Is TiVo's Signal Fading?

After a strong start, the TV-recording service is in trouble

For months, TiVo Inc. (TIVO ) hoped to hook late-night talk show host David Letterman. Celebs from Rosie O'Donnell to Howard Stern had become converts to the company's nifty gadget. And why not? It seemed straight out of Star Trek, allowing customers to pause live TV, skip commercials, and automatically record favorite programs. Letterman, though, showed little interest in trying TiVo's "personal video recorder" until a guest raved about it on his show. Within days, he had one and began talking it up, too. "You can't buy that kind of advertising," crows TiVo CEO Michael Ramsay.

Trouble is, all the celebrity buzz in the world might not do the trick for TiVo. Despite an early lead in the personal video recorder business, as well as critical accolades for what the company calls "time-warping" technology, TiVo is fighting for its life. The company will drain its $50 million cash reserve by Feb. 1 unless it can find takers for a $75 million private stock offering it launched in July. Even then, it must at least triple its 225,000 subscribers to break even. What's more, TiVo will have to fend off new, deep-pocketed competitors, including Microsoft Corp. (MSFT ), and enforce patents on its technology--all while keeping potential suitors such as AOL Time Warner Inc. (AOL ) at bay. "Yes, things have melted down, but we're in this for the long haul," Ramsay says.

So far, though, TiVo has played more for the short term. In fiscal 2001, ended in January, the company spent $100 million on sales and marketing, or a staggering $735 for each new customer it acquired that year. With a business model built around expectations it would have cash to burn from bullish investors, TiVo ran tongue-in-cheek television commercials. These boosted its profile, but the marketing message was too muddled to explain what its technology could do for people--such as finding and recording any show starring, say, Pee Wee Herman. Now, TiVo's fiscal 2002 marketing budget has been slashed to $13 million and execs are hoping to gain subscribers through word-of-mouth endorsements--a tricky maneuver given the number of customers it needs. "The good news is, people who are TiVo subscribers love it. The bad news is that growing that number is proving a bigger challenge than we thought," laments board member Geoff Yang, whose venture-capital firm, Redpoint Ventures, was an early backer.

FALLING SHORT. TiVo's problems are yet another reality check for new technology companies. What looks good on paper can turn to dust if consumers don't catch on. PVRs (personal video recorders) were billed as the technology that would deal a deathblow to TV advertising and a mass culture built around prime time by letting people watch TV whenever they wanted without ever having to lay eyes on a commercial. But America's couch potatoes seem to be on another channel: So far, they have snapped up only 700,000 recorders, far short of the 3 million Forrester Research Inc. predicted would be sold by the end of this year.

Ramsay and co-founder James M. Barton knew it would be a tough slog. The two former Silicon Graphics Inc. (SGI ) execs got together in the early 1990s while collaborating with Time Warner Inc. on an interactive-TV trial in Orlando. From that experiment--which ultimately failed--they dreamed of a box that could navigate the flotsam of TV. They founded TiVo in 1997, warning their Who's Who list of investors--including AOL, NBC, Disney (DIS ), Sony (SNE ), and major cable operators--that it would take time for the idea to catch on.

More than $300 million in losses later, it still hasn't. The company generated only $3.6 million in revenues for its fiscal year 2001, while losing $206 million. For fiscal 2002, analysts expect TiVo to lose $163 million on sales of $21 million, according to a survey of analysts by First Call/Thomson Financial. The company's stock is at about $5.50 a share, down more than 90% from its peak of $71.50 in January, 2000.

Part of the company's problem is pure economics. A TiVo box--a receiver with a spacious computer hard drive for storing shows--ranges in price from $300 to $600 from makers Sony Corp. and Philips Electronics (PHGZF ). To make the box work, TiVo sells software and a program guide that let customers record selected shows--for either a onetime cost of $249, or $9.95 a month. The double whammy in fees is about what rivals charge, but it's too much for many consumers, who can buy a VCR for $49.

Now, Ramsay and Barton are scrambling to keep TiVo afloat. To conserve cash, TiVo in April laid off 80 of its 350 employees. To shore up sales, it has persuaded Philips to offer entry-level boxes for $199. The company has a deal with DirecTV Inc. that gives it the potential of reaching the satellite-TV provider's 10 million subscribers. While customers of both services still must pay TiVo's $9.95 monthly fee, the two offer a combo satellite receiver and PVR for a mere $299. And TiVo hopes to clear up its marketing message in a 30-minute DirecTV-only infomercial showing how the PVR works, with vignettes on how it adds value to the TV-viewing experience.

Competitors are ready to pounce on any weakness at TiVo. On Sept. 5, SonicBlue Inc. (SBLU ), the maker of the popular Rio MP3 player that bought troubled rival ReplayTV Inc. last month, will unveil a new ReplayTV box starting at $699--the first to allow consumers to both download and share video and pictures through high-speed Internet connections. And then there's Microsoft. The software giant is spending $50 million this year to make a market for itself in PVRs. Leveraging Microsoft's older WebTV technology, its $399 UltimateTV box offers e-mail and Web surfing. This fall, Microsoft plans a torrent of television and print ads and in-store demonstrations to push the benefits of PVRs and outflank its rival. "TiVo hasn't shown you what a PVR is and why you'd want it. We plan to," says Mark Mullen, director of strategic planning for UltimateTV. Ramsay scoffs at the challenge. "There's a learning curve here" that Microsoft will have difficulty climbing, he says.

PATENT PAYMENTS. One potential bright spot is the company's intellectual property. In May, TiVo was awarded patents for many of the fundamental aspects of the technology that makes PVRs different from VCRs. Ramsay says those patents could generate up to $27 million in licensing fees in fiscal 2003--on top of the $40 million in other revenues the company is expecting. Problem is, TiVo may be forced to burn cash if it needs to sue to get rivals such as Microsoft to pay up.

Even with the patent money, some analysts wonder whether TiVo can remain independent. AOL already owns 13% of the upstart through a $200 million investment made to co-develop its next-generation AOLTV service due next year. AOL has options to purchase up to 30% of TiVo, but analysts say it could gobble up the entire company. Indeed, Forrester analyst Josh Bernhoff bluntly says AOL should snap up TiVo. He argues that the proprietary technology would prove a compelling feature for AOL's cable subscribers, who could then use the machine to store downloaded movies, music, and games. AOL declines to comment on its plans for TiVo. Ramsay confidently predicts TiVo can survive its challenges alone. But unless he can find customers and money quickly, TiVo may become just another footnote in the history of the boob tube.

By Cliff Edwards in Alviso, Calif.

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