"How long must we sing this song?"
-- U2, "Sunday Bloody Sunday"
Rich, I can do the U2 tango with the best of 'em. It looks as though you, like most of the market these days, took one look at TiVo's
Year-over-year comparisons of TiVo's results are about as fair right now as comparing apples to pomegranates. At the end of 2005, the company changed its pricing policy rather radically. The new strategy involves heavy hardware discounts -- giving the boxes away for free, essentially -- in return for long-term service commitments. As a result, gross margins are shrinking, as Rich pointed out. The move also hurts the cash flow figure by piling up truckloads of unearned revenue. That's money on the balance sheet, collected for future services.
The upshot of the policy change is accelerated customer growth in return for increased upfront customer-acquisition expenses. As long as these new subscribers stay with their TiVo plans, that's a fair tradeoff in my eyes -- and the company sports one of the lowest subscriber churn figures in the entertainment business. It's lower than the much-admired 1.6% monthly churn at Netflix
TiVo consistently experiences churn rates of less than 1% per month. That's what you get for building a great product. Well, that and a bunch of enforceable patents with massive earnings potentials of their own. Take note, Apple
Sure, TiVo is a Tweener, but there's no death rattle here. You're looking at a Rule Maker in the making. If the court system and patent office do their jobs, the teeming hordes of competitors will eventually end up paying TiVo handsomely for the right to use their intellectual property. When the victor surveys the conquered field, that will truly be a Bloody Sunday. Wipe your tears away, Rich. TiVo will make it.
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Fool contributor Anders Bylund is a Netflix shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is an unforgettable fire.