Technology > Tech Biz
Test time for TiVo
First-quarter results come out tomorrow. Here's what investors should look for.
May 24, 2004: 3:41 PM EDT
By Eric Hellweg, CNN/Money contributing columnist

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SAN FRANCISCO (CNN/Money) - Google, iPod, and TiVo have something in common: Each has managed, like Kleenex, to turn its brand name into a synonym for its product category.

The similarities among the three end there: While Google and the iPod enjoy tremendous success in the marketplace, TiVo's future is less certain.

The company will report its fiscal-year first-quarter results tomorrow after the market's close, and then we'll have a better idea of its prospects. This fiscal year will be one of the most crucial and telling yet for the Alviso, Calif., digital video recorder company.

First the good news: TiVo has made some progress in the past few months. It's been growing subscriber numbers at a decent clip (the company added 330,000 subscribers last quarter, more than three times the number added a year ago), thanks in large part to a key partnership with DirecTV.

What's more, companies such as Pioneer and Toshiba partnered with TiVo to bundle DVR functionality with DVD players and DVD-Rs, and we're finally seeing the first products to result from those alliances.

The good and the bad

But (you knew there was a "but" coming) even those gains require asterisks. The DirecTV relationship that's provided most of TiVo's subscriber gains (200,000 of the 330,000 reported in the most recent quarter) is scheduled to end in 2007, and TiVo will likely see dilution of those DirecTV subscriber gains even before then. News Corp. (the parent company of DirecTV) is the majority shareholder of NDS Group, which also manufactures a DVR device.

"[The DirecTV deal] is a hugely important relationship for TiVo," says Adi Kishore, an analyst with the Yankee Group. "But News Corp. plans to deploy a set-top platform in the U.S. that's owned by NDS so they can leverage economies of scale. It helps to be owned by your customer." Representatives from TiVo and News Corp. didn't return requests for comment by press time.

By far the biggest threat to TiVo's continued existence is the confluence of two key factors. First is the commoditization of what was once TiVo's bread and butter: the stand-alone DVR device.

"The stand-alone unit is dead," Kishore says. "There's no growth opportunity there. TiVo needs to make its stand-alone box more than a DVR and add more functions and features," much as Pioneer and Toshiba are doing.

The second factor is that more and more cable operators are now including DVR functionality in their digital-cable set-top boxes.

"DVR has been a big driver for digital-cable adoption," says Anthony Crupi, editor of CableFax Daily, an industry trade newsletter. "Cable's been very aggressive in marketing DVR, and they have a direct channel to their subscribers."

New markets

TiVo has yet to successfully crack this market, and most people I spoke with said they doubt that the company will ever be able to do so.

They cite two reasons: First, the cable operators have long-standing relationships with the two leading set-top manufacturers, Motorola (which occupies about 55 percent of the market, according to the Yankee Group) and Scientific-Atlanta (which claims about a third). Second, the digital-cable networks are largely built around either Motorola or Scientific-Atlanta technology.

When Motorola was late in releasing the most recent version of its DVR-enhanced set-top box, TiVo had a chance to enter the digital-cable space. But that window of opportunity just slammed shut.

Motorola finally unveiled its first "dual tuner" model, which allows consumers to watch one program while recording another, on May 3 at the annual cable-industry confab in New Orleans. According to a Motorola spokesperson, Comcast is rolling out the devices aggressively.

NDS Group Plc
TiVo Incorporated
Motorola Incorporated
News Corporation Limited

So, what should investors look for in tomorrow's earnings announcement?

First and foremost, continued subscriber growth -- and not just through its deal with DirecTV. Second, look for more partnerships like the ones already announced with Pioneer and Toshiba. And third -- perhaps most important but least likely -- look for any movement in the cable set-top box space.

If good news doesn't materialize on those three fronts, TiVo may become one of the first products to define its category in the minds of consumers, only to disappear in the face of competition.

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