Although media convergence is often associated with digitalization, traditional media formats were already beginning to blend prior to the widespread diffusion of digital media platforms. The videocassette recorder (VCR) brought theatrical films to the television screen, eroding traditional media boundaries while allowing interactivity in the form of rewinding, pausing, and fast-forwarding. This sense of control and interactivity continues to be a primary characteristic of convergent media. With the diffusion of digital technologies, traditionally discrete media have continued to merge while allowing increased control for the user.

Nicholas Negroponte (among other media scholars) suggests that digitalization has reduced print, film, and video to a universal format of binary data, so that the only real difference among media is the choice of display technology. As these previously disparate media are digitized, image and text are translated into lines of ones and zeros, becoming a flexible stream of information to be transmitted through wireless satellite and microwave technologies, fiber-optic cables, or the copper wires of traditional telephone lines. The information can then be displayed on a television screen, a personal computer (PC), or a cellular phone. The primary limitations on this process are the storage capacity of the receiving device and the bandwidth of the transmission channel. With the ongoing diffusion of broadband technologies such as fiber-optic cable and wireless satellite transmission, it is increasingly easy for the media consumer to interact with a variety of formats over a single network. Digital cable service, for example, offers video-on-demand (VOD) as well as a plethora of video and audio channels, and the home consumer can also hook up a network-ready game console, such as Microsoft Xbox or Sony PlayStation, to use their television as a gaming display, while playing with distant users on the network. These digital networks allow both upstream and downstream data transmission and allow the user more control over the media product, whether through digital video recording, VOD, or access to information services. DVRs allow the television viewer to manipulate television content, skipping commercial breaks even while a program is still being broadcast, and later burn the edited program to a digital video disc (DVD) for future viewing. Home media servers integrate DVR technology with PCs, so that users can transmit movies, television, audio, and still-image programs to displays throughout the house from a single computer.

Efforts to market convergent technology to the home consumer include WebTV, DVR products such as TiVo and ReplayTV, and PC media servers. WebTV, founded in 1995 and purchased by Microsoft in 1997, was marketed as a device that would bring Internet connectivity to the television, bypassing the PC. To bring interactive television content to consumers, Microsoft formed an agreement with the CBS network to integrate interactive capabilities into dramas, sports programming, and reality shows, such as CSI and Survivor. Still, as PC prices fell in the late 1990s, there was little customer interest in using the television as an Internet interface. WebTV, now called MSN TV, has been considered a commercial failure. Microsoft’s next attempt at converging television and Internet technologies was UltimateTV, a product that offered both DVR capabilities and Internet access via a satellite receiver. By 2000, however, other DVR products such as TiVo and ReplayTV were already on the market.

ReplayTV and TiVo decks were first available to consumers in spring 1999. With 10 gigabytes of hard drive space, these products could record 14 hours of video, providing the ability to pause and rewind a television program as it was broadcast. Both devices cost about $700, but TiVo became more commercially successful, possibly because of its enhanced capacity to learn the user’s viewing preferences and record appropriate programs automatically. The user would connect the TiVo unit through the phone line or a broadband connection, allowing the unit to download and update program information. By choosing a particular program, the user could ensure that all new episodes of the selected program or similar programs would be automatically recorded.

In 2003 TiVo storage capacity had increased to 80 hours on the basic DVR model and TiVo had formed an agreement with DirecTV, the largest satellite television service in the United States. This connection to DirecTV helped TiVo revenues grow by almost 75 percent in the third quarter of 2003, and it is credited with adding 150,000 new subscriptions for TiVo in that quarter, out of a total of 209,000. In late 2003, TiVo was estimated to get about half of its subscribers from DirecTV customers, so that TiVo was expected to reach 1 million customers total by the end of 2003. This agreement with DirecTV has benefited TiVo substantially, but may lapse if NewsCorp follows through on its proposal to purchase DirecTV from its corporate parent, Hughes Electronics, in 2003. NewsCorp, which owns a rival DVR service, NDS, could either drop TiVo in favor of its own DVR technology or use this leverage to purchase TiVo at a reduced cost.

TiVo has also been unable to form an agreement with a major cable provider. Thus far, multiple system operators (MSOs) have been reluctant to commit to offering premium DVR services, although some MSOs, such as Time Warner Cable, do offer generic DVR capability with devices manufactured by companies such as Panasonic, Samsung, Toshiba, and Hitachi. These “generic” DVRs, like their brand name counterparts, are equipped with hard drives so that users can record television programs onto the drive, edit programs, and even write the finished program to a DVD for long-term storage. In addition, users can watch a program while it is still recording but are unable to access the program listings features provided by TiVo. Some of these hardware companies are also producing set-top boxes for TiVo and DirecTV use, allowing up to 120 hours of media storage, as well as DVD-recording capabilities. Meanwhile, other forms of interactive television are chiefly of the “two-screen” variety. Viewer surveys demonstrated that television program websites received a high number of hits during the actual broadcast, and in response, shows such as the CBS network’s CSI Miami have included a variety of interactive activities targeted at audience members as they are watching the program. The interactivity is two-screen, because the user accesses both the television screen and the screen of the PC.

