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TiVo Inc.

Case

By Mitch Casselman & John Nadeau


October 29, 2002
Carleton University Ph.D. Program - Dr. Tom Koplyay

Note: Analysis is based entirely on information from public sources


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1
Presentation Outline
n Company Background
n Market Discussion
n Competitive Picture
n Situational Analysis
n Strategic Direction

2
Company Background

Product, Technology, Partners,


Investors, Government, Lawyers
and Customers

3
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 content
n Audience measurement research
n Platform for electronic commerce
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The TiVo Service represents what’s been billed as the Personal Television
Industry. 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 Partners
n Hughes Network Systems
n Sony
n Quantum
n Phillips
n Thomson Multimedia

MANUFACTURING PARTNERS
Hughes Network Systems
Manufacture, marketing and distribution of personal video recorders that enable TiVo
Service in the United States
Sony
Manufacture, marketing and distribution of personal video recorders that enable TiVo
Service 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 TiVo
Service 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 TiVo
Service in the United Kingdom
Subsidy on a monthly basis for each unit sold 6
Company Background -
Partners
n Service Partners
n AOL investment ($200 Million)
n Discovery Communications and NBC
n DirecTV
n AT&T Broadband
n BSkyB
n Best Buy
n Creative Arts Agency
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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 Partners
n Lieberman Research Worldwide
n Nielson Media Research

Research Partners
Lieberman Research Worldwide
Nielson Media Research

Develop ways of improving and measuring promotions and viewer


behaviour
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 services
n CPU’s
n MPEG2 encoder/decoder
n secure microcontroller semiconductor device
n 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 Fund
n $13.8 million purchase of common stocks
n 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 Consumers
n 464,000 subscribers (October 2002)
n TiVo community Forum where customers can
engage each other and the company online
n Hacker community is utilizing TiVo’s proprietary
software code to design a web interface
n Advertisers
n Relatively small portion of revenues
n Experimenting with various ideas for sponsored
content (e.g. concerts for CD releases)

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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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Company Background:
Sales & Gross Margin Growth
Total Sales

40.0
30.0
$US Millions 20.0
10.0
-
Oct Jan Apr Jul 2002
Beginning 2001 2002 2002
exponential
Quarter Gross Margin
growth?

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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

Broadcasting & TV

Software & Programming TiVO Electronic


Instruments

Communications Equipment

14

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
Projected Digital Television Penetration
350

300
Households

250

200

150

100

CAGR 29%
50

0
2001 2002 2003 2004 2005 2006

Source: Strategy Analytics 2002


15

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

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High Segment Growth
Projected Interactive Television Penetration

240
220
200
Households

180
160
140
120
100
80
60
40
CAGR 40%
20
0
2001 2002 2003 2004 2005

Source: Strategy Analytics 2001


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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

17

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 TiVo
n Intellectual Property
n Standards

n Consumer Class Action

n Competitors
n Replay TV

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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 allows
fastforward.

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Competitive Picture

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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
Broadcasting & TV
(EchoStar, DirecTV, BSkyB,
Cox, Liberty, MDU,
Walt Disney, AOL,
Communications Newscorp)
Equipment Electronic
(NDS, Nagra Vision, Instruments
Canal+, GIC-Motorola, TiVO (SONICblue, Sony,
Scientific -Atlanta, Phillips, Panasonic,
Viaccess-France Microsoft)
Telecom)
Software & Programming
(OpenTV, Microsoft,
Liberate Technologies,
Canal+ Group, NDS)

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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 customers
lDirect – Microsoft (UltimateTV), OpenTV, NDS, EchoStar
Communications, 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 and
does not charge for the service.
lSony PlayStation 2 game console will have TiVo- like features using BroadQ
software to connect the PS2 to a PC and Snapstream personal video software
for the PC

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Competitors and Size
Firm Size of Some Competitors
TiVo is a
Number of Employess

12,000
10,000 very small
8,000 player, even
6,000 compared to
4,000 SONICblue
2,000 (a recent
0 entrant).
S

o
ND

TV

TiV
lue
r
sta

en

Cb
ho

Op

NI
Ec

SO

Competitor

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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
22

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
• Partnered with many large established players for • Single suppliers for key product components
quick entry and development in the US and UK •Over reliance on partners
•High customer growth rates •Separated from customers by partners
•Still able to attract fresh capital (I.e. Oct 2002) •Partners squeezing pressure on value chain
•Multiple potential revenue streams •Cannot make financial obligations without further
injection of cash

Opportunities Threats
•High market growth •Established players in traditional markets are
•Sponsored content entrenched and will implement defensive
•Market research data strategies to protect their market share (eroding
•Electronic commerce traditional strategic segment barriers)
•Replay is drawing most legal attention •Legal challenges
•Legislative agenda could restrict opportunities
•Low barriers to entry (technology is easy to
replicate)
•Many competitors – many are heavy weights
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General summary of what we discussed

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TiVo Lifecycle
Tivo 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
Pay TV/Set-top Boxes (OpenTV, NNDS)
Pure PVR Co.’s (SonicBlue)
Broadband Internet

Multimedia Giants Personal


Satellite
Traditional Broadcast TV Television
Cable Consumer
Industry
Electronic Manufacturers

Microsoft, Western Digital,


Seagate, Scientific-Atlanta,
Digeo (Paul Allen)
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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 Analysis
Company’s High
Financial
Strength

Low High
Company’s Industry
Competitive Defensive Strength
Advantage

Environmental
Stability Low
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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. 26
Value Chain Analysis
Traditional Value Chain
Research Feedback

Broadcasting Delivery Software Equipment Customer

TiVo Value Chain (vertical Integration)


Research Feedback

Broadcasting Delivery Software Equipment Customer

27

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 the
TiVo 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 Analysis
High Financially reliant on
Defenseless Endangered AOL and others.
Impact of Threat

Rely on others for


manufacturing.

