Why Comcast + TiVo is Actually Bad for TiVo (Sorry)

Well, everyone seems in a bit of a tizzy over the Comcast announcement. On the surface, this certainly looks promising for TiVo. Access to lots of customers. The drowning of those pesky “TiVo Deathwatch” people in an ocean of good PR.  From what I’ve been reading, everyone’s pretty much calling this the saving grace of an otherwise doomed company. Unfortunately, this strikes me as more of a coup de grace. It actually reminds me of another “smart move;” Apple’s ill-fated announcement that it was going to begin to license its operating system to third party vendors. Seemed like a good idea at the time and a lot of people said “Phew, finally. Apple did what they should have done a long time ago. Imitated Microsoft.” Well, it turns out that this wasn’t such a brilliant move and the majority view was way off base.

Anyway, let me explain why this deal will eventually suck for TiVo and its customers… TiVo has had an internal power struggle between two camps for some time. One camp, led by Ramsay, felt that TiVo needed to focus on generating substantial (i.e. profitable) monthly fees on TiVo services, while (most importantly) retaining control over technology direction (i.e. ability to innovate). The second camp has been all about driving consumer growth through carrier channels (as it turns out, at almost any cost.) It appears that this internal struggle has run its course and the latter group has prevailed. I believe that this is a bad thing for TiVo’s customers, and therefore a bad thing for TiVo in the final analysis.

Here’s the problem, TiVo is going to start to resemble a two-headed monster (and not in the positive sense of that term)…

1. Head 1: Right now, TiVo gets substantial subscriber growth from the sale of DirecTiVo devices. These sales ultimately add very little to the bottom line. In fact, I would say that at $1/month, TiVo has been right to downplay the value of this revenue and this relationship. As with DirecTV, it appears that the Comcast deal should add substantial additional subscriber growth, although also at a price point less than $1. (I would anticipate that the final number represented the amount at which TiVo felt that they actually broke even on the deal. They have a good idea what that number is now having dealt at length with DirecTV.) Now, since they don’t make any money on the hardware (certainly in this case since they’ll be integrating with Moto boxes) and they won’t make any money on the service, this head is all about maximizing the leverage that a large customer base will afford with advertisers. For this head, advertisers are king, not customers.

2. Head 2: While TiVo does not generate substantial growth from the sale of devices directly to consumers, these sales are their bread and butter. These sales are where TiVo generates all of its margin-rich revenue. While the cost of marketing has escalated, TiVo can actually make money on their current subscription fees if they decided to ramp down marketing expenditures considerably. As I believe Ramsay said in an IR call recently, “FY 2006 is all about $12.95 per month” (Well, not quite Mike…) Anyway, the point is that for this head, the goal is all about maximizing the value of the product for consumers to ensure people keep buying boxes, paying a monthly fee for service, and generally talking positively about the TiVo service. For this head, customers are king, not advertisers.

I frankly think this is a bad position in which to operate a cohesive strategy moving forward. I mean what are you, a company that produces great products for consumers, or a product that attempts to aggregate eyeballs for advertisers? You can’t be both (at least not very successfully.) Some constituent is going to suffer at some point, maybe not tomorrow or even this year, but soon. As time progresses, TiVo will be forced to focus more and more attention on pleasing folks like Comcast until eventually, their priorities change completely. As a result, I believe that the new priority list for TiVo is going to evolve into something more like this:

1. What’s important to Carriers,

2. What’s important to Advertisers,

3. What’s Important to Consumers.  

As a consumer, I don’t like this priority list. But either way, they need to resolve this issue or risk disappointing all their constituents (as TiVoToGo clearly demonstrated.)

Bottom line. In my opinion, this move was all about satisfying “The Street” and placating a jittery board who had lost faith in TiVos current trajectory. The board of TiVo got freaked out about missing the boat on this whole PVR thing (TiVo “Deathwatches” springing up all over probably didn’t help) and struck a deal that, in my opinion, shortchanged the long-term advantages that TiVo had for the near-term benefit of minimizing the risk of outright failure. I think this was a mistake.

