TiVo Inc. Case
By Mitch Casselman & John Nadeau
October 29, 2002
Carleton University Ph.D. Program - Dr. Tom Koplyay
Note: Analysis is based entirely on information from public sources
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Presentation Outline
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Company Background
Market Discussion
Competitive Picture
Situational Analysis
Strategic Direction
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2
Company Background
Product, Technology, Partners,
Investors, Government, Lawyers
and Customers
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3
Company Background Product
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TiVo Service Subscriptions -
monthly
$4.99 (recently reduced from $9.95) or
lifetime $249
Licensing arrangements for
Personal Video Recorders (PVR’s)
Sponsored content
Audience measurement research
Platform for electronic commerce
4
The TiVo Service represents what’s been billed as the Personal Television
Industry. Watch what you want, when you want!
PVR’s are designed and developed by Tivo, licensed for manufacture and sold
in retail channels as a consumer electronic device.
Seasonality – anticipate large growth of annual new subscribers during the
holiday shopping season.
Sponsored content delivers charter advertising and sponsorship revenue.
However, revenue by this source has been relatively insignificant.
Examples: Short films, Counting Crows Debut of Album
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Company Background:
Technology/R&D
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Pause and instant replay
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Planned R&D focus
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On-staff engineers
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Technology Risk
5
Pause and instant replay of live TV by storing information on a hard drive
Continued investment in the improvement and addition of features and functionality of current
products as well as design of new platforms
On-staff engineers in R&D now (previously contract based)
Technology Risk – can be devised in home on a PC with a large hard drive and video card or a
competitive technology solution. Overall, many competing solutions
5
Company Background Partners
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Manufacturing Partners
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Hughes Network Systems
Sony
Quantum
Phillips
Thomson Multimedia
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MANUFACTURING PARTNERS
Hughes Network Systems
Manufacture, marketing and distribution of personal video recorders that enable TiVo
Service in the United States
Sony
Manufacture, marketing and distribution of personal video recorders that enable TiVo
Service in North America
7 year deal to pay royalties on Sony video recorders incorporating TiVo’s technology (part
when shipped and another part when activated)
Given the right to sublicense mfg. in Japan
Quantum
Supply agreement for hard disks
Revenue sharing of subscription fees for devices with their hard disks
Philips
Manufacture, marketing and distribution of personal video recorders that enable TiVo
Service in North America
Awarded a subsidy by TiVo for each unit sold (part when shipped and another part when
activated)
Ceases mfg. TiVo recorders Jan 31, 2002
Thomson Multimedia SA
Manufacture, marketing and distribution of personal video recorders that enable TiVo
Service in the United Kingdom
Subsidy on a monthly basis for each unit sold
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Company Background Partners
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Service Partners
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AOL investment ($200 Million)
Discovery Communications and NBC
DirecTV
AT&T Broadband
BSkyB
Best Buy
Creative Arts Agency
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SERVICE PARTNERS
AOL investment ($200 Million)
3 year agreement to allow AOL TV subscribers access to TiVo services
AOL was issued equity for their investment
Discovery Communications and NBC
$8.1 Million in the form of advertising and promotional services
Additional $5 M paid to NBC for promotions
DIRECTV
Market, sell, and support the TiVo Service
To collaborate on R&D and utilize a portion of DIRECTV’s satellite network
Issued 3M shares for marketing services
Revenue sharing of DIRECTV/TiVo subscriptions
Comprises a “healthy” portion of TiVo subscribers
AT&T Broadband
Market, sell, and support the TiVo Service in Boston, Denver and Silicon Valley areas
Revenue sharing of subscription fees and advertising
BSkyB
Market, sell, and support the TiVo Service in the United Kingdom
Best Buy
exclusivity agreement to sell only TiVo branded Series2 digital video recorders (expires February 2003)
Creative Artists Agency
Marketing and promotional support of the personal video recorder
Given 67,122 shares of preferred stock as compensation
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Company Background Partners
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Research Partners
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Lieberman Research Worldwide
Nielson Media Research
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Research Partners
Lieberman Research Worldwide
Nielson Media Research
Develop ways of improving and measuring promotions and viewer
behaviour
First ever DVR-based panel established in August 2002 with
Lieberman
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Company Background Suppliers
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Single supplier dependency for key
components and services
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n
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CPU’s
MPEG2 encoder/decoder
secure microcontroller semiconductor device
program guide data
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Risk – should strive to develop a relationship for secondary suppliers in these
areas (possible for 10-20% of demand?)
