Friday, March 26, 2010

Time for TiVo to say Ta Ta!

We discussed the prospects for TiVo in class last week, as I’ve done many semesters for the past few years with students in my technology strategy MBA class . As the company moves into its final act, the picture is becoming quite clear.

As in most semesters, there were some highly loyal TiVo fans in the room. TiVo had an early and unusually high adoption rate here in Silicon Valley. However, loyalty is not enough. My grad school classmate, Hope Schau (now at Arizona) published several papers (including an oft-cited “A” journal paper) on how Apple Newton owners were highly loyal — but that didn’t make it a viable business.

As we discussed TiVo’s “challenges” — euphemism for problems — it seems to me that TiVo faced a perfect storm, buffeted by old substitutes, new substitutes, and commodity low-cost rivals.

The old substitute is VCR: that's how I’m watching 24 this semester while teaching my Monday night honors class. Eventually the old substitute will die off, but then along came the new substitutes. There’s (,, etc.), Hulu, the iTunes and Amazon stores. There’s even the build-your-own computer solution (e.g. Windows Media Server) which right now is no appliance, but could come back to haunt them some day.

Then there’s the commodity rivals, made by Asian rivals and sold by the cable and satellite TV companies. The cable companies are also promoting an alternate Video-on-Demand solution to replace time-shifting of mass-market content.

The industry has high economies of scale — particularly with the online program guide — but the competing solutions have enough scale that TiVo’s market share lead no longer servers as an entry barrier. There is also the problem that broadcast television — the content that DVRs time shift — is clearly a declining distribution medium, if not source of original content.

With all these substitutes, there really wasn't enough time to get market awareness and reduce prices to reach the mass market before the DVR product became a commodity. Yes, TiVo had a better run than Ampex, but it’s yet another example of pioneer disadvantage — the pioneer pays the cost of creating a market and doesn’t reap the benefits. (Peter Golder and Gerry Tellis demonstrated many examples of this almost 20 years ago).

Yes, TiVo got a nice stock bounce out of a favorable appeals court decision in the EchoStar patent lawsuit. But, IP or not, TiVo is boxed in on all sides, like a farmer who finds urban sprawl has paved over his formerly bucolic neighborhood.

The time for fighting the good fight on a point product is long since passed. Like other “Silicon Valley” companies (not clear if this fits), the value is created by diversified rivals who can cross-promote and integrate various complements and substitutes.

While the exit is almost certainly selling the company, I can’t predict who would want to buy at a premium to current prices: whether a consumer electronics company, settop box company, cable TV company, EchoStar, or even Microsoft (which did, after all, buy WebTV). But I think it’s time for TiVo shareholders to ask what the end game is, because the alternative to an orderly exit is a disorderly one, not living happily ever after as an independent company.


Haley said...

Maybe Dish could buy them with what they owe them from copyright infrigements!


Howard Chang said...

I think TiVo cannot change the tide even by rolling out the latest TiVo Premiere machine. Yes, the TiVo premiere looks nice and can please the loyal customers. However, the improvements are incremental, not breakthrough. There are alternative solutions on the market which can do the similar tasks. (For example, now the DIY PC DVR solution is more matured w the media center in Windows 7 and has the potential to do the work. See David's white paper at: TiVo might be able to slow down the process. But, just like you mentioned on the post, it is the best for the shareholders to ask what the end game is.

Good post!

Mark said...

Interesting article, but I don't think it takes into full account intellectual property and patents, the only industry player with international agreements with many more to come, worldwide brand recognition and audience measurement services that will be the death of Nielsen. Moreover, with all due respect, Professor, you still use a VCR. Our friend in Omaha will tell you to stick with what you know.

Joel West said...

Haley and Howard — thanks for your comments.

Mark — I do not minimize the value of their IP. However, most patents can be invented around, and running an IP-only company is an invitation to do so — which is why Qualcomm makes chips that incorporate its patents.

Re-read the article. TiVo is never going to reach the mass market, because its solution is expensive and cheaper solutions (with better distribution) will be what the early and late majority want.

The company has its strongest hand in years right now with the recent appeals victory. It should sell out to another company that has distribution and/or manufacturing, who needs to be indemnified for patent infringement and maybe wants to beat up rivals with patent lawsuits.

As an example, Nokia bought Symbian because it wanted to stop paying royalties.

Waiting will mean only more competitors and more dilution of the TiVo brand value by generic DVRs. Selling the brand now would allow the new owner to use it as a premium brand to target the high end of the market, while using lower-featured solutions for the low end of the market.

Timing is everything. Two years ago, Yahoo rejected a $47b buyout offer from Microsoft; today its market cap is $23b. TiVo doesn’t have to sell this month, but they should arrange a friendly acquistion this year.

Kenneth M. Kambara said...

I've taught the TiVo Harvard case so many times I can do it in my sleep. My best students saw that the business model was an uphill battle from the start and there was a narrow window for success. It needed the tipping point it never got. Hindsight is 20/20, but I'd step back from the loyalty question and examine value in a Claes Fornell sense (price given value and value given price) for consumers and those entities who should care about the data TiVo has.

Although I haven't seen it in a few years, the software is first rate and a paragon of usability. That said, what is the value proposition here? Is it timeshifting or something else?

24? Sigh. I'm sure you've seen 24: The Unaired 1994 Pilot from a few years back.

Joel West said...

I don't know if it's a "tipping point" ala Gladwell, or a critical mass, or "crossing the chasm" or reaching the mass market. At some point it doesn't matter, they didn't do it, and I think there are too many competitors to pull it off now.

Yes, I did see the cute 24 spoof, and blogged on it last year. Doesn't make it any less cute.