Overpowered by Tivo

****NOTE: THIS ARTICLE WAS ORIGINALLY PUBLISHED ON AUG 21, 2003 ON OUR OLD WEBLOG, HTTP://P9THINK.BLOGSPOT.COM.*****

Over the weekend, we (finally) hooked up our brand-new TiVo. Ordinarily, the installation of consumer electronics products is a pretty mundane activity, and not a very blog-worthy activity at that. However, in case you hadn’t heard from the growing course of TiVo fanatics (a roster that includes publications like the Wall Street Journal, cult leaders like Oprah Winfrey, and fictional characters like Miranda from HBO’s Sex in the City, TiVo is a revelatory, life-changing, and even epiphanic experience.

Although most American consumers currently consider TiVo’s and personal video recorder (PVR) technology to be little more than a souped-up VCR that uses a hard-drive rather than tapes, there’s actually much more to it than that. (You can find a reasonably decent demo of what a TiVo actually does by clicking here, if you prefer visual descriptions to written ones.)

First, TiVo has a variety of interesting bells-and-whistles—the ability to “pause,” (to answer a call, go to the bathroom, or gorge yourself on food), “fast-forward,” through commercials and “rewind” through live TV, a feature that works via a buffer in the TiVo hard-drive that records the channel you’re watching as you watch it. Secondly, TiVo has an interesting feature that recommends shows and TV events to viewers based on their viewing habits—imagine Amazon’s “Users Who Purchased this Item” feature applied to TV programming—enabling non-Entertainment Weekly reading viewers to quickly get up to speed on pop-culture.

However, the most compelling feature TiVo offers is that it not only records TV, but it does so via a remarkably easy-to-use interface that allows you to easily record what you want to watch, and then access that content at a time that’s convenient for you. In short, the TiVo achieves what VCRs were supposed to accomplish way back in the day: the simple recording of television programming. For most Americans, VCRs have been “recorders,” in name only: although it’s theoretically possible to record tons of TV programs with a VCR, most people don’t do so due to the complexity of programming the VCR, and the cumbersome nature of videocassettes themselves. And when people do record TV, they usually record the channels that they’re watching at that time. Consequently, for most people, VCRs have existed primarily as VCPs—video cassette players, used mainly to play movie rentals, or home movies created on a different device altogether.

The recording feature of TiVo is great simply because it’s so liberating. We stopped watching large bursts of TV about a decade ago, not because we hated the quality of programming, or because Iwe're anti-pop culture Luddites, but simply because we're almost always been preoccupied or busy with work, school, or a social life during the prime-time hours during which the lion’s share of worthwhile TV happens to be aired. Since that time—e.g. prior to TiVo—most of the episodic TV (the Sopranos, Six Feet Under, etc) we watched has been on DVD. In any event, it’s hard to describe how amazing it is to finally be able to watch television programming that was previously unavailable due to a hectic schedule—after just four days of having convenient access to Sponge Bob Square Pants, The O.C., The Office, Queer Eye for the Straight Guy, etc, it’s simply thrilling to be plugged back into the mainline of pop culture. Not too mention the fact that it’s a pleasure to finally be able to watch the cream of the television show crop, and not have to settle for the chaff that’s regularly on.

Obviously, PVRs is vastly superior to any substitute product used to currently record television programming, such as a VCR. Furthermore, from the perspective of consumers, it’s pretty clear that TiVo is, to use Dave Eggers-style random capitalization, A Truly Great Thing! Whether it’s a great thing for investors, however, and moreover, whether it’s TiVo that ultimately wins the coming battle for dominance in the PVR marketplace between cable and satellite companies and giant consumer electronics firms, remains to be seen.

Recent analyst reports—not too mention the current consumer buzz in the marketplace—suggest that PVR’s like TiVo are on the cusp of mass acceptance. The technology consultancy Forrester Research projects that 14m PVRs will be in use by the end of 2004; TiVo’s own projections, according to its SEC filings, call for its subscriber base to rise to more than a million (from 703,000 users today) by January 2004. Meanwhile, the prevailing conventional wisdom in the consumer electronics world suggests that PVRs look like they will be the DVD player of this Christmas season. The growing size of the marketplace, coupled with the fact that technological barriers to entry are especially low—a PVR is effectively just a combination of a hard-drive and software of average complexity—has ensured that TiVo is facing increased competition from a collection of electronics firms and cable companies eager to capture TiVo’s revenues for themselves.

With increased competition, the threat to TiVo will increase substantially, especially since its most recent quarterly report (released in April) reveals still mounting losses at the firm--$7.8m on $26.5m in revenue. (TiVo’s latest financial reports should be coming out later this week.) It’s hard to see how these losses can’t do anything but grow given TiVo’s current model, which sees revenue being generated by sales of hardware (which the firm is considered by analysts to break-even on) and “subscription” revenues (users pay a monthly fee of $12.95 or lifetime fee of $300 to receive TV listings that allow the easy recording of TV programming.) Increased competition will almost certainly lower prices of PVRs, perhaps pushing TiVo’s hardware sales from a break-even revenue stream into a loss-generating one. Competition will also likely cut the fat out of the hefty subscription fee (the one element of TiVo that we found hard to swallow, incidentally), which should also pose a challenge to TiVo's efforts to turn a profit.

