TiVo Records Another Loss

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Digital video recorder (DVR) pioneer TiVo (Nasdaq: TIVO) overshot average analysts' projections for both revenue and earnings in the third quarter, but investors dragged the stock down 9.6% anyway.

When fellow Fool Rich Smith previewed this quarter's results of the Motley Fool Stock Advisor pick, he predicted the stock's fate (and Tuesday's fall) would rest on subscriber numbers. A marketing agreement with DirecTV (NYSE: DTV) accounted for 87.3% of TiVo's 434,000 net subscriber additions -- a rise of 3.6%. Talk about vendor concentration.

And now the worst of all possible outcomes: It seems that source of DVR revenue and new subscriber fees is going away. DirecTV reportedly plans to use DVRs from NDS (Nasdaq: NNDS), a fellow subsidiary of parent News Corp. (NYSE: NWS), though TiVo will retain its subscribers.

The bottom line is that TiVo has to find new vendors quickly to replace what has clearly been the lifeblood of its operations.

Also disturbing is the churn rate for TiVo-owned subscribers. It increased from 0.6% to 1%. While that's not an outrageous number, it's a trend that a company seeking sustained profitability needs to curtail.

In one fell swoop, it is trying to improve its marketing, the quality of its DVRs, and its product reach -- a lofty goal.

To differentiate its DVRs from generics, for example, the company has purchased IBM (NYSE: IBM) patents to bolster its intellectual-property portfolio.

TiVo is launching a service in 2006 that will run TiVo software on cable giant Comcast's (Nasdaq: CMCSA) DVRs. It's a smart move. Hardware is like razors. You need the razor to use the blades, but it's the recurring sale of blades that generates the long-term profits. TiVo wins big if its software becomes the proverbial razor blades of its industry because its subscription service business could generate revenue from multiple hardware platforms.

Also in the works for 2006 is functionality to use TiVo software to download DVR recordings to Apple (Nasdaq: AAPL) iPods or Sony (NYSE: SNE) PlayStation portable devices. In an increasingly electronic and mobile world, TiVo is trying to cover its bases with leading-edge product enhancements.

What has received the most electronic ink is the company's advanced advertising feature, which will arrive in spring 2006. Unfortunately, pricing and other relevant details are not available at this time.

While the stock cratered Tuesday because of subscription numbers, investors would be wise to look at the wealth of products the company has in development. Already cash-rich, TiVo's alliance with Comcast (which gives them almost twice as many subscribes as DirecTV) provides a captive audience for its products and, in turn, the potential to build its subscriber base into the millions.

TiVo, at $5 and change, is a stock that appears poised to break through to profitability and much higher stock prices in 2007.

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Fool contributor W.D. Crotty owns stock in News Corp. and is hoping the local cable company will provide TiVo features on their DVRs. The Fool has a strict disclosure policy .