TiVo Case Ppt

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TiVo Inc. Case

By Mitch Casselman & John NadeauOctober 29, 2002Carleton University Ph.D. Program - Dr. Tom Koplyay

Note: Analysis is based entirely on information from public sources

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Presentation Outline

n Company Backgroundn Market Discussionn Competitive Picturen Situational Analysisn Strategic Direction

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Company Background

Product, Technology, Partners, Investors, Government, Lawyers

and Customers

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Company Background -Product

n TiVo Service Subscriptions - monthly $4.99 (recently reduced from $9.95) or lifetime $249

n Licensing arrangements for Personal Video Recorders (PVR’s)

n Sponsored contentn Audience measurement researchn Platform for electronic commerce

The TiVo Service represents what’s been billed as the Personal TelevisionIndustry. Watch what you want, when you want!

PVR’s are designed and developed by Tivo, licensed for manufacture and sold in retail channels as a consumer electronic device.

Seasonality – anticipate large growth of annual new subscribers during the holiday shopping season.

Sponsored content delivers charter advertising and sponsorship revenue. However, revenue by this source has been relatively insignificant.

Examples: Short films, Counting Crows Debut of Album

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Company Background: Technology/R&D

n Pause and instant replay

n Planned R&D focus

n On-staff engineers

n Technology Risk

Pause and instant replay of live TV by storing information on a hard drive

Continued investment in the improvement and addition of features and functionality of current products as well as design of new platforms

On-staff engineers in R&D now (previously contract based)

Technology Risk – can be devised in home on a PC with a large hard drive and video card or a competitive technology solution. Overall, many competing solutions

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Company Background -Partners

n Manufacturing Partnersn Hughes Network Systemsn Sonyn Quantumn Phillipsn Thomson Multimedia

MANUFACTURING PARTNERS

Hughes Network Systems

Manufacture, marketing and distribution of personal video recorders that enable TiVoService in the United States

Sony

Manufacture, marketing and distribution of personal video recorders that enable TiVoService in North America

7 year deal to pay royalties on Sony video recorders incorporating TiVo’s technology (part when shipped and another part when activated)

Given the right to sublicense mfg. in Japan

Quantum

Supply agreement for hard disks

Revenue sharing of subscription fees for devices with their hard disks

Philips

Manufacture, marketing and distribution of personal video recorders that enable TiVoService in North America

Awarded a subsidy by TiVo for each unit sold (part when shipped and another part when activated)

Ceases mfg. TiVo recorders Jan 31, 2002

Thomson Multimedia SA

Manufacture, marketing and distribution of personal video recorders that enable TiVoService in the United Kingdom

Subsidy on a monthly basis for each unit sold

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Company Background -Partners

n Service Partnersn AOL investment ($200 Million)n Discovery Communications and NBCn DirecTVn AT&T Broadbandn BSkyBn Best Buyn Creative Arts Agency

SERVICE PARTNERS

AOL investment ($200 Million)

3 year agreement to allow AOL TV subscribers access to TiVo services

AOL was issued equity for their investment

Discovery Communications and NBC

$8.1 Million in the form of advertising and promotional services

Additional $5 M paid to NBC for promotions

DIRECTV

Market, sell, and support the TiVo Service

To collaborate on R&D and utilize a portion of DIRECTV’s satellite network

Issued 3M shares for marketing services

Revenue sharing of DIRECTV/TiVo subscriptions

Comprises a “healthy” portion of TiVo subscribers

AT&T Broadband

Market, sell, and support the TiVo Service in Boston, Denver and Silicon Valley areas

Revenue sharing of subscription fees and advertising

BSkyB

Market, sell, and support the TiVo Service in the United Kingdom

Best Buy

exclusivity agreement to sell only TiVo branded Series2 digital video recorders (expires February 2003)

Creative Artists Agency

Marketing and promotional support of the personal video recorder

Given 67,122 shares of preferred stock as compensation

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Company Background -Partners

n Research Partnersn Lieberman Research Worldwiden Nielson Media Research

Research Partners

Lieberman Research Worldwide

Nielson Media Research

Develop ways of improving and measuring promotions and viewerbehaviour

First ever DVR-based panel established in August 2002 with Lieberman

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Company Background -Suppliers

n Single supplier dependency for key components and servicesn CPU’sn MPEG2 encoder/decodern secure microcontroller semiconductor devicen program guide data

Risk – should strive to develop a relationship for secondary suppliers in these areas (possible for 10-20% of demand?)

