The New Television: Is TiVo plugged in for future profits?

Oct 7, 2002  •  Post A Comment

TiVo, which has burned so much cash it could be accused of financial pyromania, said last week it will actually break even during the final quarter of 2002. In an interview with Reuters, TiVo CEO Mike Ramsay sounded more confident than an ice cream salesman at Anna Nicole Smith’s house.
“I think more about growing the business for the long haul, not looking over my shoulder,” said Mr. Ramsay, co-founder of the digital video recording service that enables viewers to pause live TV and skip commercials. “I have confidence that TiVo has staying power and that we have a business model that works.”
Mr. Ramsay has reason to be excited. TiVo, which launched in 1997, has cut the company burn rate by more than 800 percent; second-quarter net losses dropped from $34.5 million to $4.1 million. TiVo also recently signed partnership deals with Sony, Real Networks and AOL.
However, before you go out and buy shares in the DVR service, hit the Pause button. This is the most critical and challenging time in the company’s history. In fact, TiVo’s performance during the next few months could ultimately determine whether it survives, much less thrives.
Saying no to TiVo?
Most industry analysts agree that digital recording features will eventually replace the VCR. The DVR, now in approximately 2 million homes, is expected to reach 30 million to 40 million homes in the next five years. However, the real question is whether TiVo will emerge as the DVR leader. In five years, the service has generated fewer than 500,000 subscribers; a lot of consumers have been saying no to TiVo.
TiVo needs to put some big numbers on the board-and it needs to do it this holiday season. If it doesn’t, three things may happen and they’re all bad:
TiVo loses Wall Street. The investment community has been generally supportive, but TiVo’s stock has nonetheless dropped to under 4. If TiVo has a disappointing holiday season, Wall Street analysts may lose patience and downgrade their ratings. And if that happens, TiVo could soon have just two choices: sell the company under duress or wait until its funding dries up. (TiVo now has only $26 million in cash reserves.)
TiVo loses the cable TV industry. TiVo sells a “standalone” set-top at retail, but industry observers agree that future DVR features will come with your cable or satellite receiver. Consequently, the cable and satellite operators will have tremendous influence over which DVR companies succeed. Cable operators are expected to add the DVR in the coming year, but several have hinted they may not use TiVo; they say they may use an unbranded-and less expensive-service from a company such as Metabyte Networks. However, that could change if TiVo shows that its name brand would help generate new subscribers. The company could become the Intel of cable set-tops (TiVo Inside!). But fewer than 500,000 subscribers in five years won’t cut it.
TiVo loses the satellite TV industry. TiVo has a partnership agreement with DirecTV but no deal with EchoStar, which currently uses its own PVR service. Like cable operators, EchoStar probably won’t use TiVo unless the company can better demonstrate its marketing muscle. And the situation could get worse if federal regulators approve the EchoStar-DirecTV merger. EchoStar has not said if it will honor the DirecTV-TiVo partnership.
The Coca-Cola of DVRs
In five years TiVo has been remarkably successful at building brand loyalty and awareness. TiVo reports that 97 percent of its subscribers have recommended the service to a friend. And when people talk about DVRs, they say TiVo. (Just as people say “Coke” when they talk about cola drinks.) However, despite TiVo’s recent success, the company’s future may be predetermined.
If TiVo is denied access to cable and satellite viewers, it’s difficult to see how it will survive. So I predict that TiVo will launch an intensive marketing blitz over the next three months, right through the holiday season. The blitz will include a sharp increase in retail distribution, TV advertising and PR efforts. (TiVo announced last week it will launch a new set-top that enables viewers to record up to 80 hours.) The company must show Wall Street-and the industry-that it will be the leader in the PVR category. And it needs to show that it can generate mass consumer demand.
Will it succeed? I predict that TiVo will achieve a partial success. The company will boost its subscriber numbers and maintain its claim as the No. 1 PVR service. However, in time I also predict it will decide to sell the company to a larger media outfit. This would give TiVo the necessary funding and industry connections for long-term growth and survival.
Phillip Swann is president and publisher of TVPredictions.com. He can be reached at swann@tvpredictions.com.