs, which record TV shows on hard drives instead of on videotapes, are set to hit the mainstream as cable and satellite operators start to offer them at huge discounts.
As a result, the number of DVRs in front of couch potatoes could nearly double, to 5.8 million by the end of 2004, according to tech consulting company the Yankee Group (RTRSY ). That number could jump to 24.7 million -- or more than one in every five TV households -- by 2007. By then, SG Cowen Securities Corp. analyst James Marsh projects, TV users will be zapping through more than 60% of the commercials, ignoring an estimated $6.6 billion worth of ads. "The DVR has the potential to blow apart the entire network business model," says media consultant Blair Westlake, a former chairman of Universal TV.
Network executives, of course, have heard such doomsday predictions before. This time, however, the threat is real: DVRs make recording shows and skipping commercials a snap. And the equipment is cheap and easy to get. Already, satellite operator EchoStar Communications Corp. (DISH ) gives DVRs free to new subscribers who agree to pay $4.98 monthly for DVR service. And Rupert Murdoch, eager to take as many as 1 million subscribers a year from cable, says his newly acquired DirecTV will likely match EchoStar's offer.
Those moves have cable fighting back: On Dec. 3, giant Comcast Corp. (CMCSK ) said it would begin offering DVRs to its 21 million customers by the end of 2004. And Time Warner Cable Inc. is rolling out DVR service in 30 of its 31 markets, including New York and Los Angeles.
AUDIENCE EROSION. How will broadcasters and ad agencies retaliate? No clear strategy has yet emerged. Many top network execs insist the arrival of mass market DVRs doesn't present an immediate problem. With a nearly $50 billion ad market, TV executives are hardly shaking in their Guccis (GUC ). "Worrying about it doesn't take up too much of my day," says NBC Entertainment (GE ) President Jeffrey A. Zucker. "I know its coming -- and it will be important -- but it's not coming this fall."
Maybe not. But network execs do face the immediate problem of DVR owners zapping through promos that alert viewers to their new shows, which could further speed audience erosion. To fight back, many networks have been promoting their shows by running the names and times of their upcoming programs along the bottom of the screen. NBC, a 6% owner in DVR pioneer TiVo Inc. (TIVO ), has gone a step further: For its recent promo of the Jan. 26 Golden Globe Awards show, it gave TiVo owners the option of clicking on a "thumbs up" icon that lets them set their machines to record the show when it airs.
More important, as the use of DVRs catches on, TV executives could face a nasty revolt from advertisers. The rumblings are already beginning. The future "is away from broadcast TV as the anchor medium," warned Coca-Cola Co. (KO ) President Steven J. Heyer last year. The company, which spends more than $300 million a year in TV ads, is veering away from 30-second spots with more money flowing into such areas as ad placements in DVDs and video games.
REAMS OF DATA. Still, broadcasters will have plenty of other opportunities to nab ad dollars. Coke, for instance, spent an estimated $20 million to put cups with its logo in the judges' hands during Fox's superpopular American Idol TV show. Coke isn't the only one: Product placements are booming elsewhere in TVland, says Devery Holmes, president of product placement firm Norm Marshall & Assoc. Her firm has seen its TV placements triple for its 60 clients, including placing a General Motors Corp. (GM ) truck on cable channel Bravo's Queer Eye for the Straight Guy and USA Today on NBC's West Wing.
Moreover, the arrival of DVRs isn't all bad news for TV and ad executives. Ad-zapping may eventually force Madison Avenue to get more creative and up the amps on their TV spots. To get viewers' attention, they'll have to turn out must-see Super Bowl quality ads like the 90-second Britney Spears spot in last year's big game, says Ted Sann, chief creative officer of ad agency BBDO North America.
What's more, the devices can collect reams of demographic data that networks and agencies can use to tightly target or "telegraph" ads to desired audiences. Coke marketers in October began airing monthly 25-minute music programs for TiVo's Showcase service, a menu-style page that allows viewers to record 30-minute music shows sponsored by Coke for later viewing. And, using TiVo's demographic information, ad-buying firm Starcom Worldwide plans to create tailored commercials for shows that TiVo watchers view most. Last year, it put Best Buy Co. (BBY ) ads featuring singer Sheryl Crow in the middle of MTV and VH-1 shows. DVR viewers could stop the ad and watch a longer performance by Crow that was sponsored by Best Buy.
As the DVR revolution catches on, that's just the sort of blurring of the line between programming and sponsorship that viewers could see more of. But if TV networks and advertising agencies aren't careful, it could also be just the kind of programming that viewers will increasingly zip right through.
By Ronald Grover in Los Angeles with Tom Lowry and Gerry Khermouch in New York, Cliff Edwards in San Mateo, Calif., and Dean Foust in Atlanta