TiVo Is Doomed
Sam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
More and more, it looks like TiVo’s (NASDAQ: TIVO) 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.
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.
TiVo’s business is challenged -- and that’s putting it mildly
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 and DirecTV (NASDAQ: DTV) 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 its annual report, TiVo notes that DirecTV is a key partner, which makes the Genie all the more threatening, particularly because DirecTV hypes up the Genie on its website as being superior to TiVo’s product.
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.
On the company's last earnings call, management said the Genie was encouraging existing customers to upgrade their equipment. Clearly, DirecTV has benefited from pushing its own advanced hardware, and more of that should be expected going forward.
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.
The industry could be on the verge of consolidation
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.
Hedge fund manager John Paulson, who was able to correctly forecast the wave of consolidation in the wireless industry, believes that Cablevision Systems (NYSE: CVC) is a likely target.
Shares of the small cable provider have rallied more than 20% since June. 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.
Paulson appears to be betting big on a Cablevision takeover. As of the end of March, Paulson's fund owned nearly 17 million shares, up about 40% from the end of December.
Paulson's fund profited when its large stakes in Sprint and Leap Wireless were purchased by Japan's SoftBank and AT&T, respectively. He appears to be hoping to do the same with Cablevision.
And it isn't just Charter, Time Warner, and Cablevision. Although he personally would not be involved, Malone has said that he wants to see DISH merge with DirecTV.
Whether that actually occurs or not remains to be seen, but the larger point is that 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.
The patent case is over
Of course, the bull case for TiVo in recent months has not been based around the company’s actual business. Rather, TiVo investors have largely been banking on cash from legal settlements.
As the company more or less invented the DVR, it has a slew of valuable patents. To date, TiVo has settled with companies like Google, Cisco, and Time Warner Cable.
Those settlements have brought in over $1.5 billion, and TiVo has channeled much of that into share repurchases (it plans to use $200 million to repurchase shares over the next two years).
The problem is that, at this point, there are few companies left for TiVo to sue. With no major settlements on the horizon, shareholders should focus on the company’s core business -- which appears to be in a precarious situation.
Investing in TiVo
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.
One 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.
While small cap stocks have been hot in recent months, this is one for investors to avoid.
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Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!