In the two years since Pete Solderitsch bought a digital video recorder from TiVo ( TIVO), television just hasn't been the same. Now he never stays home to watch his favorite shows, since TiVo tapes them automatically, and he can fast forward through all those annoying commercials.

"It's definitely an upgrade over the whole VCR thing," says Solderitsch, a software developer at a small telecommunications firm. "I don't even have to think about taping my favorite shows. It's brain-dead easy to use."

While Solderitsch was an early adopter, one whose palmtop computer doubles as a mobile phone and a digital camera, he will have a lot more company over the next six years. By 2008, one out of every four American homes with a television will also have a digital video recorder (DVR), according to a study released in July by the Carmel Group.

"We estimate that there will 28.6 million DVR users by then ," says Sean Badding, author of the Carmel study. "But right now, economics and education need to improve. Consumers need to know what DVRs can do for them. And price points need to become more attractive."
In the Year 2008...
...the number of DVR users is expected swell to 28.6 Million, representing one-quarter of all American TV-watching households. But few will use standalone boxes, instead receiving their DVRs through either cable or satellite TV providers.
Category 2001 2002 2003 2004 2005 2006 2007 2008
Total DVR Users 800K 1.6M 3.9M 6.7M 10.4M 15.0M 21.0M 28.6M
Standalone DVR Users 100K 300K 400K 600K 800K 900K 1.1M 1.3M
Cable DVR Users 200K 300K 1.3M 2.8M 4.8M 7.4M 10.8M 15.3M
DBS DVR Users 500K 1.0M 2.2M 3.3M 4.9M 6.8M 9.2M 12.0M
Source: Carmel Group

Digital Video What?

After advertising on the Super Bowl, millions of consumers learned about TiVo, but few have actually seen or used its technology. DVR units work like a clever VCR, taking a digital television signal and manipulating it in many different ways, allowing users to store shows direct to disc and even pause live television.

Some DVRs, like TiVo, are part computer, able to automatically tailor options and features to individual user needs. Others, like ReplayTV, take the technology to controversial levels, allowing users to send digital copies of television shows to each other or automatically skip commercials. (For a look at how this is working out, click here. )

"Our product is all about lifestyle and family and control over what you want," explains Morgan Gunther, president of TiVo. "But the beauty is, if you have 400 channels and nothing is on, now you can tell TiVo you like Italian cooking or Sean Connery films and it will find it for you automatically."

Unfortunately, these features come with a steep price tag.

A TiVo with 60 hours of recording time retails for $400, not including a $10 monthly fee for the TiVo service. SonicBlue's ( SBLU) ReplayTV with 80 hours of recording time costs $750, not including a one-time service charge of $250.

And with an array of consumer electronics like videogame systems and DVD players all competing for the same expendable income, Badding says it's not surprising that only 800,000 DVRs sold in 2001.

Falling Prices

But by the end of 2002, Badding predicts that the number of installed DVRs will double, to 1.6 million units, with much of the growth coming from cable and digital broadcast satellite (DBS) providers. Instead of purchasing separate, standalone units, consumers will be able to get an all-in-one cable box that includes DVR as part of the package.

DVR capability is already available for DBS subscribers. DirectTV has partnerships with TiVo and Microsoft's ( MSFT) UltimateTV, while EchoStar ( DISH) has paired up with OpenTV ( OPTV). In 2001, DBS users accounted for 64% of the total DVR-enabled population.

By 2005, Badding estimates cable operators will have 4.8 million DVR-based users, while DBS providers will have 4.9 million. "We're already seeing this integration happen with DBS companies," he says. "It's available with DirectTV's TiVo combination box. Now it's going to be introduced by cable companies."
The Road to Fruition
When digital video recorders, or DVRs, first burst onto the scene in early 1999, investors were excited about the promise of something new. But three years later, the industry is awash in lawsuits as entertainment companies use the courts to protect their business and sort out difficult copyright questions in a digital age.
Date Event
Jan. 7, 1999 WebTV's DVR is integrated into satellite provider EchoStar's set top box.
Sept. 30, 1999 TiVo's stock debuts on the Nasdaq Stock Exchange.
Jan. 6, 2000 DirectTV invests in TiVo.
Feb. 7, 2000 Thomson Multimedia and Seagate invest in Metabyte Networks.
June 14, 2000 AOL invests in TiVo.
Jan. 7, 2001 EchoStar offers 501 series receiver with DVR capability free to subscribers.
Feb. 5, 2001 SonicBlue buys ReplayTV.
Sept. 5, 2001 ReplayTV debuts the 4000 series set top box, which allows users to skip commercials and send digital files to friends.
Oct. 31, 2001 Entertainment companies sue ReplayTV over the commercial skipping and file sharing features.
Dec. 12, 2001 TiVo and ReplayTV file countersuits against the entertainment companies.
Jan. 22, 2002 Microsoft announces restructuring of its UltimateTV unit and lays off 150.
April 29, 2002 The first DVR-enabled cable box, the Scientific Atlanta Explorer 8000, debuts.
Source: Carmel Group, TSC Research

Just over a month ago, this vision became a reality with the debut of the Scientific-Atlanta ( SFA) Explorer 8000 set top box, the first ever DVR-enabled cable box. While cable companies aren't expected to make DVR features widely available anytime soon, some, like Time Warner Cable and AT&T Broadband, will begin offering the service in select East Coast markets this summer.

Details on cable offerings aren't yet clear, but Badding estimates that it could cut the price of a unit in half. Or consumers could end up leasing their DVR-enabled boxes the same way they lease their current cable boxes. " Consumers are not going to see that $400 price tag, but cable companies could add on $10 to $15 a month to the cable bill."

When Do You Buy?

If the price tags don't give you sticker shock, then buying a DVR unit right now isn't such a terrible idea. Users like Solderitsch rave about their units and say they can't imagine watching television without it.

In TiVo's case, the likelihood that the unit will become obsolete is relatively remote because hardware updates focus on memory size, but not how the unit actually operates. The focus is on TiVo's software, which is updated by the digital stream headed into the box.

"No matter what unit you have, it's constantly being refreshed with new content so it won't ever get out of date," says Gunther.

But for those who balk at paying $400, waiting until Christmas could be a smart idea. Last year, many retailers and DBS-providers discounted or subsidized standalone DVR units. In some regions, people who signed on for satellite service got a DVR unit for as low as $99 after rebates. And with cablers beginning their push into the space, incentives could increase.

Ultimately, the price of a DVR will slide as acceptance rates inch higher and DBS and cable companies subsidize their cost.

"At the end of the day, price points are clearly one of the issues to mass acceptance," says Gunther. "At some point, this will be driven down to a mass-market price point of $199."

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