Fleeing Subs Worry TiVo

Sees 247,000 fall-off in first half

After a painful second quarter, TiVo is hoping to staunch the hemorrhaging of subscribers by finally kick-starting deals with cable operators.

When TiVo announced its second quarter results two weeks ago, it revealed some disturbing trends in its subscriber growth. In the first half of the year the company's net subscriber loss was 247,000, dropping its total cumulative subscriber base to under 4.2 million, its lowest level since the quarter ending October 2005.

The main catalyst for the sharp decline is the accelerating subscriber losses from DIRECTV, which accounted for 229,000 of those defections. As of February DIRECTV stopped promoting TiVo to new customers in favor of a box from parent News Corp.'s NDS Group. Perhaps most distressing is that 60% of TiVo's customers are DIRECTV subscribers.

The hope at TiVo, which is famous for its high-end features and user-friendly interface, is that through deals with cable operators such as Comcast Corp., with its 24.2 million customers, and Cox Communications, with its 5.4 million customers, it can lure new subscribers and stop the bleeding.

“As a company, we are much more aligned with cable than ever before,” says TiVo's Jeff Klugman, VP and General Manager of service provider and advertising engineering. Klugman points to the extensive development work the company has done in conjunction with Comcast to fit TiVo software to Motorola set-top boxes and the work the two companies plan to do with Scientific Atlanta boxes.

In 2005, TiVo and Comcast agreed to partner on a multi-year deal that would make available to Comcast customers a downloadable software installation of TiVo that would come as an additional choice to a customer's existing DVR. TiVo initially hoped the service would be available by mid-year 2006, but the rollout took longer than anticipated. The delay was chalked up to technical problems.

Investor Skepticism

Now, it seems, the time has finally come. Comcast has been running trials and expects that the service will soon be available in pockets of metro Boston. It will be gradually rolling out throughout its New England footprint throughout the fall.

But investors on Wall Street aren't holding their breath. “One thing to realize is it will be a phased rollout, they need to control customer expectations and test the marketing,” says Bear Stearns analyst Kunal Madhukar. Madhukar says it is tough to estimate the financial or subscriber impact on TiVo, but does not expect to see anything significant in the near term.

While the retail pricing of TiVo on Comcast is not announced, analyst estimates target it anywhere from $2 to $4 over the existing Comcast DVR offering. Assuming the company achieved a 25% penetration of Comcast's digital subscriber base, which was 14.1 million at the end of the second quarter, that would add 3.5 million paying subscribers to TiVo's base.

The company's revenue share also has not been disclosed, but using its average revenue per unit (ARPU) from its DIRECTV relationship of $0.86, TiVo's added revenue in this scenario would be around 9 million per quarter. Tapping into this customer base is additionally appealing as these are higher margin additions with no associated subscriber acquisition costs.

Entrenching itself in the nation's largest cable systems will also be a boost to the company's revenue from interactive advertising, such as ad overlays. The company does not break out its advertising revenues in its financial reports, but CEO Tom Rogers has said the advertising business has a great deal of upside.

“In terms of that business really taking off and being a significant contributor to TiVo's top line requires sub growth,” TiVo CEO Tom Rogers said on the company's second quarter earnings call. Rogers said subscriber growth was the company's “foremost mission.”

Battlefield Alliances

For Comcast, making TiVo available to its customers is another marketing point in its battle with the direct broadcast satellite (DBS) providers DIRECTV and Echostar's DISH Network, which is currently locked up in patent litigation with TiVo.

TiVo is banking on additional cable operators following Comcast's lead. Klugman says the company is in talks to initiate similar partnerships with several companies, but cannot offer any time frame as to when those announcements might come.

The rollout on the Cox systems will be less labor intensive than on Comcast's systems because much of the initial development work has already been completed. Some activity with the Cox rollout is expected before the end of the year.

“It's inherently more attractive [for other cable companies] because we've already done all the heavy lifting,” Klugman says.