Interactive TV, Including Much-Feared TiVo, Is Still Barely A Blip
TiVo, the Mountain View, Calif., provider of digital video recording services, surprised Wall Street last week when it announced a narrower loss than many had expected. The $4.4 million loss in the second quarter was still more than the $3 million it lost during the same period a year ago. Revenues fell from $35 million last year to $24.7 million this year, with a steep drop in technology revenue and a 27% fall in hardware sales. Service revenue, which includes the $12.95 a month subscriptions needed to make the TiVo run, increased 45% during the quarter, aided by a big deal with DirecTV.
Yet the biggest news came in management's prediction that it would reach 1 million subscribers by the end of the year. At the end of July, TiVo had 793,000 subscribers and had added 90,000 during the period, the bulk of which from DirecTV.
"We expect to blow through 1 million subscribers this holiday season," Michael Ramsey, TiVo's chief executive officer, said in a conference call with analysts last week. TiVo also raised its estimate for next year, expecting to add between 550,000 and 650,000 new subscribers compared to an earlier estimate of 450,000 to 600,000.
Subscriptions are important to TiVo, not because it makes up the bulk of the company's revenues but because it would be a sign that DVRs were starting to gain a foothold in American households. Some analysts have said that the failure of the DVR to gain market share quick stems from the fact that consumers aren't sure what how a DVR compares to a DVD player or a VCR, and why a DVR would be better.
But Sean Badding, president of The Carmel Group in Carmel, Calif., credits TiVo's efforts to gain subscribers as right on schedule. He said TiVo's buzz has increases every day, with word-of-mouth and its appearances on such shows as HBO's "Sex and the City." But he doesn't think the million-mark is the vaunted "tipping point," where Madison Avenue drops what it's doing and changes the way it produces TV commercials.
Badding predicts that it will take a deployment of 5 million DVRs - not only from TiVo, but from all service providers - before the traditional advertising model begins to change even moderately. He said it will be even longer before things change drastically. The 5 million mark won't be reached until at least 2005, according to analysts' estimates.
TiVo already has a lot of company in the space, with a joint marketing pact with DirecTV that represents a significant portion of new subscribers. While one competitor, ReplayTV, had fallen on hard times in recent years, its assets were recently purchased by a Japanese consumer electronics maker. At least two MSOs, Time Warner Cable and Cox, are beginning to aggressively roll out DVR service in their markets nationwide.
Another player, DirecTV competitor DISH Network, on Monday announced a new digital video recorder that it will give away free to new subscribers who purchase a year's service.
At the same time, two other companies in the interactive TV space continue to struggle. OpenTV, which lost $8.4 million in the second quarter (compared to a loss of $22.6 million a year ago) on Monday announced a new management team at its San Francisco headquarters. The team, headed by existing CEO James Ackerman, include a new chief operating officer, SVP of programming and advertising and a research head.
And Gemstar/TV Guide International, publishers of TV Guide and owner of a technology for interactive programming guides (IPG), spent $42 million in patent and SEC litigation since the beginning of the year. It lost $22.5 million in the second quarter, far less than the $886 million it lost during the same period a year ago. Revenues were down to $226.1 million from $259.3 million in the second quarter last year, with lower revenues from the flagship TV Guide.
Gemstar/TV Guide intends to ramp up deployment of its latest IPG, due in the first half of 2004. In a conference call with analysts, CEO Jeff Shell acknowledged it would be a tougher environment for IPGs after large companies like Microsoft Corp. and Tribune launching their own IPG over the past six months.
"This is not surprising to us in that we believe the IPG business will be an extremely valuable and profitable business over time," Shell said. "What sets us apart from our competitors is that TV Guide is dedicated to television guidance and information. It's what we do. We're not trying to use this business to drive other business but are instead focused on providing the product that is functionally superior and uses TV Guide content to improve and simplify the experience for the consumer."
The Carmel Group's Badding said that Gemstar/TV Guide has its hands full, primarily with its loss in patent cases, and it will hamper the company's revenue growth and cash flow potential. But he said that IPGs are a proven benefit for digital TV services.
"We know there's still a demand for IPGs," Badding said. "It's not going to go away anytime soon."