Posted: May 25th, 2022

TiVo Strategic Issues in 2003 Analysis

TiVo Case Study

Despite a strong launch of the company and continual addition of new subscribers, in addition to the added benefit of having a very low churn rate relative to competitors and comparable industries, TiVo is still not anywhere near profitability. See Table 1, Financial Ratio Analysis, 1999-2003. With negative operating, pre-tax and net profit margins, TiVo needs to get into higher-margin generating services quickly and forget about testing the elasticity of the DVR market through low-cost product introductions. From the strategic options presented in the case and the apparent ability of OEM partners to also become competitors such as DirectTV and cable companies, TiVo needs to take an aggressive series of strategic steps to balance its own ecosystem of partners, OEM customers, and media providers. The intent of this analysis is to present the strategic issues TiVo is facing in 2003 and also provide a series of recommendations for top management to attain superior performance levels.

TiVo Strategic Issues in 2003

Over-riding all strategic options and issues are the three top priorities that emerge from the case with regard to TiVo’s daily operations in 2003. First, the continual growth of the subscriber base and its forecast as extrapolated from the case information shown in Table 2, TiVo Service Subscriptions shows that TiVo has the potential to dominate an entirely new area of on-demand entertainment and grow its subscriber base to approximately 3.8 million subscribers by 2007, based an extrapolation of data in the case study. Second, the challenge of growing licensing revenues while creating an OEM channel for products yet not creating competitors in the process is the most challenging aspect of the TiVo business model during the time period the case study takes place. Third, throughout four years of operations the company has yet to achieve positive cash flow also severely restricts the risks TiVo top management should take on. Paradoxically however TiVo has created an entirely new services industry of allowing consumers to view entertainment content when they want and how the want to view it. A value proposition that underscore convenience and time savings to consumers is clearly one that resonates and leads to loyalty, hence the very low churn rate in their service relative to other telecommunication- and cable-based businesses. For TiVo to profitably grow they need to capitalize on this unique aspect of their business model and generate higher margins from delivered content and services. The DVR itself will quickly become a commodity as more and more competitors enter the market, which is shown in Exhibits 11 and 12 of the case study. As of 2003, just five years after the launch of the company, there have been several competitors entering the DVR market alone, and several including Microsoft who have the potential to challenge TiVo for market leadership and attain a positive Return on Investment (ROI) due to their corporations being able to absorb overhead and allocatable costs. Initiating either a low price unit of the TiVo Basic DVR or going to a “white box” strategy of selling a low-end DVR through retailers would invite a price work and virtually assure that the company would have to sell itself to stay solvent. As TiVo is figuratively still in start-up mode from a financial standpoint, initiating any kind of price-driven strategy is ill-advised at this point in the company’s history. The suggested strategy of lowering the license fee charged to consumer electronics manufacturers to broader TiVo’s base literally concedes too much potential revenue for the sake of growing the customer base. TiVo needs to consider how an exponential increase in users will impact their ability to provide services; this is a paradoxical issue as the company is still struggling to gain profitability yet needs to watch how quickly it adds subscribers.

There are also the strategic options of partnering with a cable company or a media company as well, yet in these partnerships there is a heavy element of competitive threat. While the prospect of having their DVR systems and services delivered over cable television and satellite subscribers’ networks appears attractive from a pure reach standpoint, the fact is that the standards of these partners is much lower in terms of product and feature functionality than what TiVo delivered initially in their first product generation. Simply put these licenses do not need the full level of functionality that TiVo has the potential of providing, and as a result any aggressive licensing strategy that does not preserve the unique position of the company’s brand needs to be avoided.

Another potential strategy is that of selectively creating advertising-based content that is easily traceable and measurable through the use of the technologies used to deliver on-demand content to subscribers. The three strategies of relying on advertainment as it is referenced in the case study has the potential to generate revenue streams from the four most dominant industries that rely on network advertising today, which are the automotive, retail, telecom and pharmaceutical, all industries that saturate any given evenings’ television broadcasts with their ads. Charging these companies for highly targeted advertising messaging to niche markets and audiences could replicate the success of smaller networks that focus only on one area of interest, for example how the Home & Garden Television (HGTV) has successfully done.

