TiVo Economics

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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.

Which leads me to wonder: Why hasn’t TiVo been adopted more broadly?

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  1. Casey says:

    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.

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  2. m says:

    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.

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  3. Kevin says:

    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?

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  4. Murdock says:

    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.

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  5. emily says:

    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?

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  6. Kurt says:

    I agree with Casey. Long live Hulu!

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  7. Scott Moonen says:

    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.

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  8. Michael says:

    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…

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