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TiVo Winning Converts


By Hal Plotkin
CNBC.com Silicon Valley Correspondent

Dec 1, 2000 08:00 AM

My beloved 75-year-old mother-in-law can finally easily record television programs for later viewing. No blinking “12:00’s.” No mistakenly recorded static. And without any of the other frustrations that usually accompany first-generation videocassette recorders, such as dealing with those unsightly piles of bulky videotapes.

My wife’s mom is having a great time. But TiVo Inc.’s {TIVO} stock could turn out to be the biggest beneficiary of all if she and others like her keep spreading the word to friends and relatives about their newfound technical prowess.

Analysts who follow the emerging personal video recorder market say that is already starting to happen. If they are right about this new trend, TiVo’s currently depressed stock might be one of this year’s best portfolio stocking stuffers, though the stock right now is in the dumps, partly because profitability remains elusive.

“There’s very little doubt in my mind that TiVo’s basic functionality is here to stay and that it’s going to get bigger and bigger,” says David Lee Smith, an analyst at Dain Rauscher Wessels, based in Austin, Texas. “Investors with a tolerance for volatility should buy shares at these levels to take advantage of strong growth.”

PVRs do a lot more than just easily record TV programs. Users can also pause live programs in mid-broadcast — say to answer the phone — and then resume watching without having missed anything. TiVo’s product also has another feature, called Thumbs Up Thumbs Down, that lets viewers use their remote controls to indicate their approval or disapproval of any show they might be viewing. The device then automatically records other programs featuring similar topics that it thinks might appeal to that viewer. All the recordings are contained within the box, rather than on videotapes, which makes them far easier to locate and archive using simple on-screen menus. The newest version of the boxes store up to 60-hours of programs, more than twice the amount they could handle when they were first introduced earlier this year.

TiVo went public in September 1999 with shares initially priced at 16 each. Smith currently has a “buy-aggressive” rating on the stock, along with a $44 12-month price target.

TiVo’s stock was hammered early last spring when investors refocused attention en masse on near-term profitability concerns, particularly for young technology companies. And then earlier this week, PVR-rival ReplayTV Inc., which was forced to cancel its own plans to go public in August, suddenly fired its chief executive officer and executive vice president, along with nearly half the rest of the company.

The moves came as part of a dramatic corporate restructuring that includes abandoning production of ReplayTV’s own house-brand PVRs in favor of a strategy that emphasizes licensing the technology to third-party manufacturers, such as Panasonic. Sony Corp. {SNE} and Philips manufacture TiVo’s units under their own brand names.

News of the ReplayTV restructuring put further pressure on TiVo’s stock, though some say unfairly.

“I think Wall Street overreacted to the Replay news,” says Bruce Kasrel, a TiVo-owning new-media analyst at Forrester Research, which is based in Framingham, Mass. “What Replay was really saying is that they just don’t have enough capital to compete at the retail level.”

Despite the initial sour investor reaction, that could turn out to be very good news for TiVo, coming as it does near the beginning of this year’s holiday shopping season.

“TiVo is making some headway at a very important time for them,” Smith says.

As of the end of September, TiVo was already outselling ReplayTV by nearly three to one, with an estimated 73,000 TiVo units shipped so far, compared with about 25,000 for ReplayTV.


One-year performance of TIVO

Although gaining traction in its target market, TiVo’s stock remains depressed, analysts say, in part because the company isn’t expected to post any profits for at least the next two years. Like ReplayTV, TiVo actually loses money selling its boxes, which contain faster and bigger hard drives than are found in many computers that cost far more. Instead, both companies plan to make their real money after they grow their user base to numbers that are sufficient to attract the more-targeted advertising made possible by the company’s technology.

For privacy reasons, the companies don’t plan to release individual viewing habits to advertisers. But they do plan to make those data available in aggregate. When that happens, George Foreman, for example, would be able to target ads for his grilling machine to groups of people known to watch a lot of cooking shows.

TiVo lost $117 million, or $3.25 cents a share, for the nine months ended Sept. 30, on revenue of $2.14 million. The company has about $252 million in cash on hand, excluding accounts receivable and prepaid expenses.

“Investors have been saying that maybe they don’t want these companies that are not going to post any earnings for a few years,” Smith. “But TiVo is readying itself for the future, and the early consumer reactions have been very positive.”

“I’ve never heard of anyone who has a TiVo who doesn’t love it,” Kasrel agrees. “Once they see what it can do, they never want to go back.”

The one caveat analysts throw in is their expectation that next-generation digital cable-TV set-top boxes, which are expected to be rolled out over the next few years, will contain at least some of the same functionality of TiVo’s stand-alone units.

“It’s likely PVR functionality is going to be bundled with the digital cable operators,” says Mary Joy Scafidi, a senior analyst at International Data Corp. in Irvine, Calif. “They don’t want a company like TiVo coming in between them and their customers.”

The betting, though, is that a sufficient number of cable operators will turn to TiVo to license the technology they need to make their own boxes fully comparable with the best currently available PVRs. In addition, Microsoft Corp. {MSFT} has also announced a similar product but missed its original goal of getting it on store shelves in time for this year’s holiday shopping season.

“TiVo is just easier to use and more friendly,” Kasrel says. “They’ve already figured out how to get it right.”

Kasrel notes that TiVo recently received a $200 million investment from America Online Inc. {AOL} that is expected to lead to the product’s eventual integration with Time Warner Inc.’s {TWX} cable-TV product offerings. TiVo has a number of other service-provider deals, including with satellite-TV broadcasters, also in the works. The support from cable operators leaves most analysts convinced that TiVo will be able to find the resources it needs to execute on its business plan.

“I agree that the service providers are going to want to offer this themselves,” Kasrel says. “But what they’re looking for is what TiVo already has.”

“I agree that’s very likely,” Scafidi says. “Over time, it won’t be in retail outlets anymore, but it does look like TiVo is going to be a big part of the future.”

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