Comcast was in the process of getting their PVR act together, agreed. TiVo had issues around their business model, agreed. But Moto’s PVR was always going to be fundamentally limited due their focus on the needs of their primary constituent (Comcast) and their secondary constituent (Advertisers). Moto wasn’t (and isn’t) going to drive for the introduction of a new, more open architecture that allowed users to develop applications for their devices. Moto is not going to open their device up so that consumers can choose whether they get their content from the “closed” network of their cable company, or their “open” broadband Internet connection. Moto doesn’t have the incentive to do so (as a matter of fact, it has the direct incentive not to.) TiVo has the opportunity to move beyond the first phase of this technological evolution (pausing and rewinding live TV – whoopty f*cking do!) and participate in the most important second phase of this transition, the movement to, as Jeremy Allaire puts it, the “Internet of Video.” This is the giant killer opportunity of this whole adventure, and I think TiVo is trading it in, for large part, because they got confused somewhere along the way about who they were building products for. (TiVo says home networking, broadband, and multimedia features will stay. We’ll see what features Comcast actually allows in the device. My guess, they’ll be a “little” limited.)

In my opinion, this is actually a sad day for TiVo and its customers. They will certainly stick around as a result of this deal, but I think that three or four years down the road, when all is said and done, people will remember this day as the day in which TiVo traded its uncertain but arguably bright future for a future that was more certain, but certainly and substantially more diminished.

I hope I’m wrong.

Comments

[ZeoTiVo]

I for one have been posting about this being bad for the Cable Card TiVo and taking the razor sharp 'do or die" focus off the software initiatives and Cable Card deadline for Cable Card 2 deployment. I do still think that to be the case, but it is a viewpoint from a consumer of standalone TiVos who is not on Comcast.

It all remains to be seen how far Comcast goes in making use of TiVo features but you are forgetting two important things.

1. Comcast is trying to stop the bleeding of subscribers to Satellite like DirectTV. To use this new TiVo DVR effectively in that fight Comcast is very likely to open up HMO and Multi Room Viewing. I suspect they will embrace certain HME apps as well. An HME app to buy stuff from Best Buy is a win all around. Netflix downl;oads and TiVoToGo are less certain but if they determine that this is needed as well to pull subs back to Comcast then they will do it. If Comcast just wanted a plain Jane DVR box then why make a deal with TiVo, Comcast already had that. Now granted Comcast has leased only like 200,000 DVRs so far but I doubt Comcast wanted TiVo just to make a plain DVR. Software innovation at TiVo will continue.

2. The sharing of revenue from Ads is not very much of a bottom line number with DirectTV. I suspect that can be much more of a bottom line number with Comcast especially since TiVo will be allowed to present the ads on all Comcast DVRs not just TiVo branded ones. This changes the equation significantly from a 50 cents to a buck a box into a real growth opportunity for the new way to sell advertising now that 30 second ad spots are old news.

the only real downside is delay in the Cable Card TiVo, which is significant to me but TiVo will be around and still making the best DVR software when one finally comes out. Of course if TiVo makes a deal with Time Warner and Time Warner enables the bells and whistles on the TiVo as well, then I wont need a Cable Card TiVo anyway

[Dennis]

Tivo had to do this. The growth in DVRs is all in integrated cable/satellite receivers. The average consumer doesn't want a separate box, especially when it's more expensive than the one they can get from their cable company. SA Tivos do have better features than the cable/sat DVRs, but they only have one tuner and they are another box you have to deal with with another monthly bill. The Tivo zealots fail to realize that Joe Public doesn't care who makes his DVR, he just wants 2 (or more) tuners in an integrated box. Tivo's only chance for survival is more of these deals.

[Alex Rowland]

Hey Gregory, I think you are absolutely correct to make the comparison to cellular. It is a very similar model. And without the imminent arrival of an alternate distribution mechanism for video content, I would wholeheartedly agree that this was TiVo's only option. The only reason why I think that this was a mistake is the fact that video over the Internet will give them the opportunity to bypass existing closed distribution and set up a channel for "direct" producer to consumer connections.

A cell phone analogy would be that a manufacturer comes out with a cell phone that enables videoconferencing. It still works with your existing carrier, but it relies upon WiFi to deliver the alterante functionality. Your carrier says they'll support the phone for voice, but have no intention of providing similar videoconferencing over their network any time in the near future. I think the people that have an interest in videoconferencing would consider paying for a new cell phone from this manufacturer and even a monthly fee to get access to this "unique" content/service.

