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Industry is Trying to Change How We Watch TV, TiVo CEO Tells Conference

April, 2002

STANFORD GRADUATE SCHOOL OF BUSINESS—It is easier to develop revolutionary new media technologies than to reap their rewards. Innovators must deal with both inertia among customers and resistance from incumbent firms, industry leaders told a conference here.

"It just takes time," said Michael Ramsay, chairman and chief executive officer of TiVo Inc., about the challenge of marketing his company's product.

TiVo's digital video recorder contains a hard disk that stores more than 30 hours of television programming to free viewers from stations' schedules. The device scans electronic TV listings on its own and can, for example, automatically record the user's favorite shows.

"The industry is a bit nervous about this, but I don't know anyone in the advertising or entertainment business who doesn't confess that this is how everyone is going to watch TV in the future," Ramsay said.

However, although TiVo is in more than 400,000 homes, the five-year-old company has not grown as fast as expected. "We probably underestimated how much education people need in new ways to watch TV," Ramsay acknowledged.

The TiVo co-founder was the keynote speaker at this year's Future of Content Conference organized by MBA students at the Graduate School of Business April 13. The annual event surveys the state of the art in the converging media and entertainment fields and discusses their business implications.

Trends in television were a major concern at the day-long conference. Benjamin Wayne, president and chief executive officer of brand marketing firm Collabrys, was skeptical that TiVo and its competitors would reap the benefits of their innovative efforts. "Set-top box companies like TiVo are just bearing the cost of consumer education," he said.

Once people have been converted to the idea, cable TV companies will offer TiVo-like services directly to their subscribers, he said. Although slower to innovate, cable companies have the advantage of owning the channels into people's homes.

TiVo, based in San Jose, Calf., still has only 250 employees. Ramsay acknowledged the challenges of entering a market dominated by powerful conglomerates. "When you're dancing with elephants, you have to be pretty nimble," he said.

TiVo's strategy is to work closely with the industry giants, he said. Thus, Sony builds the boxes, and AOL Time Warner is TiVo's biggest investor. "Our partners have understood our role in being entrepreneurial and have not gobbled us up," he said.

As part of its strategy of getting along with the incumbents, it decided not to include a feature in its product that automatically skips the advertising. Such technology is threatening the classic 30-second spot and the decades-old business model of advertiser-supported free-to-air broadcasting. One of TiVo's competitors, Sonicblue, is being sued by the largest TV networks for incorporating such a function in its ReplayTV machines.

But, even without such a function, more than 80 percent of TiVo viewers manually zip through commercial breaks on a regular basis, Ramsay said. He added that he is not immune to this impulse himself: "As soon as I see an ad, my thumb takes over and I fast-forward through it."

However, he did not think that the $60 billion spent every year on commercial airtime would decline. "It may even go up. But it will be a different kind of ad," he said.

New concepts might include whole programs created by advertisers. As TiVo upgrades to higher-capacity hard disks, it will be able to deliver such programming to its subscribers, he said.

Michael Widman, a lawyer and consultant, noted that advertisers are trying to combine entertainment and advertising to hold viewers' attention. This trend includes the practice of "borrowed equity transactions," in which celebrities help market a product and vice versa.

Widman, a principal of the Cabana Group, warned that it is often unclear whether these deals—such as the partnership between pop group *NSync and Chili's Bar & Grill restaurants—actually benefit either side.

While most of the speakers were generally downbeat compared with the hype of the boom years, the representatives of one sector—video games—were as bullish as ever. "The economics are absolutely wonderful and delicious," said Bill Swartz, a 15-year veteran of the business who is starting up a wireless entertainment company.

He noted that the game business is less capital intensive and risky than movies. A major release might cost $5 million to $7 million to develop and market, but could easily rake in $20 million in sales.

Gabe Newell, chief executive officer of Valve Software, said that in the past 12 months, games have bypassed TV shows as the number one entertainment properties. The hit NBC show "Friends" held 2.9 billion viewer-minutes per month, whereas Valve's games—such as its popular "Half-Life" series—drew 3.5 billion, he said.

Profits will increase as the industry transitions to electronic distribution, he added. Companies could earn $30 per copy, up from about $7.50 per physical box.

Advertisers, meanwhile, are trying to take advantage of the growing appetite for games. One company, YaYa, develops "advergames"—using sponsored games as a marketing medium.

YaYa chief executive officer and president Keith Ferrazzi said that games are an effective way to "bribe" people into providing more information about themselves. Online games also can be used to reveal aspects of consumers' psychology. "You put a lot of yourself into a game," he noted.

Among YaYa's products is Spinopolis, an Internet game created for the electronics and engineering company Siemens AG to reach out to customers of its infrastructure services. Players build an efficient city by answering questions on topics ranging from transportation to healthcare.

According to Ferrazzi, Spinopolis is being played by local government officials around the world, and its list of high scorers includes Michael Bloomberg, the mayor of New York City.

by Cherian George

Related Links

Other Entertainment Conferences at Stanford Graduate School of Business