TiVo's Significant Role in 2011

The future of entertainment is digital, and TiVo (Nasdaq: TIVO  ) has a significant role to play in it -- at least in 2011.

This year was by turns promising and brutal for the DVR innovator. A major court victory in March sent shares soaring, only to fall back to earth again as legal opponents DISH Network (Nasdaq: DISH  ) and EchoStar (Nasdaq: SATS  ) scored a reversal two months later. A much-ballyhooed refresh of the high-end TiVo boxes failed to impress pundit Walt Mossberg or fellow Fool Rick Munarriz, and the stock has languished in single-digit territory for much of 2010.

Will 2011 be any different?

Given that I had put some of my own cash into the stock in November, you might think I'd say "No way." But my investment thesis does not surmise a clear path to trouble-free skies.

Instead, I'm banking on another turbulent year or two. The patent-pounding battles against the cable and satellite industries -- as embodied by DISH and EchoStar -- have been going on for, gosh, six years now and may shuffle along for a long time yet. Supposedly final court orders have been overturned or challenged over and over, delaying the final outcome by years.

The thing is that TiVo has won so many of the skirmishes that I don't see how the company could lose the war in the end. At some point, DISH and EchoStar will probably have to cough up the cash for years of fines, late fees, and cumulative damages. The challenges will run out.

TiVo's stock is currently trading in a low range because the latest chapter in the legal saga was a temporary defeat. When that particular delaying action is defeated (as I believe it will be), TiVo will jump again and give us bottom-feeders a nice return on our investments.

This will probably happen in 2011, but I'm willing to sit on my shares until 2012 if need be because the payoff will be huge. Armed with an undisputable court record, TiVo will go looking for license payments from every cable and satellite operator under the sun: Pay up or remove your DVR services along with millions of subscribers! TiVo will become a licensor of DVR technologies first and an innovator second.

And that's when I'll sell my shares, collect the winnings, and look for the next next big thing.

Peering even further into the future is a gloomy exercise for TiVo, you see. Netflix (Nasdaq: NFLX  ) is tearing up the charts with its digital movie streams, giving us a first taste of what the future will look like. TiVo's DVR technology requires you to record first and watch later, possibly missing some shows you didn't know you wanted to see. On-demand services like what Netflix is doing cut out the middle man and take the next logical step: Watch anything, anytime.

TiVo will become obsolete, but it will get its glory days first, and 2011 looks like exactly the right time to own the stock.

The Motley Fool has created a brand new free report called "The Motley Fool's Top Stock for 2011." In it, we reveal the little company set to profit from the broadband Internet expansion.

Fool contributor Anders Bylund owns shares in TiVo and Netflix but holds no other position in any of the companies discussed here. Netflix is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On December 27, 2010, at 4:04 PM, AndreWilliamson wrote:

    "TiVo's DVR technology requires you to record first and watch later."

    Not true. Netflix streams live on Tivo; so does Amazon. All of cable can be watched live also.

    Tivo allows you to watch live OR intelligently record for later. That's the whole point.

    In my opinion, Netflix is a great addition, but not a substitute. Broadband connections are just not reliable enough to guarantee you're going to be able to watch a live stream (which is the only way you can watch Netflix, by the way - the programs aren't recordable).

  • Report this Comment On December 27, 2010, at 4:43 PM, TMFZahrim wrote:

    @Andrew, you are correct in that recent TiVo boxes also handle other types of media besides cable content and recordings thereof. But you're missing my point -- TiVo-style recordings are in their prime at the moment but that won't last forever. The technology is doomed to obsolescence once on-demand streaming becomes the leading delivery method, which I see happening in the next five years.

    Side note: Your broadband hookup may not be good enough to handle Netflix streams, but then I'd also distrust your cable or satellite feed. An outage in one typically means an outage across the board, unless you're an odd duck with Internet service through one line (DSL, maybe) and TV through another (cable?). I don't think that's a valid concern in this day and age.

