Strategic inflection: TiVo in 2003

WHY EVEN MARKET PIONEERS FAIL?

JOAN VARGHESERESHMI MENONNELSON MATHEWROJI JOSEPHNISARG DHAMECHATHOMAS VARGHESE

Introduction TiVo founded in 1997TiVo- leading provider of digital video

recorder(DVR) tecnologies and services.User interface and entertainment

business.Has suffered $500 million in operating

losses since it was founded.TiVo operates in a complex ecosystemUser could pause live TV, record

programs etc.

Solved two problems: conflict among people , sifting through channels.

Recording time-40-80hrsCost $249-$349Installation cost-$12.95 per month

or one time up front fee of $299TiVo- connected to TV and

Internet or to phone jack

Technology

Computer with a large hard disk drive, read /write MPEG digital video chips for encoding and decoding, a modem and other components.

They ran on MIPS CPU core with linux operating system

TiVo DVR’s microprocessor contain cryptography software

SummaryTiVo – founded by Ramsay and Barton in

1997. Had various features like Wishlist, Season Pass etc.

In 2002, TiVo launched second generation product- TiVo Series 2 with a more robust processor and increased memory. Also, TiVo and DirecTV launched an integrates Direct TV/DVR.

In spring of 2003, TiVo shipped its first premium service application-Home Media Option(HMO).

TiVo also sold services to advertisers and networks called Showcases.

The major problems faced by TiVoThe main problem was low market penetrationof TiVo despite of innovative product andextensive advertising. The major reasons for

thisare due to the following:Expensive-cost of installation+monthly fee.Competition from satellite and cable T.Vnetworks providing DVR facilities at a lower

price. Confusion among consumers about what DVR

did and what DVR did not do.

The case also talks about TiVo’s ecosystem which consists of content aggregators, content providers and content distributors.

The case concludes with a list of possible strategies that TiVo should adopt.

StrengthsPioneer in the product categoryEasy to use and equipped with numerous

innovative featuresHigh level of customer satisfactionUnique features such as Season Pass, WishlistWeakness Expensive product with additional service feeIneffective communication with its consumersLack of brand awareness

SWOT

Opportunities 300% increase in number of families opting for

luxurious electronics International Market� Increasing adoption rateThreats Competition and possible substitutes� Dependency on major retail partners for �

distribution Dependence on external manufacturers

SWOT

The company had good results in 2003 first quarter, but the CEO, Mike Ramsay felt that the company is at its ‘Inflection Point’

Inflection Point:-Point at which a corporation facing a new situation must alter the path it is on and adapt, or fall into decline

CEO realized that they are facing a lot of changes in their ecosystem and realizes the need for an alternate path

He is in a dilemma whether to go for mass markets or for product differentiation

Problem identification

Competition:-Direct and indirectIn 1998 Tivo had just one competitor. Now it is

more than a dozen. This includes cable networks, computer manufacturers, broadband service providers etc

Transition in the cable industry from analog to digital set top boxes.

The use of integrated entertainment systemsThe change in strategic alliances with DirecTVChanges in the patterns of advertisement.M&A in film industry and other content

providers

What are the changes

Value Chain of the traditional Video Recording Industry

Value Chain of the Video Recording Industry in the digital convergence age

They had the first mover advantageThey had the superior technologyThe markets were growingBut They couldn’t exploit the advantage of being

the first moverThey were not able to reach their full

potentialThey incurred an operating loss of 500mn

from its inceptionThey could not position themselves clearly

within customers

What happened to Tivo

BCG MATRIX

High cost of production resulting in high price for the product

Slow adoption rate in the industry. This gave the competitors the time to adopt or imitate

The cable operators could offer cheaper services that would appear in the monthly bills without any initial investment

Reasons

Launch of newer models such as Tivo Series2Alliance with DirecTV Introduction of premium service application HMONew advertisement models such as showcases,

audience-measurement servicesTechnology updation and patentsBasic level service provided with Toshiba and

Pioneer DVD players with DVR capabilityEntered the UK marketSales and marketing worth $150mnUnique features such as wish list, season pass,

search engine etc….

Steps already taken by Tivo

Which strategy should the company opt?

The point where a new trend is initiated is called a strategic inflection point by Andy Grove.

Inflection points can be subtle or radical.

The consumer adoption rate of TiVo remained relatively slow.

Unawareness of the product to new customersConstantly changing technologiesLot of CE brands availableLoosing the first mover advantage.This will give competitors enough room to catch

up the market.

Why Inflection

At this point(Inflection Point) the company should find an alternate path to avoid decline.

Under these two options, company had half a dozen strategies.

Since they were the veterans in the DVR business, they had a lot of alternate paths.

Mass deployment/Product development and

differentiation

Cost…..Manufacturing and selling the basic TiVo DVR that would have no monthly fee.

Engineering recourses to be conserved.Later up gradation to full TiVo services.

• Manufacturing and selling a DVR “white Box” to CE retailers, allowing the retailers to sell their own branded DVR device.

• Chinese(6 months) Vs Japanese( 2 years) design cycle.

Strategies…….

Cost matters….. Lowering the license fee TiVo charged CE manufacturers.

Expansion of its pool of CE partners

Strategic alliances…. Entering into a major partnership with a cable company.

Enhanced advertising revenue and premium service revenue to partners

Diversification…….Expanding efforts to grow TiVo’s services for advertisers….. Market was enormous…

TiVo should be a television services company.Platform for advertisers to enhance their ads

with interaction and measurement.

Focusing recourses on developing new DVR and home entertainment capabilities.

Software portability, EPG/ IPG enhanced versions

SuggestionsManufacturing & selling a Tivo Basic DVR

that would have no monthly fee : - No monthly revenue & no up gradation by customers

Manufacturing & selling a DVR “ White Box” to CE retailers will erode their patent rights, & threat of chinese manufacture mass production

Lowering the fees charged by Tivo:- It will be difficult to get good revenue. Co will be at break even. The position of the Tivo is premium pricing.

Expanding efforts to grow Tivo’s service advertisers is not a good option because if market share of Tivo will increase then automatically ad revenue will increase, not in the opposite way

Going to partnership with cable company as their software tool will be a good option because they have large market share & also consumers are shifting from A to D so collaboration of DVR functionality in cable will be the win-win situation for both.

Enhanced ad revenue & premium service revenue

No extra capital investmentScientific Atlanta & MotorolaDownside- fee collection, negotiation

Focusing resources on developing new DVR & home entertainment capabilities will be the future of Tivo

Will help to make patents & license revenue

Value added DVR leader positioning will help to charge premium pricing

It will be able to differentiate it from other DVR providers

ConclusionBeing the pioneers, they are

really able to cash in their market segment

Tivo should stick to “bread and butter” approach

A Tivo- which has not been able to propagate its purpose

Disruptive idea