TiVo Thoughts After the Comcast Deal
"Boo keeps whispering other 'Verbs' he'd like to show me in my ear!"
It's just freaking maddening to own any stock that is so at the mercy of pretty much anything in a newspaper, good or bad. Such has been my life for the time I've been long TiVo (TIVO), which is both why I write about it so much and why I feel proprietary about the story.
Reading articles breaking the news that Murdoch owned a bunch of NNDS and, as a result, DTV may dump Tivo was pretty much my personal "I got you, Babe" for the 18-odd months going into last week (Like the song waking Bill Murray every day in the movie Ground Hog Day, in 2004 I seemed to wake up every morning to headlines telling me that I'd be taking a Tivo-Beating all day yet again... for the EXACT same reasons as I took the last one!).
For every season, Churn, Churn, Churn
For the cable and satellite providers, the issue is about churn. It's not "sizzle", what people want to watch or making customers happy. It's about keeping the cost of getting customers in check. The best way to do that is to get folks to stop dumping service.
That's all that really matters to TiVo bulls: TiVo reduces churn. Reducing churn is valuable to would-be TiVo partners. TiVo thus has value to MSO's, at some point and price. That's where the rubber meets the road in terms of customer love and "Tivo as a verb" and all that other stuff the Street and media like to mock. Every sentence you've ever read that had the basic point "TiVo bulls love the stock the way they love their TiVo boxes, but love isn't worth anything" (including this sentence and the one before it) were a waste of time.
Churn is the price MSO and Sat's pay to recover customers who drop service. You take the churn rate and deduct it from the gross-add growth rate. You multiply the churn customer count by SAC to find the amount of money needed simply to keep sub-numbers flat. Everything execs at MSOs and Sats love can be levered off keeping churn low.
The measure for "Love" is churn.
The reason the knock-offs were an enormous waste of money for MSO's was that the knock-offs don't reduce churn anywhere near the way TiVo reduces the churn for DirecTV (DTV). DirecTivo customers churn at a rate of about .2% per month. That's one full percentage point lower than the levels of churn for Comcast DVR customers (to take one example and please note that this rate isn't stated openly by Comcast or any other cable co.'s... but it can be worked out from the information they do give).
Back of the envelope
Breaking down using hypothetical math as it pertains to churn for cable and satellite companies (numbers are smoothed to make for easy math (for me), they are in the neighborhood of industry average):
- Assume a digital customer base of 10 million subscribers.
- Assume a Subscriber Acquisition Cost (SAC) of $800
- Assume existing churn of 1.75% per month.
- Assume that our MSO has the option of paying TiVo $1 per month or...
- Can produce a generic with set-top box makers Scientific-Atlantic (SFA) or Motorola (MOT) and some cost that isn't known but is high upfront, then saves the $1 a month that would otherwise go to TiVo (the co's hardware costs are the same regardless).
As the CEO of this company you could reasonably think to look at the situation along the following lines:
"I need net subscriber growth. If I don't get net subscriber growth I may be forced to take an absurdly lush golden parachute out of this place. Who needs the hassle of moving when the workmen are only just now finishing the gilding of my house here?
"I'm losing 175-freaking-thousand customers a month to churn. I got competitors up the whazoo, all of them targeting my little virtual monopoly on piping data into houses. Each customer I get costs me 800-bucks in promotion and gear. Taking my churn down to 1% would save me 60-million a month.
"My generic DVR customers are churning at 1.2% and I'm giving boxes away for free to get customers. DirecTV is stomping me on customer adds and is getting .2% churn out of their TiVo users. I want some of that but I don't like TiVo and don't want to pay them.
"Then again, my tech guys are asking for $50 million more for another upgrade of our TiVo knock-off that my tech guys swore could be re-created 'in a week of work, tops. I'm sick of dealing with that mess and if Echostar (DISH) loses in court to TiVo I'll end up paying anyway.
"I'm going to suck it up and pay TiVo then knock the snot out of DTV in ads promoting it. At worst, it nullifies DTV's TiVo advantage (which I don't think is the sole reason for the difference in churn but millions of dollars into trying to knock them off, I'm open to ideas). If DTV totally dumps TiVo I'll be alone with the DVR my idiot customers want for whatever reason.
