TiVo Inc.

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TiVo Inc.

2160 Gold Street
Alviso, California 95002
U.S.A.
Telephone: (408) 519-9100
Fax: (408) 519-5330
Web site: http://www.tivo.com

Public Company
Incorporated: 1997
Employees: 343
Sales: $172.1 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: TiVo
NAIC: 515210 Cable and Other Subscription Programming; 334310 Audio and Video Equipment Manufacturing

TiVo Inc. is a leading provider of digital video recorders (DVRs), selling its devices through retailers and licensing agreements with DIRECTV and Comcast Corporation. The company charges a monthly subscription fee for its DVR service, which is paid either directly by the subscriber or through the subscriber's satellite or cable provider. TiVo contracts with third-party manufacturers to produce its devices.

Origins

Few products in the consumer electronics industry generated as much attention as a device built by James Barton and Michael Ramsay. In the years before they built their first prototype machine, Barton and Ramsay worked for two Silicon Valley-based companies, Convergent Technologies and Silicon Graphics. At Silicon Graphics, Ramsay led the company's workstation division and Barton worked as one of the engineers designing an interactive television system for Time Warner. The system relied on using massive, centralized servers to store digitized programs that subscribers could access through their television sets at home, enabling them to watch stored programming whenever they chose. The project, which was rumored to have cost $150 million, was abandoned by Barton before Time Warner decided to shut down further development. "People come up with all sorts of reasons why interactive television didn't work," Barton said in a September 21, 1998 interview with Forbes. "The basic reason is centralized planning does not work. Why did the economy collapse in Russia?," he asked. "Because the Kremlin wasn't able to deliver what people wanted." Barton, along with Ramsay, left Silicon Graphics in 1996, intending to build a device that gave consumers greater control than the Time Warner system offered, endeavoring "to deliver what people wanted."

When Barton and Ramsay founded TiVo in August 1997, they set in motion what promised to be a revolution in consumer electronics, one that would greatly affect the entertainment industry. Few products posed such a threat to the status quo in the broadcasting industry and provoked as much speculation about the future of television as the product they envisioned. The basic idea behind the proposed device was to combine a computer-style hard drive and software with a television tuner, thereby enabling a user to record programs, pause live television, and skip past advertisements. Instead of relying on content stored on a centralized server, the basis of the Time Warner project, the machine proposed by Barton and Ramsay put the power of choosing content in the hands of the user. The cost of hard drives had dropped to the point where Barton believed he could build a machine capable of storing 20 hours of television programming for approximately $300. Convinced their idea would work, Barton and Ramsay began soliciting for the capital required to get their business underway, presenting their idea to venture capitalists in Silicon Valley. "We walked in," Ramsay remembered in a February 17, 2004 interview with the Financial Times, describing one meeting with a group of potential investors, "and said: 'We are after a consumer market, not enterprise. It is about entertainment, not technology, and we are going to need several hundred million dollars before we ever turn a profit.'" Ramsay's last statement proved particularly prescient. TiVo, from its start, created a high level of excitement, fueling great expectations, but turning such promise into financial success proved to be a challenge for the company for years to come.

Barton and Ramsay obtained $3 million from venture capitalists to get their company up and running. With the initial seed money, the pair and a team of colleagues developed a prototype device and showed it to a group of network executives, demonstrating a product that allowed viewers to watch whatever programming they liked, whenever they liked, without watching the commercials that funded the programming. The response from the group of network executives, who sat and watched a product that undermined their control, was not surprising. "They asked me if I was the devil," Ramsay said in his February 17, 2004 interview with the Financial Times.

Ramsay and Barton pressed forward with bringing their idea to market. They began negotiating with consumer electronics companies, searching for manufacturers to manufacture the TiVo boxes, and they began discussions with content providers, hoping to reach agreements with cable channels and network producers. TiVo raised an additional $4.5 million in July 1998, giving the company the capital to fund an expected product launch in early 1999. When the first TiVo was introduced in March 1999, its debut was heralded as the most important innovation in the home entertainment industry since the introduction of the VHS video recorder. TiVo offered users the ability to locate and record multiple shows and search for programs by actors, genre, and plot lines, and it featured what was called "suggestive viewing." Software offered on-screen suggestions to viewers about possible recording options, basing the recommendations on the viewing habits of the user. If a TiVo customer watched a horror film, for instance, the technology compared certain aspects of the program with other programs, deducing that the viewer might like to record other films of the same genre.

Once their company had a product on the market, Barton and Ramsay faced the challenge of turning expectations into reality. The period for talking about the potential of TiVo had ended, leaving the founders with the task of realizing the potential of their vision through execution, a task that would prove to be extraordinarily difficult in the years ahead. At the time of the launch of TiVo, analysts projected there would be ten million TiVo-like DVRs in use by 2005, but Barton and Ramsay were not alone in attempting to dominate the market. Palo Alto, California-based Replay Networks also was marketing a product with hard drive recording capabilities, marketing itself, like TiVo, as a purveyor of what both companies called "personal television." In September 1999, TiVo completed its initial public offering of stock, turning to Wall Street to fill its coffers for the battle ahead, but as it turned out the company's greatest challenge was not the threat posed by direct competitors such as Replay Networks' ReplayTV service. Instead, the greatest difficulty was in convincing the public that TiVo was the revolutionary innovation nearly every industry observer claimed it was. "We are about integrating with the traditional television infrastructure and making it better by personalizing the television experience for the consumer," a TiVo executive explained in an April 5, 1999 interview with Electronic Media. "We make it possible for them to view shows more akin to their taste and are working with the networks to provide a new frontier, a new portal into the viewing experience." The executive's statement rang true to most ears, particularly early TiVo customers who expressed a deep appreciation of the device in market research studies, but the problem for Ramsay and Barton was getting customers to bring a TiVo into their homes.

