• by Paul Gough , March 5, 2004

Just a day after Nielsen unveiled plans to speed up measurement of digital video recorders due to faster-than-expected deployment by cable and satellite TV operators, TiVo the top consumer electronics marketer in the space, told shareholders it will reach 3 million subscribers by the end of the year and 10 million in four years.

The number of subscribers long ago passed 600,000, the tipping point against outhouses. It stood at 1.3 million on Jan. 31, the last day of the company's fiscal year. During a conference call with analysts late Thursday, Chief Executive Officer Mike Ramsay said TiVo's goal is to top 10 million subscribers in the next three or four years.

"It's these goals that we have in mind as we go into this year for investment and subscription growth," Ramsay said.

TiVo didn't offer a road map on how it would reach the 10 million mark. It would no doubt depend on further acceptance of the TiVo brand not only in stand-alone products, but also the combination DVR-DVD recorders that it sells under license by consumer electronics manufacturers, its deal with DirecTV, and future deals with other satellite and cable TV operators.

As of today, there is only the longstanding deal with DirecTV, which is responsible for about half of all subscribers. But President Marty Yudkovitz, a former NBC executive, was hired in part to help TiVo gain partners among cable operators. Operators like Cox and Time Warner Cable have rolled out a Scientific Atlanta digital video recorder; Comcast has signed a deal for a Motorola DVR. But that doesn't necessarily close the door on the TiVo's entry in the cable industry, as operators rarely deal with only one supplier. TiVo doesn't do business with Echostar, the other big direct-broadcast satellite provider, which has its own DVR. TiVo recently sued Echostar, claiming patent infringement; the case is still in its early stages.

"Growth is our number one priority," Ramsay said.

Wide consumer adoption among cable and satellite users--and awareness of the product--gives DVRs in general and TiVo in particular a lot of momentum. A recent survey by Horowitz Associates has found that 95 percent of consumers have an awareness of DVRs, up dramatically from only a year or two ago. TiVo wants to make sure that it is not only on the leading edge of the DVR revolution, but also the largest player in the industry. And Nielsen Media Research announced earlier this week that it would begin including time-shifted viewing of TiVo in its audience measurement a year ahead of schedule because of faster adoption of DVRs than anticipated.

"It's imperative that TiVo capitalize on growth," Ramsay said.

There are between 3 million and 4 million DVR households in the United States, according to New York-based consultancy BrightLine Partners. They're split between Echostar, TiVo, and DirecTV, and cable operators like Cox and Time Warner Cable, which have been fast-tracking DVR rollouts in their markets.

TiVo executives didn't return calls seeking further details Thursday night, but its subscriber estimates would no doubt be a topic of conversation Friday at the company's Analyst Day.

Thursday's estimates of subscriber growth are appreciably more bullish than the company had estimated in its last conference call in November. Back then, TiVo said it would gain between 1 million and 1.2 million subscribers between January 2004 and January 2005, including the impact of the holiday season (the time of TiVo's briskest sales) and its deal with DirecTV. Now TiVo says it will gain between 1.5 million and 1.6 million subscribers in the next year. In the quarter ended Jan. 31, TiVo gained 130,000 stand-alone subscribers and another 200,000 among DirecTV customers.

TiVo plans a $50 million investment to build subscribers in the next year. Ramsay declined to spell out the initiative for competitive reasons, but said it would include targeted advertising, public relations, rebates, and other promotions, particularly in the second half in the runup to the holiday season.

The subscriber growth would also mean that TiVo would make it to profitability by the end of the year, and following that, sustained profitability. Its balance sheet--including a $143 million cash balance on Jan. 31--is its strongest in three years.

"TiVo is in a better financial position than ever before," said Chief Financial Officer David Courtney.

Ramsay also touted TiVo's deal with Nielsen Media Research for audience measurement, as well as new advertising deals signed with Coca-Cola, Nissan, and Chevrolet, among others.

J.R. McKechnie Jr., co-chief executive officer of BrightLine Partners, said that TiVo was in a good position, considering rising consumer interest and awareness of DVRs (and particularly the TiVo brand) along with better relationships with programmers who no longer seem to consider DVRs the threat to ad-supported TV they once did. McKechnie said he believes that TiVo's goal of having three million subscribers by this time next year was reasonable, given its deals with DirecTV. He said it was possible that it could reach 10 million subscribers in four years, particularly if TiVo was successful in deals with cable operators and with a favorable resolution to the lawsuit against Echostar.

He also said that the pace of DVR growth would be determined within the next 12 months.