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2HRS2GO: TV press doesn&#039&#039t change TiVo&#039&#039s picture

    COMMENTARY--You'd be hard-pressed to find a more vivid example of television's immediate power.

    TiVo (Nasdaq: TIVO) touts its digital VCR as a product that will let you take control of your TV, but the opposite happened this week. TV seized TiVo shares and drove them higher.

    Shares of TiVo shot up 26 percent yesterday, a day after "60 Minutes" basically said digital VCRs--proponents like to call them personal video recorders, or PVRs--such as those made by TiVo, Replay TV and Microsoft's UltimateTV will change television. Sunday's feature contained no new information, though it might have been worth watching just for exchanges such as this one:

      TiVo user Mr. Elms: I don't--I don't watch commercials anymore. I can watch "60 Minutes" in 45. Why should I watch it in 60?
      Host Mike Wallace: Because--because... Ms. Elms: It's called "60 Minutes." Wallace: ...those are the people who support us, for Pete's sake. Mr. Elms: Uh-huh.

    Exposure on CBS' venerable news magazine was enough to convince people to buy TiVo yesterday. The stock changed hands enough times to post volume of 1.52 million shares, or more activity than it saw over the previous six trading sessions combined.

    CBS' timing couldn't have been more fortuitous for the company.

    TiVo shares hit an all-time closing low on Friday, after the company reported what can kindly be described as an unimpressive month. It was only 31 days worth of results because TiVo just shifted its fiscal year to end on Jan. 31 from Dec. 31.

    Normally, one month wouldn't mean much. But when you show almost zero growth, that can be taken as a signal.

    "Eighteen thousand new subscribers in January suggests almost no new net sales over the 17,000 announced in the pipeline at the end of 4Q00," wrote Deutsche Bank Alex Brown analyst Peter Ausnit, who on Friday downgraded TiVo to a "market underperform" advisory, the equivalent of a "get out while you can" rating.

    Ausnit cited "slow sales, competition, cash burn and viability concerns"--in other words, everything--as reasons to forget TiVo the stock, if not the product.

    You've already seen the slow sales---just 1,000 added in a month. You will soon see the competition, not only from Replay TV, but cable and satellite TV providers.

    Manufacturers such as Sony and Phillips sell TiVo boxes for $400 to $800, but TiVo's revenue largely comes from its subscription service, which boils down to a fancy programming guide with customization options. But I can already get some of TiVo's programming benefits (though not the recording capabilities, obviously) from the AT&T cable digital box sitting on my TV.

    Satellite dish companies and Microsoft (Nasdaq: MSFT) are advertising their own digital products aggressively.

    And with competition increasing, TiVo's marketing means more than ever. Unfortunately, it needs to cut back on something.

    "While we expect the company to trim sales and marketing expense, the current burn rate suggests TiVo will require additional financing before the end of 2001 or risk being acquired or ceasing operations," Ausnit wrote.

    Deutsche Bank Alex Brown is not alone in disrespecting TiVo. Morgan Keegan today cut the stock to "market perform." Dain Rauscher Wessels lowered TiVo to "neutral" two weeks ago. ING Barings began coverage of TiVo last September with a "hold" and has never seen a reason to change. Thomas Weisel has rated TiVo a "market perform" for more than a year, which makes me wonder why the investment bank bothers covering TiVo at all.

    The only analyst covering TiVo with at least a semi-positive rating is Sutro & Co.'s David W. Miller, who maintains a "buy" on the stock.

    "Despite the apparent stand-still in economic activity throughout the first quarter as well as overall sluggish sales at the benchmark retail stores, our surveys of select consumer-electronics chains reveal that sales of TiVo-branded PVRs, though somewhat slow in January, sold fairly well under the circumstances throughout the month of February," Miller wrote last week.

    "Given the hangover effect from Christmas-time spending seen every January, no matter what the external economic circumstances, we are not surprised that February inventory movement of TiVo-branded devices was a little more brisk than in January."

    Miller's optimism may stem from the fact that his expectations from TiVo were lower to begin with. TiVo ended January with 154,000 subscribers--better-than-expected, in Miller's view, but not enough for his peers.

    Deutsche Bank's Ausnit rightfully criticizes TiVo's marketing as ineffective. The commercial featuring the faux-ad with Joe Montana about to smear goop on Ronnie Lott's groin is funny, but I can see how it might leave viewers wondering: "What the heck is this about?"

    Other analysts point out that TiVo needs to get more out of its existing customers.

    "New revenue initiatives have not developed rapidly enough to provide strong visibility to breakeven cash flow," writes Morgan Keegan analyst Murray Arenson. "We believe the company's revenue-per-subscriber goals are theoretically attainable but not sufficiently visible, given its capital situation."

    The biggest problem with buying TiVo stock is that you're buying a business that can be characterized as immature. Folks may go gaga over the technology, but that hasn't translated into booming sales.

    "PVR technology and perhaps TiVo, in particular, will revolutionize the way people watch TV--as noted on CBS' "60 Minutes" this past weekend," Arenson writes. "However, given recent changes in the capital markets and investors' attitude toward risk, we believe that the market is unlikely to reward investors for accepting risk associated with stories such as TiVo, which rely on a series of concepts and assumptions."

    Or to repeat the words of a reporter who once chastised me for believing in an IPO that turned out to be another pipe dream: "It's just an idea."

    That's all that "60 Minutes" focused on: the idea. Unfortunately, when it comes to playing the market, ideas mean less than solid business performance. Especially nowadays. 22GO>