On Monday the U.S. Supreme Court handed down a very important decision in favor of Cablevision regarding a lawsuit that had been filed against it by several entertainment companies. The court ruling is allowing the cable company to offer a hosted DVR service to its subscribers. Rather than having to provide cable boxes with a built-in DVR, Cablevision will store the saved programming on a central file server.  So why is this case so important?

First of all, DVRs are one of biggest threats facing the television industry.  A recent Nielsen study “How DVRs Are Changing the Television Landscape” estimates that almost 31% of TV households (35.4 million) own at least one DVR. According to the Nielsen quarterly “Three Screen Report” this segment also seems to be watching more and more timeshifted TV.

However, the average DVR household is timeshifting only a measly 5.5% of their total weekly TV viewing hours (8.2 out of 150+).  What has programmers and advertisers nervous is that this rate is exploding, having increased by 40% over the past year.  One reason is that DVR users are likely to skip most of the commercial breaks; according to Nielsen’s latest “DVR Factbook” when questioning DVR users how often they skipped commercials on a scale between 1 and 5 (1 being never and 5 being always) the median response was a scary 4.1.

The second reason why this case is of great significance is that Cable MSOs (Multiple System Operator) now represent the largest distributor of DVRs; as of last year 55% of all DVR devices came from a cable company.  Should other cable companies decide to offer a similar service, it could greatly increase the adoption of TV timeshifting habits, which could have more serious repercussions on the TV and advertising industry.

Finally, there are several advantages to this proposed virtual DVR service over a standard DVR cable box, some of which The New York Times and Ad Age have also analyzed:

1) A hosted service will lead to lower storage costs since everything is on a central server.  Rather than need to maintain millions of DVR boxes, the Cable MSO will simply need to deal with one large box, which is easier to maintain and repair given how inexpensive storage space has become.

2) It will be easier for Cable MSOs to offer tiered DVR services with greater flexibility in terms of recording options and storage space, which could help ultimately drive up ARPU margin.

3) Having a shared space provides the opportunity to develop peer to peer sharing among subscribers, allowing friends to watch what others have recorded and potentially allowing subscribers to have on demand access to programming.

4) Having a centralized storage server also create the opportunity to offer innovations, like allowing people to view recording programming from any cable box or record more than two streams of video, which is the current limit of a DVR cable box.

The third point means that a virtual DVR service will function effectively as a Video on Demand (VOD) service, threatening yet another important market for Hollywood production companies.

Of course it remains to be seen how the virtual service will be implemented. Cablevision could ally themselves with programmers and advertisers by developing a services offering, like Time Warner Cable did with its Start Over option, that prevent subscribers from skipping commercials. Cablevision could also use this as a chance to insert cross-channel promotions prior to the program being played.

Cablevision is currently the fifth largest Multiple System Operator (MSO), with 3.1 million subscribers. It remains to be seen how many of its customers adopt the new service and whether other cable companies launch a similar virtual DVR option. Hollywood and Madison Avenue will be surely watching.