Digital convergence -- the integration of digital voice, audio and video services -- has become something of an overworn and overworked cliché. That's not to say that significant progress toward convergence hasn't been made, however. It's just been a longer and harder slog than digital technology enthusiasts had hoped it would be.
Digitally delivered television and video are arguably the biggest and most complicated pieces of the convergence puzzle, and for various reasons, they have been a long time coming. The extended wait has had as much to do with competition in the courts and industry restructuring as it has competition in the marketplace.
The momentum behind the transition from analog to digital video and TV is building, however. Large-scale rollouts of high-definition television are underway, and a new generation of digital video equipment is making real headway in the consumer marketplace.
That, in turn, has driven traditional network and cable TV broadcasters to take a long, hard look at their business models, with an eye toward redesigning them to take advantage of a radically different technology.
"The traditional television business model is doomed. It's just a matter of time before TV goes through a radical business transformation," said Kevin Werbach, assistant professor of Legal Studies and Business Ethics at the University of Pennsylvania's Wharton School of Business. "TV is no longer an isolated, special business; it's one distribution channel for video in an interconnected, digitally converged world."
New Technology + New Habits = New Business Models
Network TV broadcasters and their cable TV counterparts have not faced any significant challenges since cable TV was first introduced back in the 1980s. That's changing however, as people in the U.S., Europe and Japan are getting their first look at high-definition television (HDTV) and the latest generation of digital video recorder (DVR) equipment and digital cable program offerings.
The U.S. DVR market will experience rapid growth during the next five years, expanding from a current 13.7 million units to 54 million by 2010, predicted JupiterResearch in a recent market research survey. The finances of leading-edge digital TV companies such as
Sling Media and TiVo (Nasdaq: TIVO) 
are looking increasingly sustainable as signs point to greener pastures around the bend.
Developments in this market pose great opportunities and challenges for well-established TV and cable broadcasters and large media conglomerates. An increasingly technology-savvy viewing public, dissatisfied to varying degrees with the nature and content of network and cable television broadcasting, is voting with its pocketbook and snapping up new digitally delivered alternatives.
Throw into the mix the initial steps being taken by telcos to enter the field, and digital TV and video is a heady market at a pivotal point in the early stages of implementation.
Like broadcast radio, "broadcast TV is a dinosaur," said Jack Plunkett, CEO of Houston-based Plunkett Research, "but one that continues to keep its head above water by raising ad rates. Niche programming via the Web will give broadcast and cable very tough competition over the long term. Now that the 40 million household mark has been passed in U.S. broadband households, and online advertising has proven to be a phenomenal growth vehicle, entertainment will continue to migrate to the Web in a big way."
The shifting technological landscape, together with an evolving society and changing viewer habits, has prompted well-established TV and cable broadcasters to find ways to protect their dominant position in the mass TV market. They are crafting strategies designed to let them garner a share of the small but fast-growing niche TV market for digitally delivered alternatives.
The Three Pillars
Distribution, advertising and syndication have long been the main drivers of growth and profitability for network and cable TV broadcasters. The traditional form of this business model is increasingly in danger of becoming outmoded, however.
A decade in the making, digital TV technology companies are forging increasingly viable new business models built around equipment, software, distribution, advertising and content. They are not only more flexible and personal, but also less reliant on traditional forms of advertising.
"All the economic underpinnings of the broadcast industry -- exclusive spectrum licensing with significant regulatory obligations, revenue from interstitial commercials, and syndication -- came about largely by accident," Wharton's Werback said. "As the environment changes, why should we expect the economics of the industry to remain static?
"There will continue to be demand for, and revenue to be made from, high-quality mass-market video programming along the lines of today's prime-time TV shows," he added. " However, that will be a minority of the TV-like video that most people consume, and people may ultimately pay for it in a different way than they do today."
Silicon TV
Alviso, California-based TiVo has earned itself a place at the head of the pack of digitally delivered TV market entrants. Its innovative set-top boxes and service have set the technological standard in terms of viewing flexibility and personalized features. This has generated fierce loyalty among users and opened up opportunities to attract advertisers.
TiVo's total cumulative subscription base numbered just over 4.4 million at the end of the first quarter, a 33 percent increase year-over-year. During the quarter, the company added a total of 91,000 subscriptions, 51,000 of which were directly through TiVo.
The rapidly growing number of DVR purchases is a source of optimism for TiVo's management, and the company is looking to increase its value as a brand by expanding its retail presence. TiVo DVRs are expected to make their debut in 3,000 Radio Shack stores this summer, a development that has the potential to significantly raise public awareness of both the company's educational efforts and its equipment sales -- particularly among families, a market segment singled out by TiVo management.
However, retail sales of TiVo DVRs are just one of several growth and revenue drivers the company has been working to develop and add to its business model. TiVo is also uncoupling the tie between the software and hardware components of its mass distribution business, company Chairman and CEO Tom Rogers explained in a recent conference call on its Q1 earnings.
"We have unshackled our growth by eliminating the need for dedicated hardware. With Comcast (Nasdaq: CMCSK) and other cable operators we are looking to sign up, we are a software upgrade that transforms the generic DVR into TiVo," he explained.
Each additional DVR purchase and installation, whether it's a TiVo box or one from a cable operator, is another potential TiVo subscriber, he added. "We are actually very excited by the number of generic DVRs the cable industry is looking to roll out, because each of those boxes, as additional cable deals are done, becomes a potential TiVo home with both a subscriber and advertising revenue elements. This creates a powerful business model, beyond the one that exists for our stand-alone retail business."
Next week: Digital TV: A Changing Picture, Part 2
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