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Founded in 1997, TiVo, a pioneer in home entertainment, created a bra nd new category of products with the development of the first digital video recorder (DVR). Today, the company continues to revolutionize the way consumers watch and access home entertainment by making TiVo the focal point of the digital living room, a center for sharing and experiencing television, music, photos and other content. TiVo connec ts consumers to the digital entertainment they want, where and when t hey want it. The company is based in Alviso, California.
TiVo Inc. is a leading provider of digital video recorders (DVRs), se lling its devices through retailers and licensing agreements with DIR ECTV and Comcast Corporation. The company charges a monthly subscript ion fee for its DVR service, which is paid either directly by the sub scriber or through the subscriber's satellite or cable provider. TiVo contracts with third-party manufacturers to produce its devices.
Few products in the consumer electronics industry generated as much a ttention as a device built by James Barton and Michael Ramsay. In the years before they built their first prototype machine, Barton and Ra msay worked for two Silicon Valley-based companies, Convergent Techno logies and Silicon Graphics. At Silicon Graphics, Ramsay led the comp any's workstation division and Barton worked as one of the engineers designing an interactive television system for Time Warner. The syste m relied on using massive, centralized servers to store digitized pro grams that subscribers could access through their television sets at home, enabling them to watch stored programming whenever they chose. The project, which was rumored to have cost $150 million, was aba ndoned by Barton before Time Warner decided to shut down further deve lopment. "People come up with all sorts of reasons why interactive te levision didn't work," Barton said in a September 21, 1998 interview with Forbes. "The basic reason is centralized planning does no t work. Why did the economy collapse in Russia?," he asked. "Because the Kremlin wasn't able to deliver what people wanted." Barton, along with Ramsay, left Silicon Graphics in 1996, intending to build a dev ice that gave consumers greater control than the Time Warner system o ffered, endeavoring "to deliver what people wanted."
When Barton and Ramsay founded TiVo in August 1997, they set in motio n what promised to be a revolution in consumer electronics, one that would greatly affect the entertainment industry. Few products posed s uch a threat to the status quo in the broadcasting industry and provo ked as much speculation about the future of television as the product they envisioned. The basic idea behind the proposed device was to co mbine a computer-style hard drive and software with a television tune r, thereby enabling a user to record programs, pause live television, and skip past advertisements. Instead of relying on content stored o n a centralized server, the basis of the Time Warner project, the mac hine proposed by Barton and Ramsay put the power of choosing content in the hands of the user. The cost of hard drives had dropped to the point where Barton believed he could build a machine capable of stori ng 20 hours of television programming for approximately $300. Con vinced their idea would work, Barton and Ramsay began soliciting for the capital required to get their business underway, presenting their idea to venture capitalists in Silicon Valley. "We walked in," Ramsa y remembered in a February 17, 2004 interview with the Financial T imes, describing one meeting with a group of potential investors, "and said: 'We are after a consumer market, not enterprise. It is ab out entertainment, not technology, and we are going to need several h undred million dollars before we ever turn a profit.'" Ramsay's last statement proved particularly prescient. TiVo, from its start, create d a high level of excitement, fueling great expectations, but turning such promise into financial success proved to be a challenge for the company for years to come.
Barton and Ramsay obtained $3 million from venture capitalists to get their company up and running. With the initial seed money, the p air and a team of colleagues developed a prototype device and showed it to a group of network executives, demonstrating a product that all owed viewers to watch whatever programming they liked, whenever they liked, without watching the commercials that funded the programming. The response from the group of network executives, who sat and watche d a product that undermined their control, was not surprising. "They asked me if I was the devil," Ramsay said in his February 17, 2004 in terview with the Financial Times.
Ramsay and Barton pressed forward with bringing their idea to market. They began negotiating with consumer electronics companies, searchin g for manufacturers to manufacture the TiVo boxes, and they began dis cussions with content providers, hoping to reach agreements with cabl e channels and network producers. TiVo raised an additional $4.5 million in July 1998, giving the company the capital to fund an expec ted product launch in early 1999. When the first TiVo was introduced in March 1999, its debut was heralded as the most important innovatio n in the home entertainment industry since the introduction of the VH S video recorder. TiVo offered users the ability to locate and record multiple shows and search for programs by actors, genre, and plot li nes, and it featured what was called "suggestive viewing." Software o ffered on-screen suggestions to viewers about possible recording opti ons, basing the recommendations on the viewing habits of the user. If a TiVo customer watched a horror film, for instance, the technology compared certain aspects of the program with other programs, deducing that the viewer might like to record other films of the same genre.
Once their company had a product on the market, Barton and Ramsay fac ed the challenge of turning expectations into reality. The period for talking about the potential of TiVo had ended, leaving the founders with the task of realizing the potential of their vision through exec ution, a task that would prove to be extraordinarily difficult in the years ahead. At the time of the launch of TiVo, analysts projected t here would be ten million TiVo-like DVRs in use by 2005, but Barton a nd Ramsay were not alone in attempting to dominate the market. Palo A lto, California-based Replay Networks also was marketing a product wi th hard drive recording capabilities, marketing itself, like TiVo, as a purveyor of what both companies called "personal television." In S eptember 1999, TiVo completed its initial public offering of stock, t urning to Wall Street to fill its coffers for the battle ahead, but a s it turned out the company's greatest challenge was not the threat p osed by direct competitors such as Replay Networks' ReplayTV service. Instead, the greatest difficulty was in convincing the public that T iVo was the revolutionary innovation nearly every industry observer c laimed it was. "We are about integrating with the traditional televis ion infrastructure and making it better by personalizing the televisi on experience for the consumer," a TiVo executive explained in an Apr il 5, 1999 interview with Electronic Media. "We make it possib le for them to view shows more akin to their taste and are working wi th the networks to provide a new frontier, a new portal into the view ing experience." The executive's statement rang true to most ears, pa rticularly early TiVo customers who expressed a deep appreciation of the device in market research studies, but the problem for Ramsay and Barton was getting customers to bring a TiVo into their homes.