Vulnerable Prepared Relatively little control


over customer base.

Major partner has just


Low acquired a competitor.

Low High
Ability to React or Retaliate

Source: Rowe et al. 28

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BCG Product Matrix
High High growth rate
Question Mark Stars
demonstrated in
Industry Growth Rate

TiVo’s rate of
customer
acquisition and
Dogs Maturity projected
technology
penetration.
Low
Low High
TiVo is not the
Relative Market Share
market leader.

29

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).

29
Technology Check
High Outsource or Technological
Grow/Protect
acquire capability
Technology Success Potential

opportunity is
present.

The company’s
Fair
technological
ability is
differentiated
Outsource Maintain
by features.
Low
Low Average High
Company Technology Ability Source: Rowe et al. 30

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


Suggestions” option

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Financial Ratio Profile
Profitability Losing Money

Very Low Average Very High

Liquidity On the brink

Very Tight About Right Too Much Slack

Leverage Negative Equity

Too much debt Balanced Too Much Equity

Activity High Sales Growth


Too slow About Right Too Fast
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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

Number of Approaches to Achieving Advantage


Many
Fragmented Specialized
Business Business

Stalemated Volume
Business Business
Few
Small Large
Potential Size of Advantage
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# 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 Summary
n Growth Phase of Product Life Cycle
n SPACE Analysis suggests defensive approach
n TiVo’s model is based on industry
convergence but the market’s not ready yet
n TiVo is currently vulnerable financially
n Proprietary technology represents a key
opportunity

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Strategic Direction

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Key Success Factors
n Market Share
n Which Standard/Business Model
Survives
n Ability to Survive
n Avoid Entrenched Players Wrath

35

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

35
Strategic Options for TiVo

1. Status Quo
(Vertical Integration via Joint Ventures)
2. Horizontal Integration
3. Concentration
4. Divestiture

36

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.

36
Recommended Strategy
n Focus on one thing and do it well
n A defensive stance from current approach
n Focus on technology development and licensing
revenue business model
n Aggressive on promoting this position to establish
platform leadership
n Anticipate a Merger
n Once made attractive to an established player
n TiVo will need help to Cross the Chasm at the end
of the growth phase

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NPD Strategies & the Life Cycle
Introduction Growth Maturity Decline

Pioneer Strategy First Mover N/A N/A N/A


Advantage
Imitator Strategy Strong Benefit Decreasing Benefit Only Useful if Cost Only Useful if Cost
Advantages Advantages
Rapid Innovation First Mover Steal Competitors Extend Life Cycle Limited Benefit
Advantage Growth
Disruptive Create New Market Strong Benefit Terminate N/A
Technology – First Mover Incumbents
Introduction Advantage
Pre-Announcement Financing Strategy Standard Setting Strategic Strategic
Strategies Perceptual Barriers Switching Costs Communication Communication
Competitive Games Competitive Games

Partnering Strong Benefit – Strong Benefit – Limited Benefit – Limited Benefit –


Absorptive Capacity Growth & Learning Cost Only Cost Only

Standard Setting Cooperate until Standard Set;Market Competitive Phase - Competitive Phase
technology Segmentation & Erect Entry Barriers
legitimation Cost
Use of Platforms Limited Strong Aid to Critical Component Weakens but some
Applicability Growth Of Survival Lasting Benefits38

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 38


TiVo should be focused on becoming the platform leader.
TiVo Inc. Case

Australia Team
Mitch Casselman/John Nadeau

Note: Analysis is based entirely on information from public sources


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Porter Competitive Analysis

Managerial Capability

Industry Rate of Innovation

Technological Sophistication

Supplier Bargaining Power

Buyer Bargaining Power

Dependency on Inputs

Product Substitutability

Intensity of Competition

Ease of Entry

Industry Rate of Growth

0 2 4 6 8

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Company Capability
Managerial
0% Weak Strong 100%
Managerial Factors
1. Corporate Image, Social Responsibility
2. Use of Strategic Plans and Strategic Analysis
3. Environmental Assessment and Forecasting
4. Speed of Response to Changing Conditions
5. Flexibility of Organizational Structure
6. Management Communication and Control
7. Entrepreneurial Orientation
8. Ability to Attract Highly Creative People
9. Ability to Meet Changing Technology
10. Ability to Handle Inflation
11. Aggressiveness in meeting competition
12. Other

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Company Capability
Competitive Factors
1. Product Strength, Quality, Uniqueness
2. Customer Loyalty and Satisfaction
3. Market Share
4. Low Selling and Distribution Costs
5. Use of Experience Curve for Pricing
6. Use of Life Cycle of Products and Replacement Cycle
7. Investment in New-Product Development by R&D
8. High Barriers to Entry into Company’s markets
9. Advantage Taken of Market Growth Potential
10. Supplier Strength and material availability
11. Customer Concentration
12. Other

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Company Capability
Financial Factors

1. Access to Capital When Required


2. Degree of Capacity Utilization
3. Ease of Exit from the market
4. Profitability, Return on Investment
5. Liquidity, Available Internal Funds
6. Degree of Leverage, Financial Stability
7. Ability to compete on prices
8. Capital Investment, Capacity to Meet Demand
9. Stability of Costs
10. Ability to Sustain Effort in Cyclic Demand
11. Price Elasticity of Demand
12. Other

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Corporate Development
Matrix
Potential for Leveraging Customer Value High

1. Watch
and Wait 2. Winners

4. Losers 3. Unstable
Cash
Bonanza
Low
Low High

Achievable Competitive Cost Advantage


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Z-Factor
n 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 = .765
n Less than 1.81 therefore significant risk
of bankruptcy

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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.

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