• by Paul Gough , August 21, 2003

In what could be a fundamental shift in business strategy, TiVo said it's in discussions to launch its branded digital video recording service with cable operators.

In its second-quarter conference call with analysts Thursday afternoon, TiVo President Marty Yudkovitz confirmed the company had been discussing with MSOs a branded DVR service targeted at cable customers. He declined to name the MSOs or put a timeframe on the discussions but said it was one of TiVo's major efforts.

"The discussions with most major MSOs based on this approach are right on track and where we'd expect them to be," Yudkovitz said.

A pitch to the cable industry could be as profitable as TiVo's deal with satellite TV provider DirecTV, which accounts for 41% of its 793,000 subscribers. More than 56,000 DirecTV subscribers signed on for the TiVo-enhanced DVR service in the three months ending July 31, a little less than twice as many standalone subscriptions TiVo gained during the period. It's also poised to grow following an intense marketing effort among DirecTV subscribers launched last month.

In the first years of its existence, TiVo had shied away from aligning itself with the cable industry, partly because of other priorities and partly because a DVR wasn't on the MSO's radar screens until recently. For TiVo, it became a priority only a few months ago, when former NBC executive Yudkovitz became TiVo's president. But the stakes have gotten higher as TiVo looks to increase its market share and fights off challenges in the world of cable by Scientific Atlanta and Motorola. Time Warner Cable and Cox, two big MSOs, are deploying Scientific Atlanta's combination set-top box and DVR, the Explorer 8000. Time Warner already has about 150,000 DVR customers nationwide, though a big deployment in New York City will begin in the fall.

TiVo doesn't want to miss the chance to grab market share in the cable industry, which is trying to keep subscribers from leaving for satellite (and some, no doubt, to TiVo's DirecTV service). Cable, which spent up to $70 billion on systems improvements within the past five years, desperately wants to get a return on its investment to show Wall Street that it didn't waste the money. TiVo wants to help.

CEO Michael Ramsey said that MSOs are responsive to the idea of a TiVo-enhanced DVR in a single set-top box, which he noted wasn't the case six months ago. He said that now was a good time to market the service because most are still testing DVRs.

"We're very confident that TiVo has a major role to play in the cable community and we think we can provide tremendous value to their offerings," Ramsey said.

Yudkovitz said the pitch centers around how TiVo can help become a revenue producer to cable operators, reduce churn and provide the service (and updates) at a lower cost than its competitors. He said that TiVo has proven itself to be effective in its advertising efforts, constrained only by scale. He said that TiVo's marketing to cable includes giving a large enough portion of advertising revenue to MSOs so that it becomes a profit center to the MSO instead of a cost center, in addition to subscription revenues.

"No other DVR provider has this upside," Yudkovitz said.