TiVo and DIRECTV Joining Forces in 1999
TiVo's efforts to create and to penetrate the market for DVRs were he lped substantially by an agreement made during the first year its dev ice was put on the market. Initially, the company's machine retailed for between $499 and $1,499, a price range encompassing model s with between 10 and 30 hours of capacity. In addition, TiVo custome rs were required to pay a $10 per month subscription fee to cover the costs of receiving programming information through TiVo software . Undoubtedly, some consumers were wary of the costs involved in tryi ng out a new type of electronics device, despite its characterization as a revolutionary product, something that would change the way ever yone watched television in the future. Barton and Ramsay's hopes of g aining widespread acceptance early on failed, but their company drew much of its financial sustenance from an agreement with DIRECTV, the largest provider of satellite television in the United States. In 199 9, DIRECTV agreed to assist TiVo in marketing and delivering TiVo ser vice to the satellite provider's customer base, the beginning of a lo ngstanding agreement between the two companies that provided the prim ary source of new customers for Barton and Ramsay.
Ramsay's prediction that it would take years and several hundred mill ion dollars of investment before TiVo turned a profit was accurate. T he company signed its one-millionth subscriber in November 2003, but had yet to record a profit, racking up more than $550 million of debt in its attempt to bring TiVo to the masses. Although competition from other DVR manufacturers played a part in TiVo's inability to po st a profit, the company's lackluster financial performance stemmed i n large part from the public's tepid response to DVR technology. By 2 004, three million DVRs had been sold, far fewer than the ten million forecast by analysts five years earlier. Of the three million DVRs i n use, only one-third bore the TiVo logo. The widely predicted revolu tion that TiVo was expected to lead had failed to materialize, leavin g the company almost entirely dependent on its licensing agreement wi th DIRECTV for a volume of business that did not generate a profit.
New Leadership for the Future
TiVo's fortunes began to improve in 2005, an eventful year for the co mpany that hinted at the beginning of widespread acceptance of DVR te chnology. The year began with Ramsay's announcement that he would vac ate his post as chief executive officer. Several months later, TiVo a nnounced that it had reached an agreement with Comcast Corporation, t he largest provider of cable television in the United States. Comcast had begun to offer DVR set-top boxes to its subscribers, but the com pany signed its joint venture agreement with TiVo because of the stre ngth of the TiVo name. "They are like Kleenex," an analyst said in a March 16, 2005 interview with the Chicago Tribune. "Their bran d name defines the entire product category. They have a lot of patent s and intellectual property, but their real value is their brand." Th e importance of the agreement with Comcast increased exponentially wh en TiVo executives learned that their agreement with DIRECTV, the lif eblood of the company, would no longer provide a significant stream o f revenue. Roughly a year earlier, Rupert Murdoch's News Corporation had acquired a 34 percent stake in DIRECTV, a deal that threatened to end DIRECTV's relationship with TiVo because News Corp. owned a U.K. -based company named NDS with its own DVR technology. As expected, DI RECTV began to distance itself from TiVo's devices in August 2005, wh en it started emphasizing the distribution of DVRs made by NDS to new subscribers.
Against the backdrop of the pivotal deal signed with Comcast and the fading importance of the agreement with DIRECTV, TiVo gained new lead ership. In July 2005, Tom Rogers was appointed president and chief ex ecutive officer. Rogers began his career as an attorney working for a Wall Street firm, a position that eventually led to his appointment as senior counsel to the U.S. House of Representatives subcommittee o n Telecommunications, Consumer Protection and Finance. Next, Rogers s erved as president of NBC Cable and executive vice-president of NBC, spearheading the creation of CNBC and the formation of the MSNBC part nership with Microsoft. He joined TiVo's board of directors in 1999, brokering NBC's original investment in the company, and reportedly pr esided over the negotiations with Comcast.
Rogers's tenure began on an exceptionally positive note, offering the new leader a moment to savor that Ramsay had never enjoyed during hi s eight years of leadership. In August 2005, TiVo reported the first profit in its history, posting $240,000 in net income during the second quarter of 2005, an enormous increase from the $10.8 milli on the company lost during the same period in 2004. "I got to hand it to the team," Rogers said in an August 24, 2005 interview with the Financial Times. "They've heard a lot of skeptical comments tha t TiVo was never going to see a profit. We've shown the world that we can manage to achieve profitability. Our customer base is generating enough revenue to secure profitability."
Despite Rogers's enthusiasm, there was little expectation that TiVo w ould begin to operate profitably on a consistent basis after its achi evement during the second quarter of 2005. Rogers conceded that the c ompany was expected to lose between $20 million and $25 milli on in 2005, as it continued to emphasize increasing its business volu me over sustaining profitability, something Rogers believed was in th e best long-term interest for TiVo. "I am firmly convinced that TiVo can extend its strong brand identity and technology platform to the m ass market through broader distribution by various carriers, and thro ugh growing its value as an advertising medium," he said in a July 9, 2005 interview with the Online Reporter. "After pioneering th e digital video category, TiVo is now uniquely positioned to help mul ti-channel carriers, networks, and advertisers grow their businesses in an environment that presents new realities for how television is w atched."
Principal Competitors: Microsoft Corporation; ReplayTV; THOMSO N; Comcast Corporation; EchoStar Communications Corporation.