March 16, 2005
More on the Tivo/Comcast Deal
"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."
Given the news we've seen lately about Ramsay nixing a previous Comcast deal, his decision to step down as CEO, and now the Comcast partnership being resurrected, this two camp scenario seems likely.
Alex goes on to describe how Tivo is pulled into two directions:
Here’s the problem, TiVo is going to start to resemble a two-headed monster (and not in the positive sense of that term)…
- 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.
- 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 think this has been going on for a long time in the pursuit to find a profitable strategy. Plans to put advertising on screen during fast-forwarding, as well as the big limitations put on extracting video from a Tivo, have more to do with building up partnerships then to provide additional value to customers.
Here's why he thinks it's bad for customers:
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:
- What's important to Carriers,
- What's important to Advertisers,
- 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.)
I think he's right, but from my point of view, Tivo's options were limited by the market dynamics for DVR. Without working with carriers, Tivo has an uphill battle trying to sell DVRs into retail. Without a significant investment in marketing to generate sales, in all likelihood retailers would start dropping the product, further eroding sales. The four P's of Marketing, Product, Price, Placement (Distribution), and Promotion don't work so hot if you have no solution for 3 out of the 4 P's.
My hope for Tivo is to try and retain its innovation until there is a viable CableCARD solution, which if the technology is implemented removes the roadblock of the set top box. This is particularly important for HDTV transmissions where there is no inexpensive solution to encode HDTV analog signals. Until then, the Carriers have a significant advantage on the market, and we the consumers will continue to be the third priority.
Posted on March 16, 2005
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