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The Case:
Since TiVo launched in 1997, it has been consistently applauded. The company name is used by consumers as a verb (to “TiVo” a show is to record it for later viewing), and customer satisfaction is off the charts. But TiVo has never generated a profit nor come close to winning the number of customers it originally expected. The company is now on the brink of profitability – but is also highly vulnerable.

The story of TiVo is a made-for-TV drama – and a good one. Few corporate histories better illustrate the fact that companies can make groundbreaking products but fail to make money. In its eight years, TiVo has struggled with a fundamental weakness: to build its customer base, it has had to cede its customer relationships to its partners. That flaw has made TiVo vulnerable to the vicissitudes of the fast-changing market for broadcast media.

That wasn’t supposed to be the way the story went. After the company formed in 1997, its then president, Mike Ramsay, claimed that TiVo “is changing the paradigm of television.” TiVo gives subscribers the ability to save television programs to digital video recorders (DVRs) for later viewing. It also does other clever things, such as recommending shows to subscribers based on their viewing behavior.

By the summer of 2000, despite slower-than-anticipated retail and Internet sales, TiVo seemed to have the cable and media relationships in place to sell millions of its DVRs. Cox Communications, NBC, Disney, and CBS had all invested in the company, and satellite broadcaster DirecTV and cable company Comcast had agreed to distribute TiVo DVRs to their customers.

Skip ahead to 2005. The company is still losing money, and the partner that is fueling most of its growth – DirecTV – will soon promote a service that will compete with TiVo. What happened?

Going It Alone
When it started in 1997, TiVo (whose officers declined to be interviewed for this story) saw an opportunity to make the experience of watching TV as controllable and personal as the experience of using a PC. This was possible largely because of the rapid improvement of storage technology: hard drives that could record hours of video were becoming affordable. Also, advances in data compression algorithms made it possible to capture video streams in real time.

TiVo’s product was a VCR-sized box that could continually capture an incoming television signal, enabling users to pause and rewind live broadcasts. The box allowed users to schedule recording in advance by selecting programs from an on-screen guide and could even record all upcoming episodes of a given show.

TiVo’s user interface for managing recorded programs set it apart from early competitor ReplayTV, which now has less than one-third of TiVo’s market share. “People who got a TiVo were extremely pleased with it,” says Josh Bernoff, an analyst with Forrester Research.

Word of mouth helped to increase TiVo subscriptions by 86 percent between 1999 and 2000, but according to Bernoff, that may have been in spite of TiVo’s marketing strategy. In 2000, when the fledgling company had revenue of $3.6 million, it spent more than $150 million on advertising and sales and ran a television ad that featured network television executives being thrown out windows. “This angered the networks with whom TiVo was trying to partner but did not help consumers understand what the TiVo did,” says Bernoff.

TiVo had a hard time convincing consumers that they should pay $9.95 per month – after purchasing the recording device – to watch content that they were already receiving anyway, adds Adi Kishore, a senior analyst with the Yankee Group. Weak sales of TiVo boxes surprised many. In 2000, Forrester Research forecast that by 2005, 53 million homes would have DVRs. According to analysis firm Magna Global, just 1.2 million DVR subscriptions were sold in the first quarter of 2005.

In 1999 and 2000, despite its small audience, TiVo signed up several network partners and advertisers – including NBC, HBO, Starz Encore, and Showtime – to offer interactive, enhanced programming and advertising through TiVo boxes. But this didn’t do much to move the needle. By the end of 2000, TiVo had fewer than 150,000 subscribers. It needed another way to get customers.

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