TiVo Targets the Mainstream

The DVR pioneer hopes to gain customers with its price-slashed TiVo HD, but subscription costs and shrinking market share remain concerns

by Cliff Edwards

Can a low-cost, high-definition digital video recorder clear up TiVo's blurry picture? The pioneer of digital video recording, which finds and automatically records favorite shows to a hard drive, is betting that a sharply lower price for its cutting-edge box will attract millions of new customers this holiday season.

The Alviso (Calif.) company announced July 24 its $300 "TiVo HD," which slashes about $500 off the cost of its previous HD recorder, the TiVo Series 3. "It's a great HDTV complement," says Jim Denney, TiVo (TIVO) vice-president of product marketing. "You get a truly broadband-based home entertainment experience, but we're making sure we do that at a price point that it isn't something you have to think about hard before buying."

Like its higher-priced cousin, the new device enables customers who pay for TiVo's accompanying subscription service to find and record both HD and standard-definition shows—even if they're watching a third program live at the same time. Consumers also can use TiVo HD as their primary cable box thanks to the addition of a slot for the CableCARD that all cable system operators are now required to provide to their customers. The card allows users to access most digital programming by authenticating the subscriber's account and unscrambling the cable signal.

Subscription Blues

To hold down costs and enable the lower price, the company is giving TiVo HD a smaller hard drive—160 gigabytes instead of 250 gigabytes—that can store about 20 hours of HD programming or up to 180 hours of standard-definition content. TiVo HD also comes with a cheaper, non-backlit remote, and drops the high-end LED display on the front of the box that displayed programming information. It connects to the Internet to download a program guide and exclusive content.

Still, expanding TiVo's customer base will be a daunting task. True, the biggest concern among potential first-time DVR users has been TiVo's cost, according to a survey by the Carmel Group, an industry research firm. But while the new TiVo will be priced significantly lower, potential customers also have been turned off by TiVo's $13 monthly or $299 prepaid subscription (both with a three-year contract) required to make the box fully functional.

Cable and satellite TV providers, by contrast, offer basic DVRs that can be leased or purchased at a substantial discount. As a result, while the number of DVR users is on the rise, TiVo and other third-party devices are expected to see their combined market share shrink from 4% at present to just 2% by 2010, according to the Carmel Group. But since Carmel expects the number of U.S. households with DVRs to double to 52.5 million by 2010, even a smaller percentage is too alluring to ignore. Though it licenses its technology and products to cable and satellite provdiers, TiVo generates higher profit margins from selling its own DVRs and subscriptions. It typically generates less than $10 per customer a month from licensing and bundling relationships with cable or satellite providers.

Low-Cost Appeal

Meanwhile, TiVo is facing new competition with a major enticement for consumers: Sony and other personal computer makers are rolling out CableCARD-enabled PCs based on Microsoft's (MSFT) Media Center and Vista Home Premium operating systems that do not require a subscription plan. And Digeo, after years of unsuccessful efforts to forge relationships with cable providers, aims to begin selling its Moxi DVR at retail late this year.

The advantage TiVo will have now, analysts say, is its price. "The $799 Series 3 box priced everyone but the power users and tech innovators completely out of the market," says Michael Greeson, principal analyst at the Diffusion Group, a research firm. "The new unit makes TiVo and HD palatable for the mainstream consumer."