TiVo to Shift Emphasis from Rebates; Plans Lower-Priced HD PVR

Rogers championed $180 and $220 mail-retail rebates last year to spur single- and dual-tuner PVR sales. But in the call he conceded the promotion’s “lack of effectiveness” in Q4 was partly to blame for a decrease in net new subscribers to 101,000, from 183,000 a year earlier. The rebates were cut to $150 and $170 in Feb. for Series2 single- and dual- tuner decks, less generous than promotions that had made the PVRs free and $69 post-rebate, company officials said. Service cancellations rose to 62,000 from 38,000, and monthly churn jumped to 1.2% from 0.9% (CED March 8 p8), company officials said.

Although sales of TiVo’s $799 PVR that featured dual ATSC tuners and a CableCARD met the company’s “modest expectations,” they suffered from the high price. TiVo will introduce a lower priced model this year, but company officials declined to release details. The rebates were partly designed to help sell off of single-tuner product, but TiVo was saddled with $30 million in inventory at year-end, nearly 3 times the level a year earlier, analysts said. The inventory build-up forced TiVo to take a $2 million write-off for “excess component materials” not expected to be used within 12 months, CFO Steve Sordello said. TiVo didn’t disclose what the components were and a spokesman wasn’t available to comment. The write-down resulted in TiVo’s having Q4 hardware gross margins of negative $8.5 million, company officials said. TiVo had never previously finished a fiscal year with more than $12 million in inventory, said American Technology Research analyst Rob Sanderson. It incurred $14.8 million in rebate-related expenses in Q4.

“We will be highly focused this year on moving forward with a lower-priced, mass-appeal HD unit, which will allow us to much better participate in the HDTV trend,” Rogers said. “On top of that, minimizing subsidies will be a key goal for us with this product line as well.”

TiVo has long worked to reduce its exposure to hardware subsidies, going back at least to 2002 when it had a $100 mail-in offer on combo DirecTV/PVR products. The recent Q4 subsidy was partly responsible for a 49% rise in subscriber acquisition costs to $245 on average, along with “heavier advertising” and lower gross subscriber additions (163,000 vs 221,000 a year earlier), Sordello said. TiVo’s churn rose as 165,000 cumulative lifetime subscribers, who paid a $249 or $199 upfront fee, reached the end of the 4 years that the company’s uses for recognizing revenue from them, Sordello said. That was up from 100,000 a year ago, he said. TiVo ended the lifetime subscription program last year. Ending 4- year pacts lowers revenue $1-$1.5 million a quarter, company officials have said. About 50% of TiVo subscribers signed up in Q4 chose a plan that requires a 3-year commitment to the service and 33% of sales were produced online, Rogers said. About 50% of TiVo’s new subscribers are coming from among the 30-35 million analog basic cable subscribers, he said.

“We've learned that a rebate intended to create a ‘free box’ at retail, is not as compelling as the online offer,” Rogers said. “That’s because someone must part with $220 at the cash register, whereas online there is truly no charge at all.”

Analysts are concerned about how fast TiVo is losing DirecTV subscribers. DirecTV switched to NDS’s PVR platform last year, and 91,000 subscribers left the TiVo service in Q4, analysts said: DirecTV’s 2.8 million subscribers with TiVo will “erode quickly.” The subscriber departures could pose a problem for TiVo since DirecTV accounted for 16% ($8.5 million) of the company’s $53.5 million in Q4 service revenue, Anderson said. DirecTV stopped selling the TiVo service earlier this year and accounted for a “small amount” of distribution in Q4, Rogers said.

TiVo is hoping to offset the loss of DirecTV subscribers with the launch its service through Comcast and Cox this year, company officials said. Comcast completed engineering trials in Jan. and began technology tests last month, Rogers said. The goal is for Comcast to introduce the TiVo service in a single “sizable” U.S. market “sometime in the spring” and then expand it nationwide, Rogers said. A Comcast spokeswoman confirmed launch plans, but declined to disclose pricing or where the service will start. The TiVo PVR platform is being integrated with the GuideWorks interactive program guide Comcast jointly developed with Gemstar-TV Guide, the spokeswoman said. It will be downloaded to Motorola digital cable boxes installed in 75% of Comcast’s markets, she said. Cox also is expected to introduce TiVo in its markets this year and recently signed a “follow-on” agreement with the company, Rogers said. A Cox spokesman wasn’t available for comment at our deadline. TiVo also has a distribution agreement for its PVRs with Cablevision Mexico, which has about 500,000 subscribers in Mexico City and is expected to begin marketing the service Q2.

Analysts wondered whether sales through Comcast and other MSOs might eat into TiVo’s stand-alone business. But Rogers maintained that some features like its pact with Amazon’s Unbox video download service will offset that. Though Comcast’s offering will be “superior” to DirecTV’s, many TiVo features developed last year will differentiate it from “generic” PVRs, Rogers said. Comcast is focused on winning back customers from satellite operators, making “stand-alone issues far less” significant, he said. TiVo ended fiscal 2006 with 1.72 million stand-alone subscribers, up from 1.49 million a year earlier, but well short of the 3 million that Rogers last year said was “within our grasp” (CED March 10 p1).

Rather than being competitors to TiVo, MSOs will be “marketing components” for the service, Rogers said. MSOs will “help consumers understand the differences between TiVo and generic alternatives, in contrast to the current practice which often create confusion,” Rogers said. With hardware subsidies being reduced “over the course of the year,” TiVo will embark on a broad advertising campaign this year that will likely tie in its alliance with Amazon.com’s Unbox service, Rogers said. It hired Kaplan Thaler Group to develop the ad campaign, he said. TiVo also is seeking to boost ad sales on its service, which was less than 10% of its Q4 service revenue, analysts said. Though Unbox offerings for TiVo subscribers will be available only by PC at first, they will move to the TV screen this year, Rogers said.

TiVo also is beginning the next round of a legal battle with EchoStar at the U.S. Appeals Court, Federal Circuit. A federal jury in April awarded TiVo more than $74 million after finding that EchoStar marketed PVRs that infringed a patent covering technology used for pausing live TV and record one show, while watching another. A federal judge in Nov. rejected EchoStar’s motion for summary judgment and a new trial, setting the stage for the appeal. EchoStar is expected to file its brief by April 18, and TiVo is to submit its documents by midyear, Rogers said. An appeal is expected to take 12-18 months.