Sizing Up Prospects of Yet Another Television Gadget

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A chicken in every pot; an IPO for every gizmo.

In these flush times, it doesn’t take long for a new product to find underwriters and offer stock to the public.

Such is the case of TiVo Inc. and ReplayTV Inc., two Silicon Valley companies that began selling digital video recorders, or DVRs, last year. The devices are cousins of the ubiquitous videocassette recorder. When connected to a television, they let viewers record programs on a hard disk drive instead of tape.

Do Americans hanker for another “box” near their TV sets? DVRs cost between $400 and $900 and are regarded by some entertainment executives as an interim product that will be eclipsed by video-on-demand.

But none of these questions dampened investors’ enthusiasm for TiVo, which filed an IPO last year when it had just 1,000 subscribers. TiVo raised $92 million in its initial public offering in September, and the stock which was priced at $16 closed as high as $71.50 in January before retreating to about $35 in recent days. Chief competitor ReplayTV recently filed a proposal to sell as much as $150 million in shares to the public.

Why the sizzle? DVRs offer greater convenience and control for TV viewers. With a few clicks on a hand-held control, you can instruct the DVR to record every episode of “The Sopranos,” for example, or search for programs with a favorite theme or actor. You can even pause, rewind and play back a live broadcast.

Both TiVo and ReplayTV were founded in August 1997. Each attracted big-name investors. But TiVo, based in Sunnyvale, beat ReplayTV into stores as well as to the stock market. TiVo reported sales of 26,000 units in 1999; RePlayTV, based in Mountain View, said it had shipped 6,000 units for the year.

ReplayTV has been selling its devices through its Web site, a toll-free telephone number and online retailers. The company said it won’t make a full-scale retail launch until mid-year.

Unlike TiVo, ReplayTV doesn’t require a $9.95 monthly fee for program listings. Both products allow a viewer to fast-forward, but Replay goes a step further with a feature that alarms advertisers and delights some viewers. “Only the ReplayTV has a 30-second skip button for zapping commercials, making it our pick” among DVRs, wrote Wired Magazine’s David Pescovitz last year.

The jeopardy to advertising revenue isn’t lost on TV networks or programmers. Some media companies invested in TiVo and ReplayTV last year to influence or temper the business plans. Both TiVo and ReplayTV now say they want to collaborate with advertisers to offer new ways of reaching target audiences. ReplayTV no longer talks up its “zap” feature.

Product capabilities

Some of the media investors are rattling their sabers for other reasons. In its registration statement, ReplayTV said it has received communications from Fox Television, Universal Studios and Walt Disney Co., among others, asserting that ReplayTV must obtain approvals and licenses for their programming. Disney is a ReplayTV investor.

ReplayTV and TiVo use identical words to describe their products: They allow “viewers to watch what they want when they want.” DVRs automatically record television shows while the viewer is watching, permitting the viewer to pause the program.

There are limits, however, to the amount and the quality of the recording. If you set the device to record at its best quality, more storage space is required on the hard drive and you can record fewer hours. If you settle for a lower quality, you can record up to 30 hours on some DVRs. The devices won’t allow you to transfer the digital data to a personal computer, but you can transfer a program from the DVR to a videocassette.

Both ReplayTV and TiVo require a phone line hookup to update the program guide from which viewers select programs. The DVRs can record programs from free over-the-air signals, cable TV or three satellite-TV services (EchoStar, DirecTV and PrimeStar).

If you rely on a “C-Band” satellite dish, you’re out of luck. Neither ReplayTV nor TiVo has access to program guide data for the dwindling C-band population, so the DVRs won’t work in those 1.6 million homes.

DVR companies face legal challenges from some patent holders. Both TiVo and ReplayTV have been sued by PhoneTel Communications Inc.; TiVo was sued last month by Gemstar International Group Ltd., a pioneer of interactive program guides. ReplayTV said it couldn’t rule out the possibility of being sued by Gemstar on similar grounds.

But lawsuits didn’t cripple the advent of VCRs two decades ago. VCRs are now found in 93 percent of U.S. households, according to the Consumer Electronics Association in Virginia.

The biggest challenge for DVR companies may be capturing a meaningful share of the market before video-on-demand services take hold.

Already, broadband delivery systems which use high-capacity phone or cable lines are angling to deliver video to viewers in real time. Microsoft Corp. announced last week that it will invest $57 million in Intertainer, an interactive, broadband TV service.

Watching AOL

Intertainer may enhance Microsoft’s WebTV unit, which has offered Internet access and interactive TV features since 1996, but it has only 1 million subscribers.

Microsoft is looking over its shoulder at America Online Inc., which has 22 million subscribers and has announced plans to launch a new service called AOL TV later this year.

TiVo agreed in January to work with AOL TV on a digital video recording feature for the service. TiVo also announced that it has joined DirecTV, the largest satellite TV provider, in developing a satellite receiver that will include a digital video recorder for sale later this year.

DirecTV’s closest rival, EchoStar Communications, began offering DVR service in December for $9.99 a month to owners of its new DishPlayer system, but the device can only record programs from the satellite service.

Amid the flurry of announcements, some veteran analysts caution that it is almost impossible to predict whether there is a profitable or enduring business in DVRs.

“Unless it catches on extra fast and captures enough adopters so that it becomes the de facto standard, it’s going to become overtaken by the tidal waves coming behind it,” said Lee Isgur, an entertainment industry consultant who some years ago correctly predicted the phenomenal success of the audio compact disc. “It’s still better to invest in content,” he said.

Isgur’s biggest stock position? CBS Inc.

Kathryn Harris is a columnist for Bloomberg News.

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