Tivo Case - Mchiang

MIS680 Case#2 

TiVo:  Reorganization   

Ming‐Hsiu Chiang  10/27/2008   

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008 TiVo: Reorganization Take Back Control TiVo, the pioneer of Digital Video Recorder (DVR) technology, has changed the way people watch, record and play back TV shows. TiVo DVR gives people the power to get all their favorite TV shows ready to watch whenever and wherever they want. Its DVR buyers subscribe to TiVo service that lets them to watch shows on their own schedule. It is a game-changing technology. For its users, there is no more “Give and Take.” It is a new game of “Take Back Control” now. TiVo DVR service is composed of three main components: TiVo Service, TiVo DVR (Hardware + Software)

(Composition of TiVo DVR service)

The key ingredients of TiVo DVR service are a hard drive (Hardware) to store video, an electronic programming guide (EPG, provided by TiVo Service) to facilitate recording, and Software to tie together the technology and give the user navigational control. TiVo brings “time shifting” and “place shifting” concepts into its function and its name is synonymous with it. Struggle for Survival

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MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008 TiVo was in a great position in the emerging DVR market. During the time, early adopters and its partner, DirecTV, gave TiVo strength and rich financial return. TiVo has become the synonym of DVR and helped popularize the technology. As the market matures, the target customer shifts away from early adopters toward a more mainstream market base. Since then, the number of DVR suppliers has increased and thus brings more competition. As more clones crop up and the broke up with DirecTV, TiVo is losing its ground rapidly. TiVo has been fighting for years and has only accounted for a declining 10% of the US DVR installed base. (Ref.1)

(US DVR Installed Base - Jul 2008. Source: TV by the Numbers) Although TiVo provides the best products in the market with sophisticated features and better user interface, most cable companies offer sub-par DVRs to their customers for free and with cheaper monthly charge than TiVo’s service. These sub-par DVRs can offer similar experience as TiVo’s boxes, although less enjoyable. Given that TiVo’s current stable of offerings range in price from $100 to $600, how can TiVo compete with these cable companies? The Cable companies have won the battle with their "good enough" feature set and low price. (Ref.2) TiVo's churn rates are lower than those of its competitors are. Nevertheless, while its competitors’ churn rates and SACs have been nearly constant over the last three 2

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008 years, TiVo has seen rises in both churn rates and SACs. (Ref.3)

(Source: wikinvest)

TiVo's rising churn rates and SACs has made the need of gaining new customers greater yet more expensive to get. At the same time, TiVo has also seen falling ARPUs over the past two years. This means that each new customer is less lucrative than the last. Under the hard pressure, TiVo is in a trend of net subscriber loss as well that made the situation even worse (Ref.4).

(Quarterly Net New TiVo Subscribers 2001-July 2008. Source: TV by the Numbers)

There is no doubt that TiVo is one of the best consumer experiences people can have, but it has suffered from getting its magic boxes into people’s homes. Even its DVRs has been heavily subsidized in order to build a customer base, TiVo still cannot turn a profit and incurs millions of dollars losses each year. Combine all the numbers, 3

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008 there is a clear message regarding the future: TiVo is in danger of becoming marginalized. (Ref.5) Regain Strength TiVo’s revenues are mainly made of three components: service, technology, and hardware. As of the fourth quarter 2008, TiVo has 3.6 million subscribers (Ref.3). The company earned 78% its revenue in 2008 through subscription fees (service revenue) paid by customers, while 15% came from the selling its hardware (the TiVo DVR). Take a look at the TiVo’s cost structure, it reveals an interesting fact: although its hardware only brought TiVo 15% of total revenues, this part of cost has accounted for amazingly 60% of the total costs (Ref.6). It is obvious that the price subsidy policy for its hardware did not bring a positive financial result, nor help TiVo gain wider market base.

