Alex, from Democracy In Media, has an interesting post on the Tivo/Comcast deal which I think is very insightful. First, here is theory on what went down at Tivo:

“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)…

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 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:

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.)

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.

Via Thomashawk.com, Tivo has announced a deal with Comcast providing a customized version of their product for Comcast subscribers starting in mid-2006. As has been pointed out, Tivo has been struggling in retail to grow its customer base, and this deal should help grow it’s subscriber numbers substantially in its quest to become profitable. Comcast is the biggest cable company in the US, so if the terms are favorable, this will mean a lot to the future of the company.

The undisclosed details of the deal make all the difference in how this deal will impact Tivo long term and Tivo certainly wasn’t in the best negotiating position, but any deal is good news to the company in the short term. With all the negative attention focused on Tivo in the last few months, this deal will certainly help convince wary DVR purchasers that Tivo is here to stay, and that can only help sales moving forward. What a difference a day makes!

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.

The Tivo earnings conference call generated a lot of buzz around the web based on some statements CEO Mike Ramsey said during the call. Here are Thomas Hawk’s notes on the subject:

Deliver a TiVo branded experience on the PC. Wow. This is huge. Although there are over 3 million TiVo units out there right now (about a million with broadband connection) there are vastly, vastly more PCs out there. “This platform (PC) is playing an increasing role in the management of home entertainment and TiVo intends to offer applications and services that capitalize on the PCs unique power and network capabilities as well as it’s enormous reach and scale of install base,” said Ramsay.

I have suggested in the past that TiVo needs to offer a software solution to run on the PC. They did not elaborate on what form this “TiVo branded PC experience” might take. Could this be a possible competitor to Microsoft’s Media Center PC? Might TiVo begin to sell a stand-alone software package that could be installed on a PC with a TV tuner card?

Quite a few others have commented on this particular subject including Build Your Own PVR, PVRBlog, Ars Technica, SlashDot, and Om Malik, all with some interesting observations. I agree with Rampy of BYOPVR.com when he says he’s “not holding his breath”. Like Rampy, I’m going to keep the oxygen flowing in the near term.

There is no doubt that Tivo could do more on the PC platform to add value to its experience. PCs and large hard drives are cheap, as are network attached storage devices (e.g. file servers) like NasLite. Being able to save Tivo recorded programs to a server with TivoToGo is nice, but being able to move it back on to the Tivo for later viewing would be much nicer. If you couple that with the ability to access other media from a Tivo available on a PC network such as downloadable movie services, iTunes, and other content, that would be nice as well.

The head scratcher for me is the term “Tivo Branded Experience on a PC” which implies moving functionality over from the Tivo on to the PC. I hearken you back to a post I did last year called “Tivo and the Mustard Lesson”:

For an example of the “revolving-world vision”, a successful company that sells mustard might very well come to the conclusion that mustard is the reason people eat hotdogs, and maybe if their product is really great, there may be an element of truth to it. If the world revolves around mustard, the corporate theory goes, and people eat other foods in greater quantity, then the company can grow its revenues by expanding into other food groups. Unfortunately, it’s only one delusional step away before they start selling mustard as an ice cream topping and wonder why people aren’t buying it. The mustard lesson: don’t try to be a new food group if you are really a condiment.

If I’m going through the trouble to rig up a PC as a DVR, is the Tivo interface really worth the $11.95 a month subscriber fee when I can use MCE 2005, BeyondTV, SageTV, MythTV, GBPVR, Meedio, or MediaPortal that all have no monthly service fee? Do I really prefer the hassles of TivoToGo’s DRM (copy protection) over the standard MPEG2 files other products produce? Even if you could come up with a solution that has traction, does Tivo really want to compete directly with behemoth Microsoft that could easily give the technology away or incorporate it directly into a future version of the OS?

Tivo is great; don’t get me wrong. The value, however, is in the entire hardware and software solution and the television experience you have using it from the comfort of your living room couch. It’s easy to setup, use, and it’s very reliable. That integration is very hard to do if you don’t control the hardware specs, OS, and other software competing for resources.