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Company Background -Investors

n Acqua Wellington North American Equities Fundn $13.8 million purchase of common stocksn Option to sell up to $19 million more

shares to raise cash (Feb 2002)

n Crosslink Capital and New Enterprise Associates are buying $25 million of stock (October 2002)

n Previous partners also major investors

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Company Background -Customers

n Consumersn 464,000 subscribers (October 2002)n TiVo community Forum where customers can

engage each other and the company onlinen Hacker community is utilizing TiVo’s proprietary

software code to design a web interface

n Advertisersn Relatively small portion of revenuesn Experimenting with various ideas for sponsored

content (e.g. concerts for CD releases)

Customers

Community development is good for loyalty and insight to help feature development

Hacker community may be beneficial (as de facto imitators) to he lp promote TiVo as a platform

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-

10.0

20.0

30.0

40.0

$US Millions

Oct2001

Jan2002

Apr2002

Jul 2002

Quarter

Company Background: Sales & Gross Margin Growth

Gross Margin

Total Sales

Beginning exponential

growth?

What we’ve seen so far:

-Multiple products

-R&D focus on developing features for the core product

-Many partners, many are large players (AOL most significant, some hold equity)

-Single source risk for some core components (Risk)

-Customer base is growing and showing signs of active involvement

-Advertising constitute a small amount of revenue

-Sales growth is high and margins are okay

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Market Discussion

Market Dynamics, Market Growth, Government, Legal Situation

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TiVo’s Market is at the point of Convergence

Communications Equipment

Broadcasting & TV

Software & Programming Electronic Instruments

TiVO

Personal Television Market is located at the convergence of these 4 established industries.

Broadcasting & TV – Content

Communications Equipment – Pipeline equipment

Software – run on equipment

Electronic Instruments – consumer products

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High Segment Growth

Source: Strategy Analytics 2002

Projected Digital Television Penetration

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005 2006

Hou

seho

lds

CAGR 29%

Digital growth is a proxy to show growth in new TV technology

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High Segment Growth

Source: Strategy Analytics 2001

Projected Interactive Television Penetration

Hou

seho

lds

0

20

40

60

80

100

120

140

160

180

200

220

240

2001 2002 2003 2004 2005

CAGR 40%

Interactive growth is a proxy to show growth in new TV technology

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Government Influence

n Legislative environment is not stable and could change n Copyright laws

n FCC could alter regulations that affect TiVo indirectly through partners

There is a real threat that the gov’t will alter the copyright legislation and create a barrier for TiVo. Consortium of broadcasters are lobbying for these changes.

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Legal Situation

n TiVon Intellectual Propertyn Standardsn Consumer Class Action

n Competitorsn Replay TV

Intellectual Property

Seven patents for pausing live television

Five lawsuits (StarSight, Pause Technology, SONICblue - x2, Command Audio)

Standards

Consortium of broadcast and cable companies threaten to require personal television operators to obtain copyright or other licenses (e.g. Time Warner & Fox Television

Consumer Class Action

TiVo faces Class Action lawsuits stemming from IPO practices and potentially misleading advertising

Replay TV (Competitor)

is being sued for harming the potential market and value of copyrighted material.

Replay TV allows users to skip commercials while TiVo only allowsfastforward.

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Competitive Picture

What we’ve seen in the market:

-TiVo sits between 4 large established segments

-High projected penetration of new TV technology (Positive)

-Legislation risk (copyright)

-Legal battle zone – Personal TV is potentially a disruptive technology

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Competition Looms Large

Software & Programming(OpenTV, Microsoft,

Liberate Technologies,Canal+ Group, NDS)

Broadcasting & TV(EchoStar, DirecTV, BSkyB,

Cox, Liberty, MDU, Walt Disney, AOL,

Newscorp)Communications Equipment

(NDS, Nagra Vision, Canal+, GIC-Motorola,

Scientific-Atlanta,Viaccess-France

Telecom)

Electronic Instruments

(SONICblue, Sony, Phillips, Panasonic,

Microsoft)

TiVO

lMany big players with vested interest in the traditional business model

lIncestuous – for example, OpenTV is owned by Liberty and has EchoStar, DirecTV and BSkyB as customerslDirect – Microsoft (UltimateTV), OpenTV, NDS, EchoStarCommunications, Cache Vision, Keen Personal Media, Sony, Moxi Digital (supported by AOL) and SONICblue (ReplayTV)lIndirect – satellite television, video on demand services, digital video disc players, laser disc players, cable TV, Internet lAdvertisers – competing against traditional media (print, radio, and television)

lEchostar has around 600,000 of its subscribers with DVR capabilities anddoes not charge for the service.lSony PlayStation 2 game console will have TiVo-like features using BroadQsoftware to connect the PS2 to a PC and Snapstream personal video software for the PC

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Competitors and Size

0

2,0004,000

6,000

8,00010,000

12,000

Echost

ar NDS

Open

TV

SONI

Cblue TiV

o

Competitor

Nu

mb

er o

f E

mp

loye

ssFirm Size of Some Competitors

TiVo is a very small

player, even compared to SONICblue(a recent entrant).

