TiVo Shifts Its Strategy Again

Aug 29, 2005  •  Post A Comment

Wall Street continued last week to raise questions about the long-term viability of digital video recorder company TiVo after the company surprised investors by warning it would abandon its goal of achieving profitability in the fourth quarter in favor of raising marketing expenses to build its standalone subscriptions.

That warning seemed to overshadow news the company had eked out a fiscal second-quarter profit and had reached an agreement with multiple system operator Cablevision Systems to test-market TiVo’s DVR product as part of the cable operator’s triple-play package of video, voice and data services. Shares in TiVo tumbled more than 15 percent Thursday on the company’s profit warning.

The company said it posted a second-quarter profit of $240,000 versus a year-earlier loss of $10.8 million. Revenue for the three months ended July 31 slipped slightly to $39.3 million from a year-earlier $39.8 million.

At the same time, TiVo announced it will run tests of its DVR with a wireless router, enabling users to use the service without the need for a telephone line to transmit relevant data required to record programs. The DVR used in the Cablevision tests will rely on Cablevision’s high-speed Internet service, which will be accessed via a wireless router.

The deal marks the second pact TiVo has struck with a cable company. Earlier this year the company entered into a long-term pact with Comcast to deploy TiVo’s DVRs and software in Comcast set-top boxes. That deal breathed new life into TiVo, which has largely relied on its reselling relationship with satellite operator DirecTV for growth.

However, what seems at issue for some investors is a continual change in strategy at the company, which has struggled to come up with a plan to grow its business in the face of an evaporating relationship with the source of most of its growth, satellite operator DirecTV.

DirecTV beginning in October will de-emphasize TiVo-branded DVRs in favor of those from rival NDS Group, which, like DirecTV, is controlled by Rupert Murdoch’s News Corp. And while TiVo has begun looking to strike relationships with cable operators such as Comcast, and now Cablevision, the company has also sought to build up the number of TiVo-owned subscribers-an uphill battle given the cable industry’s push to deploy its own DVR-equipped set-top boxes.

“While new management [led by recently named CEO Tom Rogers] was upfront about TiVo’s challenges, we remain skeptical about its strategy, which seems to change on a quarterly basis,” said Alan Bezoza, an analyst at Friedman Billings Ramsey.

Much of TiVo’s growth for the past several years has been driven by the DirecTV relationship. Though TiVo saw its subscriber base grow by 254,000 to 3.8 million subscribers, DirecTV accounted for 214,000 of those new subscribers, while TiVo-owned subscriptions accounted for the other 40,000, down from 63,000 a year ago.

Shifting that growth away from TiVo will be a challenge, said Mr. Bezoza, who noted that TiVo won’t have much in the way of inventory during the critical holiday season. Plus, he doubted that TiVo would be able to move the dial much with its cable alliances, given it is unclear just how aggressive cable operators will push TiVo-branded products versus their own DVRs.