TiVo's fuzzy picture

There are approximately 350,000 personal video service subscribers, people who own either a TiVo digital video recorder or get a service through the satellite companies Echostar or DirecTV (which offers Microsoft's UltimateTV digital video recording service), according to Forrester Research. (MSNBC is Microsoft-NBC joint venture.)

For that small, but often fanatically dedicated group of TV watchers, being able to replay instantly any show, to easily arrange with a few remote button clicks to record an entire season's worth of "The Sopranos" and, yes, speed through commercials of recorded programs, is a level of control over their TV viewing they wouldn't want to lose.

"I've never known anyone who has it who said it wasn't great," said David Lee Smith, an analyst who follows TiVo for Dain Rauscher Wessels. "It's a wonderful product."

"Everyone I've talked to who has used the service for an extended period of time said they love it," said Jim Stroud, analyst with The Carmel Group, a market research firm specializing in the telecommunications and television industries.

But mass adoption of digital video recorders is still a long way off and many believe TiVo faces some serious challenges, including Wall Street's lack of enthusiasm for the market leader.

Consumers have been slow to buy costly DVRs--which can run up to $400--in addition to shelling out a monthly subscriber fee for the digital video recording service. What's more, the whole concept of "time-shifting"--the fast-forwarding, rewinding and pausing of live TV programs--has proved difficult to explain in a 30-second TV commercial hawking the gizmos.

"We've all been a bit surprised by the slower-than-forecast adoption rates," said Mark Mullen, UltimateTV's senior director of strategy. "There's a gap between having someone tell [a consumer] about pause TV and actually using it." TiVo rival UltimateTV just arrived in stores this spring.

By the end of 2001, the personal TV industry will reach just over 1 million subscribers, with satellite services accounting for 77 percent of the market, according to The Carmel Group.

What's worse, TiVo, the market leader with 150,000 subscribers faces a cash crunch. With $124 million in the bank, some analysts assert that the San Jose, Calif.-based company has only enough working capital to last until the end of the year.

"TiVo needs more money or a buyout or a new strategic agreement like with a set-top box maker that brings in more money," suggests Murray Arenson, an analyst who follows TiVo for Morgan Keegan & Co.

In April, TiVo announced a restructuring and layoffs in order to cut $60 million in expenses and at the time chief executive Mike Ramsay said the company wouldn't have to raise additional capital.

However a growing number of Wall Street analysts question whether TiVo can survive on its own past the end of the year unless it forges agreements with cable operators or set-top box manufacturers who will be able to distribute its service to a wider customer base.

"They've just reorganized, but there needs to be an additional answer to prove the new business plan can get them [beyond the end of the year]," said analyst Arenson.

TiVo needs partner with deep pockets
TiVo already counts such media giants as NBC and Discovery Networks among its investors as well as cable operators Comcast and Cox Communications.

Increasingly, however, analysts say that TiVo needs to hook up with a deep-pocketed partner who can take on the heavy marketing costs required to educate the American TV public about personal TV.

"We do not believe that companies like TiVo will be independent by the time the [DVR] market is commonplace," said Todd Wiener, managing director of TechTrends. "The business model, since it is still unprofitable, is designed to require tremendous financial resources."

Indeed, in a report issued last week, a Forrester Research analyst suggested that AOL Time Warner should buy TiVo.

Last summer a pre-merger America Online invested $200 million in TiVo as part of a three-year strategic marketing and programming alliance. In January, Tivo expanded its relationship with AOL to include a multi-million dollar marketing and promotional campaign. At the time TiVo gained access to $43.5 million in restricted funds which were part of the prior AOL investment.

Later this year, the new versions of AOLTV set-top boxes will include the TiVo service.

By acquiring the 82 percent of TiVo that it doesn't already own, AOL Time Warner "would get the top brand name for on-demand television and a service many [cable] operators are already considering," wrote analyst Josh Bernoff.

Catherine Skelly, an analyst who follows Tivo for Gruntal & Co. said "it wouldn't surprise me to see AOL buy them out."

TiVo executives couldn't be reached to comment on the speculation, and an AOL Time Warner spokeswoman declined to comment on whether AOL Time Warner was mulling a TiVo acquisition.

"We think TiVo is a great product and a terrific company, but we don't comment on rumors or speculation," she said.

Meanwhile, the DVR competition is heating up.

Over the next year UltimateTV plans to spend $50 million promoting its $399 DirecTV box featuring digital recording features and Internet access. TV set-top box manufacturers such as Scientific-Atlanta and Motorola will likely include some digital video recording functions in the next versions of their advanced digital products. Motorola, the largest digital TV-box maker, recently signed a five-year licensing deal to use a rival's DVR technology.

"The way the world goes is inclusion of the DVR in the next generation of set-top boxes," said analyst Smith.

Then there's Rearden Steele, a company headed by former WebTV co-founder Steve Pearlman. Although details are vague, many believe Rearden Steele could ultimately be a TiVo rival with a home system delivering advanced TV services via broadband and cable boxes.

"Everyone who builds a new box will have personal video recording," said Brian Seth Hurst, chief executive of Mediaxi, an integrated media strategy company. "Can they make deals for the future that will make themselves viable?"

Most agree that the TiVo services needs to be delivered by cable and satellite companies, although the company appears to be slow to cut licensing deals.

"The key to their future is their partnerships," said GartnerGroup analyst P.J. McNealy.

For example, by the end of the year, analysts are expecting as much as 50 percent of new TiVo subscribers to come through DirecTV rather than the standalone boxes.

A six-month trial offering TiVo to subscribers was just completed in Cox Cable's Las Vegas system and the able company is currently evaluating the results, according to a Cox corporate spokeswoman. But no announcements with cable operators appear on the horizon, analysts say.

New ad campaign
Still, TiVo isn't giving up yet. The company that's become the brand name for digital video recording is breaking a new TV ad campaign later this week on cable and satellite services, according to a spokeswoman. The series of commercials will focus on how TiVo helps people pursue their "lifestyles," such as busy families or sports fans.

Whether the new commercials light consumers' interest in personal TV remains to be seen.

"It's not a case of the product being disappointing," said UltimateTV's Mullen of digital video recording services. "It's a case of communicating it successfully and helping people understand what it really is."