May 1, 2002 11:25 AM PDT

AOL, TiVo reprogram set-top deal

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America Online and TiVo, a developer of digital recording technology, on Wednesday said they will discontinue the joint production of an interactive television box and restructure the financial terms of their deal.

The announcement brings two companies that have been struggling to draw subscribers to their television services closer together.

AOL's efforts in the interactive television market have been largely stillborn. Its first-generation AOLTV set-top boxes failed to gain popularity with subscribers, and the company has turned down the volume on its interactive television efforts.

AOL is an investor in TiVo, which meant that it was only a matter of time before it took a more active role in TiVo's efforts, said Aditya Kishore, an analyst with market research firm The Yankee Group.

For TiVo, the announcement addresses one of the two major obstacles in acquiring new DVR subscribers: differentiating DVRs from VCRs. The other major stumbling block is convincing consumers that they need capabilities referred to in the interactive television industry known as "time-shifting."

Digital video recorders are similar to VCRs, but instead of recording shows to a tape they store them on a hard drive. Among other features, TiVo's service that runs on DVRs lets subscribers take advantage of time shifting to "pause" live broadcasts and resume play without missing any material; users can also fast-forward to catch up with the live feed.

"This announcement represents an overall change in strategy from DVR companies," said Kishore. Companies have started "surrounding their anchor DVR feature with other services to help differentiate themselves from old school VCRs." For example, last year Sonicblue added broadband access to its ReplayTV recorders as well as the ability to send TV shows from one recorder to another.

As part of the restructuring, TiVo will return $48 million of AOL's original $200 million investment in the device maker, reached in June 2000. The $48 million was part of an escrow fund set aside for subsidies once the planned AOL-TiVo set-top box hit the market. Also under the restructuring, AOL, a division of media giant AOL Time Warner, will return 1.6 million shares of TiVo stock back to the company.

AOL will keep 1.1 million shares of preferred TiVo stock and convert the shares into common stock Sept. 13, according to a filing with the U.S. Securities and Exchange Commission.

The companies said their modified relationship will allow TiVo to fold AOL's popular features into its Series2 DVR recording device. TiVo subscribers will be able to use the online company's instant messaging and chat services, and AOL subscribers will be able to program their TiVo devices through the online service. AOL will pay TiVo a $4 million "development fee," according to the SEC filing.

"The broader attempt at services is commendable, but I'm uncertain whether the chat and IM capabilities will become that popular in a time-shifted environment," Kishore said.

Kishore said it was good to see that companies are learning that adding Web access isn't going to be the attraction they once thought it would be. Web access was the key feature of Microsoft's WebTV, UltimateTV and AOL's AOLTV services, all of which have been relegated to the back burner.

The online programming capability, though, could prove to be a plus for consumers, Kishore said.

Deutsche Bank Securities research analyst Peter Ausnit said the announcement shouldn't affect TiVo dramatically, either positively or negatively.

"AOL is distributing TiVo; they're just getting their cash back," Ausnit said.

The changes to the deal are part of an overall "evolution" of the companies' relationship, said AOL spokeswoman Wendy Goldberg.

"The product vision has evolved in what you're seeing today from the dual-function AOLTV set-top to offering popular AOL features through TiVo," she said.

AOL, which launched AOLTV in 2000, has largely scaled back its interactive television efforts. The TV unit's former head, Robert Friedman, took on a new job working on marketing within AOL Time Warner. An AOLTV representative did not return calls seeking comment.

TiVo spokeswoman Rebecca Baer said, "This is a continuation of our partnership with AOL and a reflection of our strategy where we're moving toward adding more features to our service offering."

Earlier this year, at the Consumer Electronics Show in Las Vegas, TiVo Chief Executive Mike Ramsay introduced the company's second-generation recorder, the Series2, and said the company will be working with partners to add new services, such as online gaming and video on demand, to the recorders by the holiday season.

News.com's Richard Shim contributed to this report.

 

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