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TiVo Ready to Fast Forward?

TiVo created a new product category: the digital video recorder. Here's how CEO Michael Ramsay believes the company can fight off the forces of commoditization.

Users of the TiVo digital video recorder know well the orange button on the remote control that allows them to pause live TV. So you wouldn't blame TiVo CEO Michael Ramsay for wishing he could push a similar button to pause the forces of innovation and competition that threaten TiVo's growth.

Speaking to the Harvard Business School's High Tech and New Media Club on November 8th, Ramsay outlined a roadmap for the next ten years, which envisions the TiVo system becoming the user interface for the digital living room, the one place where consumers can access, store, and manipulate not only TV, but also broadband content, music, videos, photos, satellite broadcasts—everything digital that flows into the home.

"This area is ripe for innovation, and the idea that the DVR (digital video recorder) will become the integration point is compelling," Ramsay said.

Founded in 1997, TiVo created the DVR category now used by some 2 million subscribers, a number that has doubled each year. TiVo allows users to easily save and replay TV programs using the system's hard disk drive, as well as skip commercials and share content via the Internet. Its customers are rabidly loyal, and the company's brand recognition is high, thanks in part to many celebrity endorsements.

But TiVo appears to be running out of time. In its fiscal year that ended in January, the company lost $22.4 million on sales of $141 million, which was followed by two more quarters of losses. What's worse, competitors are surrounding TiVo on all sides. Consumer electronics makers including Sony and Apple are aggressively pursuing "digital home" strategies. Cable service providers, too, are eyeing their own DVR or similar services such as video-on-demand. Just a few hours after Ramsay concluded his remarks at HBS, Microsoft and cable giant Comcast announced deployment plans for "Foundation": a digital set-top box software that creates DVR capabilities.

The idea that the digital video recorder will become the integration point is compelling.

Critics say TiVo's DVR is about to become commoditized—some companies give away DVRs free to customers—but Ramsay thinks there is a lot of life left in the old box. And while some commoditization is inevitable, Ramsay acknowledged, the bigger trend is that the DVR is becoming a platform for delivery of digital entertainment and services to the home.

He drew an analogy with the Web browser which, when introduced, sold for forty dollars. But as the Internet developed, browsers not only became free, but also became platforms for companies including Amazon.com and eBay to run billion-dollar businesses.

The need for a digital command center in the home is apparent, Ramsay said, pointing out the myriad of consumer electronics products creating digital content: PCs, iPods, digital still and video cameras, satellite radio and TV, PDAs, cell phones, and MP3 players, to name a few. The TV, coupled with the TiVo interface, could be the gateway that allow these products to talk to each other and for users to share content—whether it be a family photo or a TV show—with friends over the Internet.

Ramsay also predicted a fundamental change in TV entertainment over the next five years. Some 20 percent of TV programming will be broadband rather than broadcast, and will include specialized digital content (think games, other forms of interactive entertainment, and customized shopping) that broadcasters can't offer over ordinary cable lines.

Another tech trend favoring TiVo: the arrival of the "CableCARD." CableCARDs allow properly equipped TVs to access cable programming without a set-top box, which Ramsay predicted will disappear within seven years. That would remedy a frequent complaint of many TiVo users, who must resort to a clumsy workaround to get their TiVos to work with cable set-tops. "This would be a great boon for us and customers," Ramsay said.

Competitors in the race to create the living room digital hub don't have the head start that TiVo does, Ramsay said. For one thing, every TiVo box is digital-ready and wired for broadband, he said. Cable providers don't have the economics to make services such as video-on-demand compelling, and computer companies haven't mastered the interface and technologies that would make the services crash-proof and easy to use. Microsoft, he said, has the resources to compete, "but they don't have the attitude."

Looking ahead ten years, TiVo's business model will be much different, Ramsay continued. Most of the company's revenue today is derived from subscriber payments ($12.95 per month), followed by hardware sales and advertising. In ten years, Ramsay believes, the model will be one-third subscribers, one-third advertising and advertising research, and one-third "premium services" to customers.

The advertising concept is an interesting one for TiVo, because part of the appeal of the service for consumers is the ability to bypass TV ads. But what advertisers like, Ramsay said, is TiVo's ability to tell them exactly what its 2 million customers are watching and when. In the end, DVRs make advertisers more effective. "You'll still get a $60 billion ad spend on TV, maybe more."

And TiVo provides special venues such as interactive advertising for advertisers to reach its customers. The difference is that the user decides whether to watch the ad or not. "Forcing you to watch ads is gone, history," Ramsay said.

The company also has plans to expand overseas, eyeing China, Japan, and the United Kingdom at the start, he said.