When you look at Tivo in the retail DVR market, one has trouble finding a way for them to compete with lower cost, better integrated (at least integrated with a set top box) solutions coming from cable and satellite operators. I’m not sure if you take the Tivo software out of the box, you won’t find the same thing in the software market: lower cost, better integrated products.

According to this press release, the Tivo patent infringement case against Echostar is slowly moving forward with the court denying motions to move the case out of Texas.

According to the press release, Tivo charges that Echostar infringed on it’s “Time Warp” patent:

Key TiVo inventions protected by this patent include a method for recording one program while playing back another; watching a show as it is recording; and a storage format that supports advanced capabilities — such as pausing live television, fast-forwarding, rewinding, instant replays, and slow motion.

As I mentioned before, I’m a layman when it comes to patents, but the “Time Warp” patent seems pretty broad in scope to me. If the patent gets validated with a few court victories, this seems like a big win for Tivo. It also looks like it’s broad enough to stifle other DVR inovation, which isn’t so good for DVR enthusiasts.

PVRBlog has an interesting discussion going on whether Microsoft is violating Tivo’s new patent. The patent in question is the process Tivo uses for auto-reversing a bit after a user fast-forwards to compensate for a user’s reaction time. The comments in the post are pretty interesting to read and add a lot to the discussion.

I’m not a patent expert, but after reading the patent, it seems like the “innovation” of the patent isn’t that it auto-reverses a bit at the end of the fast-forward, but that it records the amount the user corrects manually and fine tunes the auto-correction over time.

It’s unclear to me whether MCE does this, or for that matter, whether the Tivo unit does this.

Tivo announced that it was awarded several new patents both domestically and internationally. Among those patents were it’s fast-forwarding technique of backing up a little to correct for reaction time, as well as some other user interface features unique to Tivo. Tivo also announced that it has an exclusive license for what they call the Goldwasser Patent, the earliest patent known in regards to DVR technology.

It’s hard to say how much these patents are worth until they start enforcing them. From my experience with patents, if Tivo tries to enforce a patent, they’ll likely go after the weakest sheep in the flock, hoping to gain a precedent that they can use against bigger companies. Since litigation is expensive, we’ll see if they start pursuing it as a strategy.

As I have mentioned in the past, I’m a big fan of both Apple and Tivo. They both share a love of innovation and a focus on user experience. From the outside looking in, they appear to have similiar corporate cultures and a passion to deliver good quality products. If they were individuals instead of corporations, I’m sure my wife would try to play matchmaker because they make the perfect couple. Unfortunately, a corporate acquisition is not the same thing as a marriage, and while I personally wouldn’t mind seeing the two merge, I can’t help but point out the problems with it happening.

PVRBlog makes some great arguments in favor of a merger. It helps get Apple into the living room and it helps expand iTunes to new devices. It opens the door to opening an online video store right next to Apple’s virtual music store. I think these things are compelling from Apple’s point of view, and may lay creedence to the rumors that Apple is in contact with Tivo. If I were Steve Jobs, I’d have a conversation with Tivo’s board as well.

Let me point out two wildcards that can change my internal equation before pointing out the flaws of the merger. One is Tivo’s future product plans, the highest importance in my estimation is a HDTV DVR that can be sold as a standalone unit. The second is Tivo’s patents, which I haven’t spent time looking into and may very well be of high value for a suitor.

If you assume no wildcards as listed above, you can say that Tivo’s assets are brand recognition, technical capability, and it’s loyal customer base. Let’s look at them from a critical eye and from Apple’s point of view:

