Red Herring, January 29, 2003: The coming ubiquity of personal video recorders will lead to their demise.

Six years after pioneering the concept of personal video recording–a way to record television shows on a hard drive, skip commercials, and even pause live TV–the industry’s founding fathers are facing a unique problem: ubiquity. We’re not talking about the good kind of ubiquity, either–like Windows on every desktop and $40 billion in your bank account. Rather, it’s the kind that will likely end their lives as independent companies before they’ve even had a chance to make a profit.

The original PVRs, introduced by TiVo and ReplayTV, were indeed revolutionary: the PVR is arguably the first home recording innovation since the video cassette recorder hit the scene in 1972. In just about five years, however, what was a once unique product has become a must-have service. And almost every maker of consumer electronics is getting in on the action.

That’s bad news for business models based on the PVR alone. TiVo set out to license its technology to consumer electronics makers like Sony that would then sell the products to the public. Such devices sell for around $300, and users pay $13 a month to TiVo. Sonicblue, the owner of ReplayTV, makes its own boxes, which also cost about $300, but charges only $10 a month. Both offer a $250 lifetime subscription service as well.

Take a trip to your local Best Buy or Circuit City, though, and you’ll see that PVRs are no longer sold solely as stand-alone devices. Instead, they’ve become add-on features for other consumer electronics. While the up-front costs for many are still high, they’ll come down over time. And there are no subscription fees to speak of.

RCA sells a DVD player with PVR functionality for $600. Panasonic sells one as well ($1,200 including a DVD burner), and cable box makers Motorola and Scientific-Atlanta are wooing cable providers with hybrid cable/PVR boxes.

There are even more unlikely sources. ATI Technologies bundles free PVR software with its All-In-Wonder video card. SnapStream Media is selling a $100 software download that turns a PC into a PVR. Microsoft has a version of WindowsXP called Media Center Edition–currently sold by Gateway and Hewlett-Packard–that has PVR technology. “PCs have all the PVR components, and are cheaper and easier to upgrade,” says Kevin Eagan, general manager of Microsoft’s eHome division. “It’s a natural evolution, since consumers already use PCs for digital content.”

With all that activity, Forrester Research’s estimate that 39 million U.S. homes will have a PVR by 2007 seems almost believable. It’s the kind of number that Anthony Woods (ReplayTV) and former Silicon Graphics employees Michael Ramsay and Jim Barton (TiVo) must have dreamed of in 1997, when they founded their companies. (Both introduced products in 1999.) Investors too: TiVo went public in October 1999 and the stock hit an all-time high of almost $80 a share in January 2000.

The hype outpaced the business, however, and sales of TiVo and ReplayTV devices failed to take off. The equipment was too expensive for the masses, and users found the technology complicated. By year-end 2000, TiVo had just 150,000 subscribers, and ReplayTV had sold only 100,000 devices. Hardly revolutionary growth for such a revolutionary product. ReplayTV fell on such hard times that Sonicblue acquired it in February 2001 for about $123 million in stock (Nasdaq: SBLU). TiVo’s stock hovered around $5 this past December.

Both companies are still skating on thin ice. Sonicblue has about $13 million in cash, and a $65 million stake in the Taiwanese chip maker United Microelectronics. Yet the company had a market capitalization of just $55 million in late December. Why? Simple: it has about $146 million in debt and negative quarterly operating cash flow of $111 million.

Despite hitting 510,000 subscribers in the quarter ended October 31
(see “Reality TV”), TiVo’s situation was equally precarious, as liabilities outnumbered assets by almost two to one. The pressure on TiVo lightened a little in November, when two private investors, Crosslink Capital and NEA (TiVo’s original venture capital backer) bought nearly 7 million shares for roughly $25 million. Still, the company blows through about $25 million a quarter, so that won’t last long.

Even with what could be a combined 1 million subscribers, the two firms are still losing their grasp on the market. In the end, not enough people want yet another box for which they could lose the remote. “Consumers would probably rather not add another brick on top of their TVs,” writes Jim Davis, an analyst at TechDealmaker, a New York-based research group.

The key for both companies would be to get the licensing nod from the cable guys. It may not come: despite a grueling patent war between the industry’s two founders, other manufacturers are either waiting patiently or have developed unique ways to offer their own PVR functionality, skirting patent infringement in the process. Either way, cable players are dragging their feet on licensing, says Mike Paxton, senior analyst with the research firm In-Stat/MDR.

There’s one last hope. TiVo has a brand that has already sunk into the popular lingo. It’s a name that might be worth something to somebody. A possible buyer, says Mr. Davis, could be AOL Time Warner, which already has a stake in TiVo. RCA Electronics or Samsung Electronics could be others. He thinks Sonicblue’s ReplayTV unit is a good fit with the likes of Creative Technology, HP, or Apple Computer.

“Investors no longer have illusions that being first mover in a new product category bears any direct relationship to profitability,” writes Mr. Davis. And that about sums up the future of this cool technology–PVRs everywhere, and not a dollar of profit in sight.
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