    Anders

  • Report this Comment On December 27, 2010, at 8:01 PM, AndreWilliamson wrote:

    Anders -

    I was just pointing out that Tivos are designed for both recording and live streaming. Someone reading your article would walk away with the impression that Tivo can't handle a live feed (most units can handle 2..AND stream Netflix live at the same time).

    My connection can handle Netflix content just fine most of the time, but in the past, Netflix's end has not been able to accommodate our content requests (i.e., it's not a "wait for more download error," but a Netflix serving content error). Most people will not tolerate this if it's their only option. Also, HD live streaming is out of the question.

    I think you drastically overestimate the potential change in the near term. You're talking about a wholesale shift to a la carte viewing. It's a wonderful utopia, but there is zero chance of the seismic shift you're talking about happening in the next five years. Content providers and delivery companies both will do everything the can to prevent erosion to their revenue streams.

    A la carte kills those streams. So they won't let it.

    Netflix has a limited selection - there's all sorts of content which is not available via streaming. People don't care right now because they're not paying for the streaming service. For a free "add-on," it's pretty awesome. Hard to beat free. (Yeah, I know they've added a streaming only plan - not a big factor yet). Likewise, Amazon's movie offerings, though extensive, is limited and full of holes.

    Already we're seeing pushback from content providers threatening to pull out of Hulu, and cablecos talking about charging per Gig. If they push in that direction, it will trash some of these a la carte models.

    Finally, I know the "pipe" for cable and internet is physically the same, but I'm pretty sure they are NOT the same thing. The cable TV portion can handle live HD streams; most people's broadband cannot.

    I'm not disagreeing that the vision is a nice one, I just don't see half the nation cutting the cord in the next five years (or in 10). Single 20-somethings, sure, that makes sense. Families and people focused on HD and live viewing, doubtful.

    IMO :)

  • Report this Comment On December 28, 2010, at 2:33 AM, lowmaple wrote:

    Half the nation doesn't have cut the cord. A much smaller percentage could still be huge for netflix. And their cash flow could give them enough to push back perhaps such as a stake in a depressed cable co. share

  • Report this Comment On December 28, 2010, at 5:33 AM, AndreWilliamson wrote:

    I thought the article was about Tivo.

    I'm a Netflix subscriber, and they'll do well I'm sure. As you also say, even a small percentage is a big deal.

    The prediction I was questioning was about on demand streaming becoming THE leading delivery method in 5 years. I just don't see that happening.

  • Report this Comment On December 28, 2010, at 6:57 AM, TMFZahrim wrote:

    Remember how quickly we kicked VHS tapes to the curb when DVD hit the mainstream? I believe it's gonna be like that -- once everybody knows about the advantages of on-demand streaming, it'll be sayonara to DVDs and Blu-ray will become a footnote in history with most players used as streaming receptacles. The cable companies can fight all they want, but their best hope is leaning heavily on their own on-demand or else they'll become mere Internet connection providers. I stand by my five years.

    Anders

  • Report this Comment On December 28, 2010, at 11:52 AM, AndreWilliamson wrote:

    All content was available via DVD. It's nowhere close to true for streaming.

    [Fwiw, streaming has already been around for a good five years (from Amazon via Tivo), and for several years from Netflix, but it has still not dented cable much in that time period.]

    I agree on Blu-ray. No point to owning most content for $30 when you can stream for $5.

    The good part is, we can wait and see :)

  • Report this Comment On December 28, 2010, at 2:22 PM, TMFZahrim wrote:

    Ah, now we're talking. I bought my first DVD player in 2001, when Blockbuster started stocking their DVD shelves in any respectable volume. The first retail DVD (some say The Mask, others Austin Powers, and there are other candidates) were pressed and published in 1996. From there, it took just two years to see VHS tapes disappearing completely. I'm giving DVD a three-year respite here, man. Not trying to fight you, just making sure we speak the same language!

