Forrester foresees smart TV

Says interactive revenues will balance advertising erosion

The use of personal video recorders (PVRs) will kill $18 billion in television advertising revenues by 2005, as consumers will use the disk-based devices to quickly skip commercials and thus erode the traditional spot-buying market.

But by the same time, the television industry will enjoy $25 billion in new revenues generated by interactive services.

That's the gist of "Smarter Television," a new report from Cambridge, Mass.-based Forrester Research that examines how the use of PVRs, interactive-program guides (IPGs) and intelligent data (metadata) will dramatically change both the way consumers watch television and how revenues are accrued and distributed between programmers, satellite and cable operators and interactive television firms.

Forrester sees the evolution to "smart TV" as a two-stage process. From now until 2002, cable and satellite operators will deploy over 10 million "smarter devices," or advanced set-tops. By the end of this year, says Forrester, some 34 million U.S. households will use IPGs (15 million from EchoStar and DirecTV boxes, 16.1 million from cable operators and 1.6 million from Gemstar-equipped TVs and VCRs); 750,000 will have PVRs; and 4.9 million households will enjoy interactive features from WebTV or cable and satellite services like Wink.

Once the appropriate set-tops are in place, probably by 2003, networks will start to deliver "smarter content" by embedding metadata into the video stream. Metadata will support commerce through the TV set, allow consumers to choose commercials targeted to their interests and provide links to either "walled garden" interactive content (filtered by the operator) or general Internet material.

Rest assured, the advent of smart TV doesn't mean that plain old "dumb TV" will go away, says Forrester Principal Analyst Josh Bernoff.

"These changes are not yes-and-no or black-and-white," says Bernoff. "We'll have exactly the same television content and distribution system, and layered on top of that will be a whole interactive world that only people with sophisticated devices can enjoy."

Won't smart TV create an "interactive divide" between basic cable or satellite customers and homes equipped with premium boxes? Bernoff isn't so sure that will happen, because box makers and operators will have strong incentives to place interactive boxes in as many homes as possible.

The report predicts that, due to PVR use, traditional TV ad revenues will peak at $65 billion in 2003. But, Forrester says, by 2005, interactive ads and commerce fees from IPGs and other non-traditional video will generate $17 billion from advertisers.