MSOs SCURRY TO INTRODUCE DIGITAL CABLE-DVR SERVICE

Time Warner Cable has blazed the cable path into DVRs also known as PVRs (personal video recorders) for their ability to enable viewers to record, store, pause, rewind and fast-forward even live TV programs according to their personal whims. The nation’s 2nd largest MSO has introduced cable-DVR set-tops in 30 of its 31 cable divisions, with its large Houston cable system being the sole exception. In its 3rd quarter earnings report, Time Warner said it already had installed more than 250,000 DVR boxes in digital cable homes, up 67% from 150,000 at the end of the 2nd quarter.

But Time Warner, while the clear cable pioneer in rolling out DVR service, is far from alone. In late October, Cox Communications announced fresh DVR debuts in 6 of its biggest markets -- San Diego, Santa Barbara and Humboldt, Cal., Phoenix, Las Vegas and Cleveland. With those introductions and its earlier debut of DVR service in Gainesville, Fla., and Northern Va., Cox plans to offer its newest digital premium product to 35% of its more than 9 million homes passed by the end of the year.

“We'd like to expand the rollout as [fast] as we can,” said John Hildebrand, Cox vp-multimedia technology. “We think it’s a pretty strong product for people interested in TV.”

Similarly, Comcast Corp. is racing to make DVR service available to all of its 7.3 million digital cable subscribers by the close of 2004. Since the spring, Comcast has introduced service in half a dozen markets -- Northern Va., N.J., Charleston, S.C., Albuquerque, and Panama City, Sarasota and Ft. Myers/Naples, Fla. “We're very pleased,” said Page Thompson, Comcast vp-mktg. for new video products. “We plan to roll it out aggressively over the next year.”

The pace is likely to pick up further by the spring as other major MSOs join the DVR parade. Besides Cox and Comcast, such leading cable operators as Charter Communications, Cablevision Systems Corp., Insight Communications Co., Mediacom Communications Corp. and Adelphia Communications all have unveiled plans to offer DVR service in many markets by the end of next year.

Adelphia, for example, intends to begin 30-60-day DVR marketing trials in as many as 6-8 markets by early next year and then quickly shift into full commercial debuts of the premium product. In late Oct., the MSO introduced DVR service along with high-definition TV (HDTV) in its first trial market, Buffalo. “We are very positive about the technology,” said Matt Eammons, dir.- advanced video products at Adelphia. “We're committed to deploying the product.”

As a result, orders for advanced digital cable set-tops with DVR capability are streaming into the major manufacturers. In Sept., Charter alone announced it had ordered 100,000 broadband media centers with DVR, HDTV and DVD player capabilities from Motorola. Charter plans to introduce the new digital media centers in its Rochester, Minn., market before the end of the year.

Just a month later, Scientific-Atlanta (S-A) reported it had shipped 177,000 of its Explorer 8000 DVR set-tops in its first fiscal quarter ending Sept. 30, up 12% from the previous quarter. The DVR set-tops amounted to nearly 20% of S-A’s total digital set-top shipments in the summer quarter. S-A, which has the early PVR edge on prime set-top rival Motorola, said it now had shipped a total of 563,000 Explorer 8000 boxes.

Cable operators that had been leery of DVRs up to now are plunging into the market at least partly because of what their main rivals are doing. Satellite TV providers have been promoting DVR service heavily for years, incorporating the features into their digital set-tops and packaging the 2 pay services together. Thanks to those efforts, DirecTV and EchoStar now account for the lion’s share of the estimated 2.5-2.8 million DVRs in U.S. homes. In late Oct., EchoStar announced the sale of its 1 millionth DVR unit.

Such competition from the skies is likely to grow even more intense over the next few months. EchoStar, already the DVR market leader, is handing out free DVR-enabled satellite TV receivers to customers. And News Corp. Chmn. Rupert Murdoch, whose company is poised to take over DirecTV, has promised to match that offer.

Cable operators also are embracing DVRs because consumer demand for the devices finally is heating up after years of lethargy. In mid-Nov., TiVo, the best-known DVR brand, reported it had sold a record 209,000 service subscriptions in its fiscal 3rd quarter ending Oct. 31, more than 4 times as many as it in the same 2002 period. Some 150,000 of them came through DirecTV. With the surge, TiVo passed the 1 million-customer mark.

Another reason for the cable rush into DVRs is that the technology for putting the features into digital cable set- tops is now proven, ready and affordable. Besides shipping more than half a million Explorer 8000 boxes to MSOs, S-A has a more advanced version coming out that can carry HDTV signals as well. Motorola has gotten off to a later start, hampering such MSOs as Comcast that rely heavily on its boxes. But the cable set-top king has begun shipping its first combined DVR-HDTV cable set-top and has a more advanced, dual-tuner version in the works.

“I think it’s a matter of the technology maturing and the price point getting appropriate,” Cox’s Hildebrand said. “Now the hard drives have gotten cheap enough and reliable enough.”

One more key driver behind the quickening DVR rollout is that cable subscribers love them. As the various market trials and early service offerings have shown, customers swear by their DVRs. “Customer satisfaction is just outstanding,” Comcast’s Thompson says. “It’s probably as high as we've seen for any product we've ever tested.” For example, Time Warner reports that DVR penetration already has surpassed 10% of digital cable households in such markets as Green Bay, Wis. and Albany, Syracuse and Rochester, N.Y.

In turn, customer fondness for DVRs is helping cable operators slash their high digital churn rates. In the Raleigh market, Time Warner said it had reduced its monthly churn rate more than 50% since it introduced the premium product in April, to 1.8% from 4.1% among DVR customers.

Now that they know DVRs will sell, cable operators are tinkering with the right price. Currently, they are charging digital subscribers anywhere from nothing extra to another $10 a month for the service, depending upon what other packages they take. Most often, customers pay an extra $9- $10 a month, a few notches below the $12.95 monthly fee that TiVo typically charges its standalone box subscribers. “The product is a hit,” Adelphia’s Eammons said, “but the business model [still] is questionable.”