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MAY 17, 2004
Will Souping Up TiVo Save It? Why investors, spooked by the competition, may be fleeing its stock too soon Michael Ramsay, chief executive of TiVo Inc., has heard the eulogies for his pioneering company many times before. Yes, digital video recorders, which let viewers pause live TV, zip through commercials, and automatically record their favorite programs, are suddenly hot. And yes, TiVo's name has become virtually synonymous with the technology. But the five-year-old company faces an onslaught of competition, and its strategic position seems hopeless. Most of its customers buy stand-alone boxes, then pay $12.95 a month for TiVo's "time-shifting" service. Now, cable companies are beginning to offer similar services for lower subscription rates with no up-front cost. Worse, Rupert Murdoch's DirecTV, TiVo's biggest customer, is considering using technology from another Murdoch company to replace TiVo in at least some of its satellite boxes. Investors certainly are spooked. TiVo's stock is down 50% since last July, to less than $7. "People are assuming the worst," says analyst David Farina of investment bank William Blair & Co. But tap that pause button for a moment. A close look at Ramsay's new plans for the company suggests that any requiem for TiVo may be premature. He's pushing to make TiVo less dependent on stand-alone boxes by striking alliances to have TiVo's software incorporated into hot-selling consumer electronics such as DVD recorders. He's aiming to get more revenue from subscribers by offering them cool new features, including satellite radio, digital photo editing, and the ability to surf the Web from TiVo boxes. And although many of his customers get TiVo to avoid advertising, he expects to build a significant business from selling opt-in ads specially crafted for his much-coveted audience. "TiVo has a lot of irons in the fire. I wouldn't write them off just yet," says analyst Michael Paxton of researcher In-Stat/MDR. THE BIGGER PICTURE. The strategy could remake TiVo. While the company now gets 90% of its revenues from basic digital recording -- customers who spend $12.95 a month or $299 for lifetime service -- Ramsay expects that to drop to 33% in a few years. The rest, he figures, will be split between premium services and advertising. "TiVo can not only survive, we can grow and thrive," he says. The company has more time than investors may realize. Cable providers such as Comcast Corp. (CMCSK ) are experiencing delays in their rollout of digital video recorders, and satellite provider EchoStar Communications Corp. (DISH ) is suffering shortages of its hottest product. While hardly permanent, the snafus mean rivals may cede much of the holiday selling season to TiVo. Ramsay plans to use the window of opportunity to double his subscribers to 3 million by yearend. He expects to invest $50 million in marketing and slashing prices on TiVo boxes. A TiVo that can record 40 hours of programming is now $149, down from $199. The strategic changes won't come cheap. The company is expected to lose $82.5 million in the fiscal year ending in January, as revenues decline 18% to $115.2 million. But analysts forecast the company will bounce back in 2005, with a loss of $8.8 million on $191.3 million in sales. Over the next five years, analysts bet TiVo's gambit will shore up its precarious position, helping it post 42.5% revenue growth, vs. 13.4% for the sector. "Clearly, things aren't necessarily gloom-and-doom for TiVo," says analyst Greg Ireland of researcher IDC. TIVO INSIDE. To hit those numbers, though, TiVo's push into new markets is paramount. Its plan to license its software to consumer-electronics makers looks promising. Pioneer Corp. execs say combination TiVo-DVD recorders have been a huge success in the past six months. Toshiba Corp. (TOSBF ) and Asian set-top box maker Humax Co. plan to roll out similar products this year. By 2008, In-Stat estimates the market will hit 25.2 million recorders, up from 4.3 million this year. TiVo receives licensing fees from each manufacturer and a shot at follow-up revenue. Consumers who buy the boxes get free basic TiVo service but are allowed two free weeks of premium TiVo, including features like a 14-day electronic programming guide, instead of a three-day one. Ramsay says nearly 80% of those people who take the two-week trial opt to keep the higher level of service and begin paying $12.95 a month. Advertisers also are beginning to warm to TiVo after early concern about its commercial-skipping features. TiVo subscribers typically earn more than $70,000 a year and are more likely to make big-ticket purchases, the company's research shows. Car companies, like Ford Motor Co. (F ) and BMW, and Hollywood studios have experimented with opt-in ads on TiVo boxes, and TiVo says nearly 70% of users watch them. This summer, TiVo plans to roll out a new advertiser service called Video-to-Video. It will install pop-up teasers when people fast-forward through ads. If users click on them, they can see three-minute pitches. Less than 10% of the $141 million in revenue last year came from advertising, but Ramsay says it's the fast-growing part of TiVo's strategy. TiVo fans may be its best weapon. As many will attest, the world is divided into two camps: those who unabashedly love TiVo, and those who don't have it. With a loyal and growing fan base, Tivo may not be the biggest kid on the block, but it could be the most powerful.
 By Cliff Edwards in Alviso, Calif.
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