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.
Prediction is an entertaining activity better suited for stimulating discussion than providing an absolute outlook on the future. Therefore, the bolder and more controversial, the better. Keep that in mind as you read and respond.
Microsoft (MSFT) just announced that on November 22nd the Xbox 360 will allow users to purchase and rent high definition television and movies. I made this call back in January of 2006, and repeatedly since then (search this site for Xbox IPTV).
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.
I’m tired of reading about Apple’s ho-hum iTV announcement. And the Microsoft Zune strategy is incomprehensible. I don’t want the new PG-13 Microsoft that everyone likes. I want the old, evil, R-rated Microsoft you’re not sure you like.
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.
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.
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 thatâ€™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 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):
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.