Digital Video Recorders Threaten Ad And DVD Revenue

The rising popularity of digital video recorders (DVRs) and the declining price of digital storage threaten two major sources of revenue for makers of film and television: advertising and DVDs.

Ofcom, the U.K. regulatory agency that oversees television, radio, and wireless communication services, on Monday released its fourth annual report on trends in the UK communications market.

"The traditional advertiser-funded model of broadcast audiovisual output faces pressures both from the growing popularity of online advertising ... [and from other mediums]," the report observes.

Among the report's most significant findings are that 15% of individuals in the U.K. now have DVRs (double the number in 2006) and that up to 78% of DVR owners claim they always or almost always fast-forward through commercials in recorded programs.

"There's no question that the DVR with its ability to fast-forward through commercials has shaken up advertisers and content providers," said Cynthia Brumfield, founder and president of media consultancy Emerging Media Dynamics and a contributor to the IP Democracy blog.

However, things may not be as dire for advertisers as Ofcom's figures suggest. When respondents were asked about their ad-skipping habits in conjunction with their usage of other DVR functions, only 58% said they fast-forwarded through commercials and only 40% said they did so regularly.

In the U.S., there about 30 million DVRs at the moment, according to The Carmel Group, which expects that number to surpass 52 million or 46% of U.S. television households by the end of 2010.

DVR users, the Carmel Group's report notes, are "intolerant of ads in general," but they "indicate that they are the most receptive to ads that are personalized and customized toward them as individuals." This, The Carmel Group claims, supports advertisers' move toward personalized advertising.

To further complicate the advertising picture, Ofcom points out that media multitasking -- watching TV while surfing the Internet on a laptop, for example, is increasingly common. This means that TV advertisers may be paying for the attention of people who aren't paying attention.

DVRs, by virtue of convenience, control, and variety of content they offer users, may hasten the obsolescence of DVDs. According to Ofcom, 28% of DVR owners say that they watch fewer DVDs because of their DVR. Only 9% of DVR owners say they watch more.

That trend has Hollywood worried. In 2006, DVD sales accounted for 44% of worldwide studio revenue for filmed entertainment, according to the Entertainment Merchants Association.

DVRs will only become more appealing as the cost of storage (and the DVR itself) continues to decline. "As recently as 2000, a hard disk capable of storing 80 hours of standard definition TV content would have cost about $3,008," the report said. "Today that same amount of storage would cost about $50. Devices offering local digital video storage that were the preserve of professionals seven years ago are commonplace consumer items today in the form of DVRs."

Ofcom's report speculates that increasingly capacious and affordable hard disks and flash memory may make DVDs even less appealing as a video storage medium. "Tomorrow's DVRs, for example, may be able to store everything that has been broadcast on all channels for many weeks, allowing the user to go 'back in time' on the electronic program guide without having to set up any recordings or download anything from the Internet," it said.

This suggests there's an opportunity for companies like Apple and Google to become the new entertainment gatekeepers by providing search, storage, personalized advertising, and a friendly user interface.

Apple's Apple TV set-top box was supposed to be the foundation of just such a platform, but it hasn't caught on yet. According to Brumfield, Apple has only shipped several hundred thousand Apple TV units through July.

"In the very long run, the Internet will look like TV and the TV will look like the Internet," Brumfield said. "But that's 10 to 20 years down the road."

With any luck, that's time enough for media companies to adapt.

($1 = .50 British pounds)