TiVo’s new set of prices and terms are a horrendous step in the wrong direction for the company. Instead of encouraging large numbers of new profitable subscribers, TiVo is setting up for very small numbers at higher marginal profit levels. In the mix they are increasing the hardware portion of SAC by about $30-40, and the marketing portion will be much higher – unless TiVo is going to cut way back on marketing.
Lost are the opportunities to profit from Download on Demand (DOD) video and advertising. Neither was getting much of anywhere anyway because of the miserable sub growth, but now all is lost. Also lost are even more S3 sales as the cost and commitment has jumped for that box as well.
For almost a year TiVo has tried to get retailers to join the Bundle program, but the retailers are too smart to go along. The new plans effectively force prices through retail into line with Bundles. TiVo claims the price structures are now simpler and fewer. The reality is that it is far more complex to understand the terms and price choices. If the customer has to think so much, the product is not going to be purchased in many cases.
TiVo makes another mistake by thinking it can use the cellular industry model to achieve better results. TiVo is not in an oligopolistic industry with all players essentially offering the same terms. TiVo is alone amongst DVR offerings using the cellular model, which is highly unfavorable relative to the competition.
Perhaps TiVo has indeed surrendered all hope of garnering significant numbers of SA subs, DOD content and advertising dollars. There is an implication to be read into TiVo’s moves that they are walking away from the hardware business by selling ever smaller numbers at ever higher prices. This may be the final capitulation with regard to all other strategies, where TiVo simply tries to survive on expensive subscriptions from a few expensive Series3s and modest numbers of S2s. In the meantime, the DTV business vaporizes faster than Cable Software can compensate for quite some time, if not permanently.
Unless TiVo cuts back dramatically on their spending, the company will be overwhelmed with losses as expenses are spread over far too few subscribers. TiVo’s explanation to the financial community appears to be that they will spend more money up front (higher SAC) and make it back during the life of the box through higher service fees. This is a classic Wall Street game designed to enhance stock price by promising ephemeral future dramatic growth. It often works for the short term stock price and rarely for the ultimate results. It will not work in TiVo’s case, and so far the market is seeing that, with TiVo’s stock price plunging this week. TiVo is running their business by accountant rather than entrepreneur.
As usual, TiVo announced the new pricing without thinking it through. They have not had any answers for the numerous questions about details of the new plans. I suspect none of those answers will be received happily once they arrive – unless TiVo does the kind of fast dancing they did around problems created last March when the last pricing fiasco was announced.
It makes no sense whatsoever that 1) the Series3, for which the box itself is sold at a profit and is not subject to a price decrease, is also subject to this bizarre set of plans; or 2) that old, used boxes that already have upfront costs sunk are under these plans, discouraging their very profitable continued use.
TiVo is worried about churn rates, so TiVo started digging itself a hole last September with one year commitments on all new activations. The hole got deeper with the start in March of Bundle Plans. In order to protect themselves from increased churn as these ill advised moves begin to bite, TiVo has dug the hole very deep this time. But TiVo is going to experience the opposite of the desired churn result. S2s coming off commitments are going to get dumped rather than pay more per month or sign 3 year commitments. Churn will start rising from .9% to 1.1-1.2%. As that happens, TiVo’s SAC per Net Add will be so enormous that the company will never realize a positive return. As churn starts to exceed 1.5%, subscriber growth will cease, and eventually subs will fall.
These are dramatic and dire projections for the company. TiVo will be forced to cut back substantially on spending to survive. No reasonable amount of Cable Software subs can compensate for these losses. TiVo will have to completely evolve the business model to small revenues and profits with limited expenses.
We are less than 3 months away from the Vista Tsunami, and TiVo has spread its blanket on the beach to watch.