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TiVo Falters Despite Upbeat Q3

Dec 6, 2004  •  Post A Comment

When TiVo held a conference call last month to discuss its third-quarter earnings, company executives touted TiVo’s strong subscriber growth and the revenue gains that came with it. However, Wall Street wasn’t impressed and sent shares in the digital video recorder maker down 2 percent Nov. 22, the day of the earnings call. Since then, TiVo’s shares have dropped another 20 percent.

Why the cold shoulder? Blame it on a clouded future for the maker of digital video recorders. Despite its ownership of important technology patents, ties to satellite titan DirecTV Group and more than doubling in the third quarter the number of customers signing up for the service, investors are clearly growing less confident in TiVo’s ability to compete in a landscape rapidly changing, thanks to moves made by DirecTV itself and by cable operators moving ahead with their own deployments of DVRs.

Further, shareholders, at least at present, aren’t warming up to TiVo’s strategy of relying less on its DVR services and DirecTV for growth and more on technologies that go beyond simply recording television programs, including home networking and broadband.

Those strategies are at the heart of what TiVo Chairman and CEO Michael Ramsay described as going “beyond the DVR.” They include developing technology that would create what Mr. Ramsay called a “digital living room,” such as DVD recorders, home-networking systems and devices that would enable TiVo technology to incorporate broadband technology for downloading onto portable devices such as a personal digital assistant.

A key component of this strategy is TiVo’s partnership with online video rental service Netflix. The two companies have agreed to work together to develop technology that would allow the delivery of movies and other content to customers through high-speed Internet connections.

But Mr. Ramsay isn’t abandoning the DVR completely. He noted that cable operators in their rollout of DVRs are focusing solely on digital cable subscribers, leaving open the opportunity for TiVo to go after analog cable subscribers.

But even with those plans under way, analysts aren’t entirely convinced Mr. Ramsay’s “beyond-the-DVR” strategy will address the fundamental challenges confronting the company.

“TiVo faces significant longer-term challenges, including the impact of DirecTV on [average revenue per customer] and a shrinking opportunity as cable pushes digital video recorders aggressively,” said Alan Bezoza, an analyst at Friedman, Billings, Ramsey.

Mr. Bezoza noted that although some opportunity exists for TiVo to go after analog cable customers, cable set-top box makers Scientific-Atlanta and Motorola could be developing analog-based DVR boxes, further shrinking the pool of new customers at which TiVo can target.

On top of that, TiVo customers are voicing worry over the company’s plans to introduce in March pop-up advertisements that appear as users fast-forward through commercials of recorded programming and to limit subscribers’ ability to record certain kinds of programming.

A dicey future is something TiVo investors have long had to grapple with. Despite its brand recognition, TiVo hasn’t been able to translate that into what it calls “standalone activations,” or subscriptions that TiVo owns outright.

Instead, much of TiVo’s growth has been achieved through its relationship with DirecTV-and a growing number of observers think that partnership is not long for this world. According to the company’s latest statistics, more than 60 percent of TiVo’s 2.3 million subscribers signed up for the DVR service through its partnership with DirecTV, which translates into lower revenue per customer for the company.

The DirecTV relationship poses another drawback for TiVo. Now that the satellite giant is controlled by Rupert Murdoch’s News Corp., many observers predict DirecTV could favor a DVR technology developed by NDS Group PLC, a company controlled by News Corp. While DirecTV officials have repeatedly maintained that their relationship with TiVo is very much intact, the satellite operator starting next year will introduce set-top boxes equipped with NDS technology, which could blunt TiVo’s growth.

Mr. Ramsay has told Wall Street that its future plans will be to work with DirecTV at “the value end of the marketplace,” while the company puts its efforts toward new services.

“We want to focus on standalone [sales] and differentiation,” Mr. Ramsay said, adding that the company plans to continue to be aggressive in encouraging standalone sales.