NBC Allies With Firm That Challenges TV Traditions

In a ground-breaking alliance with a company whose main product takes dead aim at traditional network viewing habits, NBC will today announce it is taking a multimillion-dollar stake in TiVo Inc., which markets a set-top box that allows viewers to control when and how they watch TV programs.

Sunnyvale-based TiVo is one of two purveyors of a technology that diverts the TV signal to a high-capacity hard disk--similar to that found in most desktop computers--before sending it to the TV screen. The process allows viewers to record, pause, rewind and fast-forward programs--as well as zap commercials--without using videotape.

TiVo’s device, like that of its competitor, Replay Networks, also provides viewers with an on-screen electronic schedule that allows them to record programs with a click of their remote control. That is expected to promote “time-shifting,” or recording programs for later viewing, more powerfully than the convention video recorder.

Many in the consumer electronics and entertainment industries expect the hard-disk devices, which are known as “personal television” systems, or electronic VCRs, to take the consumer world by storm. Although TiVo and Mountain View-based Replay are so far the only companies selling the boxes in the retail marketplace, other competitors are sure to materialize soon. Microsoft’s WebTV subsidiary is expected to offer the disk technology in its next generation of Internet-and-TV decoders, and manufacturers of cable TV set-top boxes also are likely to follow.

TiVo’s basic product, marketed under the Philips brand and by the DirecTV satellite service of Hughes Electronics, provides for about 14 hours of recording time for $499, plus a monthly service fee of about $10; Replay’s basic model, marketed under its own name and, by Thanksgiving, under the Panasonic label, has 10 hours of capacity and sells for $699, with no monthly fee.

“The bottom line for our business is that five years from now all TV will be watched from a hard disk, as opposed to when it is broadcast,” said Steve Shannon, director of marketing and sales at Mountain View-based Replay.

If Shannon is right, that would lead to a revolution in the way television programming is produced, scheduled and paid for.

Many television executives already acknowledge that the traditional scheduling model--force-feeding viewers with, say, soap operas in the daytime, news at 6 p.m. and mass entertainment for the rest of the evening--may soon be a thing of the past.

Even more important, the electronic VCR’s threaten the very foundation of broadcast network economics--the reliance on interpolated commercials to pay for programming.

“There’s a threat here to all advertising-supported networks because it’s extremely easy to skip ads,” said Josh Bernoff, an analyst at Boston-based Forrester Communications.

For NBC, the deal is a recognition that resisting technology that expands viewer options may be futile.

“You can’t underestimate the appetite of the American viewer for more choice,” said Tom Rogers, who as the president of NBC Cable and head of the network’s Internet operations is spearheading the investment. “You don’t just sit there and not participate.”

In fact, NBC’s investment in TiVo represents a continuation of the network’s strategy of anticipating and even trying to control how new technologies affect its fortunes.

Under Rogers, the network has aggressively taken stakes in several other new media ventures. These include Intertainer, a provider of video-on-demand and other interactive entertainment over cable TV lines for viewing on personal computers, and Wink Communications, a provider of “enhanced” television--that is, information and other content blocks that viewers see on screen while watching conventional programming.

NBC and TiVo declined to specify the size of the network’s cash investment, which is understood to be several million dollars. Rogers is also joining the privately owned company’s board.

In return for its money, NBC will gain a prominent position on TiVo’s electronic programming screen, on which viewers can choose programs to record.

The investment is the payoff to a decision by TiVo to seek programming alliances with major entertainment companies. Compared to Replay, TiVo’s device makes it slightly more cumbersome, but not impossible, for viewers to skip through commercials.

The NBC-TiVo alliance underscores the extent to which the television networks, once the undisputed monarchs of home entertainment, are being forced to come to terms with fast-paced changes in programming and technology.

Over the last decade, cable channels have drained millions of viewers from the networks. The networks responded by acquiring and starting cable channels themselves. For example, Walt Disney Co. owns ABC as well as ESPN, the nation’s most profitable cable channel, and NBC started CNBC, which is now among the leading news and finance cable channels.

Technologies like TiVo’s and Replay’s appear to present an even greater challenge because they promote a vast expansion of choice for entertainment consumers--countless “virtual channels” through which viewers can, in effect, create their own viewing schedules.

“This is even bigger than the decision to upgrade to color,” said Ted Harbert, a former ABC executive now developing TV fare for the DreamWorks studio. “The new services add thousands and thousands of channels. So the erosion will continue and the network system will have to undergo radical change to be profitable.”

The TiVo and Replay devices are technologically similar. Both are beneficiaries of the plummeting price of digital data storage.

A key difference is how the two handle commercials.

Replay features a 30-second skip-ahead button that is marketed as a commercial zapper and has antagonized broadcasters and entertainment companies. By contrast TiVo omits such a button. It does, however, allow users to fast-forward through ads and programming, and automatically skip back to the point where programming resumes.

Rogers said the key to the broadcast and cable networks’ success in surviving the new technologies is to use them to expand audiences.

“We find that if people record, they watch,” he said, arguing that encouraging viewers to record NBC programs and watch them at their own convenience will allow programmers and advertisers to reach larger, not smaller, audiences.