TiVo Goes for Broke

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When Fool co-founder David Gardner picked TiVo (Nasdaq: TIVO) as his July 2003 selection for Motley Fool Stock Advisor, we had high hopes for the little digital video recorder pioneer. DVRs were once a cult item spurned by the "but I already have a perfectly good VCR" set (of which yours Fool-ly is a charter member). But by 2003, the verb "to TiVo" was fast entering the cultural lexicon.

It didn't matter whether you owned a TiVo-brand DVR or a clone manufactured by the likes of Scientific-Atlanta (NYSE: SFA) or News Corp. (NYSE: NWS) subsidiary NDS (Nasdaq: NNDS). The acts of recording a program on a hard drive rather than a cassette tape, skipping merrily past commercials, or pausing live TV all became known as "TiVo-ing." With name recognition like that, how could TiVo fail? (Hint: Ask Xerox (NYSE: XRX).)

Things swiftly went awry with our recommendation. Fellow News Corp. subsidiary DirecTV (NYSE: DTV) made noises about wanting to favor its sibling's wares. Even the subsequent news that TiVo had inked a deal with cable czar Comcast (Nasdaq: CMCSA) didn't keep TiVo's stock price up for long. And when, at long last, TiVo finally announced a breakeven quarter, even that good news was undercut by the announcement that TiVo had decided to take desperate measures to put its hardware in the hands of paying subscribers.

Yesterday, TiVo announced a new rebate program that will allow consumers to purchase its boxes for as little as $50. It truly sounds like a desperate plan -- offering a 75% discount off the sticker price for TiVo's DVRs. And judging from TiVo's last earnings release, there's zero chance that any of the DVRs sold with these rebates will make profits for TiVo. On the contrary, in the first half of 2005, TiVo's statement of operations shows that it generated $15.2 million in "hardware revenues" -- but that the cost to manufacture these boxes was $22.2 million. Thus, each hardware sale was a "loss leader," draining $0.46 from TiVo's corporate pockets for every dollar's worth of DVRs sold.

The hope, of course, is that getting its wares in the hands of customers at an initial loss will ultimately allow TiVo to recoup that loss with higher-margin subscription revenues in years to come. With this strategy, TiVo is no longer pulling any punches. It's clearly going for broke. For the shareholders' sakes, though, let's hope TiVo's not taking that notion too literally.

Rewind for recent TiVo Takes:

• A Fool Looks Back
• Oh No, TiVo
• Fuzzy Reception From TiVo: Fool by Numbers
• Investors Turn On TiVo

Despite TiVo's woes, our Motley Fool Stock Advisor portfolio's returns are still soundly walloping the market. Discover David and Tom Gardner's selection of the market's best stocks with a free 30-day trial subscription.

Fool contributor Rich Smith does not own shares of any company named above.