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Replay Sale Signals Shift
in the PVR Business Case
by Ken Freed.
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The personal video recorder pioneer, shed of retail, now sells to SONICblue with promises of expansion.
 

ReplayTV's acquisition by SONICblue in January reflects a change in thinking about the business case for the hard-disk personal video recorder (PVR). The implications of the Replay sale, especially which of pre-sale contracts will continue, reveal primal trends in the American interactive television marketplace.

ReplayTV CEO Anthony Wood outlines his company's progression toward a sale. "We felt the original business model of subsidizing retail products and making it up on service revenues just was not a sustainable model for ReplayTV. That's why last year we changed to the business model of licensing our technology, and we've had a good reception."

Replay's ongoing partnership with Panasonic, for example, includes licensing the proprietary Replay software for use in stand-alone PVR boxes and consumer electronics products with integrated hard disks, such as set-top boxes and television sets. Replay also is developing a PVR licensing relationship with CE manufacturer Sharp.

Replay is expanding its relationship with Motorola, meanwhile. Beyond PVR development for the DCT 5000 and other advanced digital set-tops, Replay and Motorola are participating in a joint venture with Charter Communications and Vulcan Ventures to develop revenue-generating PVR services. Replay also will continue trial deployments with AT&T Broadband, Comcast and Time Warner.

The "ReplayTV" name will not vanish as a PVR vendor licensing to other businesses, apparently, but consumers who bought a branded Replay box now own a collectors item, effectively. What about the branded TiVo boxes still being sold?

"There are cable operators and other types of customers in the TV services business," Wood says, "who can successfully provide PVR subsidies, which they make up with e-commerce and advertising. But we recognize it's going to be difficult for any company to make a go of it as a stand-alone business."

Competitor TiVo is still mirroring Replay's original business model of a subsidized PVR, he adds. TiVo's subscription and hardware pricing is about the same as Replay's initial pricing while TiVo's subscription service lets customers pay up front or monthly.

"Maybe TiVo has something figured out that we don't understand," Wood says, "and we'll see what happens with stand-alone PVRs, but we foresee PVR integration into set-tops, televisions, computers, and portable players as the most profitable path forword."

TiVo did not comment for this story.

SONICblue CEO and Chairman Ken Potashner says Sb is leveraging its success with the Rio player to evolve a broad line of media products. First up is integrating video PVR functionality into the stand-alone protable Rio MP3 audio player, then comes offering PVR software for computers, including home media servers integrating Replay's PVR technology. Also in development is a mobile product using a wireless receiver to download more than 10,000 songs to a vehicle's hard disk.

Describing the origins of the acquisition, Potashner says Sb initially approached Replay about adding PVR capabilities to the Rio player. "We initially thought this meant licensing their technology, just as Panasonic and others are doing, but after we engaged in discussions with them, we saw that buying Replay would be best for both of us."

Pending SEC approval, the deal will be final by the end of March 2001. Replay's investors will see their stock convert to SONICblue.

The business case for subsidizing the PVR challenges Neil Gaydon, president of Pace Americas. Pace developed its own "X-TV" version of the PVR for integration into the set-tops that Pace customizes for each order from a satellite, cable or terrrestrial operator. "The entry price point is very important in any business," he says, "and PVR pricing at the moment is too high for mass markets."

The problem is all the additional costs beyond the hard drive and software, he says, such as adding a power supply for the hard-drive, plus additional memory, plus a central processor chip with sufficient horsepower to handle the PVR workload.

"The central question everyone's asking here," he says, "is how to pay for the PVR in a way that makes money at the end of it.

"The business equation is everything," he continues. "Sometimes you have to bear a high up-front cost to get into a market, to understand how that market operates, to be competitive by early market entry. Yet how far down the line can you wait for a payoff?"

Gaydon notes that TiVo and Replay both began with a business-to-consumer (B2C) model. Last year Replay shifted into on a business-to-business(B2B) model. "Which will prove better in the long run?"

