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March 14, 2005

Rebuttal to the Tivo Deathwatch

Megazone, from TivoLovers weblog, has a good rebuttal to all the commentary on the impending doom of Tivo. PVRBlog discusses his post and there is also a good dialog going on in the commments.

Megazone makes many valid points about Tivo. It would be a mistake to strictly look at last quarter with Tivo's $33M loss and $120M or so in the bank, and assume there will be a huge crator in Alviso 9 months or so from now. They undoubtedly will cut back their costs to help with their cash flow and a successful launch of a Cablecard product would help address their lack of HDTV offerings. They have time to change course.

I would quibble with the idea that Tivo is running an "operating profit" at this point and could be profitable if they wanted. Their service revenue is growing and runs on nice margins, but it can't be sustainable without selling more hardware, and the costs associated with the hardware business remains expensive. According to my back of the envelope calculations, every $1 that Tivo receives from the sale of hardware costs them $1.54. That's up from $1.21 a year ago. It will be interesting to see how that ratio will be effected with a standalone cablecard product. If the cost to add cablecard is low and Tivo can demand a premium for a standalone HDTV product, the hardware cost ratios will surely change to Tivo's benefit.

Megazone makes the point that most people don't own an HDTV yet. That's true, but I'd hazard a guess that HDTV owners are more likely to be DVR owners, and up until Tivo has a HDTV offering, there will be a certain abandon rate of existing Tivo owners who purchase an HDTV, as well as an impact on future Tivo sales from people looking for a DVR who already own a HDTV. The lack of a HDTV offering doesn't mean the imminent death of Tivo, but it certainly has a negative effect on its business.

The biggest positive impact for Tivo will be if their patents hold up in court. If they do have some court victories on broad technology patents and make it difficult for new and existing competitors, the calculus for Tivo changes dramatically. If they are easily circumvented, court victories will be short lived.

Without patent protection, Tivo's competitors will continue to improve upon their products, and NDS, Motorola, Scientific Atlanta, and Microsoft are all big enough that they can continue to spend research and development dollars to continue to innovate. The first to market advantage Tivo had in the beginning has been all but eroded at this point; the question really is whether Tivo can continue to stay ahead on the innovation curve.

At the end of the day, Tivo has some big problems facing it on the way to profitability and growth. Megazone reminds us that Tivo is still paying its electricity bills and will be for some time. Tivo has the time and resources to make changes to be a successful company; the hard part is figuring out what changes to make.

Posted on March 14, 2005

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