Glimpse of TiVo’s relative size to competitors

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Strategic Analysis

SWOT, Product Life Cycle, Porter, SPACE, Value Chain Analysis, Vulnerability, Product Matrix,

Technology Check, Financial Ratios, Advantage Matrix

Competition Summary

- Incumbents are big and there’s potential for a fierce fight since personal TV strikes at the core of the incumbents’ business model.

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Strengths Weaknesses

Opportunities Threats

• Partnered with many large established players for quick entry and development in the US and UK•High customer growth rates•Still able to attract fresh capital (I.e. Oct 2002)•Multiple potential revenue streams

• Single suppliers for key product components•Over reliance on partners•Separated from customers by partners•Partners squeezing pressure on value chain•Cannot make financial obligations without further injection of cash

•Established players in traditional markets are entrenched and will implement defensive strategies to protect their market share (eroding traditional strategic segment barriers)•Legal challenges•Legislative agenda could restrict opportunities•Low barriers to entry (technology is easy to replicate)•Many competitors – many are heavy weights

•High market growth•Sponsored content•Market research data•Electronic commerce•Replay is drawing most legal attention

General summary of what we discussed

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TiVo LifecycleTivo has entered the growth phase of the PLC

Introduction Growth Maturity Decline

Sales are increasing at high rate, many new entrants, not yet profitable, low barriers to enter, recent price reduction for

subscriptions

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Porter Analysis

Personal

Television

Industry

Pay TV/Set-top Boxes (OpenTV, NNDS)

Pure PVR Co.’s (SonicBlue)

Broadband Internet

Microsoft, Western Digital, Seagate, Scientific-Atlanta, Digeo (Paul Allen)

SatelliteCable Consumer

Multimedia Giants

Traditional Broadcast TV

Electronic Manufacturers

Although typical for pressure to be coming from vertical areas, the market dynamic is coming from all sides on the Personal Television Industry.

Not only is there pressure from all sides but these players are directly getting into the Personal Television market or indirectly through ownership of another player.

This is a market in transition.

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SPACE AnalysisCompany’s Financial Strength

High

HighLow

Low

Company’s Competitive Advantage

Environmental Stability

Industry StrengthDefensive

Environmental Stability is low

-rapid technological change

-Price range of competition is relatively high (Echostar free service)

-Barriers to entry are low (functionality can be set up on a computer, a number of different patents to do the same thing)

-Many substitute products

Industry Strength is moderate

-High growth potential

-Technological know-how

-Overall, the industries are quite strong, but the ranking becomes tempered when looking specifically at the Personal Television market.

Company’s financial picture is weak

Tivo is currently engaging an aggressive strategy that is not a good fit. The company is trying to aggressively sign on subscribers, generate content, and conduct market research.

TiVo is situated in an attractive industry but lacks the financial and competitive strength to pursue a competitive strategy.

The SPACE analysis indicates that TiVo should consider a more defensive strategy than the one they currently use.

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Value Chain Analysis

Delivery Software Equipment Customer

Traditional Value Chain

Broadcasting

Research Feedback

Delivery Software Equipment Customer

TiVo Value Chain (vertical Integration)

Broadcasting

Research Feedback

These are the four primary areas of the market where TiVo participates –Broadcasting & TV, Communications Equipment, Software and Programming, and Electronic Instruments.

TiVo is striving to influence the whole value chain rather than focus on their component where they excel. They are essentially trying to implement a convergence model at the intersection of these industries.

-Broadcasting with sponsored content

-Although not trying to replace the Delivery channel, they are branded theTiVo service to the end consumer

-The software to receive signals, record, and adapt to viewer preferences

-Equipment by designing and outsourcing the manufacturing of the “box” that houses the software and large storage device.

-They are also getting into the feedback loop by conducting viewer panels and collecting viewing statistics.

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TiVo Vulnerability AnalysisHigh

Low

HighLow

Impa

ct o

f Thr

eat

Ability to React or Retaliate

Defenseless Endangered

Vulnerable Prepared

Source: Rowe et al.

Financially reliant on AOL and others.

