October 31, 2006 4:00 AM PST

TiVo readies for prime time with Comcast

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Comcast's Web site says the upcoming TiVo DVR will be available in "a majority of its markets" and will have features such as the ability to automatically record shows based on past user preferences.

Despite the lack of details, it's clear that there's a definite upside for both companies. Comcast, for its part, can offer its customers the premier brand name in digital video recording.

Access to Comcast's large customer base, meanwhile, should help TiVo in the long run, but only if cable customers see the value in the service. TiVo reported net losses of $6.5 million and net revenue of $59 million for the second fiscal quarter of this year. Revenue increased by 50 percent from the previous quarter, while losses were up more than 620 percent, due to an obligation to fill inventory for the first time in 3,000 Radio Shack stores.

That two-pronged approach--supplying hardware, like the new Series 3, an $800 high-definition DVR aimed at home theater enthusiasts, and licensing software--makes some analysts who monitor the company a bit nervous.

The relatively lower revenue and margins that come with selling an expensive box like the Series 3 make Mark Harding, senior digital media analyst for Maxim Group, skeptical of TiVo's ability to succeed in the standalone box business.

"I look at TiVo as a software R&D shop," he said. "Its interface is very attractive, but trying to do both the software and the hardware in a commoditized concept, and trying to charge a premium price and get a premium return is, I think, very challenging for the company."

Success in attracting new users through the initial Comcast test run could bode well for TiVo in terms of future distribution partnerships.

"TiVo doesn't want to be in the hardware business to the extent they can be a software licensing or services company," said Arenson of Ferris, Baker Watts. "The Comcast deal in particular is a kind of an overlay--it's a download onto an existing platform." The premise, he said, is if it finds success in the Comcast market then it's in a better bargaining position with other, albeit smaller, cable operators.

Partnerships have worked well for TiVo in the past--one in particular. As of the end of the second quarter of 2006, 64 percent of TiVo's subscriber base, or 2.84 million people, comes directly out of its DirecTV relationship, according to data collected by Current Analysis. The two companies renegotiated their contract in April 2006, but TiVo won't get any new customers under the deal as DirecTV has since developed its own DVR service.

In August, TiVo announced an agreement with Cox Communications. Though it can't offer TiVo as many potential customers as Comcast, deals with smaller companies like Cox and its 6.7 million subscribers are still a vital part of TiVo's software licensing strategy. Cox will begin testing the new service in early 2007.

"From an investment standpoint, it's a dangerous sort of story," said Arenson. "I think (TiVo has) proven it can manage its finances that way, and to be pretty creative striking partnerships and offering new features. But, I think it's best to just sit and watch."

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