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Pulling the Plug on Tivo

I’ve pulled the plug on Tivo (TIVO) after three years of great service. With my recent FiOS TV subscription, I needed HD capability and I cannot justify paying $800 for hardware I get for free from Verizon (VZ). I just wish I had tried to cancel my Tivo service earlier as they offered to cut the per month fee in half if I stayed. That’s a bad leading indicator for the health of this company.

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Tivo Pulls the Plug on Echostar

A final injunction has been handed down by the Texas court handling the Tivo-Echostar patent infringement case. Echostar will not only pay $89M in cash damages, but will also have to disable nearly all customer DVR’s in the field within 30 days.

In a press release, Echostar will now appeal at a federal level. They also indicate that existing customers are not impacted by this court order, even though a scan of the court order clearly shows that they must cease operating all but 100k+ of their DVRs. That’s right, they need to settle or shut down all of their customer DVRs.

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Tivo – The Road Not Taken

Davis Freeburg, the best Tivo (TIVO) blogger on the planet, has a thoughtful post at Thomas Hawk’s website. He draws parallels between the advertising ‘upfront’ media buys and where Tivo is eventually heading.

All and all it is interesting watching TiVo as the vanguard of where advertising is headed on your television. Advertising, ironically enough for an ad zapper, is probably more important to TiVo than just about anything for them right now. While TiVo makes far more money from a standalone subscriber, the explosion of TiVo users in the years ahead are more likely to come from the major cable deals that they are striking with folks like Comcast (and many more surely to come shortly). In these deals TiVo makes much less money per subscriber but is entitled to valuable advertising revenue from a far greater audience.

Davis appears to be of the opinion that Tivo can have it’s cake and eat it too – win big deals with companies like Comcast while extracting ad revenue bundled with broadband content distribution.
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Tivo – Barron’s Reports

This weeks Barrons has a short article ($$$ link) on Tivo (TIVO) that highlights the acquisition option as well as the need to pursue Cablecos for licensing deals. No new analysis beyond what I’ve written over the last few days, but the article is getting media attention so I thought an excerpt was in order.

With a name that’s become a verb, plus great software, TiVo could be acquisition bait. But its share of DVRs is on course to be eclipsed this year by Scientific-Atlanta (SFA) and Motorola (MOT), the two largest cable set-top makers.

Most of its subscribers come from a deal with DirecTV (DTV), the satellite operator, which pays TiVo $1.15 a subscriber, and accounts for nearly 70% of TiVo’s users and 20% of its revenue. DirecTV last week extended the deal to 2010. It won’t market TiVo’s service, but the deal prevents TiVo from losing existing customers.

Last week’s jury verdict may boost TiVo’s chances to sign up cable operators other than Comcast (CMCSA), with which it already has a deal. Cable guys will find it difficult to work around TiVo’s patents, says Terence Clark, a lawyer who heads the national intellectual property practice at Greenberg Traurig. That could force Time Warner Cable and Cablevision (CVC) into licensing deals.

But the case doesn’t solve TiVo’s most pressing long-term problem. It still has a long road ahead as it tries to win over cable operators with its patent claims.

A buyout may in fact be the best exit strategy for TiVo. In the meantime, selling on Thursday’s pop in TiVo shares may be the best exit for investors. What lies ahead are many years of knocking on cable operators doors, a long, long story with no fast-forward button in sight.

Hat Tip – Seeking Alpha

Tivo – Better Off Without The Legal Jackpot

Tivo (TIVO) won the patent infringement lawsuit against Echostar Communications (DISH).

Tivo wasn’t starved for cash before, and having a lot of money sloshing around typically doesn’t help companies focus on solving their core problems. While winning anywhere between $73.9MM and $220MM at the litigation roulette wheel (there will be appeals, and the judge can treble the $74M in damages) can hardly be positioned as a bad thing, it doesn’t help solve, and worse, may fundamentally distract Tivo from the core problem they face- they are not growing as fast as the DVR market.

From the WSJ today($$$ link):

Tivo_DVR_Growth

The common explanation for this is that the cable companies have developed their own clone systems that are inferior but cheaper than Tivo. Perhaps they even egregiously violated some patents in the process. They didn’t take these risks and get into the equipment business because they didn’t want to pay Tivo $1/month in licensing.

The bottom line is the Cablecos and other Video transport companies know that letting Tivo control the set-top-box, particularly one with a broadband uplink, is effectively allowing Tivo to roll a Trojan horse into the living room of every one of their subscribers. If the DVR patents truly are bulletproof my guess is the cable guys would rather not offer DVR’s than let Tivo get between them and their customers.

With this legal victory, my concern is that Tivo will now seek market penetration by legal bludgeoning rather than innovation and market leadership. Rambus (RMBS) is trying this, and will eventually fail, because it is an awful and painful strategy. It’s analogous to terrorism. Customers refuse to be coerced in the long run and will eventually find their way to freedom through technology or legal means. Companies that get sucked into this business model eventually realize it is just as bankrupt as it’s political counterpart.

Tivo faces a decision, one we have outlined before. Either they need to become friendly with cable/telco/satellite video providers and swear up-and-down to never compete with them. Or they need to mount a full scale assault and convince consumers that the Cableco DVR represents the old media model by offering truly innovative downloadable video and content services. Getting Yahoo! Weather and amateur video blogs on my TV doesn’t count. This would require making nice with the content providers and showing them a path to generous revenue models.

Tivo now has more cash (note the difference between cash and cash flow) but that doesn’t necessarily mean they will use it intelligently. What they do in the next year will be critical.

