TiVo push raises revenue, concerns

Digital recording company TiVo is testing new promotional methods to assure TV networks that it won't tune out their ad-supported businesses, walking the fine line between its customers and entrenched media giants.

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In a move that came with little advance notice, TiVo subscribers in the United Kingdom last week found the BBC comedy "Dossa and Joe" automatically pushed onto their digital video recorders (DVRs) unless they had already programmed the device to record another show during the same time slot.

The promotion, part of a broader deal with the BBC, set off a wave of complaints that caught the company off guard. Many customers were baffled by the show's appearance as a new menu item--one they had not recorded and could not delete. The program will be deleted automatically after four days, according to TiVo.

"In retrospect, it may have been a good idea to send a message to the subscribers," TiVo spokeswoman Rebecca Baer said.

TiVo has won a loyal following from customers who love the convenience of recording and watching shows at their own pace, rather than on the schedule dictated by the TV networks. But the company has been equally eager to court broadcasters and advertisers who see the ability of such devices to easily skip over advertisements as a potential missile aimed at their businesses.

Major media companies have filed a lawsuit against TiVo rival Sonicblue, alleging the company's ReplayTV recording devices infringe their copyrights. TiVo, with backing from major media players including AOL Time Warner, has walked a more conciliatory line.

Among other things, TiVo has been ratcheting up its advertising and promotions efforts with its partners to demonstrate that digital video recorders are not a threat to the TV-advertising market. The San Jose, Calif.-based company has already worked with the likes of Best Buy and Lexus to demonstrate new methods of promoting products on its DVR service.

Advertising represents just a fraction of TiVo's overall revenue, but the company expects it to contribute more in the future. TiVo receives most of its revenue from the approximately 400,000 subscribers to its DVR service. TiVo's service costs $12.95 per month or $249 for a subscription that lasts for the life of the recorder.

TiVo will host a conference call Friday morning to report its fiscal first-quarter 2003 results.

Playing both sides
Digital video recorders are similar to VCRs, but instead of recording shows to a VHS tape they store them on a hard drive. TiVo maintains a service that lets subscribers program DVRs to record their favorite shows, "pause" live broadcasts, and resume play without missing any material. They can also fast-forward to catch up with the live feed.

The ability to fast-forward over parts of shows has TV networks complaining that DVRs are putting their businesses in jeopardy. Several top-level executives in the last couple of months, including AOL Time Warner CEO Richard Parsons and Turner Broadcasting CEO Jamie Kellner, have spoken out against the dangers of ad-skipping features, saying they undermine a network's ability to make money.

The issue has split the DVR industry, with Sonicblue aggressively pushing the envelope with media companies and TiVo seeking to play both sides of the fence.

Sonicblue is unapologetic about its ad-skipping feature, called "Commercial Advance."

"Sonicblue is working to develop new broadband services to create new channels for content, whether that be targeted advertising or pay-per-view," said Andy Wolfe, chief technology officer for Sonicblue.

But Wolfe added that Sonicblue's main concern is customers who have said they don't want to watch commercials.

"When entertainment companies start investing in some of these new business models, then we're going to be there to support them," he said.

In contrast, TiVo has not been as active in promoting the ability to fast-forward through commercials.

"TiVo has been working within the confines of the current television market where programmers make money because they offer advertisers value in the form of reaching viewers," said Aditya Kishore, analyst with research firm The Yankee Group. "TiVo isn't making any enemies."

Kishore added that in some cases, viewers could go beyond just watching the commercials; they may be interacting with them.

In early March, TiVo signed an exclusive distribution agreement with Best Buy. As part of that deal, TiVo and Best Buy have been working on new commercials. When a Best Buy commercial appears on regular TV programming, an electronic tag appears on the screen. A TiVo subscriber that clicks a designated button on the remote control can access a commercial that is stored on a reserved section of the DVR's hard drive. From there, the subscriber would see content from Best Buy, showcasing products that can be bought from the retailer. Viewers can access such content whenever they want, and Best Buy can update that information constantly.

TiVo has also worked with Lexus on a sweepstakes tied to a commercial for its ES-300 luxury sedan.

Kishore said that without knowing how many TiVo subscribers reacted to the Best Buy and Lexus promotions, he couldn't be sure if they were more valuable than regular commercials. "But the nature of television viewing is changing...They're going to have to adapt the way commercials are created," said Kishore. "This is what these companies should be doing: looking for new ways to generate revenue through advertising for the service."

These promotions not only allow TiVo and its partners to directly interact with viewers and potential customers, it also lets them measure how anonymous viewers interacted with the promotion, TiVo said. For example, the companies can find out which Best Buy products viewers requested information on the most so they know what products consumers are interested in.

Unwilling participants
TiVo's efforts with Lexus and Best Buy required viewers to choose to interact with the promotions, but the "Dossa and Joe" promotion was less participatory.

"The new content is recorded into TiVo's reserved service area, a partitioned area of the hard drive currently used for the software for the receiver, program guide data, Inside TiVo and Channel Highlights," Andrew Cresci, vice president for TiVo Europe, said in a statement. "As it does not use the viewer's own storage area--the "Now Playing" section--it cannot be saved or deleted (by the viewer), but will automatically be deleted after four days."

The promotion--one of the more aggressive moves by TiVo and a partner--confused many subscribers who were not notified in advance that the show would be recorded.

"My TiVo just switched channels without asking me. 'Now Playing' doesn't show anything recording but 'TiVo Central' has an extra menu item: 'A must see from the BBC--"Dossa and Joe."' It's not a suggestion, and there certainly isn't a wish list for it. There appears to be no way of canceling this recording, or deleting it.

"I really hope TiVo hasn't started getting backhanders from the program makers to do this kind of thing. I'm pissed off that I missed the start of the 10 p.m. news because of this," one TiVo customer wrote in a TiVo Web forum.

TiVo spokeswoman Baer added that TiVo and the BBC plan to promote two more shows in the same manner, but said TiVo would be more aggressive in communicating to subscribers what it is doing. The companies have not yet determined how they will inform subscribers of the promotions.

TiVo does not have similar promotions planned for the U.S. market, Baer said.

Despite some complaints over the "Dossa and Joe" promotion, analysts said they expect the consumer fallout for such tests to be short-lived, and relatively unimportant compared to TiVo's bigger problem of courting content companies.

Interactive TV companies "are always doing things that either get the broadcasters upset or their users upset, so it's not a surprise," said Jarvis Mak, a senior analyst at research firm Nielsen/NetRatings. "On the broadcasters' perspective, it opens up some possibilities where it can work in their favor."

News.com's Gwendolyn Mariano contributed to this report.