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Does anyone want TiVo?
Merger talk has lifted TiVo but analysts aren't buying it. The stock looks like a risky bet.
March 9, 2005: 10:39 AM EST
By Paul R. La Monica, CNN/Money senior writer
Shares of TiVo are well off their highs but the stock has bounced back recently on takeover rumors.
Shares of TiVo are well off their highs but the stock has bounced back recently on takeover rumors.

NEW YORK (CNN/Money) Shares of TiVo have surged nearly 20 percent in the past month. But some analysts think investors need to hit the rewind button on the stock.

TiVo, the company that popularized digital video recording technology, has never reported a profit and analysts are forecasting a loss of 43 cents a share in its fiscal fourth quarter, despite an expected 56 percent gain in revenues.

What's more, losses are widening. The company posted a loss of 12 cents a share a year ago. TiVo (Research) is scheduled to report its latest results on Thursday.

Analysts say increased speculation about a takeover is one of the reasons for the stock's pop, with Apple (Research) being rumored as a possible acquirer. A TiVo spokeswoman declined comment for this story, citing quiet period rules leading up to its earnings announcement.

But during the past several years, TiVo has been mentioned as a likely buyout target numerous times. Sony (Research), Comcast (Research), Liberty Media (Research) and Time Warner (Research) (which owns CNN/Money) have all taken turns on the possible merger merry-go-round.

TiVo is obviously still independent and analysts say investors need to be wary that a sale appears to be just wishful thinking.

"I don't see any logic in Apple taking over TiVo and I don't think TiVo is dressing up for a sale right now," said David Miller, an analyst with Sanders Morris Harris. "This is clearly the most emotional, rumor-driven, highly ephemeral name I've ever dealt with."

Competition is intensifying

Renewed takeover talk may not come completely out of the blue. TiVo does have several patents that could be attractive to a larger tech firm and TiVo is facing a bit of a management brain drain.

The company's president, Marty Yudkovitz, resigned in late January and chairman and CEO Michael Ramsay announced earlier that month that he would be stepping down as CEO once a replacement was found. Ramsay, a co-founder of TiVo, will remain chairman.

So Wall Street may be hoping for a merger because it could be a way for the company to address the management issue and cash in before competition gets even tougher.

Cable companies like Comcast, Cox and Time Warner are starting to pitch set-top boxes with built in digital video recorders made by the likes of Scientific-Atlanta (Research) and Motorola (Research). The monthly subscription charges for cable DVRs are often lower than TiVo's $12.95 a month and customers typically don't have to pay extra for the box, either. The most popular TiVo device costs $99.99.

The one company that TiVo does have a partnership with, satellite TV provider DirecTV (Research), which is majority-owned by Rupert Murdoch's News Corp (Research)., announced late last year that it will soon start selling a box with a DVR developed by NDS Group (Research), another News Corp-controlled firm.

The marketing agreement between DirecTV and TiVo lasts until February 2007 but investors have reason to be worried since TiVo has relied heavily on DirecTV to gain new subscribers. Nearly 60 percent of TiVo's 3 million subscribers are DirecTV customers.

"TiVo's relationship with DirecTV is tenuous. It's unclear what DirecTV will do with existing TiVo subscribers but if it wants to move forward with NDS, TiVo will lose a fair amount of shelf space," said April Horace, an analyst with Janco Partners.

Is time running out?

Although TiVo has a fair number of loyal subscribers (and some would argue better technology than other DVRs), Horace said it will be difficult for TiVo to match the massive marketing muscle of the big cable firms, with their large captive audiences. "TiVo is playing in a domain where people have much deeper pockets," Horace said.

TiVo has just $88.5 million in cash on its balance sheet. And if TiVo has to keep spending heavily on marketing to acquire customers, it will be harder for the company to survive in the long-term. To that end, Friedman Billings Ramsey analyst Alan Bezoza wrote in a recent report that the likely cash burn from higher subscriber acquisition costs is one of the biggest risks TiVo faces.

The company is, no doubt, a cultural phenomenon. After all, it's one of the few tech products that has actually transformed from a noun to a verb.

But unfortunately for TiVo, the company's brand name has become interchangeable with its category, kind of like Kleenex for tissues or Xerox for photocopies. "You may say you're going to TiVo a show even if you have a cable company's DVR," said Miller.

Contrast that to popular search engine Google. When people say they've "Googled" something, they mean they looked it up on Google, not Yahoo!, MSN or Ask Jeeves.

Therein lies the biggest problem for TiVo. Everybody seems to want the service that TiVo provides. But fewer people appear to want it from TiVo.

"There are a lot of rumors about TiVo's future," Horace said. "I think it's because they spent years and years educating the consumer about the on demand paradigm for TV viewing only to find out that they are not going to hold on to the lead."

For more about personal technology, click here.

Analysts quoted in this story do not own shares of TiVo and their firms have no investment banking ties to TiVo.  Top of page


TiVo Incorporated
Mergers - Acquisitions - Takeovers
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