DirecTV Can’t Kick the Tivo Habit

Tivo LogoTivo (TIVO) announced today that they have extended their agreement with DirecTV (DTV) for three years. In addition to this, both parties have agreed to not assert patent rights against each other. The previous agreement was due to expire in 2007.

The market appears to be viewing this positively. As investors in Tivo, we won’t complain, but fundamentally the two companies have not changed their relationship. DirecTV continues to develop and market their own set-top with homegrown DVR software and not market the Tivo version.

From the Reuters Article:

DirecTV is a top TiVo customer and the extension of the deal was initially greeted positively on Wall Street, where there had been concerns that DirecTV would transition their TiVo customers to its own service if an extension was not reached.

This is silly. Extending the agreement is much cheaper and easier than replacing 3 million set top boxes. The reality is DirecTV could have done nothing, and their customers with Tivo boxes would have continued to work. From the most recent Tivo 10-Q:

While DIRECTV would have the right to continue to service existing DIRECTV receivers with TiVo service without payment to us, it would not have the right to add new DIRECTV customers with TiVo service. And while TiVo would no longer be able to generate additional revenue from the then-current DIRECTV customers with TiVo service, we would have no further obligation to provide upgrades, fixes, new features, or software support.

Tivo currently gets about $1/month per box from DirectTV, or around $36MM a year in revenue. The announcement indicated that the new agreement has very similar pricing.

In short, we’re a little stumped why the market thinks this is such a great deal beyond protecting a recurring revenue stream. If DirecTV had agreed to use Tivo exclusively and stop in house development, that would be big news. All that has really happened is a further extension of the status quo. Regardless, if this brings more attention to Tivo and the strong value they provide, I’m OK with it.

The consensus opinion on Tivo is that they are in a death spiral, attacked by low-end commodity DVR’s from all sides. Their ‘only hope’ is to hit the litigation jackpot with Echostar and land a big wad of cash. We disagree vehemently with this opinion. Tivo is an exceptionally strong brand and commands incredible user loaylty. The Tivo software provides a significant differentiator in a future of commoditized video delivery by Cablecos and Telcos.

Our worst case scenario for Tivo assumes that they transform themselves into a software-as-a-service company, selling subscriptions to run on set-top-boxes from a multitude of hardware suppliers. A $12/year income stream from 20 million households (roughly 20% of US market) would yield $250M/year in revenue at substantially higher margins than the company enjoys now.

A more optimistic future would have Tivo turn their hardware devices into content delivery systems, utilizing the broadband connections available in homes to deliver content to the hard drive in each Tivo. Instead of recording a show from the tuner, content would be downloaded and stored on the Tivo. The new Series 3 Tivo will have HDTV capabilities and provides an ideal platform for storing and delivering content. DirecTV is working with Microsoft to potentially use the Xbox 360 as a content delivery platform, it’s unclear why they wouldn’t pursue a similar agreement with Tivo.

The problem with both scenarios is that they are totally incompatible business models. The first would require strong relationships with the content delivery folks, and an implicit agreement that the second model would not be implemented as a way to compete with the video delivery mechanisms of their customer. The second would require significant partnerships with content owners and distributors to provide them with an alternative way to distribute content. Disney’s recent decision to make shows via the web could just as easily be an agreement to make shows downloadable to Tivo, with an agreement from Tivo that the commercials could not be skipped.

Our frustration with Tivo, something I voiced in my post titled “Tivo Should be Sold” is that the company doesn’t appear to be pursuing either outcome. There has been little in the way of innovative hardware, software, or business models from Tivo in recent months that would indicate a move in either direction. The pursuit of the current business model of selling hardware DVR’s on retail shelves implies a future move to scenario two- the high risk/high reward strategy. However, the lack of any announced partnerships, as well as the vaporware Netflix agreement would indicate it isn’t being pursued aggressively enough.

If the company is not driven strongly in one of these two directions, it should be sold to a company that will. Some market and technical leadership needs to emerge from Tivo in the near term, because the market has priced in what we feel is a very reasonable 600M-800M acquisition value, based on continued pursuit of their original business model.

Tivo 6 Month Chart

Tivo Should Be Sold

Tivo LogoTivo (TIVO) announced their new partnership today. It’s called KidZone, essentially a TV Nanny. My previous prediction is looking a little silly though I wouldn’t rule out seeing more carrier partnership announcements. Thomas Hawke is excited because of the moral implications and I would agree the features make a great political statement. I’m not interested in political statements unless they enhance financial statements and it isn’t clear how this announcement (or other minor ones made in the past year) will do so.
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Tivo Partnership Announcement Tomorrow

Tivo LogoWe’ve been following Tivo (TIVO) closely. We think the company is a value play on broadband distrubution of content to the home. The current financial trajectory is frightening, but investors have been holding out hope for either an acquisition or partnership that will spur the deployment of more Tivo’s. Tivo just announced a press conference tomorrow that appears to indicate a new partnership.
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Nyquist 2007 Predictions Revisited

It’s time to take a look back at 2007 and see how our predictions fared. (See “Nyquist Predictions for 2007“)

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Home PCs and Home Theater Don’t Mix

Anandtech has an absolutely horrifying review detailing the trials and tribulations of setting up a Windows Vista home theater PC (HTPC) with the first HD capable TV tuner from ATI (AMD). Even with the on-site assistance of Dell (DELL) and Time Warner Cable (TWC) (with promptness and technical expertise you or I could never hope to see) it took two days to get the Windows Vista PC, external HDTV cable tuner, and Time Warner Network integrated and up and running. The resulting experience was great, though most consumers would have never had the patience or technical fortitude to get it up and running. It makes one wonder why anyone would bother to do this at all.

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