Netflix (Nasdaq: NFLX ) and TiVo (Nasdaq: TIVO ) have lots in common. They're both twists on old services or technologies that make life better for consumers. They're both innovative, forward-thinking companies. They both create big-time fans -- nay, fanatics -- among the happy flock of folks using their offerings. They're connected in that TiVo's CEO Michael Ramsay sits on Netflix's board of directors. They both face some heavyweight competitors chomping for a piece of their action.
And they were both back-to-back recommendations recently by David Gardner for Motley Fool Stock Advisor.
Given that just about everyone I know either adores Netflix or can't shut up about how amazing their TiVo is (or both), and that David thought enough of these companies to add them alongside his past whopping successes like Marvel (NYSE: MVL ) (up almost 300%) and Amazon.com (Nasdaq: AMZN ) (up 160%), I decided it would be fun to compare them and see how the next-big-things stack up.
Now, yes, I'll concede upfront here that Netflix and TiVo aren't direct competitors. They don't do the same thing, and, therefore, can't be matched against each other as directly as Dell (Nasdaq: DELL ) and Hewlett-Packard (NYSE: HPQ ) were a week ago.
But it can't be denied that the buzz around the companies and their respective services and gadgets is similar. Netflix and TiVo have captured the attention of many people because they actually are revolutionary businesses and ideas.
But before moving ahead, perhaps I'd better describe just what it is that Netflix and TiVo do.
Netflix's innovative business
Netflix has taken movie rentals and elevated them to a whole 'nother ballgame. For $20 a month, subscribers can rent unlimited DVDs. The genius here is that there are no late fees with Netflix. None. Ever.
Netflix will mail you three DVDs at a time. You can keep them for as long as you want. Want to watch Caddyshack four times in four days? Feel the need to load up on disparate Halle Berry with Monster's Ball and Die Another Day? You can admire Halle to your heart's delight and never think twice about the rental joint down the street collecting late fees. Just send your DVDs back to Netflix at your leisure, using the ready-to-go envelopes they provide. When they receive a DVD back from you, they'll ship another one from your queued list of titles.
That list brings up another wonderful aspect of Netflix: The company has upwards of 15,000 titles available, far more than your neighborhood Blockbuster (NYSE: BBI ) could dream of stocking. It's a godsend for people who love foreign films, independent films, or old classics that might be crowded out to make way for the latest Adam Sandler masterpiece (cough). Just about any movie you want to see, Netflix has. All you have to do is add it to your queue, and the company will send you titles as they become available and as you return DVDs.
TiVo's habit-changing service
While Netflix makes renting movies a more pleasurable and less pressure-filled experience (who hasn't returned a movie unwatched simply to avoid a late fee?), TiVo makes television better, forever altering viewing habits and expectations.
The technology behind TiVo is a digital video recorder (DVR). There's no need to get geeky here, and try to understand it from the inside out. What's important is how TiVo changes how people watch TV.
With Tivo, you can pause live TV, run off to grab some Fritos and a Coke, then come back whenever you want and pick up the show right where it left off. TiVo records it all for you quickly and easily. No fumbling with VCR tapes or any of that.
That's an appealing feature, but it's the fact that TiVo will record hours and hours of your favorite shows that makes most users swoon. No longer do you have to scamper home from the gym in time to catch Paradise Hotel -- just TiVo it. (Yes, like Google, it's become a verb.)
Love The Sopranos? TiVo will record it for you each and every time it comes on. Like Martin Scorsese flicks? TiVo will search them out for you and record 'em, without you having to do a blooming thing beyond telling TiVo that's what you want it to do. TiVo will even start paying attention to your viewing habits and will suggest and record stuff it thinks you might enjoy.
TiVo has become something of a cultural phenomenon. HBO's Sex and the City gave TiVo a prominent role as Miranda's stand-in boyfriend in a recent episode. David Letterman has talked about his TiVo more than once. And perhaps the biggest sign that TiVo is huge happened earlier this year: Oprah got a TiVo, raved about it, and showed her audience how easy it is to set up and operate. Her in-studio audience members that day also walked off with TiVos, smartly donated by the company.
Good services, good businesses?
Netflix's and TiVo's services may be cool, but what about the businesses behind them? It's one thing to love something. It's another to invest in the company that produces what you love. A fantastic idea doesn't always translate so readily into a fantastic investment.
The financial conditions for each company are admittedly different. Like many small firms trying to launch a revolution, TiVo hasn't yet turned a profit. It is cutting its losses, though, and reining in marketing spending in an attempt to get there. An old adage says it costs money to make money, and TiVo's still in the costing phase.
Relative to TiVo, Netflix is further down the profitability trail. It recently reported a second-quarter profit (its first!), and is also producing free cash flow. Revenues for both companies are jumping each quarter over the prior year's quarter.
Subscriber-wise, Netflix is filling its ranks quicker than TiVo. At last quarter's close, Netflix had 1.15 million subscribers, while TiVo has just over 700,000 subscribers. The companies have been in operation for about the same amount of time.
One likely reason for the quicker adoption rates for Netflix is that it's a more affordable proposition for many people. A TiVo machine will run a couple of hundred dollars, and then there's either a monthly subscription charge for the service or a heftier lifetime subscription charge. Netflix's $20-a-month fee lends itself to faster initial growth, though when TiVo's prices come down, I don't doubt that it will garner some mass-market appeal.
Netflix and TiVo both face competition that's hankering for market share. Not surprisingly, Blockbuster's trying to get in on Netflix's game. More concerning for many, though, is Wal-Mart's (NYSE: WMT ) entry into the field of players. We've seen Wal-Mart trounce more than one ambitious upstart.
However, I don't think Wal-Mart will succeed in destroying Netflix, which has a first-mover advantage in this subscription-based business model. That counts for a lot. Further, there's likely enough room in the market for both Wal-Mart and Netflix to co-exist. And finally, although Netflix doesn't want it to come down to this, the company did just recently receive a patent covering parts of its operations and way of conducting business. Netflix thinks it can handle Wal-Mart without resorting to that, and I agree.
The waves Wal-Mart's made are actually helping Netflix, since they bring attention to the company and the service. When describing what Wal-Mart's offering, the word Netflix invariably turns up.
TiVo also faces competition. Cable companies incorporating other DVR technology into their set-top boxes could increasingly be its competition. Both Motorola (NYSE: MOT ) and Scientific-Atlantic (NYSE: SFA ) are producing boxes with DVR innards, and such giants as Time Warner Cable are using them.
TiVo's service is much more sophisticated, though, and its brand carries a lot of weight. You don't become a verb for nothing! The competition threat is real, but there's no reason to dismiss TiVo yet. The company will survive, despite these Johnny-come-latelies.
Who's the winner in the Netflix/TiVo smackdown?
I can't declare an out-and-out winner here, because I don't think there is one. One of the great features of investing is that, as in life, there are often multiple winners. That's the situation I see here.
Both companies produce services that people love and are loyal to. Both are improvements on how things used to be done. Both are worthy of the enormous amounts of praise heaped upon them.
Investment-wise, I think Netflix is the surer thing in the short term, but I think TiVo bears watching as it steadily improves its financials. Long term, Netflix and TiVo will likely make both users and investors happy.
Want to see even more of David Gardner's investment ideas? His brother Tom is returning market-beating results, too. Check out Motley Fool Stock Advisor to get recommendations from both of them.