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TiVo, Inc. (NASDAQ: TIVO) is the creator and leader of television services for digital video recorders (DVRs), with 2.7 million subscribers as of 3Q09^[1]. Through a subscription-based service, it provides consumers with a way to record, watch, and control live television. In 3Q09, the company witnessed revenues of $56.9 million, a 12% decrease over 3Q08, and a net income loss of $6.7 million^[1]. Of its 3Q09 revenue, 66% came from subscription fees paid by customers, 17% from the the sale of its TiVo box, and 16% from the distribution of its DVR technology to its strategic partners^[1]. TiVo is not confined to finding subscribers through its proprietary hardware, diversifying its revenue streams through agreements to provide its TiVo service to advertisers and television service providers such as Comcast and DirecTV^[2], . Often criticized within the industry for allowing users to fast-forward through advertisements, TiVo announced in October 2009 that it is seeking to sync its TV digital recording service with the contents of TV online free media provider Hulu.com, which contains advertisements that cannot be skipped^[3].

Company Overview

Business and Financial Metrics

Since its IPO, TiVo's costs have consistently outweighed revenues, creating a net loss in each fiscal year. However TiVo has a substantial amount of cash on its balance sheet ($78.8 million as of January 31, 2008^[4]) so the company can continue their operations while taking a net loss in the short term.

Source: Company 10-k

Business Segments

Service (66% of revenue in 3Q09)

TiVo generates service revenues from recurring and prepaid subscription fees for providing the TiVo service to consumers and through the sale of advertising and audience research measurement servicesallowing advertisers to evaluate consumer demand and advertising campaign effectiveness. TiVo's technology allows for more targeted advertising because the company is able to collect data reflective of each DVR owner's television tastes.

In 3Q09, service revenues amounted to $37.7 million, a 21% YoY decrease. The reason for the shrinkage is threefold. DirecTV decided not to offer new TiVo service subscriptions to its customers until the launch of its new High Definition platform, shrinking TiVo's cumulative subscription base. Additionally, DirecTV overestimated its FY2008TiVo subscriptions, so TiVo had to recognize a $1.8 million revenue reduction adjustment to account for this. Lastly, TiVo changed the amortization period for its product lifetime subscription revenues in FY2009 from 54 to 60 years, thus recognizing lesser annual revenue for each of these subscribers^[1].

Technology (16% of revenue in 3Q09)

TiVo generates technology revenues through licensing and engineering service agreements with strategic partners such as Comcast, DirecTV, and Seven/Hybrid TV. In 3Q09, technology revenues amounted to $9.4 million, a 134% YoY increase, stemming from a higher volume of work with Comcast and DirecTV in comparison to the same period in FY2008^[1].

Hardware (17% of revenue in 3Q09)

In 3Q09, hardware revenues amounted to $9.8 million, a 23% YoY decrease. This can be attributed to a decline in the number of TiVo boxes sold as consumers, weathering the economic downturn, cut back on discretionary spending^[1].

Trends and Forces

Strategic Partnerships, New Markets, and Revenue Stream Diversification

TiVo has used its platform to change how consumers use their televisions, and how the entertainment industry researches consumer behavior. Specifically, TiVo and Amazon.com have partnered to allow TiVo subcribers to purchase items from Amazon.com directly on their television using their TiVo remote. TiVo has also used its service as platform for collecting data on television viewing habits and advertising strategies. TiVo licenses this data to advertisers and major networks who use it to study and develop advertising and programming strategies. If the DVR market continues to grow the data TiVo has access to could be very valuable for advertisers as they develop new ways to reach DVR users.

• Cable and Satellite TV Providers: TiVo provides several subscription packages through DirecTV, Comcast, and Cox Cable that do not require TiVo's proprietary hardware but whose software is compatible with third party DVRs. These partnerships give TiVo access to the majority of the U.S. cable subscribers^[5].

• Amazon Video on Demand: In September 2006, Amazon launched its on-demand service known as "Amazon Unbox", rebranded as "Amazon Video on Demand" in 2008, that allows customers to download films, television shows and other video entertainment. In March 2007, TiVo and Amazon partnered to begin providing this service to TiVo subscribers, allowing customers to rent movies directly to their TV using their TiVo remote^[6].