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Company Background Investors
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Acqua Wellington North American
Equities Fund
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$13.8 million purchase of common stocks
Option to sell up to $19 million more
shares to raise cash (Feb 2002)
Crosslink Capital and New Enterprise
Associates are buying $25 million of
stock (October 2002)
Previous partners also major investors
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Company Background Customers
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Consumers
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464,000 subscribers (October 2002)
TiVo community Forum where customers can
engage each other and the company online
Hacker community is utilizing TiVo’s proprietary
software code to design a web interface
Advertisers
n
n
Relatively small portion of revenues
Experimenting with various ideas for sponsored
content (e.g. concerts for CD releases)
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Customers
Community development is good for loyalty and insight to help feature
development
Hacker community may be beneficial (as de facto imitators) to he lp promote
TiVo as a platform
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Company Background:
Sales & Gross Margin Growth
Total Sales
40.0
30.0
$US Millions 20.0
10.0
-
Beginning
exponential
growth?
Oct
2001
Jan
2002
Apr Jul 2002
2002
Quarter
Gross Margin
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What we’ve seen so far:
-Multiple products
-R&D focus on developing features for the core product
-Many partners, many are large players (AOL most significant, some hold
equity)
-Single source risk for some core components (Risk)
-Customer base is growing and showing signs of active involvement
-Advertising constitute a small amount of revenue
-Sales growth is high and margins are okay
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Market Discussion
Market Dynamics, Market Growth,
Government, Legal Situation
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TiVo’s Market is at the point of
Convergence
Broadcasting & TV
Software & Programming
TiVO
Electronic
Instruments
Communications Equipment
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Personal Television Market is located at the convergence of these 4 established
industries.
Broadcasting & TV – Content
Communications Equipment – Pipeline equipment
Software – run on equipment
Electronic Instruments – consumer products
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High Segment Growth
Projected Digital Television Penetration
350
Households
300
250
200
150
100
CAGR 29%
50
0
2001
2002
2003
2004
2005
2006
Source: Strategy Analytics 2002
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Digital growth is a proxy to show growth in new TV technology
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High Segment Growth
Projected Interactive Television Penetration
240
220
Households
200
180
160
140
120
100
80
60
CAGR 40%
40
20
0
2001
2002
2003
2004
2005
Source: Strategy Analytics 2001
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Interactive growth is a proxy to show growth in new TV technology
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Government Influence
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Legislative environment is not stable
and could change
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Copyright laws
FCC could alter regulations that affect
TiVo indirectly through partners
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There is a real threat that the gov’t will alter the copyright legislation and
create a barrier for TiVo. Consortium of broadcasters are lobbying for these
changes.
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Legal Situation
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TiVo
Intellectual Property
n Standards
n Consumer Class Action
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Competitors
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Replay TV
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Intellectual Property
Seven patents for pausing live television
Five lawsuits (StarSight, Pause Technology, SONICblue - x2,
Command Audio)
Standards
Consortium of broadcast and cable companies threaten to require
personal television operators to obtain copyright or other licenses (e.g.
Time Warner & Fox Television
Consumer Class Action
TiVo faces Class Action lawsuits stemming from IPO practices and
potentially misleading advertising
Replay TV (Competitor)
is being sued for harming the potential market and value of copyrighted
material.
