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Tech Industry

Watching the digital revolution

A digital revolution is powering the consumer electronics industry, and personal video recorders are leading the pack.

A digital revolution is powering the consumer electronics industry.

Digital and Internet appliances are entering mainstream markets as costs have come down and services offerings have improved. DVD players and digital cameras have recently found widespread appeal. Businesspeople and students alike have embraced handheld organizers and other personal data assistants (PDAs). The market for portable digital music players has exploded and will continue to grow as more music distribution channels set up shop on the Net.

The personal video recorder is an emerging digital consumer electronics appliance that merges PC technology with the TV to produce an entertainment system with recording and programming features. Currently, TiVo and Replay Networks provide subscription-based television services based on this type of digital set-top box platform. Philips Electronics and Sony are following with their own versions of personal video set-top systems.

Personal video recorder systems allow viewers to pause, record, and instantly replay live television programs. The set-top boxes store programming on computer hard-disk drives and let viewers create personalized television "channels" that are automatically recorded and stored based on a user's profile. Both TiVo and Replay allow viewers to easily record television shows and are much easier to program than a standard VCR.

These companies hope in the future to offer network partners the opportunity to beam targeted advertising to viewers. The systems will send commercials to specific viewers, allowing advertisers to increase the effectiveness by targeting an audience that is likely to be receptive to their individual products. For example, Nissan may want to push new sports utility vehicles at viewers whose profiles indicate that they like sports and outdoor programs.

TiVo and Replay Networks are shipping their personal video recorders today. TiVo offers two versions: one that supports up to 14 hours of recorded programming, and another that supports 30 hours. Replay Networks offers three versions: a 10-hour storage system, a 14-hour system, and a 28-hour system.

The personal video recorder should be a huge commerce platform in the future. As the technology becomes more widespread, advertisers will be able to offer more details on products or specific buying opportunities to targeted audiences. By pressing a button on a remote control, viewers will be able to learn more about the products they see in advertisements and even buy products through the system.

Indeed, these type of set-top systems may facilitate e-commerce, perhaps even surpass such transactions over PC systems. Television as an appliance is more widely used than the personal computer, and the success of television shopping channels--such as QVC--leads one to believe that once set-top and "television-commerce" services become widely adopted, shopping through this platform will catch on.

Furthermore, over 98 million U.S. households own televisions and over 75 percent of these subscribe to cable television. Worldwide, over 900 million households have televisions.

As an added service for televisions, like cable services, set-top systems could share a significant portion of the television market in the next few years. If these digital systems are successful, most major consumer electronics vendors are likely to create and brand their own set-top products to benefit from the huge market opportunity.

The struggles surrounding WebTV provide an important lesson on reaching mass markets. Today's personal video recorders present a different experience for users than previous Internet and interactive television options, as they are far easier to use. TiVo and Replay services offer easy-to-use menu screens and remote controls that are similar to a standard television remote. With one or two clicks, viewers can record and play their favorite shows. WebTV was unable to grab a large audience because too many TV viewers were not familiar with the system's computer keyboard interface. In the future, viewers may be able to buy items and surf the Internet with similar ease through these set-top systems.

Consumers are more ready than ever to adopt new consumer electronics devices. DVD players have been one of the fastest-adopted appliances, after an universal standard was set and DVD disks became widely available. In the past year, digital audio players have become popular, emerging from obscurity to become one of the fastest growing digital consumer appliances. Because of the familiar TV interface, set-top systems should also find rapid adoption, and in the process create an opportunity for companies, investors, and consumers alike.

Personal video recorders are one of many new and interesting technologies on the consumer electronics front. As these Internet devices become more popular, the digital technology that powers them will also represent a growing investment opportunity.

Robertson Stephens maintains a market in the shares of TiVo and has either been a managing or comanaging underwriter for it or has privately placed securities of TiVo within the past three years.

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