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Video on demand may trouble digital video recording upstarts

Given cable operators' current focus on VOD services, DVR companies TiVo and Replay Networks may find industry forces ranged against them.

Judging by apparent progress toward delivering video on demand to cable customers, companies in the nascent digital video recording business might be in for some competition.

Much-anticipated video-on-demand (VOD) services, which offer the ability to order and promptly watch one's selection from a library of movies, are nearly a reality. Several more major trials of the technology were announced at last week's Western Show, the cable industry's answer to the Comdex trade show.

Digital video recorders (DVRs), which allow television viewers to pause and rewind live TV by recording video streams to the device's hard drive, also are coming online. But given cable operators' current focus on VOD services, upstart DVR companies like TiVo and Replay Networks may find VOD suppliers such as SeaChange, Diva and Concurrent Computer ranged against them.

Whether VOD will become friend or foe to DVR depends largely on whom one talks to.

"From a technology standpoint, the two technologies are very complementary. At the very least, VOD vendors are educating the consumer as far as new [capabilities] for their TVs," said Laurence Bloom, director of consumer electronics research at TechTrends.

DVRs and the associated service provided by TiVo or Replay seem to promise a new way of watching TV. For instance, a viewer could "pause" a football game, get a snack, come back and resume viewing without missing anything, even though the game in reality has continued on. These devices can also be programmed to record shows much like a standard VCR, but allow a user to automatically record an entire season's worth of shows with the click of a button.

Executives at TiVo and Replay say cable operators are excited about the new technology because it increases the audience size for advertisers and gives operators a potential new revenue stream in the form of monthly service fees for personal TV options. Others are optimistic about the future of DVR services as well.

DFC Intelligence is forecasting that revenue from personal video recording will generate $1.1 billion by 2005, while video-on-demand services will generate $526 million in sales by the same time.

IDC, another research firm, believes that 10 million DVR products, including set-tops, will ship by 2004. The popularity of TiVo-style devices will mirror that of DVD players because of high consumer interest and little required infrastructure, the company said in a recent report.

But so far, cable operators appear to be focusing on VOD services, in part because it is easier to figure out when they will make a profit from the service, say industry observers. Given the limits of disposable income, the initial high cost of DVR boxes will have consumers leaning towards VOD in the near term, TechTrends' Bloom thinks.

The more important question seems to be whether VOD will co-opt DVR's best features.

For example, AT&T's broadband and Internet services unit (formerly TCI) is looking to enhance its video business with VOD functions that create, in essence, a "Blockbuster in the sky," Dan Somers, head of AT&T's cable operations, said in a recent interview.

Taking that system and adding pause and rewind capabilities for broadcast programming is perhaps a logical way for cable operators to go.

SeaChange has a system for storing the broadcast programs it sells to broadcasters such as Fox, for instance. This could be integrated with a VOD system to provide broadcast programming on demand, said John Coulbourn, a spokesman for SeaChange, although no such plans have been announced.

Concurrent, which is engaged in VOD trials with Time Warner Cable and Comcast, said it plans to soon offer a "Personal Video Channel" feature for its products that enable it to replicate most of the functions of a DVR without having to use a seperate device. One advantage, Concurrent claims, is that users could have virtually unlimited storage of programs by using a server-based technology rather than the 20 to 30 hours limit of current DVR devices. In practical terms, however, the storage is limited by what the consumer is willing to pay for, as a cable operator's main office has a finite amount of space to put servers into.

"VOD is a replacement for Blockbuster," said Bob Poniatowski, director of strategic marketing for TiVo.

But in terms of showing any broadcast when a viewer wants it, VOD systems don't have the storage technology and fast connections into homes that are needed, he asserted. Also, TiVo has spent considerable time licensing content for the specific purpose of allowing it to be viewed anytime, which is something each cable operator would have to duplicate on its own, he noted.

Representatives from both TiVo and Replay additionally noted that VOD providers could have difficulty in replicating video recording functions because both companies hold patents in the field. TiVo's Poniatowski said that Cox and Comcast have invested in TiVo, while Time Warner Cable's parent company has invested in Replay, which could serve as an indication cable operators will have a hand in offering DVR functions to customers through the two companies.

With most market forecasts show optimistic growth rates, it's no wonder that cable set-top makers are looking to include DVR technology into their equipment as well.

Pace Micro, a British set-top maker with designs on the U.S. market, said it plans to add a hard disk drive to its set-top boxes. In order to offer DVR services, Pace will incorporate software from a company called NDS, mainly known for providing security technology to companies like DirecTV and Sky Broadcasting in the United Kingdom. NDS' software, called XTV, allows for essentially the same tasks as TiVo and Replay's service.

At the request of cable operators, General Instrument will be able to put a hard drive in its box that can record video by the end of next year, said Dwight Sakuma, director of consumer products and services at GI. Sakuma said that server-based video makes sense for movies ordered on demand, but the cost of adding the ability to record broadcast programs is an unknown quantity, he said.

Microsoft's WebTV can't be discounted as a competitor, either. WebTV has already started offering improved versions of its co-branded Echostar satellite receivers that will allow users to record and playback up to 12 hours of video. The DishPlayer 500 will be priced at $299; the digital video recording capability will cost an additional $9.99 per month on top of regular programming charges.

"All of our set-top vendors are looking at putting hard drives in boxes," but there are no firm plans to buy those boxes yet, said Jim Chiddix, chief technology officer of Time Warner Cable. Doing so adds cost to an already expensive system, so one strategy is to simply wait until component costs drop--as they inevitably do--before deciding, he said. Another alternative is to take care of those functions on a server.

If GI, the largest set-top manufacturer in the United States, includes the technology in their own boxes, where does that leave TiVo and Replay?

TiVo's Poniatowski suggested cable operators could provide the management services that aggregate content through the TV portal themselves, but due to competitive conditions, they may be more likely to outsource aggregation, billing and ad tracking services to firms like TiVo and Replay in order to offer the services quickly.

Right now, both VOD and DVR services are only being used on a limited basis. Time Warner Cable will be offering VOD on advanced digital set-tops in three U.S. cities next year, in preparation for widespread availability throughout the Time Warner network in 2001.

Ultimately, if VOD services become widely available, there could even be an increased need for managing content with a recording device, according to Replay executives. The question is then whether a cable operator can ever have enough bandwidth or storage space on the server to handle unpredictable requests for video streams, said Randy McCurdy, senior director of business development for Replay. The advantage of a digital video recorder is that it is easier to deploy them on a network without overtaxing network capacity, he said.

The only real issues delaying deals between Replay and cable companies, McCurdy said, is that the technology is new and not fully understood yet.

"People are trying to understand what's on the horizon. They are working on building an integrated box, and how that will work with a [cable operator's] system, and how we will be splitting revenues amongst the various constituencies," McCurdy said.