Replay TV allows users to skip commercials while TiVo only allows
fastforward.
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Competitive Picture
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What we’ve seen in the market:
-TiVo sits between 4 large established segments
-High projected penetration of new TV technology (Positive)
-Legislation risk (copyright)
-Legal battle zone – Personal TV is potentially a disruptive technology
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Competition Looms Large
Broadcasting & TV
(EchoStar, DirecTV, BSkyB,
Cox, Liberty, MDU,
Walt Disney, AOL,
Newscorp)
Communications
Equipment
Electronic
Instruments
(NDS, Nagra Vision,
TiVO
(SONICblue, Sony,
Canal+, GIC-Motorola,
-Atlanta,
Phillips, Panasonic,
Scientific
Microsoft)
Viaccess-France
Telecom)
Software & Programming
(OpenTV, Microsoft,
Liberate Technologies,
Canal+ Group, NDS)
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lMany
big players with vested interest in the traditional business model
lIncestuous –
for example, OpenTV is owned by Liberty and has EchoStar,
DirecTV and BSkyB as customers
lDirect – Microsoft (UltimateTV), OpenTV, NDS, EchoStar
Communications, Cache Vision, Keen Personal Media, Sony, Moxi Digital
(supported by AOL) and SONICblue (ReplayTV)
lIndirect – satellite television, video on demand services, digital video disc
players, laser disc players, cable TV, Internet
lAdvertisers – competing against traditional media (print, radio, and
television)
lEchostar
has around 600,000 of its subscribers with DVR capabilities and
does not charge for the service.
lSony PlayStation 2 game console will have TiVo- like features using BroadQ
software to connect the PS2 to a PC and Snapstream personal video software
for the PC
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Competitors and Size
TiVo is a
very small
player, even
compared to
SONICblue
(a recent
entrant).
12,000
10,000
8,000
6,000
4,000
2,000
TiV
o
SO
NI
Cb
lue
Op
en
TV
ND
S
0
Ec
ho
sta
r
Number of Employess
Firm Size of Some Competitors
Competitor
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Glimpse of TiVo’s relative size to competitors
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Strategic Analysis
SWOT, Product Life Cycle, Porter,
SPACE, Value Chain Analysis,
Vulnerability, Product Matrix,
Technology Check, Financial Ratios,
Advantage Matrix
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Competition Summary
- Incumbents are big and there’s potential for a fierce fight since personal TV
strikes at the core of the incumbents’ business model.
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Strengths
• Partnered with many large established players for
quick entry and development in the US and UK
•High customer growth rates
•Still able to attract fresh capital (I.e. Oct 2002)
•Multiple potential revenue streams
Opportunities
•High market growth
•Sponsored content
•Market research data
•Electronic commerce
•Replay is drawing most legal attention
Weaknesses
• Single suppliers for key product components
•Over reliance on partners
•Separated from customers by partners
•Partners squeezing pressure on value chain
•Cannot make financial obligations without further
injection of cash
Threats
•Established players in traditional markets are
entrenched and will implement defensive
strategies to protect their market share (eroding
traditional strategic segment barriers)
•Legal challenges
•Legislative agenda could restrict opportunities
•Low barriers to entry (technology is easy to
replicate)
•Many competitors – many are heavy weights
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General summary of what we discussed
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TiVo Lifecycle
Tivo has entered the growth phase of the PLC
Introduction
Growth
Maturity
Decline
Sales are increasing at high rate, many new entrants, not yet
profitable, low barriers to enter, recent price reduction for
subscriptions
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Porter Analysis
Pay TV/Set-top Boxes (OpenTV, NNDS)
Pure PVR Co.’s (SonicBlue)
Broadband Internet
Multimedia Giants
Traditional Broadcast TV
Electronic Manufacturers
Personal
Television
Industry
Microsoft, Western Digital,
Seagate, Scientific-Atlanta,
Digeo (Paul Allen)
Satellite
Consumer
Cable
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Although typical for pressure to be coming from vertical areas, the market
dynamic is coming from all sides on the Personal Television Industry.
