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Point, Click, Screen

It's Friday, and you feel like watching Pretty Woman one more time. Forget going to the video store or surfing through your cable video-on-demand menu. Just tell TiVo to download the flick from the Internet.

We're not there yet, but get ready.

Digital-video-recorder company TiVo is developing an Internet-based service that would allow subscribers to download movies and programming to their PC—and store it on their DVR hard drive for playback. By all accounts, the technology is at least a year off. But TiVo could change how people watch television—again.

That concerns cable and satellite operators, the distribution gatekeepers alongside broadcasters. If the service clicks, TiVo, which declined comment, could become a direct competitor in the video business.

Sanders Morris Harris analyst David Miller would like to see TiVo focus its energy on licensing its software to cable companies. An Internet programming service could be "an add-on feature," he says, for TiVo-charged cable boxes. Thanks to its interactive guide and sophisticated features, TiVo is already the "premium DVR," says Miller. A deal with Comcast, Time Warner, Cox, or Cablevision could drive healthy subscriber growth. Cable companies have opted to deploy their own DVR boxes and are enjoying strong take-up.

These developments came after a tough week for TiVo.

TiVo has been eager to license its software. To date, though, DirecTV is its only customer. Of TiVo's 1.6 million subscribers, 55% come courtesy of DirecTV.

Which is why the DBS company's decision to dump its 4% stake in TiVo sent the company's stock on a 15% downward spiral. (TiVo shares closed at $6.44 June 10.)

Although TiVo's business with DirecTV is secure through 2007, DirecTV is expected to look for deals with other DVR companies, such as British tech firm NDS. Both NDS and DirecTV are controlled by Rupert Murdoch's News Corp. DirecTV may be trolling for its own Internet-based content business. TiVo's service may seem singular. For now. But one executive at a VOD-technology company says cable companies are exploring Web-based programming for subscribers. And, as with TiVo, adding a VOD menu to that programming guide is a logical step.

But other companies are entering the fray.

Starz Encore Group and RealNetworks kicked off a movie service for broadband users. For $12.95 a month, subscribers can access a rotating menu of major theatricals that can be played on a PC or a TV linked to a computer. Netflix, an online video store that sends movies out by mail, could easily develop a high-speed Internet delivery service. Movielink allows its subscribers to stream movies to their PC.

How would a broadband content business affect TiVo's survival?

The concept is too nascent to even project revenues. But analysts say it could help grow its business. "TiVo-related predictions tend to have them either taking over the world or dying a quick death," says Yankee Group entertainment-media analyst Adi Kishore. The big driver, he says, is the DirecTV deal. Satellite companies like DirecTV and EchoStar's Dish Network need DVRs to compete with digital cable as well as to store thousands of hours of on-demand programming the way cable systems do. That's where incorporating a DVR such as TiVo into a set-top box comes in. (EchoStar has its own DVRs.)

There are other concerns. An Internet-based service faces technological constraints. With today's broadband connections, it wouldn't be true "on-demand." A two-hour movie could take two hours to download, provided there are no interruptions or network traffic. "It requires more preplanning," notes Stephen Necessary, president of system manufacturer Concurrent's VOD division.

In contrast, cable offers almost instant gratification with its VOD products. And its servers hold at least 2,000 hours of movies and programming at a time.

Cable operators boast another key advantage: content deals. It took years to sign agreements with the movie studios. Pay-per-view and on-demand movies are a $500 million business. The cable VOD window typically follows the video-store window. There is no way to know whether TiVo, or another company, could leapfrog the cable VOD window or would settle for a later window.

It sounds good, but TiVo, your Internet, and a date with Pretty Woman may be more than a click away.