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WIKI ANALYSIS
TiVo, Inc. (NASDAQ: TIVO) is the creator of and leader in 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 by forming agreements to provide its TiVo service to advertisers and television service providers, including 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].
Business Overview
TiVo customers subscribe to a service that lets them to watch television on their own schedule and avoid advertisements. TiVo has 3.6 million subscribers.[4]
Service (66% of revenue in 3Q09)
Technology (16% of revenue in 3Q09)
Hardware (17% of revenue in 3Q09)
Products
There are currently three TiVo-branded DVRs: TiVo Series2, TiVo HD, and TiVo HD XL.
- The TiVo Series2 provides 80 hours of television recording but only supports standard definition television.
- TiVo HD can record in high-definition and has 20 hours of available storage in HD or 180 hours of standard-definition recording.
- TiVo HD XL has a one terabyte (1,000 gigabytes) hard drive and can store up to 150 hours HD television.
The three TiVo DVRs sell for $149.99, $299.99, and $599.99, respectively.[5] All three TiVo-branded DVRs have two tuners, allowing subscribers to record two programs at once or record one program while watching another. TiVo DVRs can be connected to users' computers over a local network allowing TiVo customers to play digital music and display picture files on their televisions.
When the company first launched its DVR product, customers had to purchase TiVo's hardware in order to access its service. Since then, the number of hardware suppliers has increased. With more competition and consistent net losses on the hardware side of the business (which has been heavily subsidized in order to build a customer base) TiVo shifted towards a more software-centered business model which has allowed TiVo to provide its service on third party DVRs.
Financial Overview
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 ($78.8 million as of January 31, 2008[6]) so the company can continue their operations while taking a net loss in the short term.
| 2004 | 2005 | 2006 | 2007 | 2008 | |
| Net Loss ($thousands) | $32,018 | $79,842 | $36,999 | $47,754 | $31,457 |
| Revenue Segment | 2004 | 2005 | 2006 | 2007 | 2008 |
| Service | $61,560 | $107,166 | $167,194 | $198,924 | $211,496 |
| Technology | $15,797 | $6,491 | $2,797 | $18,409 | $19,382 |
| Hardware | $63,723 | $59,354 | $28,138 | $41,588 | $41,798 |
Advertising
Because DVR users have the ability to fast-forward through normal television commercials they are more difficult to reach through advertising. TiVo's advertising platforms allow companies to reach DVR users in different ways than standard commercials. Furthermore, TiVo's technology allows for more targeted advertising because the company is able to collect data reflective of each DVR owner's television tastes. TiVo also sells market research conducted on its audiences audiences to advertisers, allowing advertisers to evaluate consumer demand and advertising campaign effectiveness.
Strategic Partnerships
- Cable and Satellite TV Providers: TiVo provides several subscription packages that do not require TiVo hardware. TiVo offers its service through DIRECTV, and its software is compatible with third party DVRs. DIRECTV customers can subscribe to TiVo and run the TiVo user interface on DIRECTV DVRs. Comcast and Cox cable customers can also use TiVo software on their cable boxes. The agreements with Comcast and Cox will allow TiVo to reach 46% of the country's cable subscribers through the two major cable players[7]. In November 2009, TiVo also announced a deal to power the next generation of set-top boxes for British entertainment giant Virgin Media[8].
- Other Entertainment Providers: 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.[9]
- 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.[10]
- Amazon UnBox: In September 2006, Amazon launched "Amazon Unbox", an on-demand service that allows customers to download films, television shows and other video entertainment. In March 2007 TiVo and Amazon partnered to begin providing the Unbox service to TiVo subscribers. This allows TiVo customers to rent movies directly to their TV using their TiVo remote.[11]
Trends and Forces
The DVR Effect
The introduction of the DVR by TiVo changed the way many people view television. 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, such as banner ads similar to what's on websites, 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.[4] TiVo already has advertising deals with Comcast, Cox, and DIRECTV for advertising on both TiVo DVRs and third party, TiVo-enabled DVRs. However, TIVO has struggled to hold onto customers as many cable companies have begun offering the same services through their own cable boxes. This has led to a decline in subscribers, including a 10% decline in 3Q09[1].