Rely on others for manufacturing.

Relatively little control over customer base.

Major partner has just acquired a competitor.

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BCG Product MatrixIn

dust

ry G

row

th R

ate

Relative Market Share

Low

High

Low High

High growth rate demonstrated in TiVo’s rate of

customer acquisition and

projected technology penetration.

TiVo is not the market leader.

Question Mark Stars

Dogs Maturity

Although products in the growth phase are typically classified as Stars, TiVo has not yet accomplished significant market share. There are other players with a larger subscriber base. For instance, EchoStar has grown a larger base by offering the service for free to subscribers (they just have to buy the equipment).

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Technology Check T

echn

olog

y Su

cces

s Po

tent

ial

Company Technology Ability

Low

High

Low High

Source: Rowe et al.

Fair

Average

Outsource or acquire capability

Grow/Protect

Outsource Maintain

Technological opportunity is

present.

The company’s technological

ability is differentiated by features.

Differentiated feature example - adapting to viewer preferences – “TiVo’s Suggestions” option

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Financial Ratio Profile

Very Low Average Very High

Very Tight About Right Too Much Slack

Too much debt Balanced Too Much Equity

Too slow About Right Too Fast

Profitability

Liquidity

Leverage

Activity

Losing Money

On the brink

Negative Equity

High Sales Growth

Current Ratio = 0.80

Quick Ratio = 0.75

They are not able to meet current obligations

$27M in cash

Shareholders Equity = -51M

Market Capitalization = $199.6M

Liquidity – w/o new investment in October of $25 Million, they were essentially bankrupt. This injection represents their “burn rate” for a quarter.

Leverage – they have used up investors money and then some!

Activity is good since sales are ramping up. This is good.

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BCG Advantage Matrix

Few

Many

Small Large

Num

ber o

f App

roac

hes

to A

chie

ving

Adv

anta

ge

Potential Size of Advantage

FragmentedBusiness

SpecializedBusiness

StalematedBusiness

VolumeBusiness

# of Approaches to Achieving Advantage

There are many ways that a firm could deliver Personal Television to their advantage-traditional TV with pay-per-view-PVR-PC’s (connect to TV or stand alone)-Video Game console (X-Box and Sony Playstation)

It can be pursued from any of the four established industries, but each advantage is relatively small. It is difficult to see at this point. Eventually, if Personal Television is adopted, the position should migrate to another spot on the matrix (volume business).

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Analysis Summaryn Growth Phase of Product Life Cyclen SPACE Analysis suggests defensive approachn TiVo’s model is based on industry

convergence but the market’s not ready yetn TiVo is currently vulnerable financiallyn Proprietary technology represents a key

opportunity

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Strategic Direction

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Key Success Factors

n Market Sharen Which Standard/Business Model

Survivesn Ability to Surviven Avoid Entrenched Players Wrath

Market Share – must create a presence in the market to ultimately cross the chasm

Which Standard/Business Model Survives – the technology to win the battle over competing solutions will contribute to survival

Ability to Survive – financial resources and cash flow

Avoid Entrenched Players Wrath – big players already here that can fight hard

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Strategic Options for TiVo

1. Status Quo (Vertical Integration via Joint Ventures)

2. Horizontal Integration3. Concentration4. Divestiture

Status Quo (Vertical Integration)

Continue to grow the convergence business model

Work on developing advertisement and sponsored content revenue to evolve differently than direct competitors (essentially becoming a broadcaster)

Trying to capture value from across the value chain with such big players could come back to bite TiVo

- TiVo really doesn’t have the financial resources for this course of action.

Horizontal Integration

Purchase competitors to gain market leadership

- Again, finances restrict this course of action

Concentration - Focus on Technology Core

Expansion with product differentiation

Strive for platform leadership

Divestiture – Leave the market, dissolve the company or sell.

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Recommended Strategyn Focus on one thing and do it well

n A defensive stance from current approachn Focus on technology development and licensing

revenue business modeln Aggressive on promoting this position to establish

platform leadership

n Anticipate a Mergern Once made attractive to an established playern TiVo will need help to Cross the Chasm at the end

