TiVo skips past naysayers

Since its inception in 1999, the digital video recorder (DVR) pioneer has fended off predictions of its demise at the hands of cable companies, Microsoft and other industry giants. DVR functions can easily be folded into other devices, such as set-top boxes and media PCs, which drives down prices of and undermines the market for standalone video recording devices such as TiVo's Series2.

Now, with another positive earnings report under its belt and signs that the market is growing fast enough to support several providers, some analysts are starting to believe that TiVo is better positioned to beat the odds.

"They've managed to hang on over the last couple years, and they've driven their subscriber numbers up at a healthy rate, but they're not out of the woods," said Aditya Kishore, an analyst with research firm The Yankee Group. "Their challenges are formidable--with big cable operators on their heels. But they are certainly looking at an improved landscape, after reaching some significant milestones."

TiVo is getting new encouragement from its strong fourth-quarter and year-end results, announced last week. Its revenue was up 85 percent, compared with the same quarter a year ago, and its losses narrowed. The Alviso, Calif.-based company also finished 2003 with $143.2 million in cash--its strongest cash position in more than three years.

While TiVo did not report a profit for the fourth quarter, it did say it saw new subscriptions reach a record level of 330,000. In the previous quarter, it said its subscriber total had topped a million--a mark many analysts say is as an indication that a product has established itself in the consumer electronics market.

In a sign of its growing confidence, TiVo has announced aggressive goals of acquiring 10 million subscribers. And, backing up its bravado, TiVo said it is sacrificing earnings for growth in the short term--slashing prices and offering rebates. It has earmarked $50 million for customer acquisitions in a bid to double its subscriber numbers each year for the next four years. It now expects to earn its first profit by early 2006.

New features
Marketing is only part of the equation. TiVo is also racing ahead with the introduction of features designed to keep it ahead of rivals in the booming DVR market.

Giants such as Microsoft and cable operators Comcast and Time Warner have launched their own DVR efforts.

As cable companies come out with DVR services that don't include TiVo's technology, the DVR company will have to move fast to stay on top, according to IDC analyst Greg Ireland.

"A cable roll-out will take time, and TiVo will be able to capitalize on the growing awareness of DVR service. But they'll have to move fast to build services on top of their DVR service, if they want to stay ahead," Ireland said.

Chief Executive Mike Ramsay said TiVo's performance last year proves there is a real business opportunity in DVR television services. But he said the company can't afford to rest on its laurels.

"DVR is just the starting point, and as we develop services, we extend our reach far beyond what (our competitors') platforms can deliver," he said.

Plugging into networks
Among other things, TiVo is focusing on developing technology to take advantage of home networks. Its Home Media Option allows Series2 recorders to access and distribute content stored on the hard drives of computers. The recorders can stream the content to a television set or a stereo via a home network, whether wired or wireless. The software also accommodates online show scheduling from the TiVo Web site.

Earlier this year, TiVo said it had acquired the intellectual property assets and engineering staff of Strangeberry, which has been using home networking and broadband technologies for content delivery and other entertainment services on televisions.

TiVo has also developed TiVo-to-Go, a feature that allows subscribers to transfer shows recorded on a recorder to a home computer. Shows are protected by a memory key that, when plugged into a PC, unlocks the content.

As bait for content owners, TiVo has been developing new interactive advertising features--a small part of its business for now, but one that has big growth potential, according to the company.

TiVo allows customers to record and play back television shows in real time, as well as to pre-record up to 120 hours of programming. People can pause live sports events and resume the action without missing plays, and can fast-forward past ads. In addition, the interactive programming guide in TiVo helps viewers find programs they would like to record, based on predictions about their taste.

The company's technology has been heralded as a breakthrough that could completely change the television industry by giving consumers control over when, where and what they watch. Advertisers and network programmers are scrambling to respond to what many observers predict will become a commonplace service within the next few years.

Whether that revolution will end with TiVo at the top of the heap remains to be seen, however.

Its business currently consists of hardware sales, service subscriptions and licensing. It sells recorders at a zero profit margin to promote its DVR service, which accounts for 90 percent of its service business. Subscriptions for its DVR service have gross margins of 70 percent--a hefty return. It also licenses its technology to consumer electronics makers such as Sony, Toshiba and Pioneer Electronics.

Partner search
While TiVo has had a foothold in the satellite business through a partnership with DirecTV, it has been looking to woo a cable ally. However, it has not found one so far, and some cable operators have recently announced plans to offer competing DVR services.

In addition, TiVo is not getting along so well with satellite provider EchoStar: It's suing the company for patent infringement.

Analysts said they believe the DVR market is expanding quickly enough to give the company some breathing space in finding partners, however. About 3.5 million DVRs were shipped in 2003, and that number is expected to expand to 24.7 million units by 2008, according to The Yankee Group.

But inevitable competition from industry giants has led some analysts to put long odds on TiVo's chances of survival--an assessment reinforced by the experience of its early rival ReplayTV.

ReplayTV was acquired in 2001 by Sonicblue, after it went to a strictly licensing model. Sonicblue filed for bankruptcy protection and auctioned off assets, including ReplayTV, in 2003. What remains of ReplayTV was auctioned off to D&M Holdings, which has continued to market the ReplayTV service, but with limited success.

These days, however, analysts such as The Yankee Group's Kishore believe that TiVo has some room to maneuver. Kishore said that new competitors are not necessarily a bad thing for TiVo, since it has the most-recognized brand in the DVR business.

Here, TiVo's brand could provide a competitive edge, having won a cult status that has seen the device written into television shows such as "Sex and the City" and "The King of Queens."

Ted Malone, TiVo's director of product marketing, said rival products could wind up helping TiVo by further marketing the DVR concept.

"There still needs to be awareness-building of what these boxes and services allow you to do, and that's what these guys are helping to do," he said. "This is still a net positive instead of a net negative."

What instills the devotion to TiVo's service is its convenience, Malone said, and that is where PC makers and Microsoft are likely to face problems.

One of the main features of Microsoft's Windows XP Media Center Edition, its entertainment-centric operating system, is software that turns a PC into a DVR, but in the eyes of consumers, that is not the draw that manufacturers claim.

"There's still a consumer perception problem that a PC is still a PC, and it's tough to get it to work like a TV," Malone said.

Although TiVo has beaten the odds so far, the long-term success of its brand will depend on its maintaining an edge by rapidly identifying new features that appeal to consumers and bringing them to market.

TiVo's race to stay ahead of the technology curve is already creating tensions with some of its allies.

For example, its biggest partner, DirecTV, has not yet made TiVo's Home Media Option available on its satellite TiVo set-top boxes, to the chagrin of some of its customers. It is possible for the satellite operator to do so, according to DirecTV spokeswoman Jade Valine, but it wants to focus on its core business video services. (DirecTV is also going through some management changes following its acquisition by News Corp.)

TiVo's Malone acknowledged that DirecTV hasn't endorsed its latest features as quickly as the DVR maker would have liked, but he said the two companies are collaborating closely on products to ensure the best experience for customers.

DirecTV is working to release a high-definition satellite set-top box this month. With TiVo, it is developing a low-cost set-top box that will be available later this year, according to TiVo executives. DirecTV is expected to account for one million TiVo subscribers this year.

"We need to show that what is unique about TiVo continues to be unique," Malone said.