So, in essence, I agree with you. I just think you're ignoring the rise of an alternate "open" transport mechanism that could provide TiVo with a new and much more substantial source of revenue.

[Gregory Pierce]

Actually I think your analysis is wrong. What you are describing in your analysis is actually the only way Tivo can thrive. Its interesting to look at Tivo in a scarcity situation as a player that is guaranteed to be successful despite close competition that is 'good enough'. As a former Tivo user who has Comcast and HD - Tivo's monthly fees don't make any sense to me. The fact that Tivo gets ANY additional money from me seems to make some sense.

Nevertheless the model you describe sounds a whole lot like cellular and wireless carriers when you look at the importance/priority list you described. Carriers are the top of the food chain and they make money by providing services generally to advertisers (American Idol having their text message voting sponsored by Cingular wireless isn't a coincedence). And at the bottom of the food chain is you and I, paying absurdly high rates with horrible customer service, locked into contracts (usually), and left with no choices except to go to other carriers doing the same thing.

While most Tivo deathknells are pretty stupid, a company losing money quarter over quarter with no revenue change in sight cannot continue to 'stay the course'. A change is absolutely necessary because the worst thing for customers is for Tivo to go belly-up altogether or be acquired by another party with enough money to hijack the PVR space with patent battles and service lockouts.

[Adam]

I think the two-headed beast you just described is Google.

[Alex Rowland]

Sorry for the slow response. I’m not sure how people like Jarvis keep pace.

Morac brings up some good points. Each TiVo box is supposed to be subsidized by recurring (or one time) subscription payments. Recouping the initial loss takes some time (although I’m pretty sure recent cost adjustments has significantly improved the recoup time to closer to 1 year.) But at the end of the day, TiVo always has the option of increasing the price of the device to cover costs while maintaining the subscription fee. This would slow growth considerably, but they would become instantly profitable. To me, the loss carry forward is essentially a pure marketing expense.

As for the cash TiVo makes from Comcast… they will bill for development, but I am pretty sure that TiVo is not making much on their development effort. They probably made sure that their R&D costs would be fully covered plus 20% or something. I would doubt if the development contract yields TiVo any substantial earnings.

As for the monthlies, I think you’re forgetting a line out of the 8-K

“During the term of the agreement, we will provide Comcast with certain customer and maintenance support.”

This type of support will be expensive (customer service always is). Again, I think they have a pretty good bead on what this support costs them on a monthly basis from their DirecTV relationship. They probably begin to clear some margin after several million customers but, for the sake of argument, let’s assume that TiVo captures 20% of Comcast’s subscribers or 4 million accounts over the next 4 years. (a reach I think, but certainly plausible). At $0.80/month this would add approximately $40MM/year to TiVo’s top line in 2009. I don’t think this is anything to jump up and down about, especially when you consider the significant expense associated with working with a company like Comcast and supporting 4MM new subscribers on a new hardware platform developed and operated by a potentially hostile vendor (TiVo has to download the software onto existing Moto boxes, not a fun enginnering challenge). I’d be amazed if they cleared any profit at all at the end of the day.

As for the patent protection… I would take the opposite view. If these patents are indeed that valuable, and the case against Echostar is so promising, they should be able to charge Comcast the same kind of money to just stay out of court. Comcast knows that the legal bills alone for defending such a cast could go into the tens of millions because so much would be at stake (an injunction forcing Comcast to stop Moto PVR's from using cerain features would really hurt.). The terms of this deal look more like Comcast hedging their bets than any firm commitment.

Anyway, the last and most important point. Advertisers. TiVo has struck a relatively decent balance between advertisers and consumers to date. They’ve effectively focused almost exclusively on consumers. Again referring to the 8-K, you’ll see the term “advertising management system” peppered throughout the document. This is where TiVo plans on making their cash, not the monthlies. My point remains that this will erode the value of the TiVo device as more constituents move to the head of the priority line. They may pull it off, but I think it’s doubtful.

As to Tom’s comments. Hopefully you’ll be getting a good feel for what a merged TiVo/Internet Video experience will feel like soon… I think you’re right about the compelling content. But if the platform is easy to use, the content and the customers will follow.

