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Cable Operators

Can TiVo Reinvent Itself?

12/13/2009 2:00 AM Eastern

TiVo president and CEO Tom Rogers says he doesn’t run a DVR company.

This is odd, since TiVo is synonymous with the digital video recorder — a technology that, in the last decade, has altered the TV-advertising business and fundamentally changed the way millions of people watch TV.

It is odd, too, given that about 80% of TiVo’s revenue still comes from sales of the retail DVRs and related subscription fees.

According to Rogers, TiVo is not a DVR hardware provider or even a software company, but a “television behavioral company at heart.”

Rogers is now scrambling to convince cable operators — whose own DVRs have contributed to the decline in people willing to pay for TiVo service — that he’s able to offer much more than just the best DVR on the planet.

Instead, his pitch is this: TiVo, with its highly intuitive and user-friendly software, is better-positioned than anyone else to help users sift through and manage “infinite choice” in the same way Google has made the Web itself searchable.Multichannel News cover story Dec. 13, 2009

Recording linear TV for later playback will continue to have its place, Rogers said, but as more Internet-delivered video comes to TV screens, Tivo will be the front-end TV portal through which subscribers access linear TV, video-on-demand, broadband content, interactive services and advertising.

“Our past was inventing the DVR. Our future is advanced television,” said Rogers, who joined TiVo in 2005 after running publishing company Primedia; before that, he headed NBC’s cable division.

Rogers doesn’t have much of a choice these days. TiVo, which popularized the DVR, has watched its core business die off as cable, satellite and telco providers successfully introduced their own digital video recorders. To save itself, TiVo must cut deals with those same TV operators and persuade them to adopt its next-generation navigation software.

To that end, TiVo has signed different deals with Comcast, Cox Communications, DirecTV, RCN, U.K. operator Virgin Media and others to pitch TiVo-based DVRs and services to customers.

Each has a different motive. For RCN, the issue was that service providers that are “beholden to Motorola and Scientific Atlanta [now part of Cisco Systems] are not truly going to be able to embrace the convergence of TV and the Internet,” said RCN chief financial officer Mike Sicoli in August when the company announced its deal with TiVo. “This leapfrogs that and gives us the best platform that costs even less than what we have today.”

Virgin Media, the United Kingdom’s biggest cable operator with 3.7 million video subscribers, has also bought into TiVo’s pitch. Under a deal announced last month with Virgin Media, TiVo will become the exclusive provider of middleware and user interface software for the cable company’s next generation of set-top boxes. Virgin Media anticipates its first TiVo co-branded product in 2010.

“TiVo clearly has an experience that none of the operators has been able to match yet,” said Parks Associates vice president and principal analyst Kurt Scherf. Its next huge challenge is to persuade major pay TV companies “that they can’t develop this themselves.”

And time is running out for TiVo to turn the next-generation TV story into a real business. All at once, Rogers faces defecting subscribers, technical delays with cable operators, agile competitors and a legal strategy built around defending the patents that are the foundation of its DVR business.

As of Oct. 31, TiVo had 2.7 million total subscribers — down from 3.5 million a year ago, and off 62% from a peak of around 4.4 million in late 2006.

Its finances have also taken a hit: TiVo’s net revenue for the nine months ended Oct. 31 declined 15.9%, to $121.3 million, compared with the same period last year, and the company posted a net loss of $14.4 million.

In 2010, TiVo’s growth prospects will largely depend on convincing cable subscribers they should pay a premium to enjoy its particular flavor of digital video recorder. “Until they get some significant revenue coming in [from distribution agreements], there’s plenty of reason to doubt they’ll be able to keep it going,” Scherf said.

If it continues to hemorrhage subscribers, according to analysts, TiVo may ultimately be an acquisition target for the likes of Cisco or perhaps even Netflix (with whom TiVo has a partnership) for its patent portfolio and tremendous brand equity.

To go it alone, though, TiVo needs the cooperation of pay TV operators because most subscribers won’t go through the trouble or expense to buy a standalone DVR and hook it up themselves. According to SNL Kagan, about 34.6 million U.S. households had DVRs as of the third quarter of 2009 — giving TiVo less than an 8% share of the market.

“The consumer perception of TiVo has always been much larger than their actual adoption,” said Yankee Group director of consumer research Carl Howe.

TiVo’s partnership with Comcast is now four and half years old without producing tangible gains. Comcast has just reinitiated marketing across the New England market, which includes Boston, “now that the vast majority of technical hurdles have been cleared,” Rogers said on TiVo’s Nov. 24 earnings call.

Cox, for its part, has moved out of the testing phase with TiVo-based boxes in its New England region — but still doesn’t offer the service to customers.

With Comcast’s current TiVo offering, priced at $2.95 per month on top of the regular DVR fee, subscribers are able to search across TV and VOD listings, but the MSO is not providing access to broadband content. Cox is following that same model. RCN, DirecTV and Virgin Media, meanwhile, envision offering some broadband-delivered video through their TiVo services in an integrated fashion.