Gaydon considers the TiVo strategy. "When you sign up for their guide and search engine, you get a cheaper box, but TiVo's take-up rate has been really low, even with a strong advertising campaign that helps educate consumers."

He predicts that how PVRs are defined in the marketplace will be the critical factor. "It's obvious that consumers will make or break PVRs, but it's taking longer than expected for people to wrap their heads around what exactly a PVR can do for them, whether the expense is worth it. The value proposition still is not yet clear to the public."

The value proposition is unclear to the public, perhaps, because the business case remains unclear for the industry.

Wood insists that integrating the PVR into consumer electronics products is the most viable path forward, and that's why the Replay sale to SONICblue is so propitious. Sb makes the leading portable MP3 player, Rio, which has sold about 1.5 million units.

"In today's competitive landscape," Wood says, "by merging Replay's PVR technology with that of SONICblue, we're both now in a stronger position than we were before the merger. We're both able to offer a more complete package to service providers than we could before.

The merged company will focus on developing and marketing the next generation digital platform," he says. "Replay does not have the resources to offer such a product, but SONICblue does, and together we can build a very profitable business."

"Replay has already taken the hard actions necessary to lower costs." Potashner says. Before the sale to Sb, Replay had begun restructuring itself, reducing staff by about 40 percent. Further layoffs are not now foreseen, but he concedes it's too soon to be certain.

Some staff departures may come back to haunt Replay/Sb. Replay's former business development executive, for example, was hired by the Microsoft TV Platform Group as director of business development for North America. Microsoft is launching its retail "UltimateTV" box with an integrated PVR in alliance with the satellite service DirecTV.

Sb will maintain Replay's trial deployment deals with cable operators and CE manufacturers, Potashner says, but many of Replay's other pre-sale deals will not endure.

Because Replay is no longer offering a branded TV programming services (as TiVo still does), the studio deal with Universal Pictures and Universal Music Group has been voided. Also voided are the PVR advertising deals with Coca-Cola, Ford, Toyota, and Universal Pictures. The expired or expiring contracts for "ReplayZones" on E!, Showtime and NBC channels will not be renewed.

Replay deals that were in the pipeline but not yet concluded will be examined and negotiated on a case-by-case basis, Potashner states . "Each will be assessed in terms of how it fits within our objectives. We have to look at what's out there and decide what makes sense."

On the issue of "ad zapping," he says Sb plans to support Replay's "QuickSkip" function on remote controls, which offers 30-second incremental jumps over any content, commercials and programs alike. In contrast, TiVo only enables fast forwarding over content.

On the issue of digital rights management, he says Sb will continue and expand Replay's negotiations with Hollywood to protect studio copyright holders from piracy. "We're not going to police consumers, but we can embed security software to avert unlawful downloads."

With all these elements in place, Wood looks forward to a bright future for Replay. "With the resources of SONICblue behind us, we're ready to move ahead rapidly to build the critical mass necessary for the PVR business to succeed." end
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STATUS OF REPLAY'S DEALS
(As of March 2001)

CORPORATE DEALS

SONICblue (Sb)

Acquisition by Sb; Letter of Intent (LOI) & definitive agreement in Feb. Pending SEC approval, acquisition will be final in April. ReplayTV stock converts to Sb.

CABLE DEALS

AT&T

Ongoing trial deployment.

Charter Communication

Ongoing joint venture with Motorola and Vulcan Ventures.

Comcast

Ongoing trial deployment.

AOL Time Warner

Ongoing trial deployment.

HARDWARE

Motorola

Ongoing PVR development for DCT 5000. Ongoing venture with Charter & Vulcan.

Panasonic

Ongoing partnership for CE products

Sharp

Ongoing licensing discussions

REPLAY ZONE DEALS

E!

Expired

NBC

Expires soon

Showtime

Expired

STUDIO DEALS

Universal Pictures/Universal Music Group

Voided

ADVERTISING DEALS

Coca-Cola

Voided

Ford

Voided

Toyota

Voided

Universal Pictures

Voided

Multichannel News International
First Published in Multichannel News International, March 2001.
Revised.
(c) 2001 by Ken Freed
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