Media servers are another type of home entertainment technology taking advantage of convergence. Examples of these devices include products from Hewlett-Packard, Sony, and Prismiq. These servers tap into the home Ethernet network or can function through WiFi wireless networks. The user attaches such devices to a PC and makes it into a media server, sending videos and music to the home television and stereo. In addition, some products also allow the user to go online to check e-mail, weather, theater times, and other information services. Because some media servers only work with videos and music already purchased by the user, there is no subscription fee, as there is for TiVo or other similar DVRs receiving signals over cable or satellite. These media server devices incorporate digital-rights-management software and will not allow media from unrecognized sources to be displayed even if those sources are not illegal copies. This digital-rights-management code also will not break the encryption commonly used on DVDs, so such films cannot be shown on some of these devices. However, many media servers do make use of DVR technology, so the user is able to record, edit, and store television programs. In addition, many digital media servers and DVRs will now allow content to be delivered to any TV in the house, offering networked media services between multiple set-top boxes. In 2003 the cost for basic models of media servers was between $200 and $300. While some media server products are sold separately, to be hooked up to an already-purchased PC, Hewlett-Packard, Gateway, and other companies are also marketing PCs with built-in media server components, offering similar capabilities. The market for convergent television technology is expected to grow significantly in the next several years. In 2003 only about 1.5 percent of television viewers used personal video-recording technology, but market research firms such as the Yankee Group and Forrester Research predict that within four years, nearly a fourth of television households will have DVRs, many through cable and satellite providers.

The diffusion of convergent media products in the home creates new problems and opportunities for traditional media models. Two pressing issues surrounding DVR technology are the increasing ability for viewers to skip commercials and the problem of audience measurement, as fewer viewers watch shows in real time. According to surveys by Forrester Research, 60 to 70 percent of DVR users skip ads during playback. TiVo released information on viewing habits of 700,000 users in fall 2003, showing that prime-time advertisements, the most costly to purchase, are also the most likely to be skipped. According to the company research, over three-fourths of viewers who record shows to watch at a later time edit these commercials. The TiVo report also showed that about 60 percent of the DVR’s use is for timeshifting, or recording shows for viewers to watch at a later time. Among programs typically viewed live, such as news and sports, only 17 percent of viewers use their TiVo devices to skip commercials.

Advertisers and television sales executives have responded to this perceived threat with a variety of strategies. Product placement is one option, as advertised products are integrated directly into the content of the programs, but this is not considered an adequate replacement for traditional commercials. Another possible strategy is for advertisers to sponsor entire shows, and in 2003, TiVo formed an agreement with Coca-Cola to sponsor an entire series of short programs on this model. Other broadcaster-oriented solutions include technology that prevents the user from fast-forwarding through the commercial or only allows the user to compress the advertisement, and not eliminate it entirely. However, DVR and VOD technologies also offer new opportunities for target marketing, so that in the future commercials may be selected and programmed by zip code or other similarly narrow parameters.

Technological convergence, primarily through the diffusion of digital networks and content, has produced a variety of new consumer products and may introduce new models for media sales, as subscription-based consumer relationships and target marketing become increasingly common. The phenomenon of convergence goes beyond technology, however, also characterizing industrial strategies. As media formats become less distinct and broadband networks become more common, many traditional media companies have merged with or purchased Internet firms, hedging their bets against the future of digitalization and convergent media. Relaxed regulatory structures have also enabled a spate of mergers, leading to the clustering of TV stations and cable systems, as well as increased cross-ownership of various media formats, such as television, print, and Internet sites. There are a variety of reasons for these mergers. The popularity and perceived importance of the Internet has led to fears of little future growth in mature, established media industries. Also, media firms are increasingly concerned with maintaining and building their appeal to advertisers. Mergers that bring together a variety of media enable conglomerates to offer a wide breadth of media properties as advertising platforms. One example of this desired breadth is ABC Unlimited, the cross-platform unit of the ABC network and its parent Disney properties, which includes a television network, cable networks like ESPN, radio, magazines, and cruise ships. With this broad variety of platforms, ABC Unlimited can offer advertisers diverse opportunities to purchase airtime and space. Media company mergers are justified by emerging models of programming economics, which dictate that breadth is desirable, hopefully leading to synergistic relationships between diverse media properties. Merger trends include efforts to buy out program suppliers and content and pursuit of paid-on-demand revenue models to supplement traditional advertising income, since this income may be threatened by the diffusion of DVR and VOD technology. These growing conglomerates (the results of multiple mergers) may also be a significant competitive threat to single-revenue-source media, such as the local broadcast affiliates of the conglomerates. Advertising income is increasingly siphoned off to cable systems, which are often part of the cable networks, owned, in turn, by the local affiliates’ parent networks.