Rogers said TiVo’s distribution partners each have “various incentives and commitments” for how they market the services. He also suggested that cable operators need the firepower of TiVo’s brand and enhanced features to remain competitive.

“You don’t want to be in a position where somebody has a better product than you do,” he said.

TiVo was in many ways incubated by the cable industry. According to company lore, the idea for TiVo came to co-founders Mike Ramsay and Jim Barton while they were working together for Silicon Graphics Inc. on Time Warner Cable’s Full Service Network interactive TV project in Orlando, Fla., in the 1990s.

By 1999, after shipping its first DVR, TiVo scored a coup with its original distribution deal with DirecTV. The satellite operator launched a TiVo-based DVR, which was a major part of its growth early on. But five years later, DirecTV said it would market its own DVR, developed by NDS, then a sister company through News Corp.’s investment in both — shutting off that spigot and leading to a steady erosion of DirecTV customers using TiVo boxes.

“DirecTV was a big part of the reason TiVo was successful. Then they were part of the problem,” said Carmel Group chairman Jimmy Schaeffler, who has worked as a consultant for TiVo in the past.

TiVo last year struck a new deal with DirecTV, to run through at least February 2015, under which the companies will develop a new broadband-enabled HD DVR as a high-end option for subscribers. Previously slated to launch in the second half of 2009, that product is now anticipated next spring.

As it looks for new customers, TiVo has also erected a legal strategy around its key DVR patents, aggressively defending them against EchoStar and Dish Network. TiVo has won $400 million in judgments so far and could get even more depending on the ultimate outcome of the litigation from the U.S. Court of Appeals for the Federal Circuit.

TiVo also has taken aim at the two biggest U.S. telco TV operators, filing patent-infringement suits against AT&T and Verizon Communications for allegedly violating three of its patents. TiVo’s message to the industry would appear to be: Work with us, or we’ll see you in court.

Asked about the litigation, Rogers said TiVo would prefer a business solution, “but sometimes you have to protect yourself.” Still, analysts don’t believe there’s a bright future in its simply licensing intellectual property.

Meanwhile, TiVo is increasingly finding itself in the crosshairs of traditional cable-industry suppliers who are also trying to create a hybrid TV/Internet portal for subscribers. Motorola, Cisco Systems, Rovi, NDS, Arris and others are following similar strategies to meld Internet-based content with managed TV services, as well as provide advanced search and discovery features.

Arris, for one, in September acquired Paul Allen’s Digeo, which sells a high-end DVR that competes with TiVo, for $20 million. Arris senior vice president of corporate marketing Stan Brovont said the deal will let the vendor create a new class of home-entertainment gateways pulling together the attributes of a high-end set-top box, a DOCSIS cable modem and consumer-entertainment experience. The value is in providing the integration, rather than the on-screen menu elements, he said.

“Our focus is on the operators,” Brovont said. “We emphasize our user interface, but we recognize customers have the motivation to brand the visual presentation of their product.”

NDS, too, is pushing forward in developing new DVR capabilities. The company claims to be the worldwide leader in DVR deployments, with more than 23 million DVRs in the field running its technology, including those with DirecTV.

Jesper Knutsson, vice president and general manager of NDS Americas, said the key is to deliver a solution that an operator can maintain with its own branding. “As an operator you control your own destiny by having your own guide,” he said. “If you have to rely on a vendor that has competing interests, you might have some conflicts.”

Indeed, even as it pursues deals with MSOs and other TV operators, TiVo also is attempting to resuscitate direct-to-consumer sales. The company recently signed a deal with retailer Best Buy to commence in early 2010, under which TiVo will create “unique user interface elements” for Best Buy’s line of consumer electronics that will be integrated with Best Buy’s digital content offerings.

Naveen Chopra, TiVo’s vice president of corporate development and strategy, said tension with pay TV operator partners vis-à-vis its retail strategy “is certainly not lost on us.” But he argued that TiVo’s retail play is in fact an advantage for cable operators, because unlike most other broadband-connected set-tops, the TiVo solution is centered around cable TV service.

Chopra also pointed out that most cable operators don’t have much control over their own interactive program guides, so they’re “at the mercy of what’s made available to them by different set-top providers and they have very little flexibility to modify that.”

But is TiVo’s technology platform really that much better? The company’s promise of delivering a Google-like ability to search and discover video content across TV, VOD and the Internet has not been an effective selling point to consumers yet.

Rogers believes such advanced features will, over time, reverse TiVo’s slide. “Nobody else does the total chain of elements we do: DVR, advanced television user interface, search and discovery integrated between linear and broadband so the viewer doesn’t have to concern themselves with what the source is,” he said. Creating that unified media experience on the TV is “really hard to do, which is why you don’t see anyone in the cable industry doing this.”

September