TiVo Gets a Breather
Score one for the little guy? At first blush, that's what a new deal between struggling digital recording pioneer TiVo and DirecTV appears to signal.
The money-losing TiVo (TIVO) announced Apr. 12 that it had agreed to a three-year extension of its pact with the satellite-TV provider to maintain its subscription service with DirecTV customers beyond a February, 2007, expiration date. TiVo's shares, which have risen 45% this year, jumped another 8% on the news, to $8.12.
While the deal seemingly throws a lifeline to TiVo, which has lost close to a half billion dollars since it began in 1999, it comes with plenty of asterisks that show the company isn't out of the woods just yet.
The two sides noted that current DirecTV-TiVo customers will be able to keep their TiVo service through February, 2010. With nearly 2.9 million of TiVo's 4.34 million subscribers coming from the DirecTV relationship, that's worth nearly $40 million in revenue a year, according to researcher Ralph Schackart at William Blair & Co.
But here's where the first asterisk comes into play: DirecTV has plans to move to a different video-encoding system later this year -- and the popular high-definition TiVo boxes don't support such a switch. Industry sources say the move could be delayed by reported problems with DirecTV sister company NDS delivering a new high-definition DVR. But if that box gets back on track, it means TiVo's numbers could be steadily eroded, unless TiVo replaces its current box. Such a move would be costly, particularly since the company is trying to reduce its hardware expenses
What's more, to keep the DirecTV revenue and avoid spooking investors, TiVo CEO Tom Rogers had to do a fair amount of horse trading. As part of the extension, TiVo agreed not to sue DirecTV for patent infringement. This is no small deal. TiVo owns a patent on "multimedia time warping," which is essentially the ability to watch one show while recording another.
A federal court case is now underway in Texas, in which TiVo is suing satellite provider EchoStar (DISH) for infringing on that patent. The case could go to the jury as soon as Thursday. Should TiVo win, it would be entitled to collect licensing fees and potential back payments against every maker of digital video recorders.
Analysts suggest TiVo could collect $100 million from EchoStar if it prevails. In relation to the new DirecTV deal, that suggests the $120 million would replace any possible revenues from a settlement with DirecTV on patent infringement for new recorders that don't use the TiVo service.
Even so, the deal comes as a welcome shot in the arm for TiVo at a time when Rogers is moving aggressively to make the consumer-friendly service available on just about any platform. Last year, TiVo struck a surprise agreement with Comcast (CMCSA), the nation's largest cable operator, to add its service to high-end Motorola (MOT) set-top boxes in time for the holiday shopping season (see BW, 3/16/05, "Suddenly It's Fast Forward At TiVo").
FIGHTING THE SKEPTICS.
The company also is reportedly working on a new stand-alone high-definition recorder that it would sell directly to consumers for use with any TV signal for release late this year. The income it will receive from the DirecTV deal gives Rogers room for marketing and product development for such next-generation services at a time when it faces me-too competition from media-center PCs, set-top boxes, and broadband distribution of popular shows, such as Disney's recent deal to allow viewers to download its shows free of charge (see BW Online, 4/11/06, "Disney's Internet Adventure").
Coming on top of his recent decision to give away TiVo's standalone boxes in exchange for higher monthly service charges, it seems clear Rogers is making all the right moves to put the company on a firmer footing (see BW Online, 3/9/06, "TiVo's New Program").
"We just have to keep plugging away," Rogers said in an Apr. 12 interview with BusinessWeek Online. "We won't rid ourselves of the skepticism all at once, but we're making some progress."
SIGNAL TO NOISE.
It's the patent fight, however, that represents TiVo's best hope for success in bringing in and maintaining new licensing agreements from cable and satellite providers. As William Blair's Schackart notes: "The news [of the DirecTV deal] isn't as significant as the outcome of the ongoing EchoStar Communications patent-infringement trial."
Rogers says TiVo continues to have discussions with a number of cable operators on adding TiVo's service. The DirecTV agreement helps resolve uncertainty about the company's future, he says, and could be an impetus for striking new agreements.
But until TiVo can firmly lay claim to the exclusive rights to its simple but world-changing technology, any other news may sound like just a bunch of noise.