Coming soon to a PVR near you

The success of interactive advertising lies at the intersection of opportunity and education. Personal video recorders (PVR), such as those offered by TiVo and Replay TV (acquired earlier this month by electronics maker SonicBlue) can give media buyers the opportunity to target specific types of consumers more closely, but industry experts say it's going to take a while to educate ad buyers who've spent a lifetime believing that the bigger the audience, the better the results.

"It brings some real challenges to the advertiser in the event that consumers decide to fast forward through the commercials," notes Robin Webster, chief executive officer of the Internet Advertising Bureau. "And it challenges advertisers to make sure that their message is so impactful and so interesting that consumers will want to watch."

PVRs are not exactly box populi with consumers either. Despite heavy advertising and the backing of media giants AOL Time Warner, Sony, Philips and DirecTV, TiVo has fewer than 180,000 units in the marketplace.

"Any time there are new models or new technology in the advertising arena, it typically takes a while before a successful model is built around it," says Murray Arenson, an analyst with Morgan Keegan. But Arenson believes that TiVo has the wherewithal to reach the critical mass necessary to make it an advertising force to be reckoned with.

Arenson projects TiVo's advertising revenue will total only about $700,000 for its current fiscal year, ending January 2002. He's also scaled back his estimates of total TiVo subscribers from 556,000 by January 2002, to 375,000. The company's own projections are a bit more optimistic, pegging anticipated ad revenue at about $3 million this year.

"The impact right now is negligible," says Joe Uva, president, Turner Entertainment Group sales and marketing. "There are hardly enough boxes out there now to start a trend. It's really not even enough to experiment with."

The problem facing the industry goes to the core of the clever, yet ambiguous, TiVo television ads that seem to encourage viewers to zap ads that they don't want to see. TiVo touts its value to the advertising community, while pitching itself as a way for TV viewers to skip those same commercials.

"We are giving media buyers new opportunities to enhance their traditional spots, to change them from the passive shotgun approach to one of reaching audiences in a much more efficient and effective manner," says Stacy Jolna, vice president, TiVo Entertainment Group, and the company's chief programming officer.

Ads can be uploaded via telephone line onto the TiVo hard drive and watched at the viewer's convenience. The ads sold by TiVo do not replace those in broadcast or cable programming, although future software upgrades could enable an advertiser to transmit content targeted to a specific type of consumer. Nothing is done in real-time, however. All content must be recorded on the hard drive and played back at a later time.

As promising as PVR technology is, there is a mountain of obstacles to overcome. Slower than anticipated consumer sales in 2000 forced TiVo to scale back its marketing plans in an effort to stem its cash burn and move more rapidly toward profitability.

And while TiVo has the bulk of the PVR market to itself now, some potentially huge competition is waiting in the wings. Both Scientific-Atlanta and Motorola are working on digital set-tops that would incorporate PVR functionality, and Microsoft has announced plans for UltimateTV, a subscription service that would include Internet access along with PVR capability.

"The biggest problem for this type of hardware is that there really isn't all that much that someone else can't do in their own hardware device," says Christine Arrington, analyst, Jon Peddie Associates. "TiVo has to be looking at their business plan and trying to find any way to wring revenue out of the personal TV model."

TiVo is bringing in some potent partners. The company recently expanded its relationship with major advertising agencies, including Starcom MediaVest Group and Digital@JWT, to develop innovative ads using TiVo technology.

The company is heading away from the traditional 30-second TV spot toward integrating advertiser messages within program content. Participants in a charter advertiser program can include up to 30 minutes of content on newly purchased TiVo units. The programming is designed to be a blend of entertainment and advertising content.

Arenson believes the effort could portend the TV ad of tomorrow.

"We've already seen a blurring of the lines between providing information and advertising," Arenson said. "Advertisers and programmers are going to have to blur those lines even further in the future."