MIS680 Case#2 

TiVo: Reorganization  

Ming‐Hsiu Chiang 10/27/2008  

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008

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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

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008

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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

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008

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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,

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008

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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

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008

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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

MIS 680 Case #2: TiVo Ming-Hsiu Chiang Oct 27, 2008

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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