Foolish Forecast: TiVo Boots Up

Power on, Fools -- the granddaddy of digital video recording reports earnings on Tuesday afternoon, after the close of trading.

Investors are feeling somewhat less than bullish on the contents of tomorrow's third-quarter earnings report from Motley Fool Stock Advisor recommendation TiVo (NASDAQ:TIVO). Although analysts expect the company to narrow its year-ago quarterly loss of $0.33 and lose "only" $0.24 per share, that's a considerably worse result than they were predicting just three months ago. In fact, the Wall Street gang has been steadily lowering its estimates for the company's profits all along the past three months, predicting an $0.18 per share loss initially, then $0.23, and now $0.24.

The culprit is easy to find. Last quarter's earnings report included this little downer from TiVo:

"As a result of TiVo pursuing a more aggressive marketing approach in the second half of the year, TiVo will forgo the goal of sustained profitability by the fourth quarter." Just the thing to throw cold water on any optimism that might have grown out of TiVo's quarter-million-subscriber addition during the second quarter.

Of course, it didn't help that a month late, TiVo elaborated on its strategy for losing more money, when it described a plan to magnify its historical losses on hardware by slashing prices to $50 per unit. TiVo's aim, of course, is to trade those hardware losses for profits on the services line of its income statement. The more negative-margin boxes it can place in customers' hands, the more high-margin services contracts it can sign them to -- and as this Fool can testify, once a customer has experienced the convenience of a DVR, it's unlikely he or she will willingly return to watching TV the old-fashioned way.

That brings us to TiVo's other major problem: DVRs are fast becoming a necessity -- but TiVo-brand DVRs aren't, necessarily. TiVo currently depends on partner DirectTV (NYSE:DTV) to put the vast majority of TiVos in customers' hands. In the last quarter, 84% of the 254,000 new TiVo users signed up came via DirecTV. But DirecTV intends to stop pushing TiVos by 2007 at the latest and to begin suggesting that its customers buy boxes from DirecTV's fellow News Corp. (NYSE:NWS) subsidiary NDS (NASDAQ:NNDS) instead. When that happens, TiVo's subscriber growth could evaporate.

And that brings us to the one crucial bit of information to look for tomorrow. It's not earnings, or even revenues, that count -- it's subscribers. TiVo must prove tomorrow that, by selling its boxes at near-giveaway prices, it can move product without DirecTV's active assistance. Unless the company shows that most of its growth this quarter was external to its DirecTV partnership, TiVo's prospects will fade to black.

Now hit the rewind button and check our recent TiVo news:

• The Tube or Yahoo!
• Revolving Door at TiVo?
• TiVo Goes for Broke
• Oh No, TiVo

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