More and more, it looks like TiVo’s (TIVO, Financial) business is becoming irrelevant. The company that pioneered the concept of the DVR has been surpassed technologically, and there is increasingly little reason to be a TiVo subscriber.
In the past year, TiVo has witnessed a considerable amount of volatility on account of changes in its business structure and shaky demand for its product. Over the last 12 months, the stock has managed to score an upside movement of around 12%.
TiVo bulls have been banking on the value of the company’s patents, but with litigation largely behind it, there aren't any catalysts to carry the stock higher.
A business full of challenges
Although it’s possible to own a TiVo outright, most users pay a monthly subscription fee to the company. The total number of subscribers peaked in 2007 (at about 4.4 million) and it’s been all downhill from there. Currently, there are about 2 million TiVo subscribers, and that number should be expected to fall further. In 2007, there was a reason to own a TiVo. Sure, cable companies offered their own DVRs, but they were terrible. TiVo devices were far superior.
That’s no longer the case. In just the last year, companies like DISH Network (DISH, Financial) and DirecTV (DTV, Financial) have introduced DVRs that are better than TiVo’s offerings in nearly every way, and other major content providers are planning to do the same. DISH has used its “Hopper” as a key differentiator, advertising its entire service on the strength of the Hopper’s ability to record so much commercial-free TV. DISH’s rival DirecTV fired back with the “Genie,” a whole-home DVR system.
In fact, DirecTV has cited the Genie as a key driver of average revenue per user (ARPU) growth. Last quarter, DirecTV saw a 5% revenue increase, mostly due to higher ARPU, much of that coming from increased equipment costs. Not to be outdone, Comcast will launch its “X2” platform in the near future. The X2 renders the concept of a whole-home DVR irrelevant, transferring all saved programming to the cloud for playback anywhere and giving users innovative interface features like voice command.
Consolidation in the industry
Of course, not everyone is a subscriber to a major paid-TV provider. TiVo has said that it sees an opportunity to take advantage of the smaller players, partnering with them to offer TiVo DVRs when they lack the resources to develop their own.The problem here is that the industry appears to be on the verge of consolidation. Liberty Media’s Chairman John Malone has made it clear that he wants to use Charter Communications to force an industry consolidation.
Shares of the small cable provider have rallied more than 20% since June, last year. With about 3 million and 4 million subscribers, respectively, Cablevision and Charter are small players compared to Comcast and DirecTV (each with about 20 million), but if they were to combine, they'd be a decent-sized player. Reports have indicated that Malone is preparing a bid for Time Warner Cable – not Cablevision. But given the size of Time Warner (nearly three times larger than Charter), an acquisition would be much more difficult than buying the smaller Cablevision.
In nutshell, the number of smaller cable providers could soon decline dramatically, leaving just a handful of major players. That doesn't bode well for TiVo’s plan to partner with small providers.
Takeaway
With major litigation behind it, TiVo investors should turn their attention back to the company’s core business, which is being threatened by two major trends in the paid-for TV industry. On the one hand, paid-TV providers like DISH Network, DirecTV and Comcast are investing heavily in their own DVR technology and producing devices superior to TiVo’s. On the other hand, the small companies that could benefit from TiVo’s technology could be gobbled up in a slew of mergers. Therefore, TiVo is not the ideal stock to invest in right now.