Not only is there pressure from all sides but these players are directly getting
into the Personal Television market or indirectly through ownership of another
player.
This is a market in transition.
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SPACE Analysis
Company’s
Financial
Strength
High
Low
High
Company’s
Competitive
Advantage
Defensive
Environmental
Stability
Industry
Strength
Low
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Environmental Stability is low
-rapid technological change
-Price range of competition is relatively high (Echostar free service)
-Barriers to entry are low (functionality can be set up on a computer, a number of
different patents to do the same thing)
-Many substitute products
Industry Strength is moderate
-High growth potential
-Technological know-how
-Overall, the industries are quite strong, but the ranking becomes tempered when
looking specifically at the Personal Television market.
Company’s financial picture is weak
Tivo is currently engaging an aggressive strategy that is not a good fit. The company is
trying to aggressively sign on subscribers, generate content, and conduct market
research.
TiVo is situated in an attractive industry but lacks the financial and competitive strength
to pursue a competitive strategy.
The SPACE analysis indicates that TiVo should consider a more defensive strategy than
the one they currently use.
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Value Chain Analysis
Traditional Value Chain
Research Feedback
Broadcasting
Delivery
Software
Equipment
Customer
TiVo Value Chain (vertical Integration)
Research Feedback
Broadcasting
Delivery
Software
Equipment
Customer
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These are the four primary areas of the market where TiVo participates –
Broadcasting & TV, Communications Equipment, Software and Programming,
and Electronic Instruments.
TiVo is striving to influence the whole value chain rather than focus on their
component where they excel. They are essentially trying to implement a
convergence model at the intersection of these industries.
-Broadcasting with sponsored content
-Although not trying to replace the Delivery channel, they are branded the
TiVo service to the end consumer
-The software to receive signals, record, and adapt to viewer preferences
-Equipment by designing and outsourcing the manufacturing of the “box” that
houses the software and large storage device.
-They are also getting into the feedback loop by conducting viewer panels and
collecting viewing statistics.
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TiVo Vulnerability Analysis
High
Impact of Threat
Defenseless
Endangered
Financially reliant on
AOL and others.
Rely on others for
manufacturing.
Vulnerable
Relatively little control
over customer base.
Prepared
Major partner has just
acquired a competitor.
Low
Low
High
Ability to React or Retaliate
Source: Rowe et al.
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BCG Product Matrix
Question Mark
Industry Growth Rate
High
Dogs
High growth rate
demonstrated in
TiVo’s rate of
customer
acquisition and
projected
technology
penetration.
Stars
Maturity
Low
Low
High
Relative Market Share
TiVo is not the
market leader.
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Although products in the growth phase are typically classified as Stars, TiVo
has not yet accomplished significant market share. There are other players
with a larger subscriber base. For instance, EchoStar has grown a larger base
by offering the service for free to subscribers (they just have to buy the
equipment).
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Technology Check
Technology Success Potential
High
Outsource or
acquire capability
Technological
opportunity is
present.
Grow/Protect
The company’s
technological
ability is
differentiated
by features.
Fair
Outsource
Maintain
Low
Low
Average
Company Technology Ability
High
Source: Rowe et al.
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Differentiated feature example - adapting to viewer preferences – “TiVo’s
Suggestions” option
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Financial Ratio Profile
Profitability
Losing Money
Very Low
Average
Very High
Liquidity
On the brink
Very Tight
About Right
Too Much Slack
Leverage
Negative Equity
Too much debt
Balanced
Too Much Equity
Activity
High Sales Growth
Too slow
About Right
Too Fast
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Current Ratio = 0.80
Quick Ratio = 0.75
They are not able to meet current obligations
$27M in cash
Shareholders Equity = -51M
Market Capitalization = $199.6M
Liquidity – w/o new investment in October of $25 Million, they were
essentially bankrupt. This injection represents their “burn rate” for a quarter.
