• by Paul Gough , June 9, 2004

While it's become fashionable to write TiVo's obituary, DirecTV's decision Tuesday to sell its stake in the digital video recording pioneer might not be as dire as it seems at first glance. Among other things, the DVR marketer today will unveil plans to shift its focus from traditional TV gate-keepers like satellite and cable operators with a new service enabling consumers to download content directly from the Internet. The move is the first in what is expected to be a series of moves by traditional TV players into Web-based downloading that will accelerate the much-anticipated convergence of the two media.

Ever since News Corp. announced that it would purchase a controlling interest in the direct broadcast satellite provider, and particularly since the acquisition was completed last December, there has been speculation that TiVo's days as a partner with DirecTV were numbered--fueled by a purported sometimes-rocky relationship between the two companies as well as the acknowledgement by another News Corp. company, NDS Group PLC, that it would pursue a contract to provide DVR service to DirecTV.

More fuel was added to the fire late last week, when TiVo announced that Eddy Hartenstein, vice chairman of The DirecTV Group Inc., had resigned from the TiVo board of directors that he joined last October. No real reason was given for the move, which was closely followed by the sale of about 4 percent of TiVo shares by DirecTV.

It's not the first asset sale done by DirecTV. In recent months, DirecTV has shed its stakes in Hughes Network Systems and PanAmSat, earning the company billions of dollars that it will probably use to reduce debt related to the News Corp. takeover. In an interview with Reuters, a DirecTV spokesman said the satellite provider remained focused on increasing the TiVo DVR among DirecTV subscribers.

That partnership has been profitable to both TiVo and DirecTV, helping to increase retention among satellite video subscribers and accounting for more than 1 million of TiVo's 1.6 million subscribers. The deal runs for several more years, but rumors about what News Corp. might do regarding TiVo haven't been great for TiVo's standing on Wall Street. It's fair to say that anything that would threaten that many subscribers could cause major headaches for TiVo, which has yet to sign a deal with any other satellite or cable providers. It's been a top task for TiVo, and about a year ago it snagged a top NBC executive, Marty Yudkovitz, to help it attract the attention of cable operators as well as Madison Avenue.

Wall Street didn't like Tuesday's developments, sending TiVo's shares down 14.5 percent to $6.41 on the Nasdaq. It's only one of several shocks to the once-high-flying stock, which is down from its yearlong high of $14.51.

But media experts, particularly those who have worked with TiVo, say DirecTV's moves don't necessarily portend doom for the plucky DVR pioneer.

Mitch Oscar, a media expert who runs a consultancy called Hocus Focus, said it isn't hard to believe that DirecTV doesn't see any immediate gain from owning part of TiVo, particularly when it is shedding other nonessential parts of the company.

"Why is owning a stake in TiVo central? If they're going to license the technology, and they license it anyway, I think the question about TiVo's future seems to be whether DirecTV will use NDS and other News Corp.-owned technology," said Oscar. Maybe severing the formal ownership ties with News Corp.--anathema to cable operators who are locked in battle with satellite providers--might end up helping TiVo in the long run.

"Perhaps an alliance with DirecTV is a disservice to TiVo as they pursue cable operators," he said. Free from that piece of ownership, Oscar speculates that it might be easier to gain a contract with a cable operator.

It's also possible that even if DirecTV does go with a TiVo competitor, there are still more than a million boxes that have TiVo service. There might be some kind of legacy arrangement similar to what occurs with other DVR services, Oscar said.

"There are a lot of rumors floating around that DirecTV is essentially going to go their own way with their own platform," said Tim Hanlon, vice president of emerging contacts at Chicago-based Starcom MediaVest Group. "However, there are plenty of other signs to indicate that the relationship is pretty strong. There's no question it's a win-win for both of them right now, in terms of subscriber acquisition and retention."

In conference calls with analysts in recent months, TiVo executives have been trying to portray themselves as not just a one-trick pony. TiVo has set ambitious goals for growth, telling Wall Street that it plans to have 10 million subscribers by 2008. It's putting $50 million into marketing campaigns this year to help them gain market share. TiVo has also positioned itself as a company that provides video and audio solutions in home networking, most recently with an add-on service unveiled late last year called TiVoToGo, which would make TiVo-recorded programs portable. TiVoToGo is expected later this year. TiVo has also reached out into the world of broadband, purchasing a small company called Strangeberry that creates broadband-based content delivery systems.

Hanlon thinks that perhaps TiVo may return to its roots as a technology company, at least primarily, as satellite providers and cable operators employ other DVR services. While it's a source of legal contention, Echostar has developed its own DVR, and many cable operators have been using dual DVR/set-top boxes by Scientific Atlanta and Motorola.

"With Strangeberry, and TiVo's evolution into a home networking type of box, maybe they're becoming more of a technology play," Hanlon said. "I think the current model gets service subscriptions and distribution deals. I think in some respects the distribution play may be coming to an end, and getting distribution deals may not necessarily be what they do in the future."

Hanlon said that TiVo remains the "gold standard" for DVRs. Oscar believes it's a wonderful technology, and incredibly intuitive. Neither count TiVo out at all.

"It's hard to read into the future of TiVo from this," Hanlon said. "It just highlights the importance of the current relationship with DirecTV. The minute that that changes or comes to an end, it becomes a bigger question of how TiVo continues to survive."