(Source: TiVo earning results)

Due to its extremely unbalanced revenue/cost structure, TiVo should reorganize its business units - separate hardware and software apart. The original TiVo will be split into three independent companies (TiVo Hardware, TiVo Software and TiVo DVR) to form the new TiVo Group. The new TiVo Hardware will take charge of DVR hardware design and manufacturing. It will be an independent OEM/ODM providing manufacturing services to cable/satellite companies, third-party DVRs, and TiVo DVR. It no longer sells its boxes to consumer market. The new TiVo Software will be a pure “software plus service” provider. It no longer gets involved in DVR manufacturing and distribution. TiVo Software will in charge of selling its advanced software and service to cable/satellite companies, third-party DVRs, consumer market, and TiVo DVR. TiVo DVR will combine resources from both TiVo Hardware and TiVo Software to continue 4

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008 distributing its current DVR products to consumer market. It will be a consumer electronics distributor.

(TiVo Reorganization)

The reorganization has multiple purposes. First, DVRs are primarily reaching the mass market through cable/satellite companies. TiVo’s current offerings are hardly to compete against them because of the economy of scale and TiVo should avoid direct competition. Therefore, TiVo Software will be a pure solution provider to get its software, interface, and technology into cable/satellite companies’ DVR-equipped set-top boxes. Thus, TiVo can turn its competitors into customers. Meanwhile, TiVo Hardware will play as an independent manufacturer entering a new battlefield of unbranded DVR manufacturing to service cable/satellite companies and third-party DVRs in a broader base. DVR market is growing in a fast pace. TiVo Hardware can catch the opportunity to expand production volume and thus lower down unit production cost (UPC). This will give TiVo Group the power to provide cheaper DVRs that are more competitive than its current offerings. Second, the segregation of software and hardware will release the full potential of TiVo’s power - the UI that is second to none. What really makes TiVo unique is its sophisticated combination of software and service that delivers unparalleled user 5

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008 experience. TiVo Software will pack software and service as stand-alone products (such as TiVo PC (Ref.7)) selling to consumer market. This will help TiVo widely distribute its subscription-based service, the primary source of revenues, in an easier way without specific hardware. TiVo Software can also license its technology or port software to cable/satellite TV providers’ STBs and third-party DVRs. Nevertheless, consider the much lower ARPU per month from the partnership than TiVo-owned one, TiVo will still keep the current product line but adopt a different pricing model. New TiVo-branded DVRs will be free with 2-year service contract. TiVo DVR will utilize the support from TiVo Hardware’s low UPC and TiVo Software’s DVR-based advertising to compensate the cost. Thus, the new TiVo-branded DVRs will have the chance to take back the ground. The segregation will help TiVo service its customers better and flexible by minimizing conflict of interests. TiVo Software will be the heart of the TiVo Group. The soul (TiVo Software) will be released from the shell (TiVo Software) and fly high. TiVo’s advanced software plus service will eventually turn it into ultimate multimedia platform (try to image TiVo PC plus Hulu.com). TiVo’s current facilitator role will transform into aggregator and the platform (software plus service) will become the industry standard through its widespread and influence. Reference 1. “Over 36 Million DVRs In US Homes - July, 2008” (by Bill Gorman at July 17, 2008) http://tvbythenumbers.com/2008/07/17/over-36-million-dvrs-in-us-homes-july-2008/4453 2. “Does TiVo Have A Chance?” (by Don Reisinger at Mar 11, 2008) http://newteevee.com/2008/03/11/does-tivo-have-a-chance/ 3. “TiVo (TIVO)” (wikinvest) http://www.wikinvest.com/stock/TiVo_(TIVO) 4. “Quarterly Net New TiVo Subscribers 2001- July 2008” (by Bill Gorman at Aug 27, 2008) http://tvbythenumbers.com/2008/08/27/quarterly-net-new-tivo-subscribers-2001-july-2008/4806 5. “TiVo Faces Clone War As Market Heats Up” (by May Wong at Apr 23, 2004) http://www.crn.com/digital-home/18842465 6. “TiVo Reports Results for the Fourth Quarter and Fiscal Year Ended January 31, 2008” (TiVo Inc.) http://investor.tivo.com/releasedetail.cfm?ReleaseID=297873 7. “Nero LiquidTV™ | TiVo® PC” (Nero) http://www.nero.com/enu/liquidtv-introduction.html

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