Test market: Microsoft bets on Mexico's digital television market. It will be the first in Latin America.

TiVo, the cassette-free television recorder, wants to reinvent the way people watch their favorite TV shows in the United States. Only a few years old now, TiVo allows its users to control the transmission of televised programs by letting them record, rewind and fast forward programming on a hard drive. Despite having millions of U.S. subscribers, the company still isn't reporting the results it wants and may soon be sold as a result, according to industry analysts.

TiVo's business model, however, is changing the way people watch TV, even the kinds of companies competing in the multi-billion-dollar television market. U.S. software giant Microsoft, after testing the waters in its home state of Washington, made a deal in March with Mexico's biggest cable-TV operator, Cablevision Mexico, to offer its Microsoft TV Foundation Edition 1.7 platform to subscribers in the capital city. With this product launch, Cablevision becomes the first company to roll out the Microsoft platform in Latin America. So far, Mexico City and Washington state are the only markets where Microsoft is offering the technology.

"We had conversations in other [Latin American] markets and we found that the cable operators in Mexico were much more advanced,' says Ed Graczyk, Microsoft TV's head of marketing and communications.

Microsoft's software allows Cablevisi6n to offer to subscribers new and advanced digital television services, such as dual-layer digital video recording (DVR), high-definition television, video on demand, interactive programming guides and games.

Graczyk is optimistic. In Mexico, he says, all cable subscribers are potential clients for the new technology "Our software offers a wide range of services, and the fact that clients like Cablevision can cover a broad spectrum of consumer needs with a single platform is one of the advantages of our technology," he says.

At present, Cablevision has 355,000 subscribers in greater Mexico City and charges US$726 for connection and equipment. But the business model is battling for the attention of a very traditional group of television viewers who tend to be reticent when it comes to adopting new technologies, experts say. "Pioneering this market in Mexico represents both a risk and an opportunity," says Moises Polishuk, head of the Sistemas, Seguridad y Teleproceso consultancy. "There's the risk of coming in too early and getting burned, and there's the risk of coming in too late and finding yourself trying to reorient Mexican culture, which is hard to change once it gets used to something."

So far, the pay-television industry reaches 20% of Mexico's population. This, together with the high cost of service, slows even more the adoption of new technologies. "In all emerging technologies, it's the user who decides what works, not the manufacturer" says Polishuk. "In this case, we can assume that the potential customer is not most Mexicans, not even most people in Mexico City."

The pay-television market in Mexico could become more sophisticated, but the perhaps not more profitable, says Ernesto Vargas Guajardo, president of Cablevision's competitor MVS Television. "The thing is to know how willing the subscriber is to pay for different types of services," he says. "Why fight to raise prices when people can't even pay $18 a month to watch pay TV?"

Jairo Calixto Albarran, a cable-TV customer for the past decade and a Cablevision subscriber for the past five years, still isn't prepared to make the investment. "It sounds great to be able to do a lot of stuff without having to mess around much with the equipment, but what they say isn't always what you get" says Albarran. "The technology hasn't been tested enough, so I wouldn't sign up for it until I know whether it's reliable."

Technology aside, the television industry itself is having to adapt to frightening new realities--people can use their newfound control to avoid watching commercials. The advertising industry could get squeezed. Skipping over commercials could cost the U.S. television industry $27 billion in losses over the next five years, according to a study by Accenture, a consultancy.

Interruptions. Microsoft executives see no problems ahead. The nature of advertising is changing, they say According to them, commercials will begin to weave themselves into the shows instead of interrupting as a 30-second ad. That would make digital video recording technology something advertisers could use to their advantage. Unlike what is happening in the United States, experts say, Mexico is still a long way from calling this form of advertising as the norm.

Another threat to DVR technology can be found in pay-per-view--where the subscriber pays to see only a specific film or sporting event or other program--a service already being offered by cable operators in Mexico.