TiVo: Shareholders Stuck In the Wrong Mister Rogers' Neighborhood

Shareholders in TiVo Inc. (TIVO), a provider of digital video recorder services, have watched the value of their shareholdings tread water for more than three years, amid ongoing patent litigation, increasing competition from generic digital video recorders [DVRs], disappointing profitability, increasing subscriber churn (cancellations of recurring subscriptions), and falling barriers to competition with the introduction of Webtv (such as AppleTV and NBC.com) and digital server Video-on-Demand offered by cable companies (such as Comcast (CMCSA)).

Corporate Strategy Issues
TiVo is trying to re-boot subscriber growth by (i) offering increasingly differentiated services, such as a new service feature called TiVo KidZone (introduced in fiscal 2007), which is a personalized TV area where children are able to find quality live or recorded programming that their parents deem appropriate; (ii) deploying a software version of the TiVo service that could be integrated on certain third-party DVR platforms (of satellite and cable operators) in order to promote the mass deployment of devices capable of running its proprietary service.

Management’s existing strategies of leveraging the TiVo brand have yielded little in terms of subscriber gains or top-line growth. TiVo-owned subscription gross additions for the fiscal year ended January 31, 2007, were 429,000, which was down 13 percent from the fiscal year 2006.

TiVo-owned Average Revenue per Subscriber [ARPU] per month for the fiscal year ended January 31, 2007 decreased 5 cents year-over-year to $8.78. The decrease in TiVo-owned ARPU for fiscal 2007 was due to the increase in fully amortized and still active product lifetime subscriptions.

Subscription Acquisition Costs increased $71 per subscriber to $267 for fiscal 2007, primarily due to contractual revenue-sharing in place with some of its retail customers and consumer electronics manufacturing companies, a new multi-tiered pricing structure in exchange for a customer commitment to either a one, two, or three year service plan, and higher hardware rebates offers available to consumers.

During the fiscal years ended January 31, 2007, 2006, and 2005, TiVo’s net losses were $(47.8) million, $(37.0) million, and $(79.8) million, respectively. As of January 31, 2007, the Company had an accumulated deficit of $(741.8) million.

Time to rewind--acquisition costs almost 30 times ARPU does not make for a sustainable business model.

Another legitimate concern--given churn--even if TiVo were to lower price of its hardware, there just might not be enough customers interested in this in-home entertainment format!

Corporate Governance Issues
As TiVo’s fortunes remain closely linked to its dependence on its current distribution channel-- major retail partners include Best Buy (BBY), Circuit City (CC), and Radio Shack (RSH)—is it no wonder that CEO Thomas S. Rogers has a contractual agreement that states that he can perform his executive duties at either TiVo’s offices in Alviso, California, or at an office to be maintained by TiVo for Messer. Rogers back in New York City?

Pursuant to his employment agreement, the Company provides Mr. Rogers with air travel from New York City to Alviso, California, a furnished apartment within 15 miles of its Alviso, California offices, an automobile for Mr. Rogers’s use while working out of the Alviso, California offices and reimbursement for other out-of-pocket expenses while “on company business.”

TiVo paid their CEO a salary, cash bonus, and stock grants/options of $750,000, $303,000, and $2.32 million, respectively, in fiscal 2007.

In addition, Mr. Rogers received $38,472 for housing and living expenses (in Alviso) and $21,631 in family travel-related expenses. Tivo reimbursed him $72,182 in tax gross up payments made in connection with these taxable perquisites, too.

TiVo shareholders are living in the wrong Mister Rogers’ neighborhood. And CEO Thomas Rogers cannot placate angry shareholders over continuing management missteps by whistling to them a toddler’s tune. Can you blame Mr. Rogers for not wanting to leave New York?

What do you do with the mad that you feel
When you feel so mad you could bite?
When the whole wide world seems oh, so wrong...
And nothing you do seems very right?

What do you do?
Do you punch a bag?
Do you pound some clay or some dough?
Do you round up friends for a game of tag?
Or see how fast you go?

It's great to be able to stop
When you've planned a thing that's wrong,
And be able to do something else instead
And think this song:

I can stop when I want to
Can stop when I wish.
I can stop, stop, stop any time.
And what a good feeling to feel like this
And know that the feeling is really mine. – Mister Rogers’ Neighborhood [Real Audio File – What Do You Do?]

Full Disclosure: David J. Phillips does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

TIVO 1-yr chart:

Comments

[Janet:]

So the world is going digital. Fine.

I have been a Tivo customer, devotee and advocate since their service was introduced to me (3-4 yrs ago +/-) and before they had any competition (DVR).

I called to disconnect one of my two Tivo accounts earlier in the year, as the box was malfunctioning (a Tivo box). I was convinced by a zealous customer service agent to maintain the 2nd acct as they would send me a "deeply reduced price" replacement box that had added capability (tape two shows at once--wow!)

Come to find out this feature is rendered useless in the new all-digital world we are entering.

Talked to three Tivo customer service reps at Tivo today to find out that none of them are empowered by the company to recognize that the relationship with me -- a longtime, loyal customer, is more important than a 30 day return period; or is empowered to do whatever is necessary (very little, in fact) to maintaining me as a devoted customer and keep me from moving over to the competition.

I am deeply disappointed, but also warn senior management and, more importantly, I warn share-holders that this company is doomed for failure. While they might have at one time, they no longer "own the market," (DVR) and letting customers like me go without a fight is a clear signal that the competition has the edge.

Jan 10 09:23 PM