TiVo Needs to Change Their Strategy to Survive

Jason Serino
0 Comments »
As part of a joint Business Strategy / Information Systems Strategy
project at Boston University's Graduate School of Business, my team
and I analyzed and made recommendations for TiVo. The following
is an 1,100-word excerpt from our 3,500 word paper; the Executive
Summary, Recommendations and Conclusion.

Credit where it's due: The team members were Elise Brafman,
Katherine Chung, Scott Gullick, Hsin-Ying Hu, H. Alper Memis and
myself, Jason Serino

Executive Summary

TiVo was a pioneer of Digital Video Recorders (DVR), essentially

creating the market in the late 1990’s. Product and software innovation
has allowed TiVo to remain a technological leader in the industry.
However, increased competition and new pricing structures have
eliminated TiVo’s dominant position, shrinking its market share from
34% in 2001 to only 6% in 2008.[i]

As the industry grew, TiVo’s strategy proved unable to adjust to the

changing demands of the marketplace. Cable Television (Cable) and
Digital Broadcast Satellite (DBS) entered the market by offering their
customers DVR hardware for free; buoyed by other revenue streams
they generate as content providers. TiVo continued to experience
financial losses from its inability to match this offering. The industry
changed; yet TiVo was unable to keep pace, being forced to seek out
new revenue streams.
TiVo must recognize their previous failings and streamline their strategy
to return to a competitive position within the industry. This involves
rebranding itself as a software provider through highlighting the benefits
of their service to partners, gradually eliminating hardware sales, and
focusing on their ability to collect and sell valuable market research data
provided by their customers.

Recommendations

TiVo should rethink its business model to better position itself against
these threats and to compete effectively within the maturing DVR
industry. The following three recommendations work together to
accomplish this goal. The process starts by re-branding the company,
moving from a hardware-based to a predominantly software-based
company, and leveraging its data gathering capabilities and services.

The first recommendation is a re-branding of TiVo. The company

should switch from a focus of promoting its set-top box to promoting the
“TiVo Experience”. TiVo has many differentiated features, such as its
easy to UI, integration with on-demand video, smart search and
recording capabilities and “TiVo-to-Go” which allows users to transfer
TiVo recorded programs to their personal computer.

Effectively rebranding their service allows TiVo to take advantage of

network effects that will create demand on both the user side and the
content provider side. TiVo will position itself as the central platform
that provides the User Interface consumers want and the access to
consumers that the content providers and their advertisers desire. A
similar effect was seen with the Intel chip. A consumer does not buy
Intel directly, but one would not buy a computer without “Intel Inside”.
Our goal is to make TiVo desired in the same way, where one does not
want a DVR device that does not use TiVo software.

The second recommendation is that TiVo should slowly phase-out

hardware sales. With TiVo’s current business model, hardware makes
up only 17% of its revenues, but over 30% of its expenses. [ii] This
leads to large losses on the hardware side and negative margins. The
margins for the hardware segment for fiscal year 2007 through 2009
were -171%, -120%, and -40%. When compared to the software
margins for these three years of 78%, 80% and 76%, it becomes
evident that hardware is causing downward pressure on the company’s
earnings.[iii] The sustainability of this recommendation assumes that
TiVo is able to create demand among content providers as to avoid any
hold-up effect.

Eliminating hardware sales allows TiVo to strive to become the

standard platform for DVR software in the industry. Through a focus on
Software as a Service, increased partnerships will allow TiVo to benefit
from the low DVR penetration rate among content provider consumers.
The percentage of Comcast subscribers with a DVR is around 20% and
Time Warner is 25%[iv], showing that there is still a potential for deeper
penetration within the existing market. If TiVo were to expand its
partnership with Comcast and add Time Warner Cable, the net present
value of these potential partnerships is $101.3 million (through 2014).
See Exhibit 3 for details on the calculation of the NPV (not included).
This business model generates a modest ARPU (average revenue per
user) per month of approximately $1, however, it virtually eliminates
TiVo’s hardware losses and subscriber acquisition costs.[1]

The third recommendation is to increase TiVo’s ability to leverage the

viewer data that its software gathers from its subscribers. TiVo is
capable of capturing the viewing habits of its consumers, both its own
subscribers and from its partnerships with content providers. TiVo’s
“Stop||Watch” ratings service has the ability to track what people watch,
but more importantly, how people watch television.[v] The data
obtained includes which hours viewers watch live or on time shift, which
programs are the most recorded for later viewing, and which
commercials are viewed or skipped when viewers watch the program on
time shift.

TiVo’s data mining abilities creates additional benefits of the TiVo

software and contributes to further network effects. TiVo can capture
information from all users, providing more accurate and expansive
marketing base for advertisers and other companies to access.
Advertisers can use this information to make their ad placement more
successful and profitable. This ability to increase the ROI for
advertisers through TiVo’s technology will create demand from content
providers’ advertising partners for TiVo’s services.

These three recommendations will shift TiVo’s competitive focus in the

industry. It will move from a hardware provider to mainly Software as a
Service company. TiVo will no longer be competing with Cable, DBS or
Telecoms, but rather working with them as a partner and service
provider.
 Conclusion

TiVo’s current business model has been unsuccessful at

competing within the current DVR market. As a result, TiVo has had net
losses for the past 10 years, large marginal losses on its hardware
business and overall declining market share in an unattractive industry.
Through the elimination of stand-alone hardware sales and broadband
content distribution, TiVo becomes more streamlined, highlighting its
differentiated services to establish itself as the DVR Software Standard.
Rebranding its marketing message, moving towards a Software as a
Service company and leveraging its data-mining capabilities, will create
network effects that allow TiVo to become profitable and find alternative
growth opportunities within the industry.

March6, 2008 TiVo (TIVO) announced its earnings Wednesday, showing the results of
its new, broader focus-- licensing its technology to cable companies, selling interactive
TV ads and results of whether those ads are watched, and pushing forward with movie
and music downloads. The good news--it narrowed its fourth quarter loss to six cents a
share, from 20 cents in the year-ago quarter, and it lost less than analysts expected.

The bad news--it ended the year with 3.9 million subscribers who pay monthly fees,
down half a million from last year. But that's because the company stopped giving away
boxes, so it's actually not a bad thing.

Now the company's optimistic-- saying that deals with Comcast (CMCSA) and Cox
Communications, it expects to see a jump in subscribers. And the company is also
building its business of reporting exactly (second-by-second) what people are watching.
Omicom Media Group (OMC) just signed up for the service, joining NBC Universal,
CBS, Starcom USA, and Interpublic Group, among others.

And then there's TiVo's patent dispute with EchoStar Corp (DISH) --TiVo won an
appeals ruling saying that EchoStar infringes on TiVo's DVR patents, saying EchoStar
(now EchoStar Corp and Dish Network) is to pay a $94 million award. Echostar is still
disputing this, saying its DVRs have been upgraded with new software so they no longer
infringe TiVos patents.
TiVo's aggressive defense of its propriety technology has clearly worked in its favor.
Here's a link to an interesting Fortune Magazine story on the topic.