TIVO, anyone?

[peanuts]

What are your thoughts on TIVO?

Do you use the product? What do you think? Have you seen the competition? pros/cons?

Will TIVO be bought by a bigger media company now? After APPLE annouced it's own set-top media box, doesn't it make sense that competition is now heating up in the field, so some early consolidation may be in store? TIVO alone, in my opinion, isn't what the customer of the future will want. I think we are heading towards a full media package from the likes of Microsoft, Apple, Sony, and others. DVR's would probably be a component of that package, and it would probably be wise to get the most recognized brand name onto a big company's product.

Is this making sense to only me? I'd like to know what YOU think!

[peanuts]

here's what Dave said,

This is an old post from a member who doesn't post much, anymore.

I have seen a few people here interested in TIVO at one point or another, and I think it is a great product. The stock, however, is walking a thin line. What does the future hold for TIVO: will it prosper, or will it BK?

To get the the nitty-gritty of TIVO, we have to look at subscription revenues. This is where TIVO makes its money, as the hardware is heavily subsidized, sometimes even selling at a loss (I think this is a big mistake and will touch on that later!).

TIVO has been steadily increasing its sub numbers over the last few years, culminating in Q3/04's addition of ~413,000 subs. This gives them a current total of ~2.3mill subs, and I think they may add up to 700,000 in Q4/04. That sounds quite impressive, and when you think of the cost of a TIVO sub being $12/month, it certainly could be, but therein lies TIVO's problem: 1.4mill of those subs come from DirecTV.

"Thats great!" I can hear some people saying. Unfortunately TIVO last quarter was only paid $1.25/sub from DTV, and they predict that number to decline even more in 2005. Keep in mind that is GROSS payment from DTV, so when you subtract TIVO's cost-per-sub, they are left with a couple of dimes to scratch together. You also have to keep in mind they are not making any money on the DTV Tivo boxes, which is a shame.

So, now lets calculate out TIVO's gross income from subs. They bring in ~1.75mill/month from DTV, and ~11mill from their owned subs. As we can see, even though DTV makes up the majority of the subs, they only account for ~17% of the gross revenue. This is actually a GOOD thing, as we will look at in a minute. So, TIVO brings in, from subs, ~13mill/month, so around 150mill for the year in 2004. The current problem is that TIVO is still spending a ton to push their product. In the past they have been plagued by ill-conceived ad campaigns, and VASTLY subsidized hardware. In doing so, they continue to be cash-flow negative and have piled up close to 640mill in debt. Expenses are way too high!

What can TIVO do about their expenses? Well, first thing they need to do is to realize they may never be a mass-market product like a VCR. Certainly the DVR will become such a product, but when endowed with the TIVO service that requires a monthly payment, things get complicated. The system can be slow and cumbersome, and overly complicated, and as such, many people will steer clear of it. TIVO also offers dumb versions of their DVR through agreements with companies like Sony, Panasonic, etc. They do get a small royalty from these, which is something. Now the question remains, what can TIVO do to turn a profit? One of their problems is that they do not actually provide any CONTENT for their relatively large fee. You are simply paying for a guide to be updated with current listings so your TIVO will know what is on, and when. Why should I have to buy a piece of hardware, and then pay a high subscription fee for a simple guide service? That is a good question, and one not easily answered, so I will only point the following out:

DTV TIVO service is only $5.00/month, as is DVR service from other providers like Comcast. This is more reasonable, and since TIVO will likely never sign a cable deal, they should consider selling a middle-ground version of their DVR to compete in this price range.

TIVO sells their stand-alone boxes with HUGE rebates that can reduce the price by around 50%. This is a BIG mistake as they try to gain subs through hardware subsidies. In Q3/04 they had 27mill in gross hardware revenue, and coughed up 17mill of that in rebates and dealer incentives. I really disagree with this, as I believe that is you have a superior product, people will pay what is should cost. A good example I always use is the iPod. Apple refused to get into price wars with other companies and as a result prices have stayed fairly high for these premium MP3 players. Tivo has almost no competition in the "smart" DVR arena, so why subsidize? Thery do it because they have some crazy vision of 30mill homes with a TIVO. This AIN'T happening, not with every cable operator offering their own DVRs. TIVO needs to switch their focus and give themselves a reasonable target of 1.5-2mill subs from which they can make a decent profit. If they were to get 2mill stand-alone subs with an average of $10/sub/month, they would pull in 240mill/yr in sub revenue. Couple this with actually MAKING money on some hardware sales, and they could pull in more like 325mill/year in gross revenues. Couple this with some heavy cuts in OpEx and they could be making a nice profit in 2006.

TIVO stock has had its ups and downs, but recently has been under fire from a company called NDS. They also make DVRs, and have targetted TIVO's DTV business. "Well, TIVO already has a history with DTV, and will have close to 2mill subs through them soon. How can NDS win DTV business?" For the answer to that we must ask Rupert Murdoch. Not only does he now control DTV, but he also controls NDS. NDS also has supplied DTV with their access cards, so they have a longer history with DTV than TIVO does. Unfortunately their cards, until recently, were always the victim of hacks, so the road has been a bit bumpy. 'Unfortunately' for TIVO, DTV has announced they will also offer an NDS DVR sometime in early 2005. What does this mean for TIVO? It means they can basically tell DTV to bite them, and not renue their contract. My guess is that a small percentage of DTV customers will opt for the stand-alone TIVO, and if even 1/12 does this they will come out ahead in the long run.

This has been a bit scattered as I add to it between service calls, but it was fun as I think TIVO has a future, albeit not the TIVOWILLRULETHEWORLD future that a lot of TIVO subscribers think. I think it will take them another 2 years to really show some decent profit, although I expect them to become cash-flow positive in Q3 or Q4/05. At that point the stock should move near 10, on its way to 15 or so in 2006, providing they can focus a bit and reduce OpEx. Stop giving away your hardware, TIVO!

Happy Holidays to everyone, time to snag a PBR!

-Dave