TiVo and DIRECTV Joining Forces in 1999

TiVo's efforts to create and to penetrate the market for DVRs were helped substantially by an agreement made during the first year its device was put on the market. Initially, the company's machine retailed for between $499 and $1,499, a price range encompassing models with between 10 and 30 hours of capacity. In addition, TiVo customers were required to pay a $10 per month subscription fee to cover the costs of receiving programming information through TiVo software. Undoubtedly, some consumers were wary of the costs involved in trying out a new type of electronics device, despite its characterization as a revolutionary product, something that would change the way everyone watched television in the future. Barton and Ramsay's hopes of gaining widespread acceptance early on failed, but their company drew much of its financial sustenance from an agreement with DIRECTV, the largest provider of satellite television in the United States. In 1999, DIRECTV agreed to assist TiVo in marketing and delivering TiVo service to the satellite provider's customer base, the beginning of a longstanding agreement between the two companies that provided the primary source of new customers for Barton and Ramsay.

Ramsay's prediction that it would take years and several hundred million dollars of investment before TiVo turned a profit was accurate. The company signed its one-millionth subscriber in November 2003, but had yet to record a profit, racking up more than $550 million of debt in its attempt to bring TiVo to the masses. Although competition from other DVR manufacturers played a part in TiVo's inability to post a profit, the company's lackluster financial performance stemmed in large part from the public's tepid response to DVR technology. By 2004, three million DVRs had been sold, far fewer than the ten million forecast by analysts five years earlier. Of the three million DVRs in use, only one-third bore the TiVo logo. The widely predicted revolution that TiVo was expected to lead had failed to materialize, leaving the company almost entirely dependent on its licensing agreement with DIRECTV for a volume of business that did not generate a profit.

Company Perspectives:

Founded in 1997, TiVo, a pioneer in home entertainment, created a brand new category of products with the development of the first digital video recorder (DVR). Today, the company continues to revolutionize the way consumers watch and access home entertainment by making TiVo the focal point of the digital living room, a center for sharing and experiencing television, music, photos and other content. TiVo connects consumers to the digital entertainment they want, where and when they want it. The company is based in Alviso, California.

New Leadership for the Future

TiVo's fortunes began to improve in 2005, an eventful year for the company that hinted at the beginning of widespread acceptance of DVR technology. The year began with Ramsay's announcement that he would vacate his post as chief executive officer. Several months later, TiVo announced that it had reached an agreement with Comcast Corporation, the largest provider of cable television in the United States. Comcast had begun to offer DVR set-top boxes to its subscribers, but the company signed its joint venture agreement with TiVo because of the strength of the TiVo name. "They are like Kleenex," an analyst said in a March 16, 2005 interview with the Chicago Tribune. "Their brand name defines the entire product category. They have a lot of patents and intellectual property, but their real value is their brand." The importance of the agreement with Comcast increased exponentially when TiVo executives learned that their agreement with DIRECTV, the lifeblood of the company, would no longer provide a significant stream of revenue. Roughly a year earlier, Rupert Murdoch's News Corporation had acquired a 34 percent stake in DIRECTV, a deal that threatened to end DIRECTV's relationship with TiVo because News Corp. owned a U.K.-based company named NDS with its own DVR technology. As expected, DIRECTV began to distance itself from TiVo's devices in August 2005, when it started emphasizing the distribution of DVRs made by NDS to new subscribers.

Against the backdrop of the pivotal deal signed with Comcast and the fading importance of the agreement with DIRECTV, TiVo gained new leadership. In July 2005, Tom Rogers was appointed president and chief executive officer. Rogers began his career as an attorney working for a Wall Street firm, a position that eventually led to his appointment as senior counsel to the U.S. House of Representatives subcommittee on Telecommunications, Consumer Protection and Finance. Next, Rogers served as president of NBC Cable and executive vice-president of NBC, spearheading the creation of CNBC and the formation of the MSNBC partnership with Microsoft. He joined TiVo's board of directors in 1999, brokering NBC's original investment in the company, and reportedly presided over the negotiations with Comcast.

Rogers's tenure began on an exceptionally positive note, offering the new leader a moment to savor that Ramsay had never enjoyed during his eight years of leadership. In August 2005, TiVo reported the first profit in its history, posting $240,000 in net income during the second quarter of 2005, an enormous increase from the $10.8 million the company lost during the same period in 2004. "I got to hand it to the team," Rogers said in an August 24, 2005 interview with the Financial Times. "They've heard a lot of skeptical comments that TiVo was never going to see a profit. We've shown the world that we can manage to achieve profitability. Our customer base is generating enough revenue to secure profitability."

Despite Rogers's enthusiasm, there was little expectation that TiVo would begin to operate profitably on a consistent basis after its achievement during the second quarter of 2005. Rogers conceded that the company was expected to lose between $20 million and $25 million in 2005, as it continued to emphasize increasing its business volume over sustaining profitability, something Rogers believed was in the best long-term interest for TiVo. "I am firmly convinced that TiVo can extend its strong brand identity and technology platform to the mass market through broader distribution by various carriers, and through growing its value as an advertising medium," he said in a July 9, 2005 interview with the Online Reporter. "After pioneering the digital video category, TiVo is now uniquely positioned to help multi-channel carriers, networks, and advertisers grow their businesses in an environment that presents new realities for how television is watched."