As for mtorres07… The point I was trying to make in this post was that by focusing on multiple constituents they are not articulating this clear strategy. They are going to get stuck trying to serve too many different masters. If a vast majority of their customers are with Comcast (and any other cable/telco carriers), their strategy is going to have to shift towards making the carriers and advertisers happy. It’s virtually unavoidable.

Creating subscription tiers could potentially work, but they have no option for a free monthly without bumping the price of the hardware (considerably if you begin to see more support issues as TiVo goes more mainstream). Another problem is that they also have to continue to pay TMS for the guide data. It’s a small fee, but it adds up. Nice goal, just very difficult to implement.

TiVo does need new content channels, but think “open” communities of networks, not “closed” incumbents like Blockbuster or CinemaNow. As for News Corp. I’d like to see that meeting between Ramsay and Murdoch. That’s video you could charge people to see. And innovation is great, but you’ve also got to figure out who they are innovating for. Is it the consumer, or the advertiser/carrier. I can think of some pretty innovate stuff that would delight advertisers and carriers, but that consumers wouldn’t necessarily love. Their priorities just tend to be very different (and unfortunately, more often than not, contradictory.)

Good luck with the TiVo stock. (And it’s a he.)

[mtorres07]

I'd like to share my thoughts on the TiVo Product:

1. TiVo's future lies as a product, which is more than the DVR. The DVR is becoming a commodity. TiVo adds value to the DVR.

2. TiVo needs to remain an innovator of DVR hardware to differentiate its product. TiVo’s DVR is a platform for Premium TiVo Service products.

3. TiVo needs to build market share to fend off the foreseeable increased competition it is facing. - This was the boogey-man Wall Street worried about.

TiVo needs to articulate a clear strategy for revenue growth and market penetration, which is not a “two-headed monster...” as the author of the post, suggests. I can see his / her (?) point, but believe it is possible and smart for TiVo to actively peruse both paradigms. This does not have to be an either or. What Apple computer is, was, almost was or could have been is most likely not what TiVo is or will be...

TiVo's agreement with Comcast is "non-exclusive" and bolsters the company's finances at a crucial point in its history. This IS A POSSITIVE, maintaining a constant revenue stream as it CONTINUES to move towards the more lucrative independent subscription model.

In a nutshell -- TiVo needs to offer greater diversity in the subscription model while balancing the benefits of third party manufacturing and distribution. TiVo needs continue to be aggressive to grow its brand awareness and cannot afford to rest on its laurels assuming every-one "knows TiVo". TiVo is not just a DVR, nor the cute TV guy logo. TiVo branded products should provide exclusive ownership incentives while continuing to support and sell licenses for its software. I for one hope Comcast does not incorporate the features and promise of the HME technologies...TiVo should continue to develop the "platform" as a TiVo-DVR/PVR only feature.

Here are my humble suggestions:

1. TiVo needs to continue it's partnerships with CE firms to introduce its DVR product and gain market share / penetration.

Those partnerships are great and should remain a vital and vibrant part of TiVo’s diversified strategy for market penetration- below the "cable box". Humax, Pioneer, Toshiba, Sony and others need to be enticed to continue to offer products with "TiVo-Inside"...(musical co-branding interlude here a la Intel)...serve to introduce TiVo to the world.

These products are appropriately shipped with the TiVo-Basic service. They should also come with a 30 day free trial of a TiVo- "silver level" service- such as 14 day programming, Wish list and SeasonsPass...I'd suggested a $9.99 / mo. price point to match Comcast. I realize that TiVo Boxes are sold while Comcast will rent them. I agree with the post’s author that what Comcast and Motorola will offer will limit content to only what Comcast chooses to make available to its subscribers so as not to undercut its VOD strategy. This is an OPPORTUNITY for TiVo do sell Comcast subscribers TiVo- Branded boxes with extended capabilities!

2. TiVo must remain aggressive to brand, promote and differentiate the "TiVo-DVR" hardware platform.

The TiVo Rebate program should be extended until market penetration goals reach a critical mass or the economies of scale / cost of hardware reaches a sustainable $99.00 price point for entry level hardware. The Rebates should be offered on TiVo Branded products ONLY and be contingent on a 1 or 2 year service commitment or the "life of the box" service option.

The TiVo-DVR has to ship with the same TiVo-basic service offered by the consumer electronics companies. TiVo as a gift is a good idea- but not if the person who receives it has to pay for the service.