    Anders

  • Report this Comment On December 28, 2010, at 2:41 PM, AndreWilliamson wrote:

    :) You keep changing the subject!

    This isn't about DVDs. Consumers don't get most of their content from DVDs; they never have and never will. It's a red herring.

    Going back to the original issue, it's all about whether there is a role for local content storage and retrieval.

    You're making the case that more than half the market won't use local storage in 5 years. I'm claiming you're wildly off the mark. In fact, I'd bet that DVR penetration rates grow by quite a bit.

    To put this another way, "Tivo-style recordings" are not "in their prime at the moment" - they will be *much larger* in five years, as reflected in higher DVR ownership rates.

  • Report this Comment On December 29, 2010, at 7:19 AM, TMFZahrim wrote:

    Then the battle lines have been drawn, as I simply disagree with your conclusion. I see DVR recordings as another transitional medium in the same vein as Blu-ray, except much more user-friendly while it's here. In the end, I see centrally managed content repositories (whether it's Netflix, the cable company, Google, or someone else entirely) providing all the media you need, both back-catalog and live content. There will be no need to record stuff on your own anymore, much less buy content to own. The era of local media storage will be over. It'll be a bloody battle to get there, but we're already well on our way. I am, in fact, largely living that life already with nothing but online streams available at my house:

    http://www.fool.com/investing/general/2010/11/23/why-i-cut-t...

    As you've said a couple times, now all we have to do is wait and see who's right. And it's a pleasure debating with you, good sir.

    Anders

  • Report this Comment On December 29, 2010, at 7:49 AM, caballote77 wrote:

    this is an excellent discussion. I want to thank everyone leaving comments.

    I've watched TIVO for a while and always considered an investment in it. I thought that at some point it (tivo) would get bought out once the economics made sense (years of continuing litigation or buy now).

    It appears the patents have some value for TIVO but how much?

    Also, (as you guys have been discussing) how much of the future will impact TIVO? if we move to a 100% on demand situation then tivo or cable boxes dissapear?

    I guess the investment could make sense as an options play betting on the outcome of the next lawsuit in court.

    Interesting indeed.

    C.

  • Report this Comment On December 30, 2010, at 1:35 AM, davidstecko wrote:

    Another issue that will definitely forestall the demise of TIVO/DVRs is the copyright issue. There's never any problem when it's done at home on a personal DVR. But that same issue changes when it's done by someone else commercially. Consumers won't be satisfied if they can only get 70% of the programs they want "on-demand" (probably for a fee) when they can get 100% with a TIVO (for free).

    I agree completely that TIVO/DVRs will be around for much longer than 5 years. I also agree that you cannot draw comparasons with DVDs ----- as well said above ---- "consumers don't get most of their content from DVDs ... they never did and never will."

  • Report this Comment On December 31, 2010, at 8:59 AM, AndreWilliamson wrote:

    On the streaming vs. owning thing. Music is not a perfect analogy, but an instructive one.

    Would you be content for your music to all reside in the cloud? I wouldn't mind storing my stuff there, but wouldn't want to have to stream it every time.

  • Report this Comment On January 20, 2011, at 7:19 PM, 104r wrote:

    Has anyone heard anythink about Tivo being bought out. I hear there are two posibilities but I don't know who they are.

    I. Highlander aka-104r

  • Report this Comment On June 16, 2011, at 3:28 PM, BanjoNut wrote:

    I'm just a common guy that wants to cancel my Cable subscription, give back my DVR now that TimeWarner changed to OCAP boxes that will not accept eSATA drives, and switch to something that gives me content from a highspeed Internet connection. I think that TiVo Premiere sounds like it would do just the right thing for me. But, I am not sure. I do not require awesome HD on my TV. But, I do have an HD TV and would enjoy the Internet's HD media attempts over the non-HD stuff.

    Could any of you much experienced folks help me out with advice? THANKS!

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