Personal television supplier ReplayTV switched gears last week, dramatically cutting its manufacturing efforts and changing its focus to licensing software to third-party providers such as cable operators and set-top manufacturers.
As part of what it called "an aggressive new corporate direction," the Mountain View, Calif.-based company has laid off about 100 of its 260 employees, mostly from its manufacturing arm. CEO Kim LeMasters has also resigned, reflecting the company's shift away from pursuing revenues through programming and advertising partnerships. Founder Anthony Wood is the new CEO and chairman of the board.
These moves aren't surprising: Both ReplayTV and competitor TiVo have maintained that partnering with cable and DBS operators to create "combination set-tops" is necessary for the mass proliferation of their technology. To that end, ReplayTV is already in trials with MSOs Time Warner, Comcast and AT & T and has partnered with Charter Communications, investment firm Vulcan Ventures and set-top manufacturer Motorola to integrate hard-disk recording into digital set-tops. That effort, code-named "Project Disco" (B & C, Oct. 30), is the model for ReplayTV's future technology licensing, according to Senior Vice President of Strategic Planning Tom Carhart.
"We understand that cable operators want to operate their own private services," says Carhart. "Those discussions are already far along, and we're already making that shift. This just formalizes the change."
Although ReplayTV will no longer make its own personal video recorder (PVR), it will continue to maintain its personal TV service, which consists of a personalized electronic program guide (EPG) that is updated via phone line. Analysts estimate that there are about 30,000 subscribers who own either a ReplayTV box or Panasonic's ShowStopper, a PVR that runs the ReplayTV service. ReplayTV officials said the costs of maintaining the ReplayTV service for those boxes are negligible and they will encourage Panasonic and other potential consumer electronics partners to exploit new business opportunities through the ReplayTV service.
Panasonic spokesman Kurt Praschak confirmed that Panasonic will continue to sell the ShowStopper, which is available in $499, $599 and $799 models with varying levels of hard-disk storage. "Nothing has changed in our plans," he says.
But getting out of the manufacturing business and pursuing a straight technology-licensing model is a big change for ReplayTV, which has heavily subsidized its PVR models while being soundly beaten in the retail space by competitor TiVo. Unlike ReplayTV, TiVo never attempted to make its own PVRs but instead partnered with Philips and Sony to manufacture them. Although TiVo also subsidizes those boxes, it also charges $9.95 a month for its programming service, giving the company a recurring revenue stream ReplayTV doesn't have.
"This move cuts our expenses by a factor of five because we used to subsidize to the tune of several hundred dollars," says ReplayTV Vice President of Product Management Steve Shannon,. "Now, rather than that money going out, we have cash coming in every time a box ships. Plus, we're shifting a lot of the marketing responsibility to our licensees vs. having a $50 million or $100 million [marketing budget]. We were talking about $150 million to $200 million to get us through a year. That's now down to around $20 million or $30 million."
In the meantime, TiVo gains a clear path in the retail PVR market. The company already has more than 70,000 subscribers and recently unveiled a combination set-top that integrates the DirecTV service with TiVo PVR functionality.
"We're two different companies that approach retailing differently and branding differently," says TiVo Director of Business Development Edward Lichty. "We feel that we provide a service that has value to the customers, but [ReplayTV] didn't choose that route. They decided to generate their revenue from incremental revenue streams that we think are going to materialize, but we didn't bet the whole game on that. So they were left without a source of revenue."
The "incremental revenue streams" to which Lichty refers are advertising deals under which ReplayTV would promote Universal Pictures and Coca-Cola products through its service.
While the immediate future looks bright for TiVo, ReplayTV may be a better fit for cable operators, because of its technology.
Ken Kerschbaumer contributed to this story.