The TiVo-DVR should come too with the 30 day free trial of TiVo- "silver level" service as envisioned above and again only TiVo-DVRs should provide the digital convergence features that will distinguish its products from the commodity DVR's being produced and proliferated by satellite and cable companies.

3. The TiVo-DVR should continually be looking for new retail channel partners to expand its user base in a direct and sustainable way.

Blockbuster video store outlets would seem a logical expansion for retail sales. Costco and Wal-Mart stores will offer diversity in access to the retail channel. Other innovative partnerships such as w/ NetFlix are encouraging but they have their hands full too. What about a partnership with CinemaNow?

4. TiVo needs go back to the table and re-negotiate licensing agreements where it can and find new partners / actively promote its product to all broadband infrastructure / service providers.

The phone companies, broadband ISPs, and satellite providers can not be snubbed as we’ve seen. TiVo should go back to the table with Direct-TV! Okay so they want to use there own NDS box- why can’t TiVo offer service similar to the agreement with Comcast? Direct-TV has said their customers are “[loyal TiVo owners who tend to spend the most on their services]”. Those Customers would pay big bucks to “upgrade" to the full capabilities of a high end TiVo HME enabled box and they SHOULD be motivated to buy TiVo-branded hardware AND become direct subscribers to TiVo at the TiVo-Premium level of service.

5. TiVo must continue to innovate its products and forge partnerships with those who add value to the product with out giving-away the store / loosing control of the products future.

Partner by offering developer support for access to the HME and it's API's. TiVo needs to keep control of the core hardware to ensure proper operation of the software. They need to ensure that the platform does not devolve into a technical support or internet security morass related to hardware software integration.

Thanks for taking the time to read this; as you can see I'm a big fan. My first TiVo is being shipped to me and I've decided to put some of my money where my mouth is by investing in TiVo Stock

Long live TiVo... Okay now I have to get back to work...Thanks again!

[Mark]

TiVO would have died once the DirecTV deal ended. This deal, good or bad (time will tell) keeps TiVO alive a little bit longer.

[Thomas Hawk]

Alex,

I posted this comment over on Om's site in response to his assertation that a Comcast "TiVo lite" solution is "good for now." I'd love to follow what you are doing with your company and review your technology when the time is right.

My comments on Om's site:

“TiVo lite” I like it.

Yes you are right Om. Something is better than nothing and as much as I hate to admit it, having a dual tuner, HDTV capable unit with adequate storage is really 90% of the equation. Advanced networking a la TiVo to Go, Home Media option, etc. are nice and would be ideal in a perfect world.

As much as I hate the fact that DirecTV has dumbed down my current quad tuner HDTV DirecTV TiVo, I still use it far more than my non-HDTV single tuner MCE machine despite the MCE’s much superior home media and networking capabilities.

I’d just like to see someone finally build the “perfect” box.

Alex, you are right on with the integration of micro content COMBINED with a cable/satellite box. People need more than Akimbo. People need to be weaned off of cable and satellite and on to new internet content as you suggested in your email to me.

We should also think about the best niche content though to make them make the jump to buy this new multipurpose box.

My own thoughts are that initially this could focus on amateur athletics (little league, high school sports, etc.), local government and community stuff (planning meetings, school plays, etc.), religious programming (large congregational service broadcasts) and youth oriented indie type stuff (well made but still home made skate punk type stuff or the like) and easily produced reality television.

If my grandson plays little league in San Diego and I live in Buffalo New York, this might be just the thing to get me to buy a combined satellite/cable/microcontent box.

Someone will need to produce a guide and hire a team of editors to review, catalog, organize and rank this new internet content.

The perfect box should have quad tuners (2 analog 2 HD), have expandable storage, have full networking capabilities, have a sophisticated home media option, have a released SDK to encourage outside plug ins and development, AND have a sophisticated and proprietary microcontent platform.

The more sophisticated HME option will do things like aggregate content from copyright free places like the internet archive and display it in an easy to navigate on screen fashion.

