It's been a good month for CEO Rogers' sue-and-woo strategy
Sometimes becoming a staple of the American lexicon is easier than becoming a staple of the American living room. Just ask TiVo (TIVO). Over the past decade, the company's name has become the default verb to describe the act of digitally recording TV. Yet despite its strong brand recognition, TiVo has struggled to turn a profit. Last year it lost $84.5 million on $219.6 million of revenue. The deficit was nothing new: In 10 of the past 11 years, the Alviso (Calif.)-based company has racked up losses.
At the same time, TiVo's customer base has dwindled, from a high of 4.4 million users in 2007 to just over 2 million in January 2011. Part of the problem is that while lots of people say they TiVo their favorite TV shows, in reality, many use the cheaper digital video recorders (DVR) provided by their cable or satellite operator. "We got shunned by the operator community as a way to do DVRs," says TiVo Chief Executive Officer Thomas S. Rogers. "People went out and did their generic alternatives."
Since becoming TiVo's CEO in 2005, Rogers has tried to reverse its fortunes, in part by reversing the company's historically marginalized relationship with cable and satellite operators. At the same time, he's vigorously pursuing patent violation claims. So far, May 2011 is proving to be the finest month yet for TiVo's sue-and-woo strategy. On May 2, TiVo executives announced that after years of litigation, they had reached a settlement with DISH Network (DISH) and EchoStar (SATS), which will pay TiVo $300 million this year and $33.3 million per year through 2017 in exchange for the rights to legally use TiVo's Time Warp DVR technology. A week later, TiVo announced a deal with Comcast (CMCSA) under which the nation's largest cable provider will begin marketing and installing TiVo's set-top boxes. According to Rogers, TiVo will collect up to $19.99 per month from each customer who chooses the service from a range of box options, a cut of which will go back to Comcast. "That's an excellent model for us," says Rogers.
The Comcast deal is evidence of TiVo's ongoing transformation from a retail business that sells set-top boxes, which start at around $100 (plus $20 a month), directly to customers into a company that increasingly sells customized hardware and software solutions to cable and satellite operators, says Rogers. "TiVo's strength is not in the stand-alone box," says Bruce Leichtman, president of the Leichtman Research Group. "It's in the technology. It's in the patents. The question is: How do they leverage that?"
Over the past two years, TiVo has announced partnerships with major operators including Charter Communications (CCMM) (4.5 million video subscribers) in the U.S. and Virgin Media (VMED) (3.7 million residential TV subscribers) in Europe. "A lot of people said, 'Well, TiVo's brand won't be adopted by the operator community,'" says Rogers. "'They won't want to have someone else's brand smack in the middle of the entire user experience.' We're finding just the opposite."
Operators may be warming to TiVo because of the threat from a slew of new entrants in the home entertainment field. Devices such as Roku, Apple (AAPL) TV, and Google (GOOG) TV allow consumers to redirect free or cheap videos from the Internet directly onto their TV screens—and to do so without paying a hefty monthly cable or satellite bill. Rogers thinks cable and satellite operators have left themselves vulnerable to the new competition by failing to provide technology that smoothly integrates online content into their offerings. He believes that as cable operators scramble to protect their customer bases, they'll seek out TiVo's expertise. "It's a way to bring this world of additional choice into the cable operators' realm," says Rogers. "The cable operator can embrace it and hold onto the customer without this turning into a reason why people should go elsewhere."
To date, the flurry of deals has yet to translate into a bump in TiVo subscribers. In March, TiVo reported that over the past fiscal year the number of subscribers via third-party deals had dropped from 1,140,000 to 783,000, owing largely to the gradual phasing out of a deal with DirecTV (DTV). Some investors are growing impatient. "Tom Rogers has been there long enough. You would think they would start turning that ship around," says Kurt Scherf, the vice-president of market researcher Parks Associates. "I'm left with the question of why that hasn't happened yet."
Rogers says that TiVo's subscriber base should rebound "over the next year or so" as some of the recent deals bear fruit. "There's serious development time that is required for any of these deals," he adds. "You can't just snap your fingers."
The bottom line: TiVo, once shunned by operators, is now doing deals with them. Rogers says that will reverse TiVo's decline in subscribers and its losses.