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A Murkier Picture for TiVo

By Cliff Edwards When digital video recording (DVR) pioneer TiVo reports its earnings on Aug. 26, Wall Street will be watching its subscriber growth numbers for clues on whether it can survive an onslaught of competition from cable and satellite operators. TiVo (TIVO) Chief Executive Officer Michael Ramsay has been moving aggressively to make sure the company doesn't become a footnote in the history of digital recording, which allows viewers to record shows to a hard drive so they can watch programs at their leisure. For Ramsay, the question hanging over his head is: How do you compete with similar but free services now being rolled out by deep-pocketed competitors?

In a series of moves this week, TiVo offered a clearer picture of its response. On Aug. 11, the Alviso (Calif.) concern revealed that it has begun looking overseas for growth. TiVo recently acquired a minority stake in a company that it hopes will help shrink the cost of making its recorders and help sell them in potentially high-growth new markets such as Taiwan, Singapore, and China. In exchange for the 49.9% stake in newly-formed TGC Inc., TiVo will license some of its technology to the startup and receive limited royalty payments, according to a regulatory filing.

Two days earlier, TiVo launched its long-awaited new marketing and promotional campaign to try to convince new customers its standalone recorders are worth the time and money. Entry-level TiVo models that offer 40 hours of recording time now cost $99, after a $100 rebate. A top-of-the-line 140-hour model will go for $299. The outfit also revealed it will sell more models in warehouse clubs, such as Costco (COST) and Sam's Club, and is adding Fry's Electronics to its retail-chain distribution list. TiVo is also launching a $15 million print ad campaign -- its first in several years -- replacing the slogan "TiVo is TV your way" with "You have a life. TiVo gets it."

COMPETITION COMING. The moves could help TiVo in the short term. But company execs still must convince cable and satellite outfits -- and ultimately consumers -- that its service stands a cut above the imitators. The differences are many. Unlike most of its rivals, TiVo allows users to send shows to other boxes in the home via wireless networks. Next year, it will roll out a feature in which its service searches for programming not only over the air and through cable or satellite programming, but on the Internet. It also recently won approval to use the Web to transfer shows among 10 TiVo boxes, PCs, or laptops.

"We plan to convince people there's a world beyond basic DVRs," says Ransay. "Our playground is the home network and the ability to find and send shows over the Internet."

However, skepticism abounds. TiVo's stock plunged to a 52-week low of $4.25 a share on Aug. 9, amid investor concern that its growth will stall as satellite- and cable-TV providers begin aggressively introducing their own digital recorders later this year (it closed at $4.40 on Aug. 11). TiVo, which makes most of its money through $12.95 a month subscriptions, had 1.6 million customers in April, and expects the number to surge past 3 million by the end of January, 2005.

Analysts say TiVo could reach its target, but its future remains cloudy. "While these rebates and additional outlets will help near-term subscriber growth...our longer-term negative thesis remains," says Friedman Billings Ramsay analyst Alan Bezoza, in a note this week to investors.

DIRECTV DISCONNECT? Indeed, much of TiVo's installed base has come from its exclusive deal with DirecTV (DTV), which has been hawking digital recorders as a differentiator from cable providers such as Comcast (CMCSA). TiVo's agreement with DirecTV doesn't expire until 2007. But NDS (NNDS), a sister company to DirecTV, recently revealed it has struck a deal to offer its competing digital-recording technology to new DirecTV customers. Sources say by as early as November, set-top-box makers such as Samsung and Thomson (TMS) could begin shipping NDS digital recorders to DirecTV, which is considering offering them to new customers for free.

Meanwhile, TiVo has been stymied in its efforts to sign a major cable provider. Comcast, Time Warner (TWX), and other cable companies have asked for better deals than TiVo is willing to accept, people with knowledge of the negotiations say.

Still, Ramsay remains confident that in a few years TiVo can boast as many as 10 million subscribers. It can reach profitability with 3 million standalone customers if its plan to diversify its business model with licensing and advertising revenue also takes shape, analysts predict.

In the interim, the losses continue. For the current quarter, analysts estimate TiVo will report a loss of 24 cents a share on revenue of $25.8 million. For the fiscal year ending January, 2005, they're expecting a loss of 95 cents a share, on revenue of $115.8 million. If TiVo keeps losing money and consumer mindshare, it could become takeover bait. Worse, it could become another forgotten pioneer of the new digital age. Edwards covers consumer electronics for BusinessWeek

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