Moreover, the new competitors TiVo is starting to face have advantages that TiVo will have a difficult time matching. Large consumer electronics firms have more complete distribution systems, and greater clout with retailers like Best Buy and Circuit City. Cable companies have the advantage of being able to bundle PVR functionality into their set-top boxes, which thereby reduces the complexity of installing the system, and ensures that it will work seamlessly. (This is happening much more quickly than anticipated—AOL Time Warner is currently rolling out PVR cable boxes to subscribers in areas that it covers. And given the positive feedback it’s receiving from users—check out this review from the popular blog-site Atmaspheric –things look good for such offerings.) Due to the fact that TiVo isn’t particularly asset rich—it has just $57 million in total assets, of which just $39 million is cash, according to its April filing—things look pretty challenging for the company.

The good news for TiVo is that its business model and strategy has anticipated the commoditization of the PVR marketplace for some time. The company has always stated its desire to outsource the manufacturing of TiVo’s to consumer electronics partners such as Sony and Toshiba. In its reports and presentations, TiVo reveals its primary focus to be the “service” side of the business. The service side of the business is composed of two elements. The first of these is providing TiVo software to manufacturers, software that allows the easy recording of TV programs, enables users to record entire seasons of TV shows, and (most importantly, as we’ll discuss in a moment), TiVo’s semi-famous “recommendations” system, which allows viewers to easily find content based on their viewing habits. The second component of TiVo’s business model calls for providing information about viewers to advertisers, enabling advertisers to better understand who they’re reaching, and how their advertising is being consumed (if at all).

Can TiVo’s changing business model withstand what’s sure to be intense competition? The first component of TiVo’s business model—emphasizing the software component—will shield it somewhat if it turns out that creating the TV guide software, and the content programming, is much harder and more expensive than consumer electronics firms and cable companies seem to think it is. In our perspective, although TiVo’s software and interface is very easy-to-use, it doesn’t look like it will be too difficult for any new entrant to copy. Its recommendation system might be harder for any potential competitor to mimic, since the system relies on understanding viewing habits of existing customers, and then applying slightly more sophisticated data mining or cross-filtering software to that data, and finally making recommendations to users. However, anecdotal evidence and our experience suggests that TiVo’s recommendations—while fun—aren’t really as useful as you’d expect. Most viewers are already aware of what they’re missing, thanks to the cornucopia of media programming about television programs (e.g. Entertainment Weekly, Entertainment Tonight, and various online websites), and can easily find this content without a recommendation service. It is therefore unlikely that TiVo’s recommendation system will protect it from competitors.

The second component of TiVo’s model—selling data to advertising agencies and firms that want to reach their customers—is potentially much more powerful, and possibly much more lucrative. As TiVo already has the largest database of subscribers in the PVR marketplace—about 40% of what is still a fragmented marketplace—and because it has emphasized data-mining from day one, it has a much richer database and understanding of its viewers than any other one of its competitors. Building up such a detailed database, being able to use it effectively, is very hard to do, as most retailers who tried to compete with Amazon (Target, Toys R’Us, CD Now, Virgin, etc) have found out. (We’ve talked about this issue before, here.) It’s also clear that TiVo’s data is potentially much more valuable to advertisers than its competitor in this area—Nielsen—since unlike Nielsen, TiVo has a much deeper sample size, a better way of recording viewing habits (electronically versus forcing viewers to complete notoriously inaccurate viewing diaries) and moreover, an exact understanding of what advertisements viewers actually watch. (Nielsen doesn’t account for channel surfing during commercials, whereas TiVo can provide precise detail about such activities.)

However, the big hurdle TiVo faces selling its customer data is migrating the advertising industry to what’s clearly a better product, but one that will likely face ongoing advertiser reluctance. If, for example, TiVo’s data reveals that television advertising is largely ineffective, how likely is it that advertising agencies will want to use it, given that the current industry practice calls for agencies to receive approximately 15% of client billings, and TV advertising happens to be the most expensive form--and therefore most profitable, from an agency's perspective--of advertising around? Secondly, despite the fact that TiVo counts virtually all the major TV networks amongst its investors, how thrilled would those networks be when forced to tell the advertisers buying ad-time that most viewers simply fast-forward through or skip ads altogether when using TiVo? Perhaps TiVo will succeed in developing new subscription models to overcome these potential pitfalls—viewers who don’t want to pay a subscription fee will be unable to fast-forward through commercials, for example, or perhaps TiVo will be able to utilize broadband technology and its data to push relevant ads to users who’d actually want to watch them—but in each case, it’s likely to take time. And for a company that doesn’t have much cash on hand, and isn’t currently profitable, this poses an ongoing and growing challenge.

The one thing that TiVo has going for it right now is phenomenal awareness and buzz. TiVo, like Kleenex and facial tissues, or Xerox and copiers in the 70s, is in the eyes of many consumers, is inseparable from the category it currently dominates, PVRs. Yet history is also littered with companies that initially had great awareness, but ultimately lost out (the just-cited example of Xerox!). The biggest obstacle TiVo faces right now is its ability to complement its brand with a viable business strategy. As TiVo lovers, we hope they accomplish this goal.