DVRs tune in to integration

Digital video recorders may someday be ubiquitous, but first they're going to have to disappear.

Read more about TiVo and DVRs.

DVRs, which let consumers store TV shows on hard drives and pause live shows, draw rave reviews from most consumers, but sales have trailed expectations. That is expected to change in coming months with the integration of the devices into TVs, consumer electronics and PCs as a low-cost, or even free, feature.

"There is rock-bottom consumer interest, but off-the-charts consumer satisfaction, and it comes down to education," said Aditya Kishore, an analyst with research firm The Yankee Group. "The most effective marketing strategy is to bundle. DVR was never going to make it as a standalone product, but it has a very good chance of catching on as part of another device where it is surrounded by other features that help to mitigate price."

For an example of the disconnect between satisfaction and sales, look no further than TiVo, which will report fiscal second quarter earnings Thursday. The market-share leader has 422,000 subscribers--just a fraction of households with television sets and a number well below the adoption rate for products such as the DVD player.

The move away from DVRs as standalone boxes to integration with existing consumer electronics will likely lower the cost of the technology and tempt more consumers to try it out. Through integration, the total number of consumers could rise more than 15-fold in three years, according to Kishore.

That integration wouldn't be hard to accomplish. There are four primary parts to a DVR: a hard drive, a TV tuner card, a channel guide and a modem. PCs already have a hard drive and modem; the other two elements are becoming more common. Meanwhile, TVs hooked up to a cable set-top box lack only hard drives, which continue to drop in price.

"We believe that DVR is something that would be logical to build into the TV itself," said Scott McGregor, CEO at consumer electronics maker Philips Semiconductors. "All disk drives cost $100 or less these days. (At that point) you start thinking of your television as a device you accessorize rather than as this sort of fixed-function box that you never upgrade or change."

TiVo sees additional hardware competitors as an opportunity for both licensing sales and for expanding the DVR market in general. Jeff Klugman, vice president of licensing at TiVo, said that licensing helps the San Jose, Calif.-based company to avoid some of the "heavy lifting" involved in manufacturing and marketing a product. And it allows company to focus on getting its service and technology into more homes, he added.

The company created a licensing business unit in October and recently received revenue from one of its licensing deals. TiVo is so bullish, in fact, that it has doubled its revenue target for its second quarter from the previous estimate of between $10.5 million and $12 million, to between $23 million and $24 million.

Although TiVo would not specify the source of the licensing fees, both Sony and Toshiba recently have taken out licenses to TiVo's technology. The licensing deal with Sony roughly equaled the amount of revenue TiVo touted in its financial statements.

"Overall, we want to be able to provide TiVo in a way that our licensees want it," Klugman said. "By licensing our technology, they can figure out how they want to change the platform--it serves their objective and serves our needs."

Additionally, the licensing deals let manufacturers improvise on the basic concept. The deal with Sony is more extensive than the Toshiba agreement and has resulted in a product available in Japan, called MyCast. MyCast is a DVR that includes a feature allowing NTT DoCoMo's cell phone subscribers to program their DVRs from their I-mode phones.

TiVo's partnership with Toshiba is more limited and won't directly result in a DVR. Instead, the deal lets the electronics maker integrate TiVo technology and patents into chips that Toshiba will sell to other consumer-electronics manufacturers.

Still, that partnership could help to lower the cost of bundling DVR technology. Combining multiple features onto a chip helps to reduce the overall cost of manufacturing and the final retail cost, which analysts have said is the second-biggest obstacle to DVR adoption after marketing.

Bundles of joy
Integration of a technology to a chipset is considered a watershed moment, often leading manufacturers to adopt the technology at lower price points. Kishore estimates that there are about 1.2 million homes with devices that have DVR capabilities now, and he expects that number to expand to 18.6 million by 2006. That compares with the approximately 130 million PCs that manufacturers ship each year--close to half of which go to consumers.

"In our view, DVRs will only become mass-market products when bundled into other consumer-electronic devices," Marla Backer, an analyst with institutional research firm Brean Murray, wrote in an Aug. 2 report about TiVo's licensing strategy. "That is why we believe that TiVo's evolution to a licensing/software model from a hardware model should accelerate consumer adoption of TiVo."

The incorporation of DVR functions into PCs could mean further cost reductions, including the elimination of the need for subscription services: Free programming guides are available on the Internet that PC users can tap.

Access to TiVo's program guide, which is downloaded to the device at regular intervals, costs $12.95 per month, or $249 for a subscription that lasts the lifetime of the recorder. The DVR itself runs about $400.

The high fees are a "head wind" to the growth of DVRs, said Richard Doherty, research director at market researcher The Envisioneering Group.

"The PC-DVR market can take off much quicker than the subscription-DVR market because on the PC device it would be subscription-free," Doherty said. Also, he said, "audiences tend to go with platforms that they already use."

Additional groundwork for the convergence of DVR into PCs will be laid over the next few years through the natural action of Moore's Law, said Sean Maloney, Intel executive vice president. That is, chip designers are increasingly cramming more transistors into individual chips, which means more capabilities will be inserted into them.

In a few years, it's likely that all the functions necessary for using a PC hard drive as a digital video recorder will be incorporated into the standard sets of chips necessary for building a PC, making DVRs essentially free with every new computer. Some Japanese companies are already experimenting with how best to incorporate this function into consumer PCs, Maloney said.

Broadband and other communications functions will also be incorporated as standard PC elements. Currently, manufacturers ship approximately 130 million PCs a year, and close to half of these go to consumers.

"You are going to start to see built-in radio, built-in DSL, built-in cable," Maloney said. "The PC is a communications device. It is not a computer." That is similar to the pitch Microsoft is making for the entertainment version of Windows--which will go by the name Windows XP Media Center Edition.

A new class of PCs running Media Center Edition, due out this holiday season, will let consumers use a TV remote control to catalog songs, videos and pictures, as well as check TV listings. Windows Media Center also comes with a digital video recorder that offers TiVo-like features, provided that the PC contains a TV tuner card.

While Intel's processors are likely to power this new class of PC, Intel is also working with potential customers on a portable DVR. The device uses Intel?s XScale processors that will let consumers download from a PC or DVR such content files as video or audio clips, and store and play those files on a portable device that would essentially be a digital video Walkman.

News.com's Michael Kanellos contributed to this report.