"In the locust wind
Comes a rattle and hum.
Jacob wrestled the angel
And the angel was overcome."
-- U2, "Bullet the Blue Sky"

You remember the song. How it stirred your soul. How the zooming of The Edge's guitar made you feel the rattle and hum -- and it felt good.

The hum
But that was 1987. Twelve years later, Fools encountered new meanings for the verbs "rattle" and "hum." The hum still felt good -- it was the sound of a start-up business, newly born on the market, firing on all cylinders as it broke rules, destroyed conventions, upset the way business had previously been done, and hummed its way to the top of the stock charts. In their seminal book on the New Economy (as we called it back then), Fool co-founders David and Tom Gardner called such world-shakers the "rule breakers."

These were companies such as eBay (NASDAQ:EBAY) and Amazon.com (NASDAQ:AMZN), which rewrote the rules of retail; Nucor (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD), which taught the Rust Belt a new way to make steel; and Honda (NYSE:HMC) and Toyota (NYSE:TM), which boldly asserted: "No, 25 miles per gallon is not enough. We can do better."

The rattle
In Rule Breakers, Rule Makers, Tom and David introduced us to a few such rule breakers, and they laid out the metrics by which we determine a company's rule-breaking potential -- and the basis for our investing strategy at Motley Fool Rule Breakers. But they also introduced us to two other concepts:

  • The "Tweener" -- a bona fide Rule Breaker that, at some stage before it becomes an unassailable Rule Maker of the business world, becomes challenged by one or more competitors.
  • The "Tweener Death Rattle" -- the sound a Tweener (figuratively) makes when its competitors successfully challenge it for market dominance, in the process transforming the erstwhile rule breaker into a pathetic has-been of a company.

The TiVo
Which brings us to the point of this column. Fools, meet TiVo (NASDAQ:TIVO). And no, that sound TiVo's making isn't tuberculosis. It's -- you guessed it -- the Tweener Death Rattle. Here's how it looks, in pictorial form:

Metric

7/05

10/05

1/06

4/06

7/06

10/06

Gross Margins

24.3%

30.4%

39.2%

36.5%

35.2%

34.5%
Operating Margins

(31.8%)

(24.2%)

(19.1%)

(23.2%)

(20.7%)

(16.6%)
Net Margins

(33.6%)

(25.4%)

(17.6%)

(21.5%)

(22.1%)

(19.4%)
Free Cash Flow (millions)

($34.7)

$1.2

 ($3.7)

($18.3)

($30.8)

($48.8)
All data courtesy of Capital IQ, a division of Standard & Poor's. Margins and free cash flow data reflect trailing-12-month performance for the quarters ended in the named months. Share count reflects balance sheet entries at quarter-end in each of the quarters.

The numbers
Numbers without context can be confusing, so let me explain what TiVo's are showing us:

  • TiVo's gross margins have declined for three quarters straight; its operating and net margins, although generally improving, remain far from breakeven.
  • Meanwhile, free cash flow that briefly emerged into the black one year ago hasn't been above water since. To the contrary, cash burn has become worse.

The future
I won't argue that TiVo, the product, is no good. With sales up 40% year over year in the last six-month period, the company clearly makes a product that consumers desire. The problem is that consumers don't want TiVos enough to pay what it costs the company to make the darn things.

With its margins firmly mired in the red, and its cash going up in flames, the question here is less: "How long will it take TiVo to make a profit?" Rather, the question is: "Will TiVo ever make a profit?"

Rattle, rattle.

eBay, Amazon, and TiVo are all Motley Fool Stock Advisor recommendations. To find out why, check out Stock Advisor free for 30 days.

Fool contributor Rich Smith does not own shares of, nor his he short, any company named above. If he did (or was), The Motley Fool would require him to tell you so. We're sticklers about things like that.