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A study released last week claims that in the next five years, smarter TV devices and content will dramatically change how viewers consume television programming. The result, according to a new report from Forrester Research, will be a significant shift in the business model for television: "Even as they drain $18 billion in ordinary TV advertising revenues, smarter devices will create $25 billion in new revenues from viewers interacting with their TV screens."

Forrester's Josh Bernoff says that "in contrast to the interactive TV hallucinations of the early 1990s, television is about to get a whole lot smarter. Smarter TV devices like personal video recorders (PVRs) and interactive digital cable boxes will move viewers beyond the passive viewing experience, allowing them to watch TV on their own schedules, interact, and connect to onscreen services."

Forrester points out that smarter TV devices are here today, stating that by year's end, 34 million US households will use interactive program guides (IPGs), 5 million will interact with programs and commercials on systems like Wink, and 750,000 will record programming on PVRs like TiVo and Replay. In the near future, the researchers predict that smarter-TV device penetration will advance rapidly, and that by 2005 there will be 87 million IPG households, 65 million households that can interact with video, and 53 million PVR users.

According to Forrester, from now through 2002, television content providers will exploit these devices to generate new revenues. "Cable and satellite operators will build 'walled gardens'—captive collections of commerce and ad-supported content—generating more than $3 billion in commerce by 2002. But the true potential of smarter television won't arrive until 2003, when the networks and operators will finally agree on standards for metadata—information about programs and commercials embedded in video streams." Forrester says that metadata will unlock the door to new TV behaviors via programs with embedded commerce, customized video assembled to viewer preferences, and layered commercials that invite viewers into ever-deeper interactions. The prediction is that these new behaviors will generate new revenue streams: $7 billion in subscriptions, $17 billion in marketing fees and advertising, and $23 billion in commerce by 2005.

Bernoff adds that "Smarter TV is built on the foundation of today's television—the same video, the same commercials, and the same cable and satellite distribution. But rather than destroy traditional television, it will rejuvenate existing content and bring affluent viewers back to television. And the timing is right—the same technologies will enable viewers to skip 30% of commercials in 2005, causing an unprecedented decline in traditional advertising revenues."

Forrester also predicts that smarter-television revenues will create new roles for TV-industry players. According to the report, "targeted networks like Discovery will embed commerce in programming, while real-time information providers like CNN will embed codes in their content so that smart devices can reassemble and manipulate it. Broadcast networks will pursue product placement and divide programming into two categories: mass-audience passive dramas like ER and interactive-friendly programming like game shows and sports. Advertisers will target individuals based on the viewing data collected by smarter TV devices, raising privacy far beyond today's Internet data-collection debates."