MIS680 Case#2 

TiVo: 
Reorganization 
 

Ming‐Hsiu Chiang 
10/27/2008 
 
MIS 680 Case #2: TiVo
Ming-Hsiu Chiang
Oct 27, 2008

TiVo: Reorganization

Take Back Control

TiVo, the pioneer of Digital Video Recorder (DVR) technology, has changed the
way people watch, record and play back TV shows. TiVo DVR gives people the power to
get all their favorite TV shows ready to watch whenever and wherever they want. Its
DVR buyers subscribe to TiVo service that lets them to watch shows on their own
schedule. It is a game-changing technology. For its users, there is no more “Give and
Take.” It is a new game of “Take Back Control” now.

TiVo DVR service is composed of three main components: TiVo Service, TiVo
DVR (Hardware + Software)

(Composition of TiVo DVR service)

The key ingredients of TiVo DVR service are a hard drive (Hardware) to store
video, an electronic programming guide (EPG, provided by TiVo Service) to facilitate
recording, and Software to tie together the technology and give the user navigational
control. TiVo brings “time shifting” and “place shifting” concepts into its function and
its name is synonymous with it.

Struggle for Survival

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Ming-Hsiu Chiang
Oct 27, 2008

TiVo was in a great position in the emerging DVR market. During the time, early
adopters and its partner, DirecTV, gave TiVo strength and rich financial return. TiVo has
become the synonym of DVR and helped popularize the technology. As the market
matures, the target customer shifts away from early adopters toward a more mainstream
market base. Since then, the number of DVR suppliers has increased and thus brings
more competition. As more clones crop up and the broke up with DirecTV, TiVo is losing
its ground rapidly. TiVo has been fighting for years and has only accounted for a
declining 10% of the US DVR installed base. (Ref.1)

(US DVR Installed Base - Jul 2008. Source: TV by the Numbers)

Although TiVo provides the best products in the market with sophisticated features
and better user interface, most cable companies offer sub-par DVRs to their customers
for free and with cheaper monthly charge than TiVo’s service. These sub-par DVRs can
offer similar experience as TiVo’s boxes, although less enjoyable. Given that TiVo’s
current stable of offerings range in price from $100 to $600, how can TiVo compete with
these cable companies? The Cable companies have won the battle with their "good
enough" feature set and low price. (Ref.2)

TiVo's churn rates are lower than those of its competitors are. Nevertheless, while
its competitors’ churn rates and SACs have been nearly constant over the last three

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years, TiVo has seen rises in both churn rates and SACs. (Ref.3)

(Source: wikinvest)

TiVo's rising churn rates and SACs has made the need of gaining new customers
greater yet more expensive to get. At the same time, TiVo has also seen falling ARPUs
over the past two years. This means that each new customer is less lucrative than the
last. Under the hard pressure, TiVo is in a trend of net subscriber loss as well that made
the situation even worse (Ref.4).

(Quarterly Net New TiVo Subscribers 2001-July 2008. Source: TV by the Numbers)

There is no doubt that TiVo is one of the best consumer experiences people can
have, but it has suffered from getting its magic boxes into people’s homes. Even its
DVRs has been heavily subsidized in order to build a customer base, TiVo still cannot
turn a profit and incurs millions of dollars losses each year. Combine all the numbers,

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Oct 27, 2008

there is a clear message regarding the future: TiVo is in danger of becoming

marginalized. (Ref.5)

Regain Strength

TiVo’s revenues are mainly made of three components: service, technology, and
hardware. As of the fourth quarter 2008, TiVo has 3.6 million subscribers (Ref.3). The
company earned 78% its revenue in 2008 through subscription fees (service revenue)
paid by customers, while 15% came from the selling its hardware (the TiVo DVR). Take
a look at the TiVo’s cost structure, it reveals an interesting fact: although its hardware
only brought TiVo 15% of total revenues, this part of cost has accounted for amazingly
60% of the total costs (Ref.6). It is obvious that the price subsidy policy for its hardware
did not bring a positive financial result, nor help TiVo gain wider market base.

