TiVo Slashing Prices to Grab Subscribers

The TiVo (TIVO Quote) personal video recording service will be 50% cheaper for many of its subscribers Nov. 1.

TiVo's monthly fee will drop from $9.95 per month to $4.95 per month for current and future TiVo users who subscribe to the service through the DirecTV home satellite service, according to TiVo and DirecTV, which told subscribers about the switch over the Labor Day weekend. DirecTV will make the TiVo service free to its highest-paying video customers, says a DirecTV spokesman, and will drop the $249 "lifetime subscription" option.

Coming as part of a restructured relationship between TiVo and DirecTV -- and accompanying the introduction of a new DirecTV satellite receiver with TiVo's technology built-in -- cutting the subscription price discount is likely to boost subscriptions to TiVo during the all-important holiday season, say outsiders. Though TiVo is nearly eponymous with personal video recorders, or PVRs (in some circles, akin to Netscape Communications in the early days of World Wide Web navigation), the company has struggled to ward off competition and recover from its prior history of free-spending ways and less-than-comprehensible consumer advertising.

TiVo's shares fell 15 cents to trade at $3.92 Tuesday, down 50% from the company's 52-week high.

Elasticity

The price cuts will likely boost unit sales for TiVo, says Deutsche Bank analyst Peter Ausnit, who upgraded TiVo from market perform to buy in late August, based on the company's improving results. "I think you're going to see the classic demand elasticity take place," says Ausnit, whose firm hasn't done investment banking for TiVo. Ausnit estimates that DirecTV subscribers comprise about one-third of TiVo's 464,000 subscribers and somewhere between 40% and 50% of new subscribers to the service.

Even after the price reduction, says Ausnit, TiVo will still net $3 per month per customer from its DirecTV customers, since the restructured deal with DirecTV -- a unit of Hughes Electronics (GMH Quote) -- provides that TiVo's traditional customer relationship responsibilities, including customer service and billing are taken on by DirectTV.

Philip Swann, president and publisher of the TVPredictions.com Web site, says the price cut will be of extreme importance to TiVo in its fourth fiscal quarter, which ends Jan. 31, 2003. Because consumers regard PVRs as souped-up VCRs, for which they don't pay any subscription fee, the monthly charge to use TiVo is "a huge marketing barrier," says Swann. "It's one of the biggest marketing barriers they have going."

Turning It Around

For TiVo to be successful in its effort to license its technology to cable television operators, says Swann, TiVo will have to demonstrate that its brand will help attract consumers. Otherwise, says Swann, operators may choose unbranded alternatives. They would then be following in the path of EchoStar Communications (DISH Quote), which says it has shipped 500,000 PVR-equipped boxes to consumers and retailers. EchoStar's Dish Network home satellite service doesn't charge subscribers extra for the PVR service.

TiVo has a short window to demonstrate its marketing muscle, says Swann. "One could argue that the next four to five months are the most crucial time in its history," he says.

Yet another important audience for TiVo in the next few months, says Swann, is EchoStar CEO Charlie Ergen, who has been no fan of TiVo in the past. If Ergen were to succeed in his effort to merge EchoStar with DirecTV, TiVo would be pressured to prove it would be a more profitable option, says Swann, than EchoStar's current PVR technology.