• Market Research & Advertising: In 2004, TiVo partnered with Nielsen Media Research to provide research on consumer television viewing habits. Nielsen launched a monthly television rating service using data from 5,000-10,000 TiVo households. TiVo has also formed partnerships with major television networks, including NBC and CBS, to research television viewing habits and advertising strategies.^[7].

• Movie Rentals: TiVo has partnerships with entertainment providers like Brightcove, an internet video pioneer, and Netflix, a mail-based DVD rental company. These partnerships have allowed subscribers to view movies through their TiVo service.^[8].

• Set-Top Boxes: In November 2009, TiVo also announced a deal to power the next generation of set-top boxes for British entertainment giant Virgin Media, in an effort to diversify away from its traditional hardware-based business and license its platform^[9][10].

The DVR Effect Allows TiVo to Revolutionize Digital Advertising

Perhaps the most significant change that DVRs bring to television is how advertisements are placed and viewed. The ability to fast-forward through a recorded program allows DVR users to skip through advertisements entirely. As such, TiVo's advertisements are built directly into the TiVo interface as banner ads rather than commercials displayed during a program. TiVo can also use its software to suggest programs to viewers, and to promote content for companies that advertise through TiVo. For example, movie studios pay TiVo to distribute movie previews to their subscribers^[11].

Patents Tied to DVR Technology Pose Legal Challenges to TiVo

In 2001, TiVo received patents for its DVR hardware and software and for its core DVR functions and home networking capabilities. In 2004 TiVo sued EchoStar, a leading satellite television provider and owner of DISH network, claiming EchoStar had infringed on these patents. EchoStar was found guilty of patent infringement in April 2006. Additionally, on June 3, 2009, EchoStar was found guilty of infringing upon TiVo's patent and ordered to pay TiVo $103 million in addition to the $105 million Echostar paid in August 2008^[12].

Competition

TiVo competes with companies from four different industries: satellite and cable DVR providers, consumer electronics providers, data licensing companies and audience research companies. Interestingly, many of TiVo's competitors are also partners. For instance, TiVo competes with Neilsen in the audience research space but the two companies also have a partnership under which Nielsen uses TiVo's audience research in its television rankings^[7].

• Satellite and Cable DVR Providers: TiVo competes with major cable and satellite providers who are now offering DVR services to their subscribers. Satellite companies Echostar and DirecTV both offer standard- and high-definition DVR services to their clients, although DirecTV also offers the TiVo interface and software.

• Consumer Electronics Providers: TiVo competes with companies that provide standard- and high-definition DVR systems such as Motorola, Time Warner Cable, and Cisco Systems. TiVo also competes with companies like Dell and Hewlett-Packard that produce personal computers with DVR software. Due to the increasing consumer demand for DVR service more companies are expected to begin incorporating DVR technology into their products.

• Licensing: TiVo earns some of its revenue through licensing fees paid by companies that use TiVo's technology. TiVo competes for these revenues against makers of similar digital video recording hardware and software producers, including Gemstar, Microsoft, and Digeo.

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} "TiVo Reports Results for the Third Quarter Fiscal Year 2010 Ended October 31, 2009" 11/24/09
2. ↑
3. ↑ "TiVo Seeks to Link Hulu Web TV with Digital Recording Service" MercuryNews.com,10/09/2009
4. ↑
5. ↑ "Top 25 MSOs", National Cable & Telecommunications Association, retrieved September 21, 2008.
6. ↑ "Tivo, Amazon unveil download deal", www.macworld.com, February 7, 2007
7. ↑ ^{7.0 7.1} "TIVO INC. - COMPANY PROFILE", DATAMONITOR Independent Research,[1], August 7, 2008
8. ↑ "TIVO INC", Kaufman Brothers Equity Research, June 24, 2008
9. ↑ "Virgin Media Selects TiVo For Next Generation TV Platform" 11/24/09
10. ↑ "Platform Overload: How Many Content Platforms Can Survive on TVs and Devices?" Seeking Alpha, 01/12/10
11. ↑
12. ↑ TIVO's Stock Gains in Fast Forward. The Razor's Edge (June 3, 2009).