Earlier this week, Tom Rogers, the new TiVo CEO (4 months old, I think) came to my Strategy and Technology class. (We’ve had a ton of fascinating visitors and i’ve totally dropped the ball not blogging about them)
Mr. Rogers is much quieter, much more reserved than Mike Ramsey (the creative and energetic Founder and CEO until this past summer), whom I saw speak last year. While Mr. Ramsey was more “fun” to listen to, I left his talk last year thinking that TiVo had no hope: that they had no sustainable advantage, that DVRs would become commoditized, and that Mr. Ramsey was all over the map in terms of great ideas, but lacked some focus.
Let me first back up and say that I LOVE TiVo. Really, I do. I had TiVo/DirecTV until this fall. I moved and went with Comcast, who offered me a huge incentive to leave the ditch. I’ve been using the Comcast DVR for a few months and it’s crap. Total, complete, and utter crap. When you turn the cable box off, it stops recording. Need I say more?
Back to TiVo. Here’s where they stand today: DirecTV’s parent (News Corp) recently sold its 4% stake in TiVo and is a significant shareholder in a TiVo competitor called NDS. Why? My bet is that they feared TiVo becoming too powerful: it turns out that there is high churn in satellite and cable customers (upwards of 20%) but very low churn in TiVo customers (like me, most TiVo customers love the service). DirecTV saw this: the only customers who didn’t churn were the combo DirecTV/TiVo customers. Furthermore, the DirecTV contract was huge for TiVo: responsible for over half of their customer base (1.86M out of 3M total, as of 1/31/05). There couldn’t really have been a short term monetary reason for this move: TiVo’s current situation allowed DirecTV to negotiate very steep price discounts (paying TiVo slightly more than $1 per customer per month). Interestingly, DirecTV still advertises TiVo (only promising to push customers to NDS in the future). Further, it seems very unlikely that News Corp will incur the cost of going into the houses of all 1.86M DirecTV/TiVo subscribers and replace the box. I think it’s a safe bet to assume, at least, that those 1.86M folks will stay TiVo subscribers for the near future.
Once this happened, Comcast signed a deal with TiVo–hoping, I assume to lower their churn (and maybe snag some of the DirecTV/TiVo devotees). Again, the “deal” is a good one for Comcast (about $1 per sub per month). For Comcast subscribers (like me) eagerly awaiting the arrival of such a box–I think that they’re saying 2007 (though I’m not sure about that, so don’t quote me). It will be interesting to see if this lasts or if Comcast starts to fear the same thing that DirecTV did: that TiVo would become the valuable service and relegate them to a “dumb pipe” (therefore allowing TiVo to command a larger revenue share).
So what’s to become of TiVo? What’s their strategy?
First, let’s look at how TiVo makes money. Currently, the lion share of revenues come from hardware sales of boxes (fairly low margin) and service revenue (ARPU has been falling thanks to DirecTV and Comcast deals). It earns some revenue selling data (the information that they collect is incredibly rich, and therefore more valuable than Nielson, but currently only collects for a skewed population–TiVo owners). TiVo has been experimenting with an advertising platform that allows richer, more targeted, possibly opt-in, advertisements (mini infomercials or richer, in-program advertising). Finally, TiVo could offer content distribution (see recent talks about a deal with Netflix). Currently, these are all small businesses.
If you look at the players in the industry, you quickly realize that TiVo has the possibility to make an enemy of them all–which, as a startup, is a bad move (since the giants will take steps to protect their revenue streams). At the same time, though, the industry has recently realized that DVR penetration is inevitable–Forrester is predicting some sort of DVRs in 50M US households by 2009 (current penetration is about 10M households). This means that, with or without TiVo, the advertising industry is about to change radically (since the primary function of a DVR is skipping the spam-like 30 second commercials).
My bet, therefore, is that the future cash cow for TiVo is an advertising platform. There will likely be supply-side network effects in this industry: advertisers will want to write sophisticated, targeted ads for one platform, not many. The way to win here, therefore, is own significant market share, fast. (Additionally, the cash-strapped company needs to grow the user base, badly).
Hence, the recent moves to discount the box. You can get a 40GB TiVo series 2 for $50 these days. Additional moves are designed to distinguish TiVo from the generic DVRs that are now ubiquitous: the recently announced deal with Yahoo! means that you will be able to program your TiVo from the Yahoo website and even view pictures from the Yahoo website on your TV.
The game is surely not won. Customers generally can’t distinguish between TiVo and generic DVRs, which is bad for TiVo (since it’s generally more expensive). The better technology does not always win: BetaMax lost to VHS, Mac OS and OS/2 to Windows. TiVo is so much better that I’m rooting for them. I feel like TiVo is a sick relative in the hospital. I’m hoping they’ll pull through…
In the meantime, I need to go make sure I didn’t accidentally turn my Comcast box off again. There’s a West Wing episode on tonight that I don’t want to miss.
Disclaimer: I believe that all information herein is public. Most of it comes from the HBS case and Mr. Rogers (like all guests) was very careful about what he says due to SEC regulations (and good business sense). You can buy the HBS case online (it’s N9-706-421, a recently updated version of a 2003 case, so it’s not yet available).