If I can get Jack Johnson concerts on the Internet Archive, someone should build a plug in to have Jack Johnson’s Internet Archive posted concerts come up under “my music” in the HME option automatically. Ideally (although perhaps to the chagrin of free media advocates due to the excess bandwidth issues – and we might need to find a better way to compensate folks like the Internet Archive for our bandwidth hogging) smart HME software should scrape and collect content from any site that I enter into it. I should be able to provide http:// locations and then have the smart software go out and pull all .mp3 files from a site, all photographs from a photobloging site, etc. (feel free to take my photographs from Thomashawk.com at any time). This would all be for personal home use of course.

This content would then be aggregated into my home media library for later consumption on my 43” plasma.

Combine all of this fantastic microcontent stuff with the perfect completely networked quad tuner cable and satellite HDTV box with easily expandable storage and that dog will hunt!

On the other hand, this is not what Comcast necessarily wants to see you do.

[Morac]

You failed to take into account that TiVo actually loses money for each stand alone TiVo unit they sell (especially with the current $100 rebate). TiVo doesn't start to turn a profit on a customer till close to 2 years after the original purchase, longer for customers with multiple TiVos since the monthly fee is dropped to $6.95.
Lifetime subscriptions turn a profit immediately, but that is a one time shot. Eventually TiVo starts to lose money on lifetime subscribers since TiVo pays Tribune for their listing service based on their total number of customers.

By not having to actually spend money to get TiVos out there, TiVo can start making profit the moment the TiVo service shows up on the Comcast box.

TiVo is making money on this deal, even without selling a single Comcast TiVo service. Here's the SEC filing by TiVo:
http://www.sec.gov/Archives/edgar/data/1088825/000119312505050231/d8k.htm

Basically Comcast pays an upfront fee ($10 million, rumor has it) and then a per subscriber fee. Comcast also licenses TiVo's advertising system for Comcast's use to be deployed on non TiVo DVR's that Comcast sells (which Comcast will pay fees for). Comcast can choose which TiVo specific features (Wish Lists, Home Media Features, TiVoToGo, Tahiti, Netflix, etc) they want to include. TiVo then agrees not to assert its patents (against Comcast). The agreement is pretty favorable towards TiVo.

TiVo owns quite a number of patents on DVR technology including one they just acquired (5,241,428) on March 2nd which is the earliest known patent to cover devices that permit the simultaneous recording and playback of video material with a variable time delay between recording and playback of a given video program segment. See http://www.tivo.com/5.3.1.1.asp?article=242

With this patent, TiVo has a lot more leverage against Comcast (or any other company offering a DVR). Their patent case against Echostar is going well. Maybe Comcast thought it was in their best interest to agree to TiVos terms instead of vice-versa?

I don't think Comcast will have the stranglehold on TiVo that you think they will. TiVo has always balanced the needs of advertisers and the needs of their customers. If TiVo drives away all their customers do to annoying ads, the the advertisers won't pay to have their ads displayed.

[Thomas Hawk]

Wow! Very insightful stuff. Nice work. At present the advertising revenue and what not represent less than 10% but with a significantly larger install base that Comcast could represent the advertising and other services revenue will most likely become more significant.

Lots of unanswered questions. How will NetFlix fit into the picture? Will the TiVo Comcast box really have any teeth or will it just be a dumbed down TiVo like the dumbded down version of Microsoft's Media Center that Comcast in now testing in Washington -- the Foundation box?

And how crazy was it that Ramsay was villifying the cable companies as a "monopoly" on the analyst call just last week when asked about the CableCARD issue? I have to assume that at the same time they were negotiating with Comcast. What a strange tact to take unless it was to purposely throw people off or here's a really wild scenario, unless Ramsay never even knew about the deal. What if there were other decision makers at TiVo that in order to stave off the declining stock price made the deal without Ramsay knowing.

If what the New York Times printed previously about a Comcast deal falling apart when Ramsay wanted more money and more control over the box, could Ramsay really have been totally out of the loop and this happened behind his back.

Total and complete conjecture and conspiracy analysis, absolutely unfounded in any way, but how crazy would that have been?

And what's with the announced award of 250,000 options at the low stock price to Ramsay only a few days prior to the big Comcast announcement?

What's the chance that some anonymous individual could leak the real story on some comment board (like this) somewhere?

Very nice work.

[rampy]

Well put. You've articulated pretty much what I was thinking, that consumer/end user might be the last people considered (by tivo).

Who knows, it may work out, but it does seem pretty close to a crossroads type event to look back upon later and say "see, that's where things started to go awry..."

rampy