The End of TiVo as We Know It
How the DVR service won the battle but lost the war with cable and DBS
By John M. Higgins -- Broadcasting & Cable, 12/5/2004 7:00:00 PM
If you’re one of 250,000 or so people expected to buy a standalone TiVo box this holiday season, the purchase is only the first step. The digital video recorder (DVR) needs frequent updates so your electronic program guide knows when to catch that final episode of NBC’s Father of the Pride. Keeping the guide fresh requires paying either $12.50 per month or a fat, one-time $299 fee.
That subscription fee is immensely profitable for TiVo. Delivering the guide data costs the company a mere 94¢ a month.
Any company that can get away with a 1,300% markup on its core product should be a great success. But TiVo is not yet a success, and it’s hard to see how it will ever become one.
Despite pioneering an amazing product that is transforming the entire television industry, the company faces dramatic threats to its life. TiVo discounts its hardware so heavily that the company is riddled with losses. Revenues should total $118 million for fiscal 2005 ending in January, but operating cash flow should run a negative $87 million. (TiVo has accumulated $600 million in losses over six years.)
Cable operators—who are years behind their direct-broadcast–satellite (DBS) rivals—are aggressively rolling out millions of DVRs to their customers. But TiVo hasn’t been able to sell a single operator on employing its technology in cable set-tops.
Cable operators believe that they don’t need the brand and that they can get data and technology at a cheaper rate from their traditional box suppliers, Scientific-Atlanta and Motorola.
Moreover, cable companies want their DVR guides to show not just what’s on MTV or NBC but to integrate their video-on-demand systems.
All this helps explain why TiVo’s stock has dropped about 50%, to around $4.60 per share, this year.
It’s a sad plight for the developer of a device so amazing that its name has become a verb. TiVo’s technology is expected to be in just a third of the 6.4 million DVRs in consumers’ homes by year’s end. “It is unfortunate that TiVo has spent years and years educating the consumer, driving the consumer to 'TiVo’ television,” says April Horace, an analyst at Denver investment banking firm Janco Partners. But people recording television programming won’t necessarily use a TiVo box to do it.
TiVo executives acknowledge that they face dramatic challenges, but they don’t see such a dark future. To drive Christmas sales, they’re offering rebates to cut the retail price of a standalone TiVo box in half, to $100. The company has added a number of retailers for the Christmas season, including Costco and Target. Combined with sales of DirecTV receivers, TiVo expects to add 575,000-700,000 subscribers during the season.
In the long run, TiVo contends that innovative technology will carry the day. Chief Marketing Officer Matt Wisk compares TiVo to the iPod. Dozens of manufacturers beat Apple to the MP3 player market, but innovative design and clever software has the company cleaning up.
And the race has just begun, says Wisk. “At 5% penetration, I’d say we’re at mile one.”
There’s room even in the cable challenge. Cable operators are close to opening up the production of set-tops to all kinds of manufacturers. TiVo can then manufacture its own or partner with the likes of Toshiba.
I, too, am a devoted fan of TiVo, and I can’t imagine life now without it. Nearly 85% of my TV viewing comes from programs recorded on TiVo, and with all apologies to folks at the networks and ad agencies, I get annoyed when forced to endure all the commercials my TiVo lets me skip.
TiVo has some elements of a great business. As a brand, TiVo has become Kleenex, hugely identified with the whole category of DVRs. TiVo creates a zeal following among its customers equivalent to the cult of Apple. Subscriber growth is huge, having doubled over the past year to 2.3 million.
So what’s the problem? Getting new subscribers is enormously expensive. Todd Mitchell, an analyst for Blaylock & Partners, estimates that subscriber acquisitions cost TiVo around $200 each. TiVo’s financial statements show that consumer rebates, subsidies to manufacturers and other marketing costs sucked up about 84% of the company’s revenues during the third fiscal quarter ended in October. That’s before the company pays any salaries or other operating expenses.
Further, the bulk of TiVo’s subscriber growth isn’t coming from those lucrative standalone subscribers. It’s coming via DirecTV. About 75% of TiVo’s 419,000 new customers during the most recent quarter are DirecTV subscribers. The DBS service accounts for around half of TiVo’s 2.3 million total subscribers.
DirecTV incorporates TiVo technology and data into its receivers, charging customers an extra $4.95 a month. But it pays TiVo an average of just $1.34 per subscriber monthly. Still, TiVo incurs very little cost from each new DirecTV customer, so even the small fee is more than 90% profit.
But TiVo can’t count on DirecTV for growth. DirecTV is widely expected to stop pushing TiVo receivers next year, in favor of DVR software being developed by NDS Group. Both companies are controlled by Rupert Murdoch. News Corp. owns 78% of NDS while its subsidiary, Fox Entertainment, owns 34% of DirecTV. It is inevitable that Murdoch will use his control over DirecTV to favor NDS, a trick he may have picked up from his biggest shareholder, Liberty Media Chairman John Malone.
No doubt the deal will be completely fair to the public shareholders of DirecTV and NDS. But it’s guaranteed to be no good for shareholders of TiVo.
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