TiVo, Netflix Set Sail on Team-Up Talk

Talk of a possible linkup between Netflix (NFLX Quote) and TiVo (TIVO Quote) ignited a rally in two downtrodden tech favorites Tuesday.

Both stocks jumped 16% in midday trading after Newsweek reported that the companies are teaming up to deliver movie rentals over the Internet. But observers warned that the deal, while promising, appears likely to encounter the same cutthroat competition that already has laid low shares in both companies.

Quoting an anonymous insider reportedly close to the negotiations, Newsweek indicated that a deal was all but complete, needing only approval from TiVo's board of directors. The new venture, according to Newsweek, would allow people who subscribe to both services to download Netflix DVDs over the Internet directly to their TiVo boxes.

Spokespersons for Netflix and TiVo didn't return phone calls Tuesday morning. Shares in Netflix rose $2.41 to $16.77 Tuesday, while shares in TiVo rose 72 cents to $5.14.

Back to the Future

A partnership would bring Netflix closer to the future that both it and its supporters have long expected -- that the DVD rental firm would replace its current system of mailing discs to subscribers with a more elegant delivery of movies over high-speed Internet connections.

The possible deal also would give a boost to TiVo, the digital video-recording service that was a pioneer in enabling consumers to record TV on set-top hard drives but now faces increasing competition from generic digital video recorders. That onslaught is coming from such multichannel video providers as the satellite operator EchoStar (DISH Quote).

A potential agreement would be a "net positive" for Netflix, First Albany analyst Jason Avilio wrote in a research note Tuesday. "While we anticipated this relationship for quite some time, an announcement in the coming weeks would mark NFLX's entry into the digital world sooner than we anticipated," says Avilio, who has a buy rating on Netflix, and doesn't rate TiVo.

Summer Swoon Netflix, Tivo sag

The announcement, says Avilio, enables Netflix to differentiate itself from new entrants in the mail-order DVD rental market. In recent months, both Wal-Mart (WMT Quote) and Blockbuster (BBI Quote) have launched ventures to compete with Netflix. That has in some eyes confirmed short-sellers' hypothesis that Netflix's franchise is at risk, and prompted Netflix bulls to reiterate that playing catch-up with the video rental service is harder than skeptics believe.

Cautious Take

Of course, while the discussed service likely would please its subscribers, it also would face obvious technical challenges and competitive threats on its way to success.

Despite the positives, the potential Netflix-TiVo service likely would encounter some difficulties before being implemented, Avilio cautions. "Clearly, the studios would be nervous regarding piracy, the [cable TV system operators] would likely try to block the offering making the service good only for DSL subscribers, and getting TiVo set-top boxes installed in all households would be no easy task," writes Avilio.

One former shareholder of Netflix is similarly cautious, arguing that by the time any Netflix-TiVo system goes mainstream, it will be facing competitive services from the cable operators who serve as both video and Internet gateways to millions of homes.

The possible new venture "is the correct eventuality -- any and every movie on demand," says the investor, who spoke on condition of anonymity, and who doesn't have long or short positions in TiVo, Netflix, cable operators or satellite companies. But the possible system, which would evidently require consumers to hook up their TiVo boxes into their high-speed Internet connections, is "a Band-Aid solution," says the investor. "They can get some fanfare, do a press release. But I don't think it's going to be mainstream anytime soon."

By the time digital movie delivery is mainstream, a cable operator such as Comcast (CMCSA Quote) easily could offer such a service on its own, without needing TiVo's or Netflix's brands or technology, says the investor. "Comcast would probably argue it has something of a brand already," he says.

And perhaps the time it will take for DVD-less delivery of movies to become mainstream will take longer than expected.

Disney (DIS Quote), it was reported last week, is delaying the rollout of its MovieBeam movie delivery service as it figures out how it could integrate the necessary hardware into various consumer electronics devices.

The video-on-demand service employs wireless data broadcasting to deliver a selection of movies to people's homes, where the movies are stored on a set-top hard drive.