Clearly TiVo’s top management has much to consider in terms of strategic alternatives, yet given their financial condition, any strategy that seeks to become the low-priced leader of DVRs is one that will eventually lead to their having to find a potential merger or acquirer to keep the company moving. The company simply cannot withstand a price competitive business model in its financial state of as 2003, shown in Table 1 of this analysis.

Services From the data provided in the case study, the broader DVR marketplace has tow broad and strategic levels of service offerings: Basic Services and Enhanced Services. Many of the competitors in this industry offer these two levels of service of DVR service to consumers, with the Basic Service offering providing the options of pausing, rewinding and fast forwarding both recorded programs and live television. Many of the competitors mentioned in the case study offer a three-day program guide as well, as part of this baseline level of service. While not initially bundled in with the costs of the DVRs, companies are increasingly doing this as part of the baseline service delivered with units so customers can get them up and running quickly. TiVo and other companies in this segment do not as a result count these baseline customers as subscribers and instead capture the revenue as services, not part of the hardware bundle used for launching into retail channels. The confusion surrounding services offerings however is a major opportunity for the company to simplify while also gaining more subscribers and protecting their loyalty rate in the process.

Recommendations

TiVo still needs to manage itself as if it were a start-up and not pursue a low-priced DVR penetration or services strategy, as this will invite price competition and excessive services bundling, two competitive events the company cannot withstand financially in 2003. Instead, TiVo must look to gain positive cash flow as quickly as possible through a combined strategy of services and advertising. The following are recommendations to TiVo top management.

First, concentrate on the ability to deliver highly targeted audience segments to advertisers by creating alliances with and measuring viewership by consumer for children’s programming, learning, lifestyles, entertainment, news, sports, digital pay-per-view, international channel, shopping, music and HDTV content as well. This specific approach to creating an advertising model has the advantage of being able to track who is watching these channels and can therefore have a much more precise and profitable business model than cable operators. Look to advertising revenues as the basis of profitable cash flow.

Second, keep licensing fees high and be very selectively who becomes a licensee of the DVR technology, as cable operators and entertainment companies can easily move from being partners to competitors. As DirectTV appears to be the majority of DVR distribution today and a viable future competitor, look to balance out the risk of being too reliant on them with retailing relationships driven by bundling of lifestyle and line-of-interest channel content. For example there could be the sports bundle that includes ESPN HD for free for a year. This would serve to lock out competitors and also grow the advertising model base necessary for the company’s pursuit of profitable cash flow.

Third, TiVo could revolutionize the entire industry and make their services plans marked by simplicity and ease of understanding. As the case study shows there is a high level of complexity and confusion in services plans; drastically simplifying them would be a major competitive advantage.

Exhibits

Table 1: Financial Ratio Analysis (1999-2003)

TiVo Inc. Financial Ratio Analysis

Profitability Ratios

Return on Equity (%)

Return on Assets (%)

Return on Investment

Gross Margin

EBITDA of Revenue (%)

Operating Margin (%)

Pre-Tax Margin

Net Profit Margin (%)

Effective Tax Rate (%)

Liquidity Indicators

Quick Ratio

Current Ratio

Working Capital/Total Assets

Debt Management

Current Liabilities/Equity

Total Debt to Equity

Long-Term Debt to Assets

Asset Management

Revenues/Total Assets

Revenues/Working Capital

TIVO Service Subscriptions (subs in 000s)

2005E

2006E

2007 E

Beginning Subscribers

Gross Additions (VR Estimate)

Churn (VR Estimate)

Monthly Churn Rate (VR Estimate)

Net Additions

Ending Subscribers

Average Subscribers of Net Adds Paying Recurring Fees of Net Adds Paying Upfront

Subs Paying Recurring Fees

Subs Paid Upfront

Total Free Subs

DIRECTV TIVO Subscribers

Beginning Subscribers

Gross Additions (VR Estimate)

Churn (VR Estimate)

Monthly Churn Rate (VR Estimate)

Net Additions

Ending Subscribers

Average Subscribers

TOTAL TIVO Subscriber

Beginning Subscribers

Gross Additions (VR Estimate)

Churn (VR Estimate)

Net Additions

Ending Subscribers

Average Subscribers

Adj. Subscribers (Less Free Subs)

Average Subscribers

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