Response

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The following is a response to part 4 of the TiVo by the Numbers  series in Dave Zatz’s blog. These comments follow the article essentially in order and its not a polished article because I wrote it as a comment response to the article.

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I have been arguing for months that TiVo’s plan wouldn’t work. Now they are going to modify what they have been doing. The right question is: will they make it worse or better?

CableSoftware will bring in around $1.00/mo in subscriber net margin compared to $6.00 plus on SA hardware. I think you wrote earlier about LT sales substituting for monthly. LT compares well to CableSoftSubs.*  What happens with higher margin box/LT sales…much better than CableSoft.

CableSoft will compete with cable S3s and cable/S2 users. The substitution effect should be worse than it was with DTV, especially because of S3 substitution.

Allocating much ad spending to CableSoft sub acquisition is going to make that business line look very poor. Increasing ad spending allocated to SA sub acq. without much increase in SA GAs is going to make that business line look worse.

Your NPV numbers are wrong and the value/quality comments by TiVo are just more hot air which you know they wouldn’t back up with numbers when questioned.

You are talking about reducing SAC by heading back in the direction I have said for months was better than what they came up with in March. The problem is going to be whether this really works well enough. Lower GAs will push upward on SAC; higher ad spending – even a fraction of what you described earlier – will balloon SAC.

Throttling GAs probably means giving up on the advertising and DOD business lines, which were promising in theory.

Steps that deal with the disposable box problem created the last few months could be helpful if they don’t make other things worse.

CableSoft revenues are unlikely to make up for DTV declines any time soon. The margin is high % but low $. SA margin has traditionally been over 80%.

You are assuming a lot about what the cable cos will do to get advertising, and what they will do to get subs. Cable cos are often not good partners and DTV was a very good partner. You mention allocating TiVo’s ad spend toward CableSoft; that will just create a non-zero (high?) SAC compared to NPV.

Another big bet you are making is that simply putting software on a box is going to provide good performance and cure deficiencies, and that it will be worth whatever the Cable Co charges for the software.

Its good to see your paragraph about TiVo potentially struggling. Its not all so easy as you painted in the first 3 installments.

I have argued for years that TiVo needed to go much higher end, garnering higher margins off of premium hardware, and generating a brand rep in that segment. Now, after years of low-end hardware, does TiVo really have any rep in that market or do they have to build it and can they?

I doubt TiVo has the resources to develop features at a fast enough pace. For years they have not done so, and the big muscle is coming at them in about 6 weeks.

You have not even addressed what the competitive environment in going to evolve into during 2007. AAPL, MSFT, Sling? …

The analog cable argument has been made for what, 9 or 10 months? I never bought it and it hasn’t materialized. Hot air like the “value/quality” hot air? How are high prices going to work with low-end analog cable subs? Not well is my guess.

Obviously the S3 has a higher NPV, and 20,000 sales is possible.

I am glad to see you are working your numbers. You are still off though. Also, you forgot the cost of the 1yr free on the old LT box.

Where is TiVo going to get the $20M or so per quarter they spend on R&D and G&A? You never addressed that in your work.

Note:

* A worst case $369 LT sale less a high $180 SAC left at least $189 in cash to generate returns to fund the $2.25/mo (less ad revenue) or so in costs. Over how many months could you amortize that $189 down to zero with a $1.00/mo margin?

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