For TiVo, a channel of one's own?

TiVo needs to bolster its service package with new products, but its plans to create Internet movie and music download channels could hurt equally important efforts to woo cable and satellite companies.

The San Jose, Calif.-based digital video recorder maker said this week that it is working on a service to allow its subscribers to download content, such as music and movies, from the Internet directly to their digital video recorders.

TiVo has been trying to woo cable companies that are beginning to come around to the idea of offering DVR (digital video recording) services, but the cable companies have been balking over pricing.

The new content download service TiVo is developing may throw a wrench in TiVo's negotiations with service providers at a time when the DVR company's relationship with key partner DirecTV is seen as somewhat vulnerable. This leaves TiVo in a tough spot, because a service that some think could help the company reel in new customers and differentiate itself may harm bigger long-term deals.

"This service is a natural thing to pursue, given broadband access to recorders, and it helps to further justify the monthly fees, but it's a bit of a retreat in terms of going after cable and satellite companies, potentially alienating them," said Ross Rubin, an analyst at researcher NPD Techworld. "It competes with them."

Rubin added that the success of the service would largely depend on the content available to subscribers.

DVRs connect to televisions and let users pause live television shows and record them to a hard drive. TiVo sells recorders, maintains a subscription service, and licenses its technology to hardware makers and television service companies.

These television service companies are the big fish in TiVo's pond.

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By signing a major service provider, TiVo can bring in monthly revenue to its service and address a significant number of customers more easily than having to sell to them one at a time through retail. Its biggest partner is DirecTV, which accounts for more than 50 percent of TiVo's subscribers. For service providers, TiVo's DVR service is attractive, because it tends to be another reason not to leave for another carrier.

Tuning in to the future
TiVo's plan to hook up directly to the Internet raises a potentially touchy issue for cable and satellite companies, which could eventually see significant competition from content providers distributing material over the Web.

That day is likely years away, but it is coming. Media PCs already provide television features by incorporating TV tuners and remote-control access. Porting Internet content directly to the television has been a slower process, although some devices, including a handful of specialty DVD players, already include Ethernet and USB ports, opening the door for a networked TV.

Movie download services such as Movielink, CinemaNow and Disney's MovieBeam Entertainment already let consumers buy programming that bypasses cable and satellite television systems. Others are in the wings, and could grow in popularity once programs can be easily viewed on a television rather than a PC screen.

A TiVo representative said the planned service was a long-term project and that details such as pricing, timing and content were not yet available.

The features of the service were brought over to TiVo by the acquisition of start-up Strangeberry in late January. Strangeberry was using home networking and broadband technologies to deliver content and other entertainment services to televisions. The deal was part of TiVo's strategy of expanding its service beyond digital video recording.

Like a number of technology companies, TiVo is developing new services to allow devices to connect to home networks and play a role in what is being referred to more and more as the digital home.

TiVo executives were not available for comment. Many were in New York, preparing for an event at which the company is set to introduce price cuts for services and incorporate former for-pay features into the standard service.

Steve Shannon, founder of ReplayTV and San Mateo, Calif.-based start-up Akimbo, said content from the Internet will eventually find its way to the television. Shannon's Akimbo is working to offer a similar service this summer. It will cost $10 per month, with the associated recorder going for $199.

"Cable companies are progressive enough to see that the Internet is the future of their business, and it gives them the unique advantage of on-demand content, something that satellite companies can't offer," Shannon said. "It may take years, if not decades, to embrace, but content from the Internet will happen."

Stepping lightly
TiVo has a history of carefully handling the promotion of new features such that it's avoided offending or threatening the interests of established players in the television industry. Fast-forwarding through advertisements is something subscribers can do with TiVo's service, but the company has never promoted it as a feature the way ReplayTV initially did--only to be swatted with lawsuits. In fact, TiVo is working to develop new interactive features for advertisers.

Cable partners are important to TiVo, as its ties to DirecTV are loosening. The satellite provider confirmed on Tuesday that it sold its stake in TiVo as part of a larger effort to reduce its sizable $2.6 billion debt by selling its investments. The sale came four days after DirecTV Vice Chairman Eddy Hartenstein resigned from TiVo's board to spend more time at DirecTV, which has gone through some management changes, following its acquisition. No new DirecTV representative will be joining TiVo's 10-member board.

There are about 1.6 million TiVo subscribers in total. About a million of those are DirecTV subscribers signed up for the TiVo service. TiVo has a contract with DirecTV for DVRs that runs through February 2007, according to TiVo's annual report for the period ending Jan. 31, 2004.

TiVo receives monthly revenue per subscription from DirecTV for customers that use its DVR service.

Once the contract runs its course, DirecTV has the option to continue TiVo's DVR service without further payments. But it won't be able to add subscribers without obtaining a royalty-bearing technology license from TiVo.

"DirecTV and TiVo are joined at the hip for the time being," said David Farina, an analyst at investment bank William Blair & Co.