TiVo's Instant Replay

By Rick Aristotle Munarriz (TMF Edible)
June 26, 2000

TiVo Inc.

Ticker: (Nasdaq: TIVO)
Phone: 405-519-9100
Website: www.tivo.com
Price (6/23/2000): $30 15/16

How Did It Double?

You're on the edge of your couch. It's Who Wants To Be a Millionaire and Regis is getting ready to deliver the million-dollar zinger. Then the baby wakes up and you're hauling cribside. You miss it. Or, let's say you're watching Survivor, and just as one of the remaining islanders is about to sink teeth into a rat morsel the phone rings. Your best friend needs a bit of advice. Missed again.

TiVo is looking to put an end to all that. No, it won't rock your child back to sleep or console your friend. However, TiVo will record what you're watching on TV so you can always scroll back to see what you didn't catch the first time.

Neat gizmo. Unfortunately, as is usually the case with high-tech gadgetry, the number of early adopters willing to pay up for the bragging rights is limited. Despite glowing testimonials and praise from celebrities like Howard Stern, the $399 system had only made its way into 35,000 homes by mid-April.

But, after teaming up with entertainment and media heavyweights like Blockbuster (NYSE: BBI), British Sky (NYSE: BSY), and America Online (NYSE: AOL), the only thing climbing higher than the prospects for TiVo user growth is TiVo's stock price.

Business Description

The TiVo FAQ covers the basics of the system. Consumers can opt for a system with a 13.6 GB hard drive (14 hours of "basic" recording) or 27.2 GB (30 hours). Since it is digital, the programs are available instantly -- no need to rewind or fast forward.

The system can be bought at most electronics superstores, including Best Buy (NYSE: BBY) and Circuit City (NYSE: CC). And yes, Amazon.com (Nasdaq: AMZN) stocks it too.

TiVo also offers a subscriber service ($9.95 a month, or $99 a year, or $199 for the life of the TiVo recorder). With that, TiVo uses your phone line to make a five-minute phone call every day to download future programming information. That allows for enhanced offerings like being able to locate your favorite shows and suggesting programming you might enjoy based on your viewing preferences.

Financial Facts

Income Statement
12-month sales: $0.6 million
12-month income: ($85.1 million)
12-month EPS: ($4.55)
Profit Margin: N/A
Market Cap: $1095.2 million

Balance Sheet
Cash: $122.0 million
Current Assets: $130.3 million
Current Liabilities: $25.2 million
Long-term Debt: $1.2 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 1825

How Could You Have Found This Double?

As cool and unique as TiVo may appear to be, it is not alone. ReplayTV and its sibling Panasonic ShowStopper also have hard-disk television recorders with 30 hours of capacity. While the TiVo competitors list at $200 higher than TiVo's $399 price, they provide the updated channel guides for free. Add the $199 for TiVo's lifetime subscriber update services, and they are all in the same ballpark.

But, TiVo's business model affords it more flexibility. Prices are bound to drop as the early adopters move on and the mainstream masses move in. It has happened over the past year with DVD players, as it has with most tech gadget rollouts before that. But, while ReplayTV is glued to selling at a profit, TiVo has pricing leeway, knowing it will make it up in the subscriber services.

It is that subscriber model that probably attracted AOL in the first place. Two weeks ago, the leading online service announced that it would be making a $200 million investment in TiVo. That was the catalyst for the stock's return to favor -- not only because of the sizable investment, but because TiVo will now have a three-year agreement to make set-top boxes for the recently announced AOLTV.

The service, which promises to merge online access with interactive programming, won't be rolled out until next year. And, to be sure, big-tube cybersurfing has proven to be a hard sell. With all its marketing muscle, Microsoft (Nasdaq: MSFT) has only been able to ring up a million WebTV subscribers so far.

Then again, WebTV is strictly the bare bones online experience, blown up in living-room comfort. AOLTV promises a proprietary content performance like interactive upstart OpenTV (Nasdaq: OPTV).

But, was the AOLTV news really news? Not really. Back in August, a month before TiVo went public, the companies announced they would be teaming up to develop an interactive online television service. Investors who saw the shares dip down below the $16 IPO price in April -- and had a memory that stretched back to last August -- probably saw it coming.

Where to From Here?

The 30-hour digital recorder market is only going to get more crowded. Microsoft is working with RCA and DirecTV to roll out UltimateTV later this year. While initially it will be an enhancement for DirecTV satellite viewers, it could very well eventually cover all delivery mediums.

The irony here is that DirecTV is actually TiVo's second-largest investor. With a 12% stake in the company, one has to wonder why DirecTV's parent -- Hughes Electronics (NYSE: GMH) -- didn't go with TiVo for its set-top device. Could it view AOLTV as a competitor? Could Hughes be looking to unload its stake in TiVo any time soon?

For Hughes' sake, maybe it should hold on to those shares. The misconception here is that this will be the next phase of home entertainment hardware, which often is easily commoditized before it can be monetized.

That is not the case. For starters, TiVo has already used its Linux-language software to provide exclusive features like the clever "Thumbs Up" and "Thumbs Down" feature. On the remote control panel are two buttons. You like what you're watching? Thumbs Up, Ebert! You don't? Digit down! TiVo learns your preferences that way and begins suggesting programming that might appeal to you.

You also have the deals. TiVo has Philips (NYSE:PHG) and Sony (NYSE: SNE) putting out the boxes. It has lined up British Sky for a release in the United Kingdom. Earlier this year, the company announced it would get together with Blockbuster to develop a method to deliver select video rentals through TiVo.

Now, TiVo is a startup of course. It is losing money and will continue to bleed red for quite some time. The AOL investment should keep the company solvent for at least the next two years. By then, with all these deals and promising ventures, TiVo might be ready to stand on its own. Oh, if only one could TiVo the market. Pause the live action. Zoom ahead to see the future. Come back and make that buy decision.

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