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TiVo's Growth Picture: Still a Little Fuzzy

By Amy Tsao TiVo, the digital-recording service embodied by a smiley-face TV set logo, has reason to be happy lately. A growing number of couch potatoes use its service to manage and record their favorite reality shows, baseball games, and sitcoms. On Mar. 4, the company said subscribers had grown by 330,000, to 1.3 million, for the quarter ended Jan. 31. TiVo (TIVO) reported a net loss of $12.4 million for the three-month period, down from a loss of $32.5 million. Revenues rose to $42.6 million, up an impressive 85% from the same period a year ago.

Investor optimism has been on the rise as well. In the past 52 weeks, the stock has gained 90%, to $11. It's a far cry from its $70 per share peak in January 2000, but it's still a huge jump from the $3 per share price seen in 2002.

QUEST FOR A DEAL. "We've had tremendous growth this past year, and momentum is so strong we have decided to institute a very aggressive marketing plan," says TiVo President Marty Yudkovitz. The Alviso (Calif.) -based outfit will spend $50 million on marketing its services, which will likely translate into a loss of $75 million to $90 million in fiscal 2005, ending Jan. 31. That's a big jump from a $22 million loss in fiscal 2004. But the company is hopeful the increased spending will help double subscriptions by next January.

Analysts say that getting to 3 million subscribers in a year's time is doable. Yet it may be premature to declare a decisive victory for TiVo, as competitors are gearing up to sell their versions of personalized television services. "Without a doubt [digital video recording (DVR)] technology is something that is resonating," says Ross Rubin, director of industry analysis at NPDTechworld. "The question is: How much TiVo, the company, will be able to capture." (Rubin does not own the stock, and TiVo is not an NPD client.)

Beyond doubling its subscriber base, TiVo's next big challenge is to secure a distribution deal with a cable operator, says Murray Arenson, an analyst at independent research firm Mosaic Equity. TiVo's revenues currently come from two sources: selling TiVo DVRs directly at stores like Best Buy (BBY) ($149 for the box and $13 for a monthly subscription) and a deal with satellite TV provider DirecTV, which offers TiVo to its customers for an additional $5 a month. To get to the tens of millions who aren't using DirecTV, TiVo needs partnerships with big cable operators, which provide television content to some 60% of U.S. households.

NEW OFFERINGS. Without such a deal, TiVo would need to penetrate nearly half of the DirecTV subscriber base to reach subscription-growth goals, says Christopher Rowen, an analyst at SunTrust Robinson Humphrey. "That's achievable, but not a sure thing." Rowen rates TiVo stock neutral. (His firm has no banking relationship with TiVo, and he does not own the stock.)

So far, cable operators have been a tough sell. And though they are growing increasingly fond of the TiVo concept, viewing it as a way to differentiate themselves from competition, they now have their own efforts in the works. Says Rowen: "Companies were fighting DVR and now they're embracing it."

TimeWarner (TWX) is selling recording capability through its digital-cable set-top box, which is made by Scientific Atlanta (SFA). Charter Communications (CHTR) offers a product through a startup division called Digeo. Comcast (CMCSA) just paid company Gemstar-TV Guide International (GMST) $250 million for access to its interactive programming guide. "It seems reasonable they will explore that partnership to the fullest," Arenson says. The cable companies' offerings, he adds, "don't preclude a deal with TiVo, but it makes it a harder battle to fight."

UNBRIDLED OPTIMISM. What's more, the DirectTV relationship, which has been mutually beneficial to both companies, may soon change, some analysts worry. With media giant News Corp.'s acquisition of DirectTV, completed late in 2003, the deal could be altered or phased out in favor of an internal player. News Corp. (NWS) also operates NDS Group (NNDS), whose pay-TV access- and broadcast-control systems could double as a TiVo-like service.

TiVo deserves credit for getting to where it is, Arenson says, adding that a price of $8 to $12 seems reasonable for its stock. But until it proves that its business is sustainable, "it's one of those I recommend staying away from, because good news will drive the stock, but enough worry will drive it back down." (Arenson does not own the stock, and his firm has no relationship with TiVo.)

Execs at TiVo remain optimistic. "We expect [the DirecTV deal] to stay intact," Yudkovitz says of the partnership. He figures News Corp. might offer both products and won't abandon TiVo. Still, Arenson questions "what would happen to TiVo subscribers" if its deal with DirecTV went away. Yudkovitz concedes that cable and satellite partnerships are critical to TiVo's continued rapid growth. "The discussions remain very healthy," he says of talks with cable operators.

"KILLER" PRODUCT. Meantime, Yudkovitz insists the outfit can meet goals of 10 million subscribers, 75% annual revenue growth, and 40% operating margin by the end of 2006 without cable deals. Instead, its retail business, which already accounts for 50% of revenues, could be a big revenue-growth driver. He cited a recently introduced product that is a DVD recorder and TiVo combined. It's "an absolute killer," he says. "It's bigger than any cable [deal]."

TiVo has been the most visible pioneer in this fast-growth business. Digital video recording is expected to go from 3 million households to 25 million by 2008, says Rowen. "This is the next step in evolution -- getting what you want to watch when you want it." But the market is not likely to be TiVo's alone. The transition to DVR is still unfolding, and it remains to be seen how big a player TiVo will be. Tsao covers financial markets for BusinessWeek Online in New York

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