• Brand Recognition: Tivo has a good brand name, but in some respects, it’s a victim of its own success. Tivo has become part of the common lexicon and to many people, it’s a synonym for DVR. The Tivo brand may help some companies that don’t have a strong consumer electronics retail brand (eg possibly Creative, LG, etc), Apple already has a strong brand name that can be used in the DVR space. As an example, I can imagine a couple going into an electronics store to buy a DVR and say, “Honey, should we buy the Apple Tivo, the Sony Tivo, or the Microsoft Tivo?” The point being, I don’t think the Tivo brand has much value to Apple.
• Technical Capability: Here also, I don’t see purchasing the Tivo engineering staff adding much core competency to Apple’s already strong software and hardware engineering staff. I don’t think hardware engineering is Tivo’s strongpoint compared to software, where I think the Tivo magic of user interface really shines. If engineering capability was the entire reason to get into the DVR space, Apple would do better purchasing a software vendor like Elgato Systems which already has PVR products that run on the Apple platform and would likely come at a cheaper price.
• Customer Base: This in many ways is the crux of the argument for Apple to buy Tivo, and while I consider myself an ardent Tivo fan, there are some strings attached to the customer base. One big one is that the bulk of current customers are DirecTV customers, and (if I remember correctly) Tivo has a limited ability to modify and upgrade those DVRs. Additionally, I sound like a broken record but the market is moving towards HDTV, and without an upgrade solution, there is a significant risk that Tivo will lose those customers over time. Tivo is bleeding marketshare to cable and satellite companies which offer cheaper solutions; I don’t know how Apple owning Tivo changes that dynamic in a profound way.

If Apple buying Tivo doesn’t change Tivo from an unprofitable to a profitable business, you are left with an argument which is the theme of PVRBlog’s post: the synergy between the two companies will open up new markets and offet any negative losses by Tivo. The question then becomes, is Tivo the best strategy to open up the new markets?

I think you could make a compelling argument that at least in regards to selling movies and music online through DVRs, Tivo can be as much a hinderance as a catalyst. If you assume the DVR market is shifting to cable and satellite operators, for Apple to be successful they need to work with these companies. Competing with a corporation rarely makes for a good partnership.

Apple could turn around and offer Tivo as a an full service DVR platform, something that Tivo has been unable to do, or they could offer the technology separately that could work under any platform? At this point, I think the full service DVR ship has sailed and cable and satellite operators have formed partnerships that work. Wouldn’t building a relationship with Scientific Atlanta and Motorola, along with cableco and satco, be an easier endeavor for Apple? Without doing so, it’s hard to see this service, at least via DVRs, a ubiquitous service for Apple.

As a Tivo user, I’d love to see a merger happen. As an Apple stockholder, I’m luke warm with the idea.

Via TivoBlog.com (Congrats on the birth of your son!), a new version of JavaHMO has just been released that supports TivoToGo. An interesting new feature of the product is the ability to automatically download programming based on user selected criteria. That’s certainly a big help for someone like me that likes to archive some shows that I don’t have time to watch right away.

By the way, the next generation product from the makers of JavaHMO is Galleon, so you’ll want to update your bookmarks to stay up to date.

Om Malik and PVRBlog, along with Phillip Swann, have an interesting debate on how to save Tivo. Om Malik’s approach is to give away 2M units to build a userbase and create a premium brand. PVRBlog makes the cogent point that Tivo doesn’t have the cash flow required.

I think they both make valid points, and undoubtedly, Tivo has a premium user interface. However, I don’t see Tivo being a premium brand over the next year without better support for HDTV, which by all indications, is where the market is moving.

For all the talk of Tivo being a technology company, they are way behind the curve when it comes to HDTV, and as I’ve questioned in the past, who will want a standard Tivo controlling their television experience if they own a HDTV-ready television? To be fair, they do have a unit that works for their DirecTV subscribers, but as others have said, that relationship is on shaky ground at best.

Compressing analog HDTV streams in real-time is still cost prohibitive, but there are still two technologies that could be used in the interim. The first is building a unit with an extra Over-The-Air HDTV capture card, which isn’t ideal, but gets a foot in the HDTV door (the fact that Tivo doesn’t have a standalone DVR with two capture cards has always been a real head scratcher for me, but that’s another topic). The longer term technology is Cable Card, which eliminates the set-top box altogether.

Without a good HDTV strategy, it’s days as an independent entity are limited. Without some success partnering or building next generation products quickly, Tivo has no HDTV strategy.