|The San Jose Consulting Group
A Strategic Analysis on
Performed By Junior Analysts…
The digital video recorder (DVR) market is experiencing rapid growth, with an expected consumer base of 19.6 million DVR units in homes by the year 2006. Tivo implemented an aggressive marketing strategy in the late 1990’s; as a result Tivo Inc. has become the most recognizable brand name and thus setting the standard in this exploding industry. But Tivo is not without shortcomings. It faces inabilities to effectively reach large amounts of the DVR market due to the current monopolies that cable and satellite companies enjoy. The fairly expensive retail price of the Tivo unit could possibly jeopardize the company’s ability to stay competitive in the market for an extended period of time. The rapid growth of this industry is also creating increased competition for Tivo, and it seems the management of Tivo will be left with some crucial decisions to make if they are to continue to survive in this industry.
Currently, Tivo develops DVR software and stand-alone units with a selling focus towards television viewers seeking an improved and interactive viewing experience. A DVR unit is a set-top box that performs three different main functions:
Tivo and live television – Tivo allows the viewer to pause and rewind live T.V. programs so they don’t miss a moment of their show. No longer does a trip to the bathroom or the refrigerator keep the viewer from watching their entire program. Tivo also automatically records the show you are watching as you are watching which allows you to rewind it as far as fifteen minutes into the past. This means if a friend walks in the room and didn’t catch the first ten minutes of the show the viewer can rewind it back to the beginning and watch it again. Tivo also allows the viewer to fast forward through commercials that took place as it was recording the show. So typically after starting the show over the viewer could eventually catch back up to live television by fast forwarding through commercials.
Tivo and recording – Tivo also works as a video and television program library storing the viewers recorded movies and programs on its hard drive. Tivo’s hard drive comes with a certain amount of memory and the customer can choose anywhere from 40-120 hours of memory when they purchase their unit. Viewers can then set-up their Tivo to tape any show they want, much like a VCR, however Tivo can store many more programs than a VCR tape would be able to. In addition the viewer can program Tivo to tape the favorite shows every time they come on no matter what channel they are on. This means that if a viewer likes “Friends” the Tivo is able to record all six episodes in one day from different channels through just one command. Viewers are also able to give Tivo commands of what shows they like and Tivo will automatically find similar shows and tape them.
Tivo Home Media Option – A final option with Tivo for extended cost is networking Tivo programs throughout your household. This means that a viewer can save a program on their living room T.V. and later transfer it to their bedroom television. This allows the viewer much more memory space because they have multiple units but also more convenience because they are not limited to a certain room in their house to watch a movie or program they have saved.
As the above indicates the DVR is a very versatile machine and because it allows consumers to watch what they want, when they want, the Tivo and DVR market may prove to be more profitable than any of us realize.
Tivo has not and is not on its way to creating a sustained competitive advantage in the industry. Though the most easily recognized brand of DVR’s, Tivo has yet to make a profit in its near six years of existence. The latest figure was a 4.4 million dollar loss for the third quarter of 2003. Although that is a $10 million dollar improvement from the previous year, the Tivo situation still faces considerable roadblocks to sustained profits. Tivo remains reliant on developing and maintaining relationships with satellite and cable providers in order to remain competitive in the industry. Sixty-two percent of Tivo’s subscription growth came from an existing partnership with DirecTV to offer DVR services in conjunction with satellite television. As of now, the situation of this current relationship is up in the air. Presently, DirecTV’s parent company is in the works to be acquired by News Corp. News Corp. already owns the British firm NDS, which is developing it’s own DVR technology. If this relationship breaks down, Tivo will find it difficult to find another parent with enough clout in the cable/satellite industry to record profits. Other communication giants, such as DISH network and Comcast (DVR out in Jan. 04’), supply generic DVR’s and services for a lower price and cheaper monthly fees. With television viewers separated so clearly based upon service providers, a long-lasting mutually beneficial relationship with a cable/satellite company is a required element for Tivo to achieve success.
The prospects of Tivo being successful in this industry for a sustainable amount of time are slim and uncertain. The stand-alone unit for the Tivo cannot financially compete with the DVR packages that television providers are offering at discount prices. Tivo is at risk of becoming a niche product, comparable to Apple computers in that only a select few will have a desire to own the product. On the other hand, Tivo may be able to achieve profitability and success by concentrating on their core competencies of software development and marketing.
Tivo has diversified itself in the industry by promoting its DVR as the user-friendly system in the market. This is due to their software, which is made up of many different menus the viewer will use when operating a Tivo DVR. These menus are said to be simpler for the viewer to understand and use which had pushed many consumers towards Tivo however high quality software isn’t the main thing that has sold their DVR’s. Marketing seems to be Tivo best competence thus far because it has established their name in the market resulting in many consumers acknowledging DVR’s as “Tivo’s”. This has been extremely beneficial for Tivo because they have the set the standard in the market and are the most well known manufacturers of DVR’s. Tivo could attempt to leverage their visibility to consumers as a selling point in creating profitable relationships with third party DVR manufacturers.
The question however, is will the competences be enough to bring Tivo to profits? While the answer is hard to find, currently it seems these competences will not suffice. Tivo does have a brand name advantage but consumers are slowly seeing more advertising for generic DVR’s and the price is so much less it has been hard for consumers to ignore. While some are still chasing after the name and the user-friendly system others will gladly take the more complicated less popular DVR for the drastic price cut. Currently a Tivo unit will cost a consumer $100-250 with a $10-15 per month fee. Customers of a cable company such as Comcast will be able to get a DVR unit in January 04’ for free and pay only $10 per month. Some other cable companies have advertised as low as $5 per month. This is the very reason that competition is growing so quickly in the DVR market and why so many companies, especially in cable and satellite, are interested in manufacturing their own units.
An important lesson learned from Tivo is that consumer demand of the DVR market is less oriented toward superior quality and differentiation than it is towards low costs. With the amount of complimentary products to television viewing, along with considerably high monthly cable and satellite bills, consumers are looking to save money in certain areas. With generic DVR’s offering the same basic abilities as Tivo, though in an inferior manner, consumers are choosing to save their dollars.
If executives expect to turn Tivo into a profitable company in the DVR industry, they must focus on company strengths such a software development while phasing out their weakness of manufacturing. Tivo cannot compete with the economies of scale that Comcast and DISH possess, thus making the Tivo stand-alone unit a financial liability to the company. By ceasing unit production and instead redoubling efforts to research and development, Tivo can continue to generate innovative and consumer friendly software for DVR devices. Third party manufacturing companies that lack sufficient research and development could be possible suitors of Tivo’s widely known software interface.