# TiVo Economics

I love my TiVo. And like a good economist, I’ve been trying to quantify this love. Here’s what I came up with.

I watch about six hours of television programming per week. The miracle of the “30-second skip” button means that I haven’t watched an advertisement in years. Consequently, six hours of programming only takes me four hours to watch, and TiVo saves me two hours per week.

Let’s say my hourly wage is \$100, and so I value these marginal couple of hours at around \$200. I’m home around 50 weeks per year, and so Tivo gives me a total of \$10,000 worth of time per year. I will get to enjoy this benefit for the rest of my life, and so we should take a net present value of this benefit stream. Using a discount rate of 5 percent, this yields a total TiVo-related bonus of \$200,000 worth of leisure.

Oh, and Betsey loves our TiVo too, suggesting that this humble machine has improved our household’s well-being by about \$400,000, versus a cost of \$200.

But that’s only part of the story. Because of TiVo, I no longer just watch whatever happens to be on TV when I’m in the TV-watching mood; instead, I get to watch my favorite shows from throughout the week. (I’ll admit that this includes Ugly Betty.) Perhaps this improvement is similar to what you get when you move from a choice of the major networks to also choosing from basic cable. Given that I’m willing to pay about \$45 per month for basic cable, this quality bump must be worth at least \$500 per year, yielding an NPV of at least \$10,000. Thus, while the quality improvement is reasonably important, my real love of TiVo comes from the fact that it saves me so much time.

What about the gains to the average American?

Time use data tell us that he watches 2.6 hours per day, or 18.3 hours per week; with TiVo, he can watch this programming in around 12 hours, saving 6 hours.

Average hourly earnings are around \$18, suggesting that TiVo saves time that could otherwise have been sold for around \$108 per week. We should also add in the benefit of higher quality television — around \$11 per week — and subtract the cost of the annoying service charge, which is around \$3 per week, yielding net benefits of \$116 per week, or \$6,000 per year. The net present value of this flow is around \$120,000 per person, or perhaps around a quarter of a million dollars per household. Wow.

I’ll admit that there are at least half a dozen questionable assumptions in my analysis, and so perhaps the benefits are only half or perhaps a quarter as big as my estimates. But still, the case for TiVo seems pretty solid.

And yet, given this amazing math, around 7 in 10 U.S. households don’t have a TiVo, or a DVR equivalent.

#### Casey

In my personal experience, the additional costs of a Tivo subscription and the required hardware cannot compete with free, on-demand viewing available on the internet. There is a smaller selection of (legally) available content, but there is enough to deter me from picking up an extra monthly bill.

#### m

Even if half the population adopts TIVO, loss in ad revenue for the networks will drive up the cost of cable service. Is the additional cost less than savings in time for an households. Guessing as the productivity goes up in general savings in time is likely to be higher. But the productivity has remained more or less stagnent.

Again all this calculation is from a trained economist, not everyone thinks like this, people are irrational.

#### Kevin

Prof. Wolfers:

I worry that the quality of television programming will decline because of DVR sets. As more people get DVR, more viewers will record shows and skip commercials. Firms that advertise during TV shows will slowly recognize that their ads are less effective; hence, the demand for commercial spots will decline. TV channels will receive less money, so they will spend less on TV shows.

This might be prevented if firms begin to substitute commercial advertising for in-show product placement.

What do you think? Is this a classic free-rider problem? Do DVR owners free ride on those without DVR, who pay the costs – watching commercials – necessary to fund TV shows? Will the quality of shows decline?

#### Murdock

I've had TiVo for years, I recommend it to everyone. I bought my sister one when she got pregnant. I've thought about buying my mother one. The reason most people don't have them? Its new technology and its scary. Most people feel that if they can't program their VCR there is no way they can operate this new fangled computer DVR thingy.

Too me the biggest issue is simply a matter of exposure. If you sat those 7/10 households down in front of a TiVo and gave them a quick show of how easy it is to use you'd probably sell a lot right their on the spot. Once you explain that the cost (\$.50/day) is easily re-couped in watching a simple 1 hour show in 42 minutes that argument goes out the window as well.

#### emily

I watch TV mostly on the internet (like hulu.com), with usually no commercials. The internet service costs me around 40 dollars a month. Then I'm a netflix subscriber, which currently offers a lot of movies and shows free online, and that's under 20 dollars a month.
I just couldn't see paying more for Tivo, because then I would feel the need to up my cable package.
Maybe a lot of people are in my shoes?

#### Kurt

I agree with Casey. Long live Hulu!

#### Scott Moonen

You should also measure how much additional TV you're watching because of the TiVo's affordances -- both because it reduces the amount of time it takes to view a program and also because its time-shifting provides you with many more tempting opportunities to fill your time.

It could be that in the end, you would only have spent four or fewer hours watching TV before your TiVo. But as you point out, even if TiVo doesn't give you any additional free time, you are deriving greater utility out of your use of your time in front of the TV.

#### Michael

This calculation only holds water if your TV-watching time is a slice of the same pie as your working time. But shouldn't that slice come from your recreation pie, for which you earn \$0/hour no matter what you're doing?

And if you're earning \$100/hour, take a break, please. Or don't. Because Trickle-Down Economics actually works in this calculation, too...

