Related Resources
Look up the latest Market Summary
Track your investments on MSN Money
Who owns your favorite stock?
Check how our StockScouter tool ranks your stock
Company Focus
Recent articles:
• 15 stocks you can buy for 'free', 4/30/2003
• Should you abstain from sin stocks?, 4/23/2003
• 7 hidden market signals to watch now, 4/16/2003
More...
| | Company Focus
Back a winner in the TV revolution
Viewers may be buying as many as 18 million digital video recorders a year by 2005. But it's not so easy to spot the companies that stand to gain the most from the next big thing in home entertainment.
By Michael Brush
Listen to recent converts of the TiVo digital recorder, and youll wonder how any of them managed to cope at all in the Stone Age of TV -- before the device (and others like it) let them perform nifty tricks like time shifting shows, skipping over ads and pausing live programs for a bathroom break.
They all swear theyll never go back to inconvenient appointment television. Whats more, they pitch their friends on this home-electronics device thats likely to revolutionize the way most of us watch TV in the coming decade. Sales of digital video recorders (DVRs) -- which sit alongside television sets and are roughly the size of VCRs -- are expected to grow as much as tenfold by 2005, when as many as 18 million units may change hands.
For investors, however, attempts to catch a ride on the emerging DVR wave are fraught with pitfalls. TiVo (TIVO, news, msgs), the Alviso, Calif., company that started it all, seems like the obvious stock to buy. But it may suffer the same fate as countless tech innovators before it, who came up with great products only to see the concept snatched away by bigger competitors.
For investors, TiVos competitors -- chiefly satellite and cable companies like EchoStar Communications (DISH, news, msgs) or Time Warner Cable, a division of AOL Time Warner (AOL, news, msgs) -- might seem like the better way to cash in on the DVR trend.
But its still too early to know for sure how much money these players really will make out of DVRs. Theyve only just begun rolling out the service. The initial response has been excellent, but DVRs are only being offered in test markets, and they are heavily subsidized.
As for the equipment suppliers to the cable guys, Scientific Atlanta (SFA, news, msgs) and a Motorola (MOT, news, msgs) appear poised to gain the most -- in sales and earnings and presumably in stock price, as well -- if cable customers eventually go for DVRs in droves, as many expect.
Big growth ahead
Identifying which companies will gain the most from the DVR movement may be difficult, but theres little doubt DVRs are going to be big. Fans like the devices because, unlike the familiar VCR, DVR programming is a cinch. You can easily command a DVR to capture any episode of "Friends" running on any channel, for example, then view the show at the time of your choosing. DVRs also can be ordered to grab all programs featuring an actor or topic you like. Plus there are no messy tapes, because the recording is done on a hard drive.
Features like these explain why DVR users quickly turn into addicts. It is the greatest, anyone who has one will tell you that, says one TiVo user. So the bold hopes for the product are no surprise. Forrester Research estimates that sales could hit 18 million units annually by 2005 -- up dramatically from the 1.5 million units shipped last year.
Some Wall Street analysts caution that those projections may be a little too ambitious. But they wont be that farfetched if DVRs break through the magic $200 price barrier soon. Thats the price below which sales of consumer-electronics products like VCRs or DVDs have skyrocketed.
Were actually not that far off. Circuit City (CC, news, msgs) currently sells TiVos for $250 to $350. Users pay a monthly fee of $12.95 (or a lifetime charge of $300) to download program schedules. Because DVRs are made of standard personal computer parts, you can expect prices of the boxes to fall by about 30% a year. Some analysts expect a basic TiVo in the $100 range in two to three years.
TiVo stock aside, heres a look at the other top players in the DVR sweepstakes.
ReplayTV
Owned by Denon and Marantz Holdings in Japan, ReplayTV offers a DVR that commands the attention of consumers shopping for the best price.
A ReplayTV box costs $199 with rebates, compared to $249 for the cheapest TiVo. And the monthly fees are lower at $9.95, or $250 for the lifetime charge. Setting up a home network of ReplayTV boxes costs less, too. Plus, ReplayTVs QuickSkip feature lets viewers jump right over ads, rather than fast-forwarding through them. (TiVo and most other DVR suppliers disable the QuickSkip feature because they are aligned in some way or another with network broadcasters who make their money from ad revenue.)
Cable and satellite offerings
In the contest between cable and satellite TV companies, the DVR has turned into powerful bait for subscribers. That might sound like good news for TiVo and ReplayTV. But most of the cable and satellite operators are rolling out their own DVRs with no help from these two players.
For example, the Dish Network, a satellite service offered to more than 8 million subscribers by EchoStar Communications, simply forged ahead on its own. EchoStar has the most DVRs out there, and they are not using anybody elses proprietary technology, says Mike Paxton of In-Stat/MDR, a technology research firm in Arizona. They just developed their own. What EchoStar is doing does not bode well for TiVo or ReplayTV.
Not to be out done by satellite providers, the cable companies are, of course, rolling out their versions of the DVR, again with scant help from TiVo and ReplayTV. Instead, the cable guys are using boxes made by Scientific Atlanta. Motorola will be rolling out a DVR box for cable customers this summer.
Time Warner Cable provides DVR service in 17 of its 32 divisions, and it expects to offer DVR in the rest by the end of the year. DVR has been a fair-sized hit so far. About 12% to 14% of eligible customers have signed up, even in middle-America cities such as Green Bay, Wis., or Rochester, N.Y. -- areas where marketers didnt expect customers to catch on to the DVR concept so fast.