Subscriber Acquisition Cost (SAC) and Churn
In the relatively young DVR market, the initial customer base is made up of "early adopters", niche consumers who purchase the product early in its lifetime. As the product matures, the target customer shifts away from early adopters toward a more mainstream market. The cost of gaining additional customers increases with the need for greater marketing spending to lure more customers.
This trend can be seen in the DVR market with the rise in TiVo's Subscription acquisition cost (SAC) over the past three years. Subscription acquisition cost (SAC) is the amount of money TiVo spends for each additional customer they add. Generally these costs are in the form of marketing and product development.
Over the same period, TiVo's churn rate (the percentage of service terminations over a given period) has also been on the rise, making the need to gain new customers greater. At the same time that subscriber acquisition costs have been rising, TiVo has also seen falling ARPUs over the past two years. This means that each new customer is less lucrative than the last yet more expensive to get.
TiVo's churn rates are lower than those of its competitors, while its SAC is less than that of DirecTV yet more than that of Echostar. While competitor's churn rates and SAC have been nearly constant over the last three years, TiVo has seen rises in both churn rates and SACs.
| Churn | ARPU | |
| 2006 | 0.90% | $8.82 |
| 2007 | 1.00% | $8.77 |
| 2008 | 1.20% | $8.91 |
Legal Challenges
The protection of intellectual property rights is a serious business concern for TiVo, as many patents covering interactive television technologies have been issued to other parties but not yet commercialized.
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] This decision helps to ensure TIVO's legal rights to its techonology forcing company's such as Echostar to have to compensate them for its use.
Expanding service to new markets
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.
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.[10]
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. Due to the increasing consumer demand for DVR service more companies are expected to begin incorporating DVR technology into their products. As a result it is likely that the DVR hardware landscape may become even more competitive. The software that runs these DVR systems comes from a number of different companies, including Gemstar-TV Guide International (GMST) , Microsoft (MSFT), and Digeo.
TiVo also competes with companies that produce personal computers with DVR software. Dell and Hewlett Packard already provide PCs running Microsoft DVR software, and it is likely that more producers will follow suit in the future in an attempt to gain a share of this growing market.
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 such as Microsoft, Gemstar, OpenTV, NDS, D&M Holdings, Digeo, Gotuit, and 2Wire. As more manufacturers enter the DVR market it is likely that the licensing fees that are able to charge will be cut.
Audience Research
TiVo also competes directly with audience research companies like Nielsen, TNS, RenTrak, and TRA for revenue from advertising agencies and major television networks.
References
- ↑ 1.0 1.1 1.2 1.3 "TiVo Reports Results for the Third Quarter Fiscal Year 2010 Ended October 31, 2009" 11/24/09
- ↑
- ↑ "TiVo Seeks to Link Hulu Web TV with Digital Recording Service" MercuryNews.com,10/09/2009
- ↑ 4.0 4.1
- ↑ www.tivo.com.
- ↑
- ↑ "Top 25 MSOs", National Cable & Telecommunications Association, retrieved September 21, 2008.
- ↑ "Virgin Media Selects TiVo For Next Generation TV Platform" 11/24/09
- ↑ "TIVO INC", Kaufman Brothers Equity Research, June 24, 2008.
- ↑ 10.0 10.1 "TIVO INC. - COMPANY PROFILE", DATAMONITOR Independent Research,[1], August 7, 2008.
- ↑ "Tivo, Amazon unveil download deal", www.macworld.com, February 7, 2007.
- ↑ TIVO's Stock Gains in Fast Forward. The Razor's Edge (June 3, 2009).
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