#### Jen

Here is your answer: average people don't look at TiVo in the same way as an economist. It's a luxury, the time savings simply aren't part of the equation.

I have TiVo, and can honestly say I watch less TV than I did before. Some people end up watching more TV because of TiVo.

I'm one of those strange folks who can easily live without TV of any kind and would still perfer to (though my husband's head would explode). Only with TiVo is TV worthwhile, otherwise it is a useless time suck.

#### Jan Christiansen

Your analysis assumes that as the alternative to TIVO you would spend the two hours watching the advertisements. That is probably not true. I have a PVR with my digital cable. My experience is that with the PVR I watch about twice as many shows as I used to.

#### Jake

Many of them do not want to save the time. An adult that watches that much TV per week is probably just watching whatever is on the TV. It seems that DVR/TIVO really appeals to people with interest in specific shows or movies.

#### Doug B

1. Can't do the math to see the benefit (particularly when you get into NPV).
2. Cash flow problem. For some, time saved can't be converted into the cash needed to even cover the \$3 per week?
3. There is a value that you have not considered in being able to view a program live / as soon as possible (in particular, I think of sporting events) that trumps the desire to watch it in the most efficient manner possible.
4. Choosing to watch TV is not a rational choice. In my rational moments I think that there are other things that I would rather be doing with my time, but impulsively, I plop down on the couch and watch. The initial \$200 purchase and the agreement to the service charge may cause my rational thoughts to kick in?

#### Sean Brooks

Great article - definitely some fun math. However, I think the trend you're pointing to (desired content, on demand, all the time) is being widely adapted online. People who are interested in moving beyond the traditionally commercial -inundated TV programming started moving their media search online years ago.

This was the original impetus for illegal downloading: people just wanted what they wanted, right now. The most successful online media outlets are those which offer content, for free and instantly. Now, premium content and an efficient portal to the content is usually worth people's money for a subscription.. but that's the direction it's all heading. Even sites like the NYT and the WSJ will eventually be content aggregaters as much as news outlets... but why did I watch the election on nytimes.com instead of anywhere else? Because the MANNER of the content delivery was great, even though the content was generally the same (I'm thinking of your totally awesome county-by-county electoral map).

TiVo is just the first step for users who want to move away from programmed and scheduled content. Maybe that is why it's not more widely adopted? Or maybe the general public is still happy with their regularly scheduled programming.

#### Bill

Many people don't concentrate on the TV when watching it. They do other things (watch the kids, fold laundry, whatever), only somewhat registering what's going on on the television*.

With a tivo, to skip ads, you'd have to pay closer attention, making you less productive at whatever else you're doing. And since you're doing other things and using the TV as little more than background noise, saving time on one show just means you're going to leave something else on in the background while you finish folding laundry or can put the kids to bed.

* - this is one of the reasons why Arrested Development, 30 Rock, and other shows that reward paying close attention don't draw the kinds of big audiences that Two and a Half Men gets with generic sitcom tropes, one liners, and the good old' laugh track.

#### Nylund

Could you increase your working hours per week by 2 and actually make that extra \$200 a week? Wouldn't that be a reasonable requirement in order to justify that assumption?

#### Gavin Andresen

I think there are three technical barriers that prevents more widespread adoption of Tivo:

1. You gotta connect it to either your land-line phone (if you still have one, and haven't gone to a cell-phone-only lifestyle) or your home network (if you have one) to really make Tivo useful. As wireless home networks get ubiquitous this is becoming less of an issue...

2. Making Tivo work with your cable TV is a pain. I love my HD-Tivo, but it took a month to get an appointment with Comcast to get a technician to come to my house and make it work.

3. You've gotta find space for the box next to your TV. It means Yet Another Device next to the cable box, DVD player, audio equipment, Wii, ...

One day maybe Tivos will be built-in to TV sets and the programming information will be sent as part of the digital TV signal...

#### DJH

I can sum up my reason for not going with a Tivo in one word: "Subscription." \$13/mo or \$11/mo on an annual basis is just too much to pay, considering the cost of the thing in the first place.

#### Aaron

This just in: Government bailout package to consist of a TiVo in every house.

Because I'm still using my VCR. I pre-record the programs and manually skip commercials. I've been doing this for 20 years.

Also, you have to take in account for the effects of commercials. When you watch more ads, you tend to buy more as well.

#### PaulK

I have a ReplayTV (the other original DVR), and we save/gain more because we are not stuck with a monthly charge for what is really just a TV guide. From an economics perspective, you were not being rational if you are paying a continuous monthly charge for something you could have paid a small upfront charge. For some using Cable company DVRs, it is included in a package they already wanted, so again, no additional cost.
But, the problem with your net present value calculation is that you are pricing your free time at your wage rate, which is not reasonable; this is normally done when calculating the cost of say taking off time to paint the house or something, but this relaxation really can only be cost compared with another free time expense (say going to movies). So, you need to compare the cost of just watching TV vs. TV plus paying monthly for TiVo. TV is less than your TiVo cost assuming all cable subscriptions and electrical costs are the same; you could add the cost of being subjected to the wast of watching ads, but what is that cost if this is just relaxation time? You did not say what you do with the freed up time (from skipping commercials), it seems unlikely it is work, so it perhaps another expensive hobby? So, I would say your NPV is negative and not positive.