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Wednesday, October 13, 2004
Microsoft's Uphill Battle With DVRs


Despite all the fanfare over Microsoft's new Windows XP Media Center, Bill Gates and everyone else outside of the traditional entertainment industry may have a tough time selling digital video recording (DVR) products and services to consumers.

According to a Jupiter Research study released on Oct. 12--not coincidentally the same day Gates unveiled his new DVR-equipped Media Center Edition 2005--that market is destined to be dominated by the cable and satellite providers that already have set-top boxes in our homes.

Digital video recorders which let viewers pause and rewind live TV have been around for roughly seven years--about as long as digital video disc (DVD) players have been on the market. However, despite the best efforts of DVR service vendors like TiVo (nasdaq: TIVO - news - people ) and ReplayTV (now owned by D&M Holdings), only 4% of online households have any sort of DVR capabilities, while 55% of those homes now have DVD players, according to Jupiter.

"Consumers still don't really understand DVR technology," says Jupiter's Michael Gartenberg. "The people who have it are fanatical about it, but it's been a hard concept to articulate to consumers."

The technology eventually will catch on, and by 2009 Jupiter estimates that the cable and satellite DVR vendors will have 80% of that market, while stand-alone and PC-based vendors will see their shares shrink to 7% and 13%, respectively. Stand-alone devices had 26% of the DVR market in 2003. PC-based DVRs will see their share grow from 1.1 million to 7.2 million by 2009, says Jupiter--hardly the market dominance that Gates is accustomed to.

The trouble is that pay-TV services are already in 85% of U.S. households, and outfits like Comcast (nasdaq: CMCSA - news - people ), Time Warner (nyse: TWX - news - people ), DirectTV (nyse: DTV - news - people ) and EchoStar (nasdaq: DISH - news - people ) are pitching customers new products such as digital television and video on demand. It seems logical that most consumers are more inclined just to buy a whole package that includes DVR service from the folks already billing them monthly. Currently, 67% of homes that have DVR services are getting it via pay TV, and often these services are much less expensive than the alternatives.

Indeed, 70% of Tivo's subscribers come through its partnership with DirectTV. But that partnership is by no means certain to continue. In June, DirecTV Vice Chairman Eddy Hartenstein resigned from Tivo's board. Ever since News Corp. (nyse: NWS - news - people ) bought DirecTV, speculation has been rampant that the media conglomerate would look for DVR services elsewhere.

A TiVo spokeswoman says that it is talking to other pay TV outfits, and the tiny company (fiscal 2004 sales were $141 million) says it has further plans to reposition itself. "[DVRs are] not the company's ultimate game plan," says Chief Marketing Officer Matt Wisk. He says TiVo is working directly with content producers, such as documentary makers, to package and distribute programming directly to consumers. Recently it teamed with Netflix (nasdaq: NFLX - news - people ) on a venture that will try distributing movies via the Web to TiVo boxes.

And the introduction of these Media Center-equipped PCs from manufacturers like Dell (nasdaq: DELL - news - people ), Hewlett Packard (nyse: HPQ - news - people ) and Sony (nyse: SNE - news - people ) pose yet more competition for TiVo.

The good news: Stand-alone and PC-based DVRs really do offer superior services to consumers. "PC-based devices are complete home entertainment solutions," says Gartenberg.

The challenge for Microsoft and its partners is to sell consumers on a very complicated product that controls music, video and photos. As for TiVo, it must evangelize why its service is better--a marketing message it has thus far failed to deliver.

Says Gartenberg: "It's tough to sell consumers on premium products when there are cheaper and more convenient alternatives that fit most consumer needs."


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