of the growth phase

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Use of Platforms

Standard Setting

Partnering

Pre-Announcement Strategies

Disruptive Technology Introduction

Rapid Innovation

Imitator Strategy

Pioneer Strategy

Limited Applicability

Cooperate until technology legitimation

Strong Benefit –Absorptive Capacity

Financing StrategyPerceptual Barriers

Create New Market – First Mover Advantage

First Mover Advantage

Strong Benefit

First Mover Advantage

Strong Aid to Growth

Standard Set;Market Segmentation & Cost

Strong Benefit –Growth & Learning

Standard SettingSwitching Costs

Strong Benefit

Steal Competitors Growth

Decreasing Benefit

N/A

Critical ComponentOf Survival

Competitive Phase -Erect Entry Barriers

Limited Benefit –Cost Only

Strategic CommunicationCompetitive Games

Terminate Incumbents

Extend Life Cycle

Only Useful if Cost Advantages

N/A

Weakens but some Lasting Benefits

Competitive Phase

Limited Benefit –Cost Only

Strategic CommunicationCompetitive Games

N/A

Limited Benefit

Only Useful if Cost Advantages

N/A

Introduction Growth Maturity Decline

NPD Strategies & the Life Cycle

Relatedness to TiVo

Imitator Strategy – TiVo was a fast second to the Personal Television market after ReplayTV

Rapid Innovation – Competitors are coming into the market from all sides to try and steal away growth

Disruptive Tech – Personal Television may be disruptive, however, the incumbents have identified this potential threat and are positioning themselves accordingly. Therefore, tough to terminate them!

Pre-announcement – TiVo actually pre-announced their product when Replay TV came out first

Partnering – key aspect of the TiVo strategy since they are too small to carry out the convergence strategy on their own.

Standard Setting – A Consortium of broadcasters (incumbents) are trying to force a standard on the new technology (re: copyright) to reduce disruption to their existing business model

Use of Platforms – Becomes important in the growth phase. This is where TiVo should be focused on becoming the platform leader.

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TiVo Inc. Case

Australia TeamMitch Casselman/John Nadeau

Note: Analysis is based entirely on information from public sources

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Porter Competitive Analysis

0 2 4 6 8

Industry Rate of Growth

Ease of Entry

Intensity of Competition

Product Substitutability

Dependency on Inputs

Buyer Bargaining Power

Supplier Bargaining Power

Technological Sophistication

Industry Rate of Innovation

Managerial Capability

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Company CapabilityManagerial

0% Weak Strong 100%Managerial Factors1. Corporate Image, Social Responsibility2. Use of Strategic Plans and Strategic Analysis3. Environmental Assessment and Forecasting4. Speed of Response to Changing Conditions5. Flexibility of Organizational Structure6. Management Communication and Control

7. Entrepreneurial Orientation8. Ability to Attract Highly Creative People9. Ability to Meet Changing Technology10. Ability to Handle Inflation11. Aggressiveness in meeting competition12. Other

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Company CapabilityCompetitive Factors

1. Product Strength, Quality, Uniqueness2. Customer Loyalty and Satisfaction

3. Market Share

4. Low Selling and Distribution Costs5. Use of Experience Curve for Pricing

6. Use of Life Cycle of Products and Replacement Cycle

7. Investment in New-Product Development by R&D8. High Barriers to Entry into Company’s markets

9. Advantage Taken of Market Growth Potential10. Supplier Strength and material availability

11. Customer Concentration

12. Other

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Company CapabilityFinancial Factors

1. Access to Capital When Required2. Degree of Capacity Utilization3. Ease of Exit from the market4. Profitability, Return on Investment5. Liquidity, Available Internal Funds6. Degree of Leverage, Financial Stability7. Ability to compete on prices8. Capital Investment, Capacity to Meet Demand9. Stability of Costs

10. Ability to Sustain Effort in Cyclic Demand11. Price Elasticity of Demand12. Other

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Corporate Development Matrix

1. Watch and Wait 2. Winners

4. Losers 3. Unstable Cash Bonanza

High

LowLow

High

Achievable Competitive Cost AdvantagePote

ntia

l for

Lev

erag

ing

Cus

tom

er V

alue

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Z-Factorn Formula developed by Edward Altman

in 1968 to predict the company survival for manufacturing companies

n Z = .012 A + .014 B + .033 C + .006 D + .999 E

n Z = .765n Less than 1.81 therefore significant risk

of bankruptcy

Z = .012 A + .014 B + .033 C + .006 D + .999 E, where

A = working capital/total assets (%)

B = Total retained earnings/total assets (%)

C = Earnings before interest and taxes/total assets (%)

D = Market value of equity/book value of total debt (%)

E = Sales/Total Assets

In some cases the z-factor can be approximated with the equation sales/total assets.

Companies with a z- factor less than 1.81 have a significant risk of bankruptcy

Companies with a z- factor of 1.81 to 2.99 are in a zone of ignorance

Companies with a z- factor greater than 2.99 have minimal chance of bankruptcy.