"Either way, I can pay TiVo a buck a month then charge customers who use it $10 and make them pay for the set-top box. Seems hard for me to lose."
At least that's how I'd look at it but then, remember, I'm long TiVo.
Hoofy Vs. Boo Breakdown:
TiVo has been a beloved short for decent reasons. The argument is/ was:
1. They didn't get a cable deal. Every major MSO has rolled with their own version and they seem to hate TiVo for reasons vaguely known. (Bullish/ Hoofy retort: Ok. Fair enough. TiVo's relationships with the MSOs have been horrible. TiVo is thought of as "arrogant" and "stupid" in more or less equal measure. TiVo should have been able to convince the MSOs to save the R&D for reverse engineering knock-offs before the MSOs rolled out. TiVo couldn't do it. However, again, "it's about churn". The MSOs always seem a bit addled, like utility guys, but they had both anecdotal (surveys... "love") and financial ("churn") evidence that TiVo added value growing. DVR penetration rates remain low and TiVo can be uploaded into the knock-offs anyway. As they showed with the Love-Hate treatment of VOD, the MSOs do, in fact, change their minds if need be.)
2. The Free-Standing Business couldn't sustain them. (Hoofy Retort... it could do better but I pretty much agree. With the Comcast deal, however, TiVo once again has the cash flow to allow them to figure free-standing out. The "Who cares?" nature of this bear point becomes a real Boo-Killer if Comcast aggressively uses TiVo as a way to increase digital penetration. The best target customers for TiVo's free-standing business are more or less exactly Comcast's analog customers. This will be an interesting area to watch, in terms of the power-structure of the Comcast-Tivo relationship.)
3. DTV is dumping TiVo. (Hoofy's Retort: This point drove me nuts. First, because it seemed to break as News! On a weekly basis for over a year. Second because it made no sense. Third because it's true. Murdoch owns most of NNDS, who makes lousy DVRs for BSkyB. DTV has been rather obviously moving to using NNDS since the second Murdoch got control. The hold-up has been that NNDS can't seem to create even a working prototype. DTV's got some structural idiosyncrasies and TiVo owns the patents on making a dual tuner DVR work. This is a pretty substantial screwing of DTV shareholders by Murdoch, actually. DTV has had the best DVR on the market for 4 years and hasn't ever pushed it hard (at least until very recently... KILLING TiVo's free-standing growth). I personally think it's part of a bigger-picture erosion of customer focus at DTV. I think it's going to cost them their #1 satisfaction standing when the new JD Powers report is published. In any event, the Comcast deal 180s the power structure of the TiVo/ DTV relationship. If I were TiVo, personally, I'd be making DTV "Bark like the dogs" they are (ala Bugsy) or I'd walk.)
4. TiVo's Patents are Worthless. (Hoof's retort: That remains to be seen. Just because the generic DVR roll-outs are happening (rather slowly) doesn't mean this is a total non-factor. TiVo remains in court with Echostar, which looks like it will set the legal standard. It may not matter (b/c of the Comcast deal and the import of churn that I may have mentioned). The case will be heard in Texas in October. TiVo feels very strongly that they have the case dead to right but Charlie Ergen is NOT to be trifled with.)
The over-arching theme of the Boo scenario for TiVo was "DTV dumps them, no cable deal, free standing is worthless... the company goes to zero." The Comcast deal kills the chances of going to zero anytime soon. It makes DTV meaningless. It's set up such that TiVo and Comcast benefit from pushing the company as hard as possible in terms of penetration and promotion. It buys TiVo time to allow for development for other businesses (and the mistakes that will certainly be made toward those goals).
And if the company can get a CEO worth his salt, it means that TiVo should be able to lever themselves into having a stream of annuity-like payments coming from houses all over the country.
Throw a wildly emotional shareholder base, a huge short interest level and very widely reported nature of all of the above bearish points and I'm still liking my long position... adding back what I'd sold into the spike over the last week and adding a bit more to it this morning.
None of which should be in any way construed as advice. It's your book and that's not my business. Just walking you all through the process and thinking in the interest of sharing and education.
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