Cox Communications (COX, news, msgs), the other cable company offering DVR service, makes it available in two of its 30 cable systems, Northern Virginia and Gainesville, Fla. Cox doesnt release specific numbers, but Lisa Pickelsimer, the director of video product development, says the response has been very positive since service rolled out in January.
Cable has fastest growth
Indeed, DVRs offered by cable companies showed the fastest growth last year. About 215,000 units were shipped, compared to 14,000 the year before, says In-Stat/MDR. Growth in stand-alone DVRs -- like those offered in retail shops by TiVo or ReplayTV -- was healthy at around 30%, as 300,000 units shipped, compared to 205,000 the year before. Satellite and other forms of direct broadcast DVRs grew to 709,000 from 619,000, according to In-Stat/MDR.
Its easy to see why cables DVR service takes the lead in growth. Cable subscribers dont have to fork out any extra money for the box. And the monthly fees are typically lower, too -- at $4.95 to $9.95. (To receive the service, however, cable subscribers must have digital service, which costs more than traditional analog.) And with a cable companys DVR, you can record two shows at once, even while watching another. You also get picture in picture, even if it's not a feature on your TV set. Plus you can try out the service for free before signing on.
Besides these advantages, a natural evolution in digital broadcasting may be pushing DVR service into the cable and satellite camp. DVR is not a product, but almost a set of features that wants to be attached to a TV product or service, says James Penhune, an analyst with Strategy Analytics, a technology research and consulting firm in Newton, Mass. People dont want to have to buy a separate box, plug it in and figure it out.
That could spell trouble for TiVo and ReplayTV. Fundamentally, both of them are in one of those businesses where they came up with a good idea but its an idea that lots of other people can recreate, says Penhune. Its sort of like the first guy who came up with an off-the-shelf personal computer.
In other ways, cable and satellite operators are simply the best positioned to offer DVRs. The winners will be the pay-TV operators because they control what boxes go into the homes of about 80% of households, says In-Stat/MDRs Paxton. The stand-alone DVR will see some decent growth, but it wont be anything like satellite or cable. You have to wonder whether a company like TiVo will be around in four or five years.
The potential revenue gain
If cable companies do win the day, DVR could provide a decent revenue kick. Imagine that half of the current 6.3 million Cox subscribers signed up for DVR at an average monthly rate of $6.95. That would produce $270 million in revenue. And that works out to 5% of the companys estimated $5.5 billion yearly revenue.
Despite the potential growth, it doesnt make sense to buy cable shares now on this scenario alone because its unclear whether subscribers will pony up in the same numbers as the projections show.
True, the initial response has been strong. But cable companies typically subsidize the service by not charging customers for the DVR boxes. The boxes cost cable companies around $500, about half of which is for the DVR features. At that rate, it takes cable companies about three years to break even, assuming a monthly fee of around $7.95.
True, churn rates among DVR users are remarkably low, which helps keep down costs. But will that be the case as more subscribers experiment with DVRs? And its still too early to know how much troubleshooting call volume to expect when customers who are less tech-savvy start signing up.
DVR revenue wont be in the cable stocks soon enough to matter, said one cable stock analyst whos telling clients its too early to buy shares in the group on the DVR trend. The initial impact is going to be to keep cable operators competitive against satellite. So if they win back customers they lost, theres an economic benefit to that.
Partnerships needed
All this leaves TiVo and ReplayTV time to ensure their survival by angling into the cable and satellite business through stronger partnerships. TiVo already supplies boxes for DirectTV, a satellite service that is a unit of Hughes Electronics (GMH, news, msgs). But in a deal to play out in the coming months, News Corp. (NWS, news, msgs) will wind up holding about 35% of Hughes, after Hughes is spun out from General Motors (GM, news, msgs).
Its not clear what the presence of News Corp., a big satellite service provider in Europe, will mean for the TiVo alliance with DirectTV. We are very happy with that relationship today, says DirectTVs Bob Marsocci. But we will continue to review the relationship. Meantime, sales of TiVo units by DirectTV may eat into sales of stand-alone TiVo units.
ReplayTV has licensed technology to Motorola, but neither company offers an outlook on how much of the ReplayTV tech will be used in the future.
Advertising impact
Even if cable and satellite companies do win the DVR race, the resulting shift in consumer viewing patterns could, ironically, create new problems for some of these companies. Many cable and satellite providers own pieces of programming operations that make their money from on-air commercials, and as such, they stand to suffer as more DVR users skid over more and more of those commercials. But if theyre smart, theyll figure out a way around the problem, says one advertising expert.
I dont think that people having more control over the television environment will necessarily mean radio, magazines or the Internet will get more ad revenue, says David Ernst, director of futures and technologies for the Initiatives Media division of advertising behemoth Interpublic Group (IPG, news, msgs). After all, when you read a magazine you have total control over it, and that does not change the fact that magazines are a good way to reach people.
But cable companies and other content providers will to have to come up with advertising thats so compelling, viewers wont want to skip over it. That means more product placement, and better infotainment. Ernst thinks we also might see a return to single-sponsor support of shows, which can create strong ties between a brand and a program -- just like in the very early days of low-tech television.
|
