TiVo: The problems and their solutions
It's not too late to save TiVo; here's how!
Rudderless DVR pioneer TiVo (TIVO) is tacking on a quarter today despite a spate of research reports noting... brace yourselves... that the relationship with DirecTV (DTV) may be "troubled" and that there are concerns regarding the strategic vision of the CEO (who announced his own departure yesterday).
While I'm not a big fan of piling on analysts I would offer that the 30-odd percent decline in the stock in '05 to date reflects a certain amount of concern on the DTV relationship. DTV's announcement last week of their plan to replace TiVo with a product from NDS (NNDS) was also a decent clue that the market had sniffed out this problem.
William Blair's David Farina issued a report which stands out in terms of proactivity by considering various scenarios in terms of strategy and breaking the company down from the perspective of a buyout candidate.
Update: I called Mr. Farina this morning to touch base on the general TiVo smackdown and the direction of the company. By way of disclosure, David and I have shared a long-time frustration in trying to stand up for TiVo in the face of the company's persistant habit of making us both look like buffoons with poor execution of incomprehensible strategic initiatives.
In an expletive-laced joint tubthumping tirade we ran through some of the issues and opportunities in front of the company. The highlights follow; paraphrased and jumbled in terms of attribution... hey, I'm not Larry King (I'm taller, have had only one wife and have no Emmy's or best sellers, among other differences). If anything below offends the reader in any way, attribute it to me:
The DirecTV Relationship: Watching TiVo insist that all was well here for the last year, even as DTV openly smacked TiVo around at every opportunity, has been simply brutal. It's an experience akin to watching a buddy who is the only one on earth not to realize that his/her girlfriend/boyfriend is pure, fire-burning evil. TiVo designed (and patented) the software interface for a dual DVR that remains the best in the industry. It reduced DTV's churn by more than 100 basis points and gave DTV an enormous head start in the most effective MSO enhancement in the last decade.
DTV has thanked TiVo by dumping them in favor of Murdoch-controlled NDS; a company which produced a bug-laden DVR for B-Sky-B (BSYBF) and which seems to have yet to deliver a working prototype DVR for DTV after working on the product for over a year. I mentioned the part about the 80% NDS stake, right? That's just country hard-ball, Ozzie style, baby.
The obvious (too obvious?) play is the desire to pound the value of TiVo down prior to swallowing them whole. I can respect that in a "You know, that Atilla was one really bright and successful cannibal!" way. The head-scratcher is why on earth DTV would blithely swap out a product already in use by 20% of their best (least churning, highest arpu) customers in favor of something that doesn't yet work. How does that strategy benefit the DTV shareholders who don't own 80% of NDS?
Solution: The same thing I'd advise my hypothetical friend in the bad relationship... the same thing the Don told Johnny Fontaine... grab some canolli and stand up for yourself. DTV needs TiVo, like it or not. They have nothing else that works and nothing even in the design process to replace TiVo Hi-Def.
The market is writing this relationship off as dead anyway. TiVo should take their ball (and patents and hi-def) and go home while they still have any "hand" at all in the relationship. What's gonna happen? Will DTV relentlessly hammer TiVo on price, inexplicably fail to promote their product for years then dump them for some unproven competitor in a Putin-looking inside deal?
Cable: The third-party STB for 2006 is a nice idea but neither David or I have any optimism about the FCC pushing the mandate through on time. The issue is simply too important to the people with the deepest pockets, in the form of the cable guys, who very much want to control their own STBs.
Solution: Their stance on cable has been part of TiVo's dual-pronged "they'll respect us if we offer no threat whatsoever!" strategy (along with DTV, noted above). Over 60% of cable customers have stuck with analog boxes, over 10 years after digital cable emerged. That matters a LOT to the cable companies and is a large part of why they're so frantic about bundling everything. Cable needs users to switch to digital.
Tivo needs to go after the analog customers. If the free-standing division of TiVo is their future, and for now it is, why have they let the product go stale? Why on earth would TiVo give rebates on a tired product rather than developing dual-tuners, new features and just generally making analog as sticky as possible until cable blinks?
Mike Ramsay's Insistence that TiVo "Isn't for sale": I missed the announcement that the company had gone private. If you've got a ticker you're for sale. End of story. [See also: "What, he's still here?"]
Whoever the new CEO is his first job is to pick up the phone and make some calls. Start with Steve Jobs and go from there. The message is "There's a new sheriff here and he's open to chattin' about most anything". Dump the absurd poison pill and start shopping it (NB: Dump outloud but shop it quietly... shhhhh, not an auction). Not to get all picky or anything but it's actually the company's fiduciary responsibility.
As a general point, it's hard to see how any strategic directional change would be for the worse. The window is slamming shut. As the Sirius (SIRI... two million-odd subs... huge fixed cost... $13-odd BILLION mkt cap) hire of Mel Karmazin demonstrates, the market is willing to accept almost any pay package provided it's granted to someone good. The board of TiVo can recover from sticking with current management for a bit too long with the right hire... but it's got to be a Montana-in-the-third-round type of pick.
Or they can hire someone to finish the task of driving the company to penny-stock-dom/ non-existence. The decision is that important to the company and its shareholders (of which I am one).
And of course, none of the above should be considered Advice on the stock, long or short... it can, on the other hand, be considered entirely unsolicited, respectfully offered advice for TiVo, should they choose to listen.
[In exchange for David's generous willingness to chat (and to let me share hi-lights) I agreed to note the following:
William Blair & Company LLC has received compensation for investment banking services from the company in the last 12 months, or expects to receive or intends to seek compensation for investment banking services in the next 3 months from the company.
One or more of the analysts responsible for covering the company mentioned in this report owns shares in the security (and so does Macke).
William Blair & Co is a market maker in the security of this position and may have long or short positions.]
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