Will Comcast Save TiVo?

TiVo Inc. says the agreement it made with Comcast last week will be the first of many it signs with the nation's largest cable operators. While company execs won't detail ongoing talks, TiVo got a shot of adrenaline when it signed with Comcast to make TiVo's DVR service available to its 21.5 million subscribers in 2006.

The announcement sent TiVo stock soaring 75% on March 15 and infused the struggling company with confidence after a bumpy year. “This puts us in a real position of leadership for discussion with other cable companies,” says Dave Courtney, TiVo CFO/EVP, worldwide operations and administration.

For TiVo, the deal creates three new revenue streams: payment fees for DVR service, upfront fees for ongoing engineering services and recurring per-subscriber monthly fees that will scale as penetration grows.

Comcast, in turn, expands its DVR stable. The TiVo service will be available as a higher-priced alternative to the basic DVR functionality the cable operator currently offers on Motorola DVR set-tops. The TiVo software will also reside on the Motorola boxes. This helps TiVo's interactive ad service, which Comcast is adding to its boxes.

Comcast will put TiVo software through the typical trial paces, pushing its deployment to mid to late 2006. By early 2007, TiVo's current deal with DirecTV ends. TiVo has about 3 million subscribers—more than 2 million of which are a result of the DirecTV deal. It is unclear if DirecTV will force its subscribers to adopt its own service or let them keep TiVo.

Exit Hardware Business

TiVo's alliance with Comcast is a step toward getting out of the hardware business. Typically, TiVo customers have to buy the DVR in order to subscribe to the service. The set-top box costs in the neighborhood of $200 and up.

Comcast, however, is already deploying DVR hardware from Motorola. That gives TiVo's software a natural home; Comcast subscribers will not have to purchase a TiVo set-top box. Comcast currently charges $9.95 for its DVR service, and the TiVo version will run a few dollars more.

“Being in the hardware business has never been part of our strategy,” says Courtney. “We don't make money on the hardware; it's a breakeven business. If we can get other manufacturers to distribute versions of DVR devices compatible with our software, we can reduce our hardware position.”

Paul Alfieri, Motorola PR manager for the connected-home business, says the deal illustrates that partnerships like this are possible and can “still leverage the existing deployed platform. It's good for Motorola and the [cable] industry.”

For now, TiVo is focused on enhancing profitability by controlling subscription-acquisition costs and managing growth, says Courtney. Resources are properly split among developing stand-alone products and joint developments with companies like Comcast.

Things To Come

While the deal does nothing near-term to enhance that goal, it does end a string of bad news for TiVo. At CES, DirecTV announced the end of its relationship with the Alviso, Calif.-based manufacturer. That loss was punctuated by TiVo CEO Mike Ramsey's saying he will step down once a successor is found, and President Marty Yudkovitz left his post Jan. 31.

“This is a fantastic lifeline for TiVo,” says Adi Kishore, Yankee Group media and entertainment strategies analyst. “It's not only that Comcast is the biggest MSO but that it is becoming the definer of cable-technology development.” And the deal could be a harbinger of things to come.

But Alan Bezoza, Friedman Billings Ramsey's SVP, broadband cable research, has reservations about the union: “This gives TiVo some market momentum, but, ultimately, the stock is overvalued if it stays around $6. The company still faces a lot of difficulty.”

From Comcast's perspective, the deal beefs up the MSO's existing technical capabilities and product offerings. TiVo's interface, search features, wish-list function and ability to program from a remote location are just some of the features Comcast expects its subscribers to find attractive.

“You can always find someone who hates the other DVR guides, but TiVo's interface is popular across the board because it's easy to use and intuitive,” Kishore says. “It's done a good job of identifying the right mix of functionality and simplicity, and they do a good job of adding functionality.”

Bezoza, however, doesn't see how Comcast benefits. It already has a DVR programming guide with 90% of the TiVo feature set. A more advanced DVR option might be nice, but he questions how many subscribers will want to pay the additional surcharge. He expects the new deal to give TiVo only $1 per subscriber.

Courtney, however, is sold.

“Any particular dollar figure is nothing but speculation. This deal is a tremendous opportunity for both of us,” he says, “and we've found the No. 1 MSO, which gives us tremendous volume.”