Some early attempts at embracing convergence earned poor financial returns. In the late 1990s, Michael Armstrong of AT&T focused on the strategy of buying up cable systems, assuming they would be an important broadband link to the home consumer. Investing $110 billion in these systems, AT&T overextended itself and was forced to begin selling off other parts of the massive corporation. AT&T’s drive to enter the broadband market may have helped motivate another gigantic merger, that of Time Warner and America Online. The AOL–Time Warner merger of 2000—combining the impressive media library of Time Warner with the online acumen and reach of AOL—was based on hopes of convergence and the imminent combination of the computer and television. However, this allegedly strategic merger led to a loss of billions of dollars for the two companies within two years. There are a variety of explanations for the failure of these efforts at industrial convergence. Although huge media conglomerates may be able to spread risk more effectively, they may not be able to adapt as quickly to changing economic or technological conditions. In hindsight, these mergers have been viewed as unsuccessful, as the resulting firms have been unable to surmount the challenge of getting various parts of the newly formed conglomerate to act in harmony between multiple media platforms.

In 2002 there was little merger and acquisition activity, but this trend increased in 2003 and is expected to continue in 2004. Proposed acquisitions include NewsCorp’s intended investment in DirecTV, the General Electric/NBC purchase of entertainment conglomerate Vivendi-Universal, and Spanish-language media company Univision’s intended purchase of the Hispanic Broadcasting Company. NewsCorp’s proposed investment in DirecTV has drawn some attention from the Federal Communications Commission (FCC), which has questioned whether NewsCorp’s planned purchase of a controlling stake in DirecTV would allow the company undue influence over its cable competitors and affiliates. The National Association of Broadcasters, filing with the FCC, suggest that NewsCorp’s FOX network would be dangerous to local broadcasters, in that FOX would be capable of shifting programming from local affiliates to DirecTV. Previously, the FCC blocked a proposed 2002 merger between consumer satellite services EchoStar and DirecTV because it would have virtually eliminated competition in the direct satellite industry. This decision is credited with creating the subscriber war between the two companies in 2003, where each service was using DVR as a means to attract customers.

The NBC/GE and Vivendi-Universal transaction is valued at about $14 billion, with Vivendi getting 20 percent of the new conglomerate and GE receiving control of the remaining 80 percent. Vivendi may be at a disadvantage in this agreement for a variety of reasons. It will not be allowed to begin selling its stake until 2006, when the total value of the company may have decreased. Meanwhile, GE’s NBC will get control of the USA and Sci-Fi Channel cable television brands, and it will get Universal’s film and television production business. The acquisition puts NBC in a better position to create, distribute, and cross-promote media content, taking advantage of synergy and advertising opportunities across a breadth of diverse media properties, as do other conglomerates such as Viacom and Time Warner.

With the merger of Univision and the Hispanic Broadcasting Corporation, Spanish-language media giant Univision moves into the radio medium, owning 53 Spanish-language television stations and 63 radio stations. Already, Univision’s holdings are reflective of contemporary industrial convergence; they include a top Spanish-language website, a cable channel, and a record label. A minority of the FCC has been concerned that the merger could create anticompetitive conditions. Univision is dwarfed by media goliaths such as Time Warner and Viacom, but it is a powerful force in the Spanish-language media industries.

The current atmosphere of deregulation and media convergence leads many industry analysts to predict a variety of other mergers between conglomerates vying for strategic positions on the shifting terrain of the media landscape. This industrial convergence is facilitated by shifts in federal communications policy and a general trend toward deregulation. Whereas traditional policy has dictated a variety of market-entry rules, many restrictions surrounding cross-ownership and levels of concentration within national and regional markets have recently been loosened.

One of the primary arguments for deregulation in the 1980s and 1990s appealed to technological innovation and convergence. Theorists such as Ithiel de Sola Pool have argued that the convergence of traditional media models of broadcasting, print, and telecommunications necessitated deregulatory policy. As technological convergence changed the media landscape, traditional restrictions were no longer relevant, and were even harmful, to ongoing innovation and competition. The 1996 Telecommunications Act removed many of the historical limits on cross-ownership and market penetration, allowing a flurry of mergers between media companies. While these new policies were meant to promote competition between traditionally separate media formats, such as cable and telephony, the deregulation produced greater consolidation among media firms, with giants such as Time Warner and NewsCorp purchasing a variety of subsidiaries.

In June 2003, the FCC attempted to loosen market restrictions further, allowing newspaper and broadcasting cross-ownership within regional markets, allowing control of two or even three television stations in a single market, and permitting television station groups to reach up to 45 percent of the national audience. Although public interest groups and members of Congress protested that this shift would increase the potential for news monopolization in most U.S. media markets, proponents of the deregulation argued that online news content offers enough diversity to balance any increased concentration in news ownership. The FCC decision was blocked by a federal appeals court, and it remained a subject of controversy in Congress in late 2003.