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TiVo's Apple problem

As the digital video recorder space begins filling up with companies aiming to provide more features and lower prices, I can't help but see obvious paralells with the computer industry.

Apple created the first personal computer real people could use, and a few years later they followed it up with the first computer with an operating system made for humans. But over the years other companies offered products that were "good enough" and "not the best, but cheap!" and the IBM PC clones totally dominated the space. Apple has always stuck to being a hardware and software company, so they could never really meet the prices that a competitive PC hardware market created. While they did allow clones to spring up for a short time, they quickly put the kibash on the companies that undercut their own sales.

Apple still does their own hardware (though many components are cheap off-the-shelf PC parts) and their own software, but they are definitely the Betamax of the computer world. While they arguably offer a better interface and are easier to use, they hover around 5-10% 3% (thanks gen) of the marketshare while most consumers prefer the VHS of the computer world: the $400 plain boxes running windows. Even the places you buy computers reflect this. Apple has a line of bright, beautiful stores that you can spend thousands of dollars in, while you can walk into any Wal-Mart, muscle past the screaming kids and throw a nameless PC into your cart that'll set you back a few hundred bucks.

Like Apple, TiVo pioneered the market. TiVo has been around since 1998, and their first systems stored just a few hours and were quite expensive, but their software was revolutionary. Being somewhat of an interface designer myself, I was in immediate awe of the simplicity and functionality available in my first TiVo system. While the prices have fallen somewhat, the market sector is still a little stagnant, with TiVo just barely in the red, and a whole host of new competitors arising. Cable companies, startups, and even open-source projects have taken dead aim on TiVo's market and will make the space quite competitive very soon.

The consensus of everyone I talk to that uses these alternate DVR devices is the same: they rave about the features and/or the price, but lamment the lack of a simple to use and stable operating system that TiVo offers. But as prices fall and companies like Time Warner start offering DVRs for only a couple extra bucks a month, you have to wonder what combination of low price and "good enough" features it will take to gain lots of new customers (customers that TiVo will lose to the cheaper offerings).

As the competitors circle the market like vultures, I wonder if TiVo will resign itself as the Apple Computer of DVRs, where its snooty users will put stickers on their cars, make up 5 or 10% of the DVR space, and tell you all about how refined their TiVo operating system is. Or, will TiVo become the Microsoft of DVRs, acting more as a software and service company that licenses their OS to anyone that wants to throw together some basic parts?

Word on the street has always been that TiVo loses money on every unit they sell for $249-349 — that the hardware costs them more than the price, and their real business model is the reoccuring monthly service fee. It seems to me that due to ever-falling prices for basic commodity computer hardware, the prices of TiVo boxes must fall, or TiVo should send in the clones. Anyone can throw a hard drive, motherboard, and cheap processor into some plastic, but it takes real work to produce an operating system that works wonderfully and features an interface both geeks and grandmas can like.

Seeing the first of new TiVo-licensed products and reduced cost through TiVo Basic is a good sign, and they've even hinting at built-in DVD writers — something that would probably take TiVo another year to release in-house on their own boxes. I'm hopeful TiVo learns the lessons of the PC world and considers going the software, service, and licensing route. I'd hate to see them flounder in a tiny corner of the market they helped create.

by Matt Haughey August 22, 2003 in Op-Ed, TiVo

Comments

Matt, while I agree with the bulk of what you are saying, I wanted to bring up a few points.

1. Apple's market share is around 3% of personal computers globally, although people who understand that market do not compare Apple with Dell or HP or your next run-of-the-mill Windows PC manufacturer.

2. Tivo's new strategy with Basic is not their first licensed product. Sony has licensed Tivo for use in both the US market (SAT-T60, SVR-2000, and SVR-3000) and the Japan market (CoCoon CSV-P500) and I'm pretty sure that others have done so too.

The thing to me is that if you look at Tivo's subscriber data, which is all over their SEC filings as well as any of their media interviews, it is a very slow rate of growth. Not even 1M customers since they incorporated 3+ years ago. To me, Tivo Basic looks like an act of desperation more than anything else. There isn't any kind of hockey-stick type of growth, which, after 3 years, does not bode well. It just doesn't make sense to me because everyone I know who has Tivo loves the service. It's by far the easiest UI. But the numbers don't lie and they don't look promising, especially in the face of all this new competition.