Leverage – they have used up investors money and then some!
Activity is good since sales are ramping up. This is good.
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Number of Approaches to Achieving Advantage
BCG Advantage Matrix
Many
Fragmented
Business
Stalemated
Business
Specialized
Business
Volume
Business
Few
Small
Large
Potential Size of Advantage
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# of Approaches to Achieving Advantage
There are many ways that a firm could deliver Personal Television to their
advantage
-traditional TV with pay-per- view
-PVR
-PC’s (connect to TV or stand alone)
-Video Game console (X-Box and Sony Playstation)
It can be pursued from any of the four established industries, but each
advantage is relatively small. It is difficult to see at this point. Eventually, if
Personal Television is adopted, the position should migrate to another spot on
the matrix (volume business).
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Analysis Summary
n
n
n
n
n
Growth Phase of Product Life Cycle
SPACE Analysis suggests defensive approach
TiVo’s model is based on industry
convergence but the market’s not ready yet
TiVo is currently vulnerable financially
Proprietary technology represents a key
opportunity
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Strategic Direction
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Key Success Factors
n
n
n
n
Market Share
Which Standard/Business Model
Survives
Ability to Survive
Avoid Entrenched Players Wrath
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Market Share – must create a presence in the market to ultimately cross the
chasm
Which Standard/Business Model Survives – the technology to win the battle
over competing solutions will contribute to survival
Ability to Survive – financial resources and cash flow
Avoid Entrenched Players Wrath – big players already here that can fight hard
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Strategic Options for TiVo
1.
Status Quo
(Vertical Integration via Joint Ventures)
2.
3.
4.
Horizontal Integration
Concentration
Divestiture
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Status Quo (Vertical Integration)
Continue to grow the convergence business model
Work on developing advertisement and sponsored content revenue to
evolve differently than direct competitors (essentially becoming a
broadcaster)
Trying to capture value from across the value chain with such big
players could come back to bite TiVo
- TiVo really doesn’t have the financial resources for this course of
action.
Horizontal Integration
Purchase competitors to gain market leadership
- Again, finances restrict this course of action
Concentration - Focus on Technology Core
Expansion with product differentiation
Strive for platform leadership
Divestiture – Leave the market, dissolve the company or sell.
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Recommended Strategy
n
Focus on one thing and do it well
n
n
n
n
A defensive stance from current approach
Focus on technology development and licensing
revenue business model
Aggressive on promoting this position to establish
platform leadership
Anticipate a Merger
n
n
Once made attractive to an established player
TiVo will need help to Cross the Chasm at the end
of the growth phase
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NPD Strategies & the Life Cycle
Introduction
Growth
Maturity
Decline
Pioneer Strategy
First Mover
Advantage
N/A
N/A
N/A
Imitator Strategy
Strong Benefit
Decreasing Benefit
Only Useful if Cost
Advantages
Only Useful if Cost
Advantages
Rapid Innovation
First Mover
Advantage
Steal Competitors
Growth
Extend Life Cycle
Limited Benefit
Disruptive
Technology
Introduction
Create New Market
– First Mover
Advantage
Strong Benefit
Terminate
Incumbents
N/A
Pre-Announcement
Strategies
Financing Strategy
Perceptual Barriers
Standard Setting
Switching Costs
Strategic
Communication
Competitive Games
Strategic
Communication
Competitive Games
Partnering
Strong Benefit –
Absorptive Capacity
Strong Benefit –
Growth & Learning
Limited Benefit –
Cost Only
Limited Benefit –
Cost Only
Standard Setting
Cooperate until
technology
legitimation
Standard Set;Market
Segmentation &
Cost
Competitive Phase Erect Entry Barriers
Competitive Phase
Use of Platforms
Limited
Applicability
Strong Aid to
Growth
Critical Component
Of Survival
Weakens but some
Lasting Benefits38
Relatedness to TiVo
Imitator Strategy – TiVo was a fast second to the Personal Television market
after ReplayTV
Rapid Innovation – Competitors are coming into the market from all sides to
try and steal away growth
Disruptive Tech – Personal Television may be disruptive, however, the
incumbents have identified this potential threat and are positioning themselves
accordingly. Therefore, tough to terminate them!
