TiVo Says Hardware Subsidy to Spur $8-$10 Million in Q4 Losses

TiVo’s upfront subsidy that helps slash the entry-level Premiere DVR’s price to $99 with a one-year subscription will add $8-$10 million in losses to Q4 earnings, TiVo Chief Financial Officer Anna Brunelle said on a conference call. The price of the step-up Premiere XL also was lowered to $299 from $399.

The loss will be offset by a higher average revenue per user (ARPU) -- the promotion increases the monthly fee to $19.99 from $12.99 -- over the life of a new subscriber, TiVo executive said. The average life of a new subscriber is about five years, Kaufman Brothers analyst Todd Mitchell told us. TiVo’s Q3 ARPU for standalone subscribers was $7.59, down from $7.65. The licensed ARPU from MSOs and satellite operators, which includes RCN, DirecTV, Cox and others, rose to $1.24 from 46 cents a year ago. Partly as a result of the subsidy, TiVo’s Q4 net loss will grow to $32-$34 million from $20 million in the previous quarter on revenue of $40-$42 million, Brunelle said.

"You get the substantial increase in your monthly ARPU relative to what people were paying previously and that’s more than made up within the lifetime of the subscriber,” said Naveen Chopra, senior vice president of business development and corporate strategy. “It’s a nice increase."

Whether TiVo carries the promotion beyond the holiday season hasn’t been decided, CEO Tom Rogers said. TiVo tested the current promotion for several months and, provided it matches test results, “we will explore the possibility of continuing with this pricing strategy,” Brunelle said. The promotion helped drive up TiVo’s Q3 per subscriber acquisition costs to $178 from $165 a year ago, including $2 million in price protection for retailers, Brunelle said.

TiVo ended Q3 with 2.27 million subscribers, down from 2.74 million a year earlier as it lost 112,000 net subscribers during the quarter, down from a loss of 314,000 a year earlier. It lost 45,000 standalone subscribers to end the quarter with 1.3 million, down from 1.57 million a year earlier. MSO and satellite-related subscribers declined to 951,000 from 1.19 million a year ago. The Q3 standalone subscriber loss was flat with a year ago, but the monthly churn rate increased to 2 percent from 1.7 percent, TiVo said.

The subscriber losses will slow as MSOs start rolling out the TiVo DVR service. RCN’s launch earlier this year has “exceeded expectations” and Virgin Media is expected to introduce the service in the U.K. this month, Rogers said. U.S. MSO Suddenlink will launch it in a single market, while Canal Digital (Scandinavia) and Ono (Spain) are will come on line in 2011, Rogers said. TiVo also is readying a remote recording software for Apple’s iPad.

TiVo’s high profile relaunch with DirecTV was postponed to early 2011 from late this year, Rogers said. A DirecTV spokesman confirmed the change, but declined further comment. A TiVo spokesman wasn’t available for comment on the reasons for the delay. The DirecTV satellite receiver/TiVo DVR was originally scheduled to ship in the first half of 2009 and was postponed to last spring (CED Nov 27/09 p2). Comcast is continuing its three-year test with TiVo in the Boston area, a Comcast spokeswoman said. The Comcast test involved downloading TiVo software to upgrade Motorola set-top boxes. While the service had been scheduled to expand to the Chicago market, it was slowed as Comcast works with TiVo on tru2way integration, the Comcast spokeswoman said. Cox Communications scrapped its download test in Connecticut-Rhode Island (CED March 7/08 p3) earlier this year and shifted to marketing Premiere DVRs with its broadband service (CED Aug 13 p3), a Cox spokesman said.

"With the increase in subs that we hope to see from these newer deals kicking in, we hope to see further improvement” in stemming the loss of MSO customers in 2011, Rogers said. “In terms of meaningful impact, it’s going to take some time, even though the product launches as very near term. It will take some time before you see numbers that are going to be meaningful on the radar screen."

TiVo’s more recent deals with MSOs contrast with those signed two years ago with Comcast and Cox, in that TiVo is the exclusive or primary DVR platform that the cable operators are distributing, Chopra said. The pacts carry guaranteed subscriber levels and TiVo gets a “substantial return” in subscriber fees for any R&D investment, Rogers said. “Those guarantees tend to be quite substantial,” Chopra said. The guarantees make upfront losses on the MSO agreements “pretty modest,” most of which can be matched with revenue, Rogers said.

Meanwhile, if TiVo prevails in the current round of a legal battle with EchoStar, it could receive $500 million, Mitchell said. The case went before the U.S. Appeals Court for the Federal Circuit for a rare en banc review earlier this month (CED Nov 10 p1). If the court decides EchoStar violated TiVo’s so-called time-warp patent and a court injunction, the satellite service could be forced to shut down millions of DVR-equipped STBs. A federal jury in 2006 said EchoStar violated the TiVo patent and U.S. District Judge Charles Folsom issued an injunction that was postponed during the appeals process. In arguing that it didn’t violate the court injunction, EchoStar attorneys maintained that the company designed its receivers around the TiVo patent. “The decision of the court of appeals should be the final word in the patent case,” Rogers said. If TiVo gets an injunction, Judge Folsom will likely move “with great dispatch” to enforce it given the length of the legal battle, Rogers said.

TiVo’s legal costs will likely remain high in 2011, as its court battle with AT&T and Verizon “heats up” in Q2, Rogers said. TiVo sued AT&T and Verizon in August 2009 (CED Aug 28/09 p1) arguing the telcos infringed the same time-warp patent that’s at the heart of the EchoStar suit.

TiVo’s Q3 net loss widened to $20.6 million from $6.4 million a year earlier as revenue slipped to $50.8 million from $57 million. Service revenue dropped to $34.2 million from $37.7 million, while that from hardware declined to $9.5 million from $10 million. Technology revenue dipped to $7 million from $9.3 million. TiVo’s revenue from its own subscribers slipped to $30.6 million from $35.8 million, while that from MSO/satellite improved to $3.6 million from $1.89 million.