Here's what is on my competitive radar screen:

A. Time-Warner moving in with their SA-8000 DVR box. I think Anil is going to sign up for one of these. Essentially they are cheap at $7/mo. for basic DVR features built into your cable box (i.e. no large up-front costs and not another box to fit under/over the TV.) I think that the cable companies are using these to force people to upgrade to digital cable, which no one wants to pay for because the costs do not justify the expense. That said, maybe the cable companies will start doing those DVR-advertisements like Tivo does?

B. Microsoft is re-entering this space with a new business model and a new product: a B2B software platform called Microsoft® TV Foundation Edition. We all know what happens when we underestimate Redmond, and after all of their losses with Ultimate TV, I think they may have found a way to sneak into the TV box. Let's not lose sight of this one, which can be easy to do because it is not a customer app. Here the cable companies are the customer. One key fact - this software runs on the majority of cable boxes that are in use currently. It does not require a hardware change. See, Redmond does learn ;)

C. The ongoing switch towards digital satellite. Here Tivo wins because DirecTV is pushing DirecTivo. Customers are getting fed up with cable and see greater flexibility and better content on the digital satellite services. However, it seems like a short-term strategy because the cable companies can provide both TV and Internet on their pipes, which seems to me to be a better suite of services. Cable companies have treated their customers so poorly that there are much higher customer satisfaction rates. PVRs are a key technology for satellite companies because they essentially enable VOD, which cable has been investing in an promising to us for years.

D. Once this data on who watches what when really starts to grow, and companies begin to act on it, I think Neilsen is in trouble. The cable companies and PVR services will have the data and that stuff will be like gold. This is at least 5 years out though. Advertisers and advertising in general is so conservative and staid, it will take a long time for this new data to be trusted and acted upon.

Personally, I hate the telcos more than I hate the cable companies, so I would use cable for TV and Internet and VoIP phone services in order to keep from paying any Baby Bell any of my dollars. But that's me with my own hangups ;) Satellite cannot give me broadband Internet in both directions, so it's out of the question for me unless I was in a remote location.

Would love your thoughts on my opinions.

Posted by: Gen at Aug 22, 2003 2:28:51 AM

From the article Gen linked to: "Nobody expects that you can sell Acura TSX sports cars as Taurus wagons." Can we start referring to Apple as the Acura of the computer world rather than the Betamax? That would be... better. I guess.

Does anyone have any details on the real market share of DVRs? As in, how many people-with-cable-or-satellite use one, and which brand? The debate in the TiVo community in the last few years has seemed to boil down to "The share of DVRs in the world-at-large is so low that *any* penetration by *any* DVR maker will be a boon for all the companies involved." Has that changed recently?

Posted by: brian w at Aug 22, 2003 7:23:56 AM

The other reason that TiVo can't do "cloning" any more than Apple could is because of the integration between the hardware and the software. Building the operating system took a lot more resources when the clones were in business, because Apple then had to support more hardware platforms. Since their business model had them making the money on the hardware, rather than OS releases, the additional staffing and time requirements to support the additional hardware became prohibitive.

Apple (and TiVo) can't really afford to have their "good name" (such as it is, let's be honest) spoiled by other companies who ship their product (software) on hardware that will cause problems.

How many people blame ATI when Windows crashes? Even though it could be their video drivers that are causing the computer to crash, the blame goes to Microsoft, since the computer runs Windows. How many people would blame the vendor who provided their mouse?? No one thinks about "root cause", they just start with the most obvious vendor.

If TiVo were to release their software for 'commodity hardware', they'd have more luck than Apple did - because TiVo is based on Linux which runs on a lot of hardware - but there are still proprietary pieces to the product that are tuned for particular chips (the realtime video compression, for example) that they might have trouble supporting if a company wanted to use a different model.

Posted by: AlanD at Aug 22, 2003 8:34:22 AM

To me, Tivo Basic looks like an act of desperation more than anything else. There isn't any kind of hockey-stick type of growth, which, after 3 years, does not bode well.

I agree to an extent with this, but how much of this is due to a lagging economy, and how much is due to people not understanding the technology? I think everyone that has used a tivo is amazed that more people don't own them, but they still seem like the domain of the gadget freak or the very well-off.

Microsoft is re-entering this space with a new business model and a new product: a B2B software platform called Microsoft® TV Foundation Edition.

Whoa, nice find, I hadn't heard about this. Scary stuff indeed.

The ongoing switch towards digital satellite.

No doubt about that. The numbers don't lie on that one and my personal experience mirrors the satisfaction study. DirecTV was great, while comcast is a bit of a pain in the ass to deal with (not to mention their current FUD campaign stating the "dangers" of owning satellite dishes).

