Ad-Skipping and Time-Shifting: A Theoretical Examination of the Digital Video Recorder

I examine the impact of the two main aspects of the DVR – ad-skipping and timeshifting – on the television industry and their effects on equilibrium outcomes. I begin by exploring ad-skipping in a monopoly model in which the network delivers content to viewers with decreasing, constant, or increasing marginal nuisance costs (MNCs) of advertising and faces competition only from a static outside option. With increasing MNCs, the DVR can increase network profit depending on the percentage of ads it filters out; otherwise, it reduces network welfare. I then adapt the constant MNC model to a duopoly setting in which two identical networks face each other rather than an outside option. In this context, the DVR unambiguously helps each network, both through the decreased sensitivity the most ad-averse consumers feel towards ads when using a DVR and through the element of price discrimination it affords. Next, I examine the time-shifting capabilities of the DVR in a model in which two networks, each with a hit show and a mediocre one, compete for viewers over two timeslots. I start by exploring the lead-in effect, or the tendency for viewers to watch the same network over consecutive timeslots. When viewers are myopic, equilibrium lineups with either staggered hit shows or ones going head-to-head can exist. However, when viewers are foresighted, the lead-in effect essentially becomes bi-directional, and only staggered lineups can exist in equilibrium. I then examine the effect of the DVR, which allows viewers to watch any subset of the four shows. The iv networks are then indifferent between their lineup choices, even as the equilibrium proportion of viewers that rent a DVR becomes arbitrarily small. Lastly, I examine what happens if the DVR also eliminates a proportion of network ad revenues derived from viewers who use the device, and I demonstrate that if this proportion is greater than one-half, network profits fall with the DVR, whereas if it is less than one-third, profits are increased by it.

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