In only five years, TiVo has accomplished a feat that most start-ups dream of but never quite achieve. The young West Coast company has built a top-notch brand with fervidly loyal subscribers. These devotees rave about how TiVo's digital video recorder and service -- also called TiVo -- have unchained them from the dictates of broadcast and cable schedules, allowing them to watch whatever strikes their fancy whenever they want. TiVo does that and much, much more: It can record all the movies starring your favorite actor, zoom past commercials, pause live shows for fridge runs, and even suggest new programs you might like. In other words, TiVo is fundamentally changing the way its customers watch TV.
You might think that a company with a truly revolutionary product and deeply devoted customers wouldn't have to fret about mere survival, but TiVo does. Why? It's one thing for a company to create a product that so quickly generates a cultlike following; it's quite another challenge to move the device into the mass market -- a necessity if TiVo is going to succeed as a business. The pioneering firm must also fend off a growing number of competitors, such as ReplayTV, UltimateTV, and cable and satellite entertainment companies offering a TiVo-like service. Then there's the paradox of the TiVo box: It's easy to use, yet the product has proven to be next to impossible to explain in a snappy consumer ad. That's left the company with only 650,000 subscribers -- about a half percent of all U.S. homes with TVs. For TiVo to survive -- and some industry insiders bet it will -- the little upstart will have to coax more big technology and media companies to join with it in the revolution.
When two former Silicon Graphics executives founded TiVo in Alviso, California, five years ago, the promise of technologies like interactive television and video-on-demand were much hyped. But, as in the early days of aviation, attempts to realize the dream had yielded nothing but costly wreckage. Early ventures failed to click with consumers because of storage glitches and complex interfaces. TiVo became the Kitty Hawk of the industry, the first personal video recorder that took off. The reason was simple: Using TiVo turned out to be a breeze for consumers.
The timers on VCRs have long allowed people -- in TiVo's pet phrase -- to watch what they want, when they want, but setting things up seemed to take as long as the programs themselves. Not with TiVo. "My mother can use TiVo with no problem," says Matt McCormack, an analyst at the Arlington, Virginia-based financial holding company Friedman, Billings, Ramsey who flips on his box as soon as he gets home every night. Suddenly, even the technically challenged could shuffle broadcasting schedules at their whim. "From day one, the company had a focus not on tech but on the consumer point of view," says TiVo president Morgan Guenther.
While consumers were particularly attracted to the feature that lets them skip past annoying commercials, television networks and advertising agencies, understandably, were not. But because a few of these networks had also invested in TiVo as a way of keeping an eye on the new technology, the small company found itself in a fix: how to appease investors without killing a feature that helps sell the product. In a move that revealed an inventiveness that has become TiVo's hallmark, its executives told ad agencies that if they wanted viewers to watch commercials, they should make commercials worth watching. And, in a clever, counterintuitive stroke, TiVo offered to help.
The firm teamed up with agencies like McCann-Erickson and Starcom as well as companies like Best Buy to begin conceiving more engaging TV spots. As part of this effort, the firm tracked the viewing patterns of 10,000 of its subscribers during the 2002 Super Bowl and found that they used TiVo's instant replay feature more on certain commercials -- notably the Pepsi ads with Britney Spears -- than on the game itself. So far the new experimental ads include a sweepstakes for a free Lexus that can be entered through the TiVo software while watching a Lexus commercial, short action films made by BMW, and exclusive promotions for blockbusters including The Lord of the Rings: The Two Towers and Jack Nicholson's latest, About Schmidt. "The standard 30-second commercial won't disappear," says Ben Mendelson, president of the Interactive Television Alliance, a trade association. "But it will become less prominent."
While industry insiders give TiVo accolades for turning a difficult situation into a business opportunity, the company has stumbled repeatedly in marketing its product. Early on, TiVo tried the traditional means of getting the word out, running TV ads with the slogan "TV Your Way" that featured TV executives being hurled out of their office windows and families shoveling food in their faces to finish in time for their favorite TV show. But the ads didn't resonate with consumers, mostly because new multifeatured technology products are always a tough sell in a commercial.
So TiVo took a radically different approach. It knew its reputation had grown mostly by word of mouth, so the firm began giving its product away to such celebrities as Sarah Michelle Gellar and Drew Bledsoe, turning them into high-profile members of the cult. It worked. One night Guenther, the firm's president, turned on his TV to find David Letterman singing TiVo's praises. "He was just raving about TiVo," Guenther says. "I thought, ÔYou know you're up there when something like this happens.' "
By 2000, TiVo could claim some success with branding. It had joined the elite echelon of brands whose names -- Kleenex, Frigidaire -- had become synonymous with the product itself. Even rarer, TiVo had transcended those names to become a verb as well, as Xerox has. But still, compared to the high expectations that Wall Street analysts have created, TiVo has signed up only about 225,000 subscribers a year so far, a decent rate for a new technology but disappointing for one with such enthusiastic users. Desperate to speed up growth, the company intends to build on the devotion of its subscribers with yet another approach -- TiVo as a lifestyle. One example is the "TiVoware" parties that subscribers stage to introduce the products to others.
No matter the marketing strategy, though, TiVo is going to have to bring down the price of the product to win mass-market adoption. Most of the cost comes from the product's software and technology, which enables the hard drive to record up to 60 hours of TV. The box's price has already fallen from around $1,000 for the earliest models to between $249 and $399, but it's still above the magic $199 that TiVo believes will lead to mainstream success. The company's decision to license their technology to electronics makers such as Sony and Philips has helped reduce costs and grow their market, but licensing has its limits. It's still up to TiVo's own designers to find additional savings by reducing the number of chips used from three to one. "You can't rely on your partners to innovate for you," says Guenther. "They don't always have the passion you do."
Yet in the end TiVo's fate rests largely in the hands of others. From the get-go the company realized that to hit the big time in television you have to piggyback on the established players. To build these partnerships, TiVo has given media giants like NBC, the Discovery Channel, and AOL Time Warner an ownership stake. That early bet has paid off. This summer, longtime partner DirecTV began offering discounts on their TiVo boxes to its subscribers, eating the costs in hopes of driving up subscriptions. Recently the firm cut a deal with Toshiba to distribute TiVo in its products. "TiVo's not going to grow by selling TiVo boxes, but by Sony selling boxes with TiVo in them. They have to get a good percentage of electronics manufacturers in their corner," says Bill Niemeyer, who runs a San Francisco-based consulting firm, Centrimedia, and publishes a newsletter on emerging TV technology. He also -- that's right -- owns a TiVo.
TiVo watchers are of two minds on whether the firm that launched the revolution in TV viewing will still be around by the time tens of millions of couch potatoes finally join in. Some analysts think TiVo would draw a tidy profit if it could reach 3 million subscribers in the next five years. Hitting that high mark won't be easy, but at least TiVo is slowing the bleeding: It lost $11.5 million in the third quarter of 2002, about a third of the loss a year before. If TiVo fails, perhaps the firm will be remembered as another Netscape, a brilliant idea that unleashed great change, only to decay into an also-ran. For a small company like TiVo, survival boils down to one word: innovation. "It's the lifeblood of a company like ours," says Guenther. "You need to innovate aggressively or you're dead."
