Friday, January 28, 2005


The outlook for TIVO and NFLX continue to weaken. The list of major players adopting everything but TIVO is growing. Echostar (DISH) has been giving away TV recorders with TIVO style functions and now has almost as many subscribers as TIVO. DirectTV, TIVO's largest customer, is making its own machines and Scientific Atlanta and Motorola are selling set-top boxes with many of the same functions. SBC, BLS and Comcast (CMCSA) are all trying out the Microsoft Internet TV Protocol with a Motorola box as the hub.

These are major developments by the "big boys". If both the cable companies and the dsl companies adopt ITVP, Microsoft is a big winner and TIVO and NFLX could be among the big losers. Upon reflection, I believe the consumer is a big winner.

How can this be? By having a standard TV-IP system in place, the internet becomes the competitive distribution network for TV. Yahoo (YHOO) and Google (GOOG) have both jumped into the game. Yahoo is even setting up a media headquarters in California.

Smart money has always known that content is key. There have been no signs that companies like Time Warner Cable (TWX) or ESPN (DIS) are willing to sell content at wholesale rates. TIVO and NFLX can dream about offering movie down-loads all day long but why does TWX or ESPN need a middleman?

The answer is that the content company needs a middleman to help the consumer find the content. In other words Google or Yahoo are building systems to link consumers to providers in the same way they link consumers to web sites. When Yahoo announced their new service, the company announced that they are looking for content. It was not long ago when there were very few web sites and now there are millions. In the same way, podcasting is about to break-out. In just a few years, there will be millions of audio or video feeds. For example, many churches will choose to "broadcast or podcast" their services when it cost them almost nothing to do so. Folks are already down-loading podcasts to their Apple i-pods and other devices and playing them when they choose.

Consumer will have millions of choices of what to watch and they will need a Google or Yahoo search engine to find the show they want to watch. Once found, will the consumer need a TIVO box to "collect" the show? Or will TIVO be able to offer a competing search technology? With todays high speeds and the higher speeds on the way, shows can be streamed directly to a monitor, TV or set-top box. Google has shown that volumes of offsite storage (Gmail and Blogspot) is not a problem.

I have a couple of Google Ad-Sense accounts. One of them is for advertisements about my Myrtle Beach Rental Properties. When a consumer clicks one of the millions of Google ads that Google places for me, Google accumulates the charges and then debits my credit card. In the future, consumers may have Google accounts that work the same way. The consumer may decide to watch an old movie for which the provider wants a 65 cent fee. The consumer clicks the Google button and Google accumulates the monthly charges. Google collects the fees and sends the majority to the provider. Google would be the middleman but would require a very small cut for connecting the consumer to the provider. It makes more sense for Google to collect the fee than the provider because Google is willing to set up an account for the Southwest Forsyth Little League Nework as well as for Time Warner (isn't freedom great).

If you missed last nights over-time Georgia Tech-Wake Forest ball game--no problem; you might search Yahoo or Google, find the show, click a button, watch the show and owe ESPN a fee (perhaps a variable fee with or without commercials and you even might even get to chose from a menu of commercials). This is all very powerful stuff. The consumer gets to watch what he wants when he wants including commercials for products he wants to know about. Advertisers save money by not paying for wasted commercials. Owners of content get paid per view.

ESPN would not have to wholesale content to NFLX or anyone else. ESPN could still offer the same packages through cable but the targeted approach will eventually win the most business.

TIVO and NFLX still have value. They both are growing their customer base and these are the "good" customers the "big boys" want. Both companies have patents that the industry has had to work around. A distribution box of some sort will eventualy be common place in most homes.

TIVO may have waken from its daze too late. The CEO who refused the cut rate deals offered by CMCSA and others has stepped aside. Reed Hastings of NFLX is an excellent manager and the NFLX system is a good system that helps consumers select movies they are likely to enjoy. NFLX is growing rapidly but I happen to know that the Nissen Wagon works in Winston-Salem was a growing company when Henry Ford ramped up car production. (The Waughtown section of Winston-Salem has never recovered from the failure of the largest Wagon company in America, but Dell computer just annouced a manufacturing plant just to the east of Waughtown. Wouldn't you know it took 100 years and a computer company to replace the wagon works as the biggest employer in the area.)

Writing about TIVO and NFLX is like writing about the Sony Beta-Max VCR or the Apple Computer. Sony and Apple produced the best technology but failed to make the distribution deals.

I am seriously considering selling my TIVO and NFLX postitions. Although NFLX had a very good quarter and the price to sales of each company is not a bad number, the internet continues as an extremely powerful disruptive force. I am 100% certain that TV and movie viewing are about to go through dramatic change. I am not at all certain that TIVO or NFLX will be apart of the revolution.

I have hesitated for two reasons. One is that I hate to sell a loser without telling my readers first and the second is the take over potential. I have no way of knowing the value of the TIVO patents but I know that there are big companies that would like to own the TIVO name. The patents could allow someone like Motorola a leg up on the competition and the name would help market the product. It seems that Google and Yahoo have decided to develop their own menu or sorting system. GMST (TV-Guide) and TIVO serve to help the consumer search for a particular show. Liberty Media has made moves to buy GMST and the old Chief at TIVO spurred offers in the past. The pressure of the new paradigm that is developing quickly may pressure TIVO and or NFLX to sell to a bigger player.


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