TiVo's Catch-22

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TiVo’s survival depends on cable. Cable has limited incentives to see it succeed. Does TiVo have a way out?

This week, the company that has amassed such powerful brand equity that it has become a verb ("Did you TiVo The Sopranos finale?") announced that it is working hard to convince the cable industry that it’s a friend, not a foe.

The purported olive branches: TiVo’s new $299 high-definition DVR, designed "exclusively for cable," and a tech-support program designed to take the heat off operators for CableCard snafus instead of pointing fingers.

Well, that’s fine. For the subset of subscribers that want a TiVo, I suppose anything that shaves off a truck roll or builds customer goodwill is a good thing. But I wonder how much this will move the needle for TiVo.

I certainly don’t see cable companies suddenly starting to flog TiVos as awesome alternatives to their own set-tops. Operators potentially lose revenue if a customer chooses a TiVo CableCard box. TiVo also gets its Trojan horse in the door as a rival TV-related service provider, with (for example) the over-the-top Amazon.com movie-download service that Amazon has touted as providing a "better experience" than cable VOD. Gee, thanks, guys.

Passive support for TiVo boxes is one thing. Promotional marketing is something else altogether. 

There’s potentially a way out of this conundrum: licensing the TiVo magic to operators themselves so they can continue to own the subscriber. Comcast and Cox are doing this as we speak.

But it remains to be seen how passionately Comcast and Cox will promote this. Comcast hasn’t exactly stepped on the gas here. The MSO may merely be embracing TiVo as a tactical, defensive measure. Note that under these agreements, Comcast and Cox will give a cut of the monthly lease fee to TiVo. That means either that (A) they’ll earn incrementally lower margin on TiVo boxes deployed versus their own DVRs or (B) they’ll price TiVo boxes at a premium. I’d bet on option B. How many folks will judge the TiVo "experience" worth an extra 5 or 10 bucks a month?

So there will not be terrific demand-generation through cablers, though this could change someday. What about TiVo’s own consumer marketing? Surely the $299 HD DVR can heat up enough techno-lust to let the company finally turn the corner? 

TiVo has long been a darling of consumer-tech reviewers — check out, for example, these happy hosannas from BusinessWeek, New York Times and Wall Street Journal. These guys are constantly befuddled that TiVo hasn’t been more successful. Yes, TiVos make cute little popping noises when you click the remote. And they definitely provide cool features, like suggesting shows you might be interested in.

But the cognoscenti enamored with TiVo’s whizziness ignore a certain reality. It’s easier to get a DVR from your cable company. And most people prefer to rent, not own, a set-top. Indeed, most DVRs in use today are already supplied by cable companies, according to a Carmel Group study. Furthermore, this trend (Wall Streeters call it a "secular trend") is likely to accelerate… with TiVo’s share diving to 2% or less by 2010, the research company predicts.

So perhaps TiVo hangs on as the cool kids’ choice of DVR, rather like the cult of Macintosh users. Not bad footsteps to follow in — if TiVo can manage to make it a profitable business. In May TiVo posted its first-ever profitable quarter for Q1 2007 after years of red ink. At the same time, the company said it would post a Q2 net loss of $5 million to $8 million because of its "My TiVo Gets Me" ad campaign. One step forward…

Let’s consider one other option: Could TiVo sell itself, perhaps to Cisco/Scientific Atlanta or Motorola?

Not likely. True, the company is affordable. TiVo’s market cap was around $550 million as of Thursday. The problem is that TiVo carries baggage — i.e., its existing business model. Cisco/SA and Motorola wouldn’t want to continue to service and support the 4.3 million TiVo subscribers out there, and it would be a rather pricey acquisition just to get the technology. I can’t imagine buying TiVo would tickle Comcast’s fancy either.

The trends just don’t play in TiVo’s favor. Major cable operators (and Gemstar-TV Guide, which has a less-threatening licensing-only model, unlike TiVo) are rolling next-generation on-screen guides with search and personalization features that promise to rival the one edge TiVo enjoys today. Verizon has its own guide, too. 

And someday you may not even need a DVR, if cable providers end up just putting all video programming on VOD. Powerful brand or no, TiVo may end up being an innovator that couldn’t escape its own dilemma.

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