My new series 2 tivo is the first one I've had to use an IR Blaster with, and I really hate it. Once a week or so, the channel doesn't change correctly and I get the wrong channel taped, so I slowed down the process, which makes channel surfing live TV impossible. My next place will have DirecTivo for sure. I love both the integrated hardware and the expanded channel offerings for the same price as cable.

Posted by: Matt Haughey at Aug 22, 2003 9:43:41 AM

I think Tivo is in a precarious position. It hasn't grown fast enough and has thus left a lot of room for better offerings. Even though the set-top devices will likely be far inferior, they will have better distribution and more attractive pricing. It seems that Tivo doesn't want to be the Microsoft of the PVR market. It would be a lot easier to license a PVR OS than it would a PC OS. Not that it would be commercially viable, but I'd like to see something like Freevo combined with a cheap device and hooked into TitanTV. The problem with Freevo (and pretty much every offering other than Tivo) is that the interface is so lousy. It's mind boggling that they don't just copy the Tivo interface.

Posted by: pb at Aug 22, 2003 11:09:54 AM

Shouldn't TiVo's primary customers be the cable companies and not individual consumers? TiVo's product is significantly easier to use than the SA 8000 box that TW is using. Selling to the cable companies would be much more lucrative and probably cheaper to market, too.

Posted by: Andrew Raff at Aug 22, 2003 11:30:50 AM

Andrew, that does make sense at face-value but I think the heart of the matter is that Tivo is too much, too soon for the average TV viewer. Tivo is an enthusiasts' tool, as far as I can tell.

I would wager that Tivo is desperate to get the cable companies to use Tivo technology. But I think that is a losing proposition.

Tivo is expensive, for both the customer (upfront and ongoing) and for the company implementing it. The average TV viewer is already indignant at the cost of cable TV, so additional costs aren't an option for many, many households. Also, I think that Scientific Atlanta can make their SA8000 for a price that Tivo could never match. SA has vendors and relationships and bulk purchasing power that Tivo only dreams about. Plus the SA8000 software is nothing in comparison to the cost of building out the Tivo platform, feature set, etc.

My guess is that they (Tivo) went for the satellite companies first for 2 reasons: 1) satellite TV companies have a lot more to gain from PVR technologies than do cable companies (who have been investing to implement video-on-demand services for quite some time), and 2) there are only 2 satellite TV companies whereas there are many, many cable companies. (Higher costs to do business with many customers than just 2.)

Posted by: Gen at Aug 23, 2003 12:09:06 AM

I see a future for the TiVo brand in the home entertainment area, but not necessarily tight to a specific hardware and software platform like it is nowadays. They should split the company in a similar way Palm has done with it's OS and hardware division.

Posted by: Yme Bosma at Aug 23, 2003 7:03:14 AM

I think a major difference in comparing Apple to Tivo is based on the patent portfolio that Tivo has under it's control. Tivo has significant patetns on basic PVR features. Recording one program while watching another is patented by Tivo.

As we all remember, Apple lost most it's patent battles. Tivo loks able to win theirs, if it comes down to a fight.

It can be very profitable to license patents to others. Most of the major PVR players are faced with having to license from Tivo to use basic features. As the growth of PVR occurs, these patents royalties will increase dramtically.

My prediction is that PVRs will come in many flavors from many vendors, but the ones from Tivo will remain the standard by which others are measured.

Posted by: Michael at Aug 24, 2003 8:58:44 AM

Regarding the posting by "Gen" mentioning 2 Sony products that use TiVo... The US product is indeed a real TiVo box, but there is no TiVo service in Japan. The Japanese CoCoon box does indeed contain something licensed from TiVo, but I believe it doesn't use a TiVo interface or service. There is a Japanese TiVo web site but it does not appear to have any products or services for the Japanese market.

Posted by: Shlomo at Aug 26, 2003 5:54:23 AM

Andrew Raff said:

SA has vendors and relationships and bulk purchasing power that Tivo only dreams about...

But TiVo does NOT make the hardware. The hardware is made by Philips and Sony and perhaps more manufacturers. Philips and Sony are orders of magnitude larger than SA so they should have much better purchasing power.

Posted by: Wayne at Nov 3, 2003 10:54:55 AM

Semi-off-topic, but I couldn't resist. The difference between Apple and Acura is that Acura is really Honda. Honda sells the Civic and the NSX, and they're based on the same UI. Apple has no compatible low-end.

This doesn't really apply to TiVo because it isn't a platform.

Posted by: Wes Felter at Nov 19, 2003 8:27:59 PM

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Listed below are links to weblogs that reference TiVo's Apple problem:

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