The little TiVo that could: Can it survive cable's attack?
By David Lieberman, USA TODAY
NEW YORK — Who does TiVo CEO Michael Ramsay think he is? Doesn't he know that giants such as AOL Time Warner, Comcast and Sony are supposed to control the products and services aiming to help consumers manage their "digital convergence" — the torrent of entertainment and information flooding homes via cable, satellite and broadband?
Tivo has outlasted most of its major rivals.
Apparently not. Ramsay talks as though his tiny San Jose, Calif.-based upstart is about much more than powering a better VCR — offering far more control and flexibility in finding, storing and replaying TV shows on digital video recorders, or DVRs. (Related story: How digital video recorders work)
He seems to believe that TiVo — the software and scheduling service that drives compatible DVR hardware — can become as central to the TV as Microsoft's Windows is to the personal computer.
"We felt from Day 1 that what we're doing goes beyond DVRs," Ramsay says. "We're revolutionizing TV."
It's been a while since you heard that kind of boasting from Silicon Valley hasn't it?
But to many of the company's 624,000 subscribers, the "TiVolution" — as some of the cultlike followers call it — is not so far-fetched. Their ranks are expected to hit 1 million by year's end as devotees spread the word of how the computerlike devices changed their lives — or at least that part devoted to watching TV. With nearly half of the DVR service market, TiVo has outlasted rivals both big and small. Last year, Microsoft quit producing boxes for its UltimateTV DVR service. This year, Sonicblue collapsed after Hollywood pummeled its ReplayTV service with copyright lawsuits. D&M Holdings, maker of Denon and Marantz electronics, bought ReplayTV last month in a bankruptcy auction.
So, while TiVo's far from a sure bet, it's the company to watch in the fast-changing convergence arena. "I'm on the fence with my feet dangling on the side of their making it," says Research Associates analyst Marla Backer. "If any company can do it, it's TiVo."
Ramsay hopes to make TiVo's service ubiquitous by persuading cable, satellite and consumer electronics companies to license and offer its consumer-friendly system for their DVRs. He already has deals with DirecTV, Sony and Toshiba. And DirecTV, which accounts for 40% of his customers, is about to be taken over by News Corp. CEO Rupert Murdoch, who has vowed to heavily promote combo satellite decoders and DVRs to compete with rival cable's video on demand (VOD).
If he does, Morgan Stanley forecasts TiVo could have 3 million satellite subscribers by the end of 2006. (EchoStar has its own DVR system for its Dish Network customers.)
TV is just the start
A strong endorsement from Murdoch — who owns the Fox network and studio — also could help deflate programmers' objections to the technology, especially to its ad-skipping capability.
Ramsay has been trying to convince them that TiVo actually will let advertisers grab viewers' attention more effectively through what he calls his "permission-based marketing." For example, lots of subscribers choose to watch the movie trailers or mini-features on new cars that TiVo periodically records on their hard drives. Music or travel companies could do the same thing, while marketers of more humdrum products could offer coupons or contests, he says.
Yet TV is just the start of TiVo's convergence ambitions. Last month, it became one of the first widely available services that, for an extra fee, can function as an entertainment hub for a home PC and media electronics network. Subscribers could use their TiVo-powered DVR to send music from the PC to the living room stereo, send digital photos to the TV or transmit TV shows from one room to a TiVo machine in another room.
"If you want to do this, now you have to go to TiVo," says Richard Green, CEO of CableLabs, the cable industry's technology certification group.
But he adds that TiVo may be left out there alone if other companies settle on a different common technology standard and copyright protection scheme for offering similar services.
That's one reason many investors remain queasy about TiVo. The stock has fallen from about $47 in late 1999 to $6.75 on Tuesday. Several also feel burned by watching DVR sales continually fall far short of projections in the nearly four years they've been out.
Major reasons for that are that most consumers still don't know what DVRs do — and many who do think they're too expensive. TiVo's stand-alone boxes start at $250 — plus a TiVo service fee of $13 a month or $300 for the life of the box. DirecTV customers pay $5 a month after buying a combo satellite receiver and DVR.
That puts TiVo out of reach for many who might value it most, Leichtman Research Group President Bruce Leichtman says. Poorer people tend to be heavier TV watchers.
