MSOs SCURRYING TO INTRODUCE DIGITAL CABLE-PVR SERVICES

Time Warner Cable has blazed the cable path into PVRs 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 second largest MSO has introduced cable-PVR 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 PVR 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 PVR service, is far from alone. In late October, Cox Communications announced fresh PVR 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 PVR service in Gainesville, Fla., and Northern Virginia, 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 PVR 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 Virginia, N.J., Charleston, S.C., Albuquerque, N.M., 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 PVR 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 PVR service in many markets by the end of next year.

Adelphia, for example, intends to begin 30-60-day PVR 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 PVR 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 PVR capability are streaming into the major manufacturers. In Sept., Charter alone announced it had ordered 100,000 broadband media centers with PVR, 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 PVR set-tops in its first fiscal quarter ending Sept. 30, up 12% from the previous quarter. The PVR 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 PVRs 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 PVR 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 PVRs in U.S. homes right now. In late Oct., EchoStar announced the sale of its 1 millionth PVR unit.

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

Cable operators also are embracing PVRs because consumer demand for the devices finally is heating up after years of lethargy. In mid-Nov., TiVo, the best-known PVR 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 PVRs is that the technology for putting the features into digital cable set-tops is now proved, 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 PVR-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 PVR rollout is that cable subscribers love them. As the various market trials and early service offerings have shown, customers swear by their PVRs. “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 PVR 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, such customer fondness for PVRs is helping cable operators slash their high digital churn rates. In the Raleigh market, Time Warner said it had slashed its monthly churn rate more than 50% since it introduced the premium product in April, reducing it to 1.8% from 4.1% among PVR customers.

Now that they know PVRs will sell, cable operators are tinkering with the right price for selling it. 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.”