It's a familiar story. Upstart popularizes technology that threatens to disrupt an industry. Larger rivals enter picture and try to squeeze out little guy. TiVo (TIVO), whose set-top boxes made it routine for viewers to save TV shows on a hard drive so they could watch them later (and fast-forward through the ads), has followed this very trajectory. The cable companies began rolling out their own digital videorecorders a few years ago, and TiVo has been hemorrhaging subscribers ever since.
The TiVo story doesn't end there, however. By leveraging its still potent brand name and cache of more than 140 patents, the Alviso (Calif.) company is trying to remake itself as the Google (GOOG) of television—helping viewers navigate the increasing crush of entertainment choices and selling ads to boot. "Like Google," says CEO Thomas S. Rogers, "TiVo will bring that ease of use to TV sets." A laudable goal, but this is a crowded field.
Remaking a company is never easy, especially when the bottom is falling out of your primary business. This year, TiVo's revenues will shrink by 10%, to $225 million, according to Standard & Poor's (MHP) analyst Tuna N. Amobi, who expects TiVo to shed about 400,000 subscribers. That would leave it with 2.8 million, down from a high of 4.4 million in 2006. But Rogers has an ace in the hole. In 2006 a jury found that EchoStar (SATS), which then owned the Dish Network (DISH) satellite TV service, violated a TiVo patent; TiVo collected $104.6 million. The money let Rogers wipe out the company's debt and bought time to regroup. (On June 2, TiVo was awarded $103 million more after Dish still was found to be in violation of the patent. Dish won a temporary stay and is appealing.)
TiVo remains the standard in program guides. Where cable's technology can be hard to use, TiVo's interface makes finding shows easy. This expertise helps explain why Netflix (NFLX) and Blockbuster (BBI) have signed on to use TiVo technology for their online video services, which stream shows and movies to PCs and TVs. "When consumers want to use their TV to order a program, what better name is there than TiVo?" says Blockbuster digital czar Kevin Lewis. TiVo will get a piece of each transaction, and Netflix and Blockbuster will offer promotions to help sell the box.
Rogers is also keen to work with cable. Comcast (CMCSA) has begun offering some subscribers a TiVo "upgrade," where for an extra $3 or so a month they can get TiVo's navigation service. Cox and DirecTV plan to offer TiVo upgrades, too. Those deals will cut into sales—TiVo gets some 90 cents a month per subscriber from the cable guys vs. $8 from its own customers. But Rogers figures the extra eyeballs will help persuade companies to buy ads through his company.
TiVo, of course, became infamous in advertising circles because viewers used it to blast through commercials. "We used to be demonized by some in the TV world," he says. "Now we're partners with them." TiVo has developed a way to make pop-up ads appear on the screen when viewers pause a program or fast-forward through commercials. It has sold pop-ups to Mercedes-Benz (DAI), Domino's Pizza, and others. When viewers paused during football games last year, for instance, TiVo users saw an ad for new Mercedes cars. Viewers could then click an on-screen button that took them to an ad with more information. TiVo also sells ratings and ad-skipping data to TV networks and advertisers.
Amobi, the S&P analyst, is impressed with TiVo's turnaround plans but figures its technology and cash hoard make it an attractive takeover target. Rogers won't talk about that. But he says: "From a place where our financial survival was in doubt, we're feeling pretty good right now."