As a result, TiVo lost nearly $80.6 million on revenue of $96 million in the year ended Jan. 31 and has repeatedly turned to the equity markets for cash. Ramsay says it should be cash-flow positive this year, but some have doubts because competition is coming that will offer some or most of the same features.
"TiVo is going head-to-head with giants like Sony, Toshiba and Panasonic and with cable operators with deep pockets and a huge subscriber base," says Vamsi Sistla, senior technical analyst at research firm Allied Business Intelligence.
For example:
Panasonic is selling a line of DVD recorders for as little as $250 that — similar to DVRs — let viewers watch one TV show off a disc while recording another. Panasonic also is preparing to sell a TV set with a digital recorder built in.
Hewlett-Packard will soon market, for $200 and up, a digital media receiver that can use a home network to send music from the PC to the stereo and photos to the TV.
Sony, Toshiba, Zenith, Apex and others have or plan to have combo DVD-DVR machines.
Some Sony Vaio computers and other PCs with Microsoft's new Windows XP Media Center Edition, can record TV like a DVR.
Cable box manufacturers including Motorola, Scientific-Atlanta, Pioneer and Pace are introducing DVR-equipped boxes. Some may become widely available in electronics stores after the Federal Communications Commission approves standards for them to work on any cable system.
Cable operators also are on the move. They've seen too many customers switch to satellite services that feature DVRs. And TiVo's effort to become a full-fledged convergence service "represents a direct competitive threat to cable operators' strategy (to control) the home entertainment network," Scientific-Atlanta CEO Jim McDonald told analysts last month.
Analysts are impatient
One line of counterattack is video on demand. It's available to about 8 million digital cable subscribers, likely 12 million by midyear. Now mostly movies, a few operators, led by Comcast, are working out deals to offer via VOD lots of conventional, scheduled TV shows. AOL Time Warner is headed in a similar direction with an ambitious system, which it won't discuss, called Mystro.
Their thinking is that such services will appeal to viewers who don't want to hook up extra boxes or decide ahead of time what they should record.
"DVR is moving too slowly," says James Kelso of SeaChange International, which supplies VOD services to cable.
The top operators, including AOL, Comcast and Cox, however, are hedging their bets by also offering DVR-equipped cable boxes to some subscribers.
With all of these forces aligning against TiVo, many analysts are impatient. "There's a huge concern that they have to show profits soon and sustainable growth," says Richard Doherty, director of The Envisioneering Group.
That's led many to conclude that TiVo would be safer in the arms of a bigger company. Analysts say that AOL, News Corp. (which controls Gemstar-TV Guide), Liberty Media, Cablevision Systems and Apple would probably be interested at the right time and price.
Yet Ramsay says his business is on track and can stand alone.
"We've never felt like we needed deeper pockets to be successful," he says. "The large companies didn't develop DVRs. We did."
He notes that cable companies have few shows on VOD and face a technological nightmare if they try to provide every program to lots of subscribers.
Others say that cable companies could cut their own throats if their DVRs offer the same capabilities as a TiVo-powered machine. For example, some also own lots of programming. That's why DVRs from AOL — which has WB, CNN, the Cartoon Network and other channels — limit ability to skip ads or transmit recorded shows to other sets.
"We are on both sides of the content and distribution divide," says AOL Time Warner CEO Richard Parsons.
DVRs also could be used to compete directly with cable in offering programming.
"There's the potential here to route programming around the cable company," says Sanford C. Bernstein's Tom Wolzien. For example, a movie studio could send a film via the Internet directly to a DVR so it's ready when the viewer wants it.
Disney's intrigued. "We may be one that goes directly to the consumer without a middleman," CEO Michael Eisner told analysts last week.
No wonder cable has given TiVo a cold shoulder. But the company hasn't given up hope.
Last month, it hired Martin Yudkovitz, who helped launch NBC's CNBC and MSNBC, to be president — and a peacemaker.
"If there's a hatchet that needs burying, let's bury it," Yudkovitz says. The pitch is that there's no way to stop the forces that'll give consumers more choice, and TiVo can be a friendly partner.
That's not far-fetched. AOL, NBC, DirecTV, Sony and Discovery Networks collectively own more than 40% of TiVo.
Yet Ramsay's not approaching the big guys as a supplicant:
"The message we're sending is: 'We're going to be a big player in TV.' " |
