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TiVo readies for prime time with Comcast

Although TiVo continues to sell high-priced hardware, distribution partnerships will determine its future success.

What do you do when the product you pioneered is being sold better, and for less, by someone else? In TiVo's case, the answer seems to be, if you can't beat 'em, join 'em--sort of.

In a move that will largely determine the future of other partnerships and, potentially, the company's success, the brand synonymous with digital video recording is inching closer to the real-world tryout for a deal first announced in 2005. In March of last year, TiVo signed a deal to put its technology inside set-top boxes from cable giant Comcast.

Selling its own standalone DVR boxes probably won't bring in the revenue its investors expect, and finding success with the nation's largest cable company is an important part of TiVo's strategy.

For the less technologically savvy crowd, it isn't a hard choice between buying a TiVo DVR box from a retail store and renting a set-top box from the local cable company that combines channel services and video time-shifting capability into one square, plastic package. A less-expensive option from a familiar entity, like Comcast, almost always trumps a pricey product.

DVR technology has drastically changed the way viewers watch television with features like the ability to record one program while watching another and skip commercials. Adoption of the technology is growing, and it will be driven largely by cable TV subscribers, according to a 2006 study by JupiterResearch. The study forecasts that 34 percent of households that subscribe to Internet access will own a DVR by 2011, up from the current 13 percent. Approximately a quarter of Comcast and Time Warner basic cable subscribers also subscribe to DVR services.

Observers have been sounding the death knell for TiVo almost since its founding, but the Alviso, Calif.-based company has trudged along and beaten expectations. The Comcast deal is seen as a crucial step for TiVo since its most successful partnership to date, with satellite service DirecTV, has essentially ended. In April, the two companies agreed to extend their partnership, but the deal won't bring any new subscribers to TiVo as the satellite company will offer its own DVR service instead. The agreement does ensure that existing DirecTV customers who subscribe to TiVo will continue to receive customer support from DirecTV.

Under the agreement with Comcast, TiVo was paid up front to build a DVR compatible with the cable provider's service, and will receive a monthly fee for each customer who chooses TiVo's DVR service through the cable company. Comcast's current offering includes a hard-drive-based box manufactured by either Motorola or Scientific Atlanta.

Following the announcement that TiVo had snagged Philadelphia-based Comcast and its 23.3 million cable subscribers, Wall Street responded positively, sending shares of TiVo upward. Though the stock has dipped and risen since then, many are reserving judgment until the partnership actually comes to fruition.

Comcast DVR 'very TiVo-like'
"I think the Comcast deal is a major deal for them. They've got most of their eggs in that basket," said Murray Arenson, senior equity analyst for Ferris, Baker Watts. But there's still much to be addressed. For starters, he added, TiVo needs to begin rolling out its product and establishing a demand among Comcast customers for its DVR services.

The initial release seems to have been pushed back, though both parties say nothing has changed. When the deal was first announced last year, Comcast said its first TiVo-brand DVR service would be available in "mid- to late 2006." That timeframe is still accurate, said Comcast spokeswoman Jenni Moyer, and will be available on a limited basis later this year, with a broader rollout planned for 2007, she said.

Customers will be able to choose Comcast's own existing DVR service, which currently has a monthly fee of $9.95, or download the TiVo service right over the Comcast network for a price yet to be announced, Moyer said.

Few details about the actual service have been released, but TiVo director of marketing Jim Denney said the Comcast DVR features will be "very TiVo-like," and will take advantage of the service's famously easy-to-use interface, but won't include all TiVo features. Comcast's Web site says the upcoming TiVo DVR will be available in "a majority of its markets" and will have features such as the ability to automatically record shows based on past user preferences.

Despite the lack of details, it's clear that there's a definite upside for both companies. Comcast, for its part, can offer its customers the premier brand name in digital video recording.

Access to Comcast's large customer base, meanwhile, should help TiVo in the long run, but only if cable customers see the value in the service. TiVo reported net losses of $6.5 million and net revenue of $59 million for the second fiscal quarter of this year. Revenue increased by 50 percent from the previous quarter, while losses were up more than 620 percent, due to an obligation to fill inventory for the first time in 3,000 Radio Shack stores.

That two-pronged approach--supplying hardware, like the new Series 3, an $800 high-definition DVR aimed at home theater enthusiasts, and licensing software--makes some analysts who monitor the company a bit nervous.

The relatively lower revenue and margins that come with selling an expensive box like the Series 3 make Mark Harding, senior digital media analyst for Maxim Group, skeptical of TiVo's ability to succeed in the standalone box business.

"I look at TiVo as a software R&D shop," he said. "Its interface is very attractive, but trying to do both the software and the hardware in a commoditized concept, and trying to charge a premium price and get a premium return is, I think, very challenging for the company."

Success in attracting new users through the initial Comcast test run could bode well for TiVo in terms of future distribution partnerships.

"TiVo doesn't want to be in the hardware business to the extent they can be a software licensing or services company," said Arenson of Ferris, Baker Watts. "The Comcast deal in particular is a kind of an overlay--it's a download onto an existing platform." The premise, he said, is if it finds success in the Comcast market then it's in a better bargaining position with other, albeit smaller, cable operators.

Partnerships have worked well for TiVo in the past--one in particular. As of the end of the second quarter of 2006, 64 percent of TiVo's subscriber base, or 2.84 million people, comes directly out of its DirecTV relationship, according to data collected by Current Analysis. The two companies renegotiated their contract in April 2006, but TiVo won't get any new customers under the deal as DirecTV has since developed its own DVR service.

In August, TiVo announced an agreement with Cox Communications. Though it can't offer TiVo as many potential customers as Comcast, deals with smaller companies like Cox and its 6.7 million subscribers are still a vital part of TiVo's software licensing strategy. Cox will begin testing the new service in early 2007.

"From an investment standpoint, it's a dangerous sort of story," said Arenson. "I think (TiVo has) proven it can manage its finances that way, and to be pretty creative striking partnerships and offering new features. But, I think it's best to just sit and watch."