Friday, May 05, 2006
TiVo in the Network Era
TiVo currently operates in both hardware and software layers of the media and entertainment stack. Creator of the now ubiquitous digital video recorder, TiVo initially targeted consumers with the value proposition of “taking back control of your television.” Specifically they focused on the DVR’s unique functionality which allows users to pause and rewind and fast-forward recorded television as well as skip advertisements with the touch of a button.
TiVo initially partnered with subscription-based satellite TV provider DirectTV to bring advanced functionality to the service. On the other hand, cable providers refused to bundle Tivo with their service in reaction to TiVo’s positioning as a “ad skipping device.” At the same time TiVo’s direct competitor ReplayTV automatically removed commercials from recorded programs using a feature called “Adskip.” ReplayTV was sued by the networks, bankrupting its parent corporation Sonicblue. TiVo, by indirectly letting users skip commercials, was seen as a threat to their business model though no legal action was taken. Cable operators would later break ranks with the networks and change their opinion on DVRs.
Competition in the hardware layer
Echostar, owned by DirecTV rival Dish Network, developed an OEM digital video recorder and licensed this technology to other hardware OEMs. These OEMs were contracted by the local cable operators to develop PVRs for customer use. Cable companies began offering PVRs to customers for an additional monthly fee (~$15) and no upfront payment. TiVo sold its hardware in electronics retailers for upwards of $250. There was serious danger of TiVo’s hardware market becoming commoditized. Users of TiVo, however, remained loyal proponents of its user interface and information sorting/program recommending features which were lacking in the “hardware-only” PVRs offered by cable operator OEMs.
TiVo reacted to threats in the harware layer in several ways. First, it sued Echostar and recently won damages of over $75 million. Secondly, it partnered with online movie distributors Netflix and Blockbuster to provide its software and information frontend. Third, it adjusted its sales model by moving customer costs from up-front hardware sales to a more expensive subscription model with free hardware. This parallels the market realities as TiVo’s hardware position is untenable and the real value it offers is in its proprietary software. TiVo just recently penned a deal with longtime rival Comcast to offer branded PVRs to Comcast customers.
TiVo will ultimately have to leave the hardware layer – too many competitors have found ways around the TiVo patents. The concept of DVR/PVR is not unique, any personal computer with a TV input can perform the same task and, in fact, Microsoft is moving into this space with its
Competition from other “value-added data aggregators” such as Google and AOL in the software layer will be fierce in the future. With its advanced software, TiVo is ahead of the demand curve – mainstream
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