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.

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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