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September 28, 2004

Tivo's Devoted Followers

DigitalMerging.la has some interesting thoughts on the Tivo 2 Million Subscriber Milestone, along with some dire predictions. He is not alone, and Phillip Swann's article, "Tivo: Sell or Die" adds a second voice echoing his predictions. While I share many of their concerns, Tivo has been doing a good job of growing revenues without alienating its loyal subscriber base.

The theory is that cheap competition, primarily from cable and satellite providers, will impact Tivo's ability to grow into profitability. Tivo has been unable to form partnerships with the big players with the exception of DirecTV, which looks like it is unraveling. For a startup like Tivo, big companies make better partners than competitors.

The usefulness of integration shouldn't be underestimated. In the world of satellite and digital cable, there is a set-top box sitting in between the signal and the television, and Tivo must interact with the set-top box to change the channels and receive the video stream. The communication between Tivo and a set-top box is not ideal, but what makes the integration so nice is the ability to watch live television while also recording another program.

Investors would like to see more subscribers and Tivo CEO, Mike Ramsay has promised to have 3 million subscribers by the end of January. Not only do subscribers generate more monthly fees and offset Tivo expenses, but they also provide a powerful incentive to potential advertisers and marketers who are more likely to buy Tivo advertising.

It's a tough road ahead for Tivo, as it is for any small company trying to build a business in an emerging market, and satellite and cable operators can see the value of retaining that customer experience, so they won't make it easy for Tivo. However, I believe even if they can't become profitable, the likely outcome will be being acquired by a larger company.

Tivo the company has little debt and quite a few assets that make it attractive. The Tivo brand has a lot of equity and is often synonymous with DVR for many people. Its technology is arguably better than any of the competitors and could provide a boost for some willing provider. The biggest asset, trumping all others, is its devoted subscriber base.

I see a lot of similiarty between Tivo users and the original Macintosh users. Old Macintosh users not only shared a passion for their products, but they went to great lengths to evangelize for the Mac. Competitive products like Windows were utter heresy, and Mac users actively tried to dissuade others from going to the dark side. There was excitement when new versions of the OS were released, and Mac users loved to share newly discovered tips and tricks. If you talk to Tivo users or follow them on discussion groups or blogs, you see the same passion for the product.

This type of devotion helped Apple recover its footing when it made the giant technology switch to OSX. OSX required a lot of switchover costs for the average Mac user. Unlike older Macintosh upgrades, older computers and many peripherals no longer worked. For third party companies, it took quite a bit of effort to change their product lines to support OSX and many made the choice to abandon the platform. The Mac users did not however, and at the end of the day, Apple and the companies that supported the platform saw people purchase new equipment and saw their revenues grow.

Unfortunately, I also see a lot of similiarty between Tivo users and the original Netscape users during the web browser wars. This saga didn't have quite as rosy an outcome as Apple after Netscape languished inside of AOL. At some point, Microsoft's Internet Explorer became the obvious choice as it continued to improve in quality, came bundled with one's computer, and just plain worked better on many websites.

I'll admit I'm oversimplifying a great deal. The Apple model and the Netscape model don't really fit all that well for Tivo. The point I'm trying to make is that the Tivo has a special relationship with it's user, and how that is managed, both by Tivo and any potential suitor, will greatly affect the value of Tivo's business. Mis-managed, Tivo lovers will become embittered and move on to other products.

For now, the Tivo fans remain happy evangelicals.

Posted on September 28, 2004

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