(Source: TiVo earning results)

Due to its extremely unbalanced revenue/cost structure, TiVo should reorganize its
business units - separate hardware and software apart. The original TiVo will be split
into three independent companies (TiVo Hardware, TiVo Software and TiVo DVR) to
form the new TiVo Group. The new TiVo Hardware will take charge of DVR hardware
design and manufacturing. It will be an independent OEM/ODM providing
manufacturing services to cable/satellite companies, third-party DVRs, and TiVo DVR. It
no longer sells its boxes to consumer market. The new TiVo Software will be a pure
“software plus service” provider. It no longer gets involved in DVR manufacturing and
distribution. TiVo Software will in charge of selling its advanced software and service to
cable/satellite companies, third-party DVRs, consumer market, and TiVo DVR. TiVo
DVR will combine resources from both TiVo Hardware and TiVo Software to continue

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distributing its current DVR products to consumer market. It will be a consumer

electronics distributor.

(TiVo Reorganization)

The reorganization has multiple purposes. First, DVRs are primarily reaching the
mass market through cable/satellite companies. TiVo’s current offerings are hardly to
compete against them because of the economy of scale and TiVo should avoid direct
competition. Therefore, TiVo Software will be a pure solution provider to get its software,
interface, and technology into cable/satellite companies’ DVR-equipped set-top boxes.
Thus, TiVo can turn its competitors into customers. Meanwhile, TiVo Hardware will play
as an independent manufacturer entering a new battlefield of unbranded DVR
manufacturing to service cable/satellite companies and third-party DVRs in a broader
base. DVR market is growing in a fast pace. TiVo Hardware can catch the opportunity to
expand production volume and thus lower down unit production cost (UPC). This will
give TiVo Group the power to provide cheaper DVRs that are more competitive than its
current offerings. Second, the segregation of software and hardware will release the full
potential of TiVo’s power - the UI that is second to none. What really makes TiVo unique
is its sophisticated combination of software and service that delivers unparalleled user

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experience. TiVo Software will pack software and service as stand-alone products (such
as TiVo PC (Ref.7)) selling to consumer market. This will help TiVo widely distribute its
subscription-based service, the primary source of revenues, in an easier way without
specific hardware. TiVo Software can also license its technology or port software to
cable/satellite TV providers’ STBs and third-party DVRs. Nevertheless, consider the
much lower ARPU per month from the partnership than TiVo-owned one, TiVo will still
keep the current product line but adopt a different pricing model. New TiVo-branded
DVRs will be free with 2-year service contract. TiVo DVR will utilize the support from
TiVo Hardware’s low UPC and TiVo Software’s DVR-based advertising to compensate
the cost. Thus, the new TiVo-branded DVRs will have the chance to take back the
ground.

The segregation will help TiVo service its customers better and flexible by
minimizing conflict of interests. TiVo Software will be the heart of the TiVo Group. The
soul (TiVo Software) will be released from the shell (TiVo Software) and fly high. TiVo’s
advanced software plus service will eventually turn it into ultimate multimedia platform
(try to image TiVo PC plus Hulu.com). TiVo’s current facilitator role will transform into
aggregator and the platform (software plus service) will become the industry standard
through its widespread and influence.

Reference

1. “Over 36 Million DVRs In US Homes - July, 2008” (by Bill Gorman at July 17, 2008)
http://tvbythenumbers.com/2008/07/17/over-36-million-dvrs-in-us-homes-july-2008/4453
2. “Does TiVo Have A Chance?” (by Don Reisinger at Mar 11, 2008)
http://newteevee.com/2008/03/11/does-tivo-have-a-chance/
3. “TiVo (TIVO)” (wikinvest)
http://www.wikinvest.com/stock/TiVo_(TIVO)
4. “Quarterly Net New TiVo Subscribers 2001- July 2008” (by Bill Gorman at Aug 27, 2008)
http://tvbythenumbers.com/2008/08/27/quarterly-net-new-tivo-subscribers-2001-july-2008/4806
5. “TiVo Faces Clone War As Market Heats Up” (by May Wong at Apr 23, 2004)
http://www.crn.com/digital-home/18842465
6. “TiVo Reports Results for the Fourth Quarter and Fiscal Year Ended January 31, 2008” (TiVo Inc.)
http://investor.tivo.com/releasedetail.cfm?ReleaseID=297873
7. “Nero LiquidTV™ | TiVo® PC” (Nero)
http://www.nero.com/enu/liquidtv-introduction.html