Time for TiVo to Say Ta Ta

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 |  Includes: AAPL, AMPX, AMZN, DIS, GE, MSFT, NWS, SATS, TIVO
by: Joel West

We discussed the prospects for TiVo in class last week, as I’ve done many semesters for the past few years with students in my technology strategy MBA class. As the company moves into its final act, the picture is becoming quite clear.

As in most semesters, there were some highly loyal TiVo (NASDAQ:TIVO) fans in the room. TiVo had an early and unusually high adoption rate here in Silicon Valley. However, loyalty is not enough. My grad school classmate, Hope Schau (now at Arizona) published several papers (including an oft-cited “A” journal paper) on how Apple (NASDAQ:AAPL) Newton owners were highly loyal — but that didn’t make it a viable business.

As we discussed TiVo’s “challenges” — euphemism for problems — it seems to me that TiVo faced a perfect storm, buffeted by old substitutes, new substitutes, and commodity low-cost rivals.

The old substitute is VCR: that's how I’m watching 24 this semester while teaching my Monday night honors class. Eventually the old substitute will die off, but then along came the new substitutes. There’s Fox.com (NASDAQ:NWS) (ABC.com (NYSE:DIS), NBC.com (NYSE:GE), etc.), Hulu, the iTunes and Amazon (NASDAQ:AMZN) stores. There’s even the build-your-own computer solution (e.g. Windows Media Server (NASDAQ:MSFT)) which right now is no appliance, but could come back to haunt them some day.

Then there’s the commodity rivals, made by Asian rivals and sold by the cable and satellite TV companies. The cable companies are also promoting an alternate Video-on-Demand solution to replace time-shifting of mass-market content.

The industry has high economies of scale — particularly with the online program guide — but the competing solutions have enough scale that TiVo’s market share lead no longer serves as an entry barrier. There is also the problem that broadcast television — the content that DVRs time shift — is clearly a declining distribution medium, if not source of original content.

With all these substitutes, there really wasn't enough time to get market awareness and reduce prices to reach the mass market before the DVR product became a commodity. Yes, TiVo had a better run than Ampex, but it’s yet another example of pioneer disadvantage — the pioneer pays the cost of creating a market and doesn’t reap the benefits. (Peter Golder and Gerry Tellis demonstrated many examples of this almost 20 years ago).

Yes, TiVo got a nice stock bounce out of a favorable appeals court decision in the EchoStar (NASDAQ:SATS) patent lawsuit. But, IP or not, TiVo is boxed in on all sides, like a farmer who finds urban sprawl has paved over his formerly bucolic neighborhood.

The time for fighting the good fight on a point product is long since passed. Like other “Silicon Valley” companies (not clear if this fits), the value is created by diversified rivals who can cross-promote and integrate various complements and substitutes.

While the exit is almost certainly selling the company, I can’t predict who would want to buy at a premium to current prices: whether a consumer electronics company, settop box company, cable TV company, EchoStar, or even Microsoft (which did, after all, buy WebTV). But I think it’s time for TiVo shareholders to ask what the end game is, because the alternative to an orderly exit is a disorderly one, not living happily ever after as an independent company.