How TiVo won
Once viewed as a pariah of the media industry, TiVo's ease of use and aggressive defense of patents have made it the only game in town.
(Fortune) -- Apparently, the revolution will be televised - and recorded - on Tivo. With apologies to '70s jazz-poet Gil Scott Heron, Tivo is poised to continue the media upheaval it began more than a decade ago with faster growth and a new plan to help advertisers, and cable and broadcast providers, rethink their relationships with consumers.
Tivo is scheduled to announce fourth quarter 2007 earnings on Wednesday. A consensus of analysts surveyed by Thomson Financial forecasts a fourth-quarter loss of 11 cents per share, based on revenue of $59.3 million for the three-month period ending Jan. 31. Furthermore, no one expects the company to make its first profit until 2013.
So why is this small, money-losing company so hot?
In the 11 years since the Alviso, California, company was founded, Tivo has almost singlehandedly created "time shifting." The company's set-top device and installed software enables U.S. consumers in more than 4 million homes to unshackle themselves from appointment TV viewing, allowing them to record and then watch their favorite shows whenever they choose.
That's not, of course, an earth-shattering idea; VCRs have been doing this for decades. Tivo's edge is simple but critical: it's easy to use. As a result, the company is now on the very short list of corporate brand names - like Google (GOOG, Fortune 500), Xerox, FedEx (FDX, Fortune 500), and Photoshop - that are widely used as verbs. Thanks to broad appeal among consumers, Tivo (TIVO) shares have performed well over the last year, rising more than 52% while the S&P 500 dipped 4% over the same period.
And now, at last, there seems to be a path to profitability. A successful courtroom defense of its software patents laid the groundwork for what many analysts believe to be a coming period of exponential growth. In January, a federal appeals court upheld that digital recorders distributed by The Dish Network (owned by EchoStar (SATS)) infringed on several Tivo patents, including one that allows viewers to simultaneously view one show while watching another.
That legal victory puts Tivo in a position of enormous strength, says BMO Capital Markets analyst, Leland Westerfield. "We believe that in spite of its relatively small size as a media enterprise, Tivo has leverage to negotiate deals with cable and satellite TV operators," Westerfield told investors in a recent communication. Those new deals stand to increase the number of Tivo households nearly six fold over the next three years, from 4.4 million to more than 25 million. As a result, Tivo's share of the digital video recorder market is expected to grow from roughly 40% to 65% by the end of 2010.
What will drive that breakneck adoption rate? Rather than risk infringing on Tivo's strong patents, cable companies will have little choice but to forge agreements with Tivo in order to provide their customers with DVR capabilities.
Says Westerfield: "Pay-TV operators who have not yet properly licensed the right to provide DRV services in the vein set forth by Tivo's patents might well be at risk of patent infringement claims. Therefore, in due time, we think that nearly all pay-TV operators will review their risks and opt to legitimize their DVR offerings."
Comcast and Cox have already said they will provide customers with settop boxes using TiVo's technology, and others seem likely to follow. Based on those potential deals, Westerfield recently raised his year-end 2008 price target for Tivo from $12 to $20. In Monday's trading, Tivo shares rose 2.9% to close at $8.93.
Of course, not everyone believes satellite and cable companies will acquiesce so easily. "Those are dubious assumptions," says Scott Cleland, president of Precursor LLC, a communications industry research and consulting firm. "It isn't in anyone's interest to settle quickly or just fold. Cable companies are known for being shrewd negotiators, and this is just not how these things play out."
Still, enhancing Tivo's deal-making power with cable and satellite providers is the company's new commitment to repairing its image among Big Media and advertising companies. For years TiVo was perceived as a pariah because it allows viewers to zip through TV ads. When former NBC executive Tom Rogers took over as Tivo CEO in July 2005, he made it part of his mission to smooth over relations with broadcasters, cable providers, and advertisers.
The olive branches Rogers is offering Tivo's former adversaries, it turns out, are also areas of expected revenue growth. Last year, for instance, Tivo rolled out its Stop Watch audience measurement service, inking recent deals with NBC and CBS, to track consumers' minute-by-minute viewing habits. "With two major networks on board, other networks likely will have to subscribe to the data as well, as will the ad agencies and advertisers," noted Bear Stearns analyst, Kunal Madhukar. "And as such, CBS's decision was critical to the service gaining general acceptance in the industry." Tivo also unveiled a similar service that will provide advertisers with information about how viewers respond to (or fast-forward through) commercial spots.
Even with all the new revenue streams, analysts don't foresee Tivo turning a profit until at least 2013. But the company seems to have enough growth potential to keep investors from changing the channel.