Pre-announcement – TiVo actually pre-announced their product when Replay
TV came out first
Partnering – key aspect of the TiVo strategy since they are too small to carry
out the convergence strategy on their own.
Standard Setting – A Consortium of broadcasters (incumbents) are trying to
force a standard on the new technology (re: copyright) to reduce disruption to
their existing business model
Use of Platforms – Becomes important in the growth phase. This is where
TiVo should be focused on becoming the platform leader.
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TiVo Inc. Case
Australia Team
Mitch Casselman/John Nadeau
Note: Analysis is based entirely on information from public sources
39
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Porter Competitive Analysis
Managerial Capability
Industry Rate of Innovation
Technological Sophistication
Supplier Bargaining Power
Buyer Bargaining Power
Dependency on Inputs
Product Substitutability
Intensity of Competition
Ease of Entry
Industry Rate of Growth
0
2
4
6
8
40
40
Company Capability
Managerial
0%
Weak
Strong
100%
Managerial Factors
1. Corporate Image, Social Responsibility
2. Use of Strategic Plans and Strategic Analysis
3. Environmental Assessment and Forecasting
4. Speed of Response to Changing Conditions
5. Flexibility of Organizational Structure
6. Management Communication and Control
7. Entrepreneurial Orientation
8. Ability to Attract Highly Creative People
9. Ability to Meet Changing Technology
10. Ability to Handle Inflation
11. Aggressiveness in meeting competition
12. Other
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Company Capability
Competitive Factors
1. Product Strength, Quality, Uniqueness
2. Customer Loyalty and Satisfaction
3. Market Share
4. Low Selling and Distribution Costs
5. Use of Experience Curve for Pricing
6. Use of Life Cycle of Products and Replacement Cycle
7. Investment in New-Product Development by R&D
8. High Barriers to Entry into Company’s markets
9. Advantage Taken of Market Growth Potential
10. Supplier Strength and material availability
11. Customer Concentration
12. Other
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Company Capability
Financial Factors
1. Access to Capital When Required
2. Degree of Capacity Utilization
3. Ease of Exit from the market
4. Profitability, Return on Investment
5. Liquidity, Available Internal Funds
6. Degree of Leverage, Financial Stability
7. Ability to compete on prices
8. Capital Investment, Capacity to Meet Demand
9. Stability of Costs
10. Ability to Sustain Effort in Cyclic Demand
11. Price Elasticity of Demand
12. Other
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Potential for Leveraging Customer Value
Corporate Development
Matrix
High
1. Watch
and Wait
4. Losers
Low
Low
2. Winners
3. Unstable
Cash
Bonanza
High
Achievable Competitive Cost Advantage
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Z-Factor
n
n
n
n
Formula developed by Edward Altman
in 1968 to predict the company survival
for manufacturing companies
Z = .012 A + .014 B + .033 C + .006 D
+ .999 E
Z = .765
Less than 1.81 therefore significant risk
of bankruptcy
45
Z = .012 A + .014 B + .033 C + .006 D + .999 E, where
A = working capital/total assets (%)
B = Total retained earnings/total assets (%)
C = Earnings before interest and taxes/total assets (%)
D = Market value of equity/book value of total debt (%)
E = Sales/Total Assets
In some cases the z-factor can be approximated with the equation sales/total
assets.
Companies with a z- factor less than 1.81 have a significant risk of bankruptcy
Companies with a z- factor of 1.81 to 2.99 are in a zone of ignorance
Companies with a z- factor greater than 2.99 have minimal chance of
bankruptcy.
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