TiVo Looks to Devoted Fans to Help Keep It in the Picture

Joshua Rafofsky and TiVo Inc. can’t live without each other.

Rafofsky, a 33-year-old technology consultant from Hancock Park, owns three TiVo digital video recorders -- two to record multiple shows that might be on at the same time, and another just to tinker with.

“I know it sounds weird,” Rafofsky said, “but TiVo’s almost become a member of my family.”

TiVo executives feel much the same way about Rafofsky, though they have never met him.

“The one thing we have is our customers,” said TiVo board member Randy Komisar. “They love us, which is why we’re still alive.”

Throughout TiVo’s precarious existence, enthusiastic -- some would say evangelical -- customers like Rafofsky have kept the company afloat in the face of repeated predictions that it would fold. That devotion matters more than ever as the Alviso, Calif.-based company struggles anew to convince investors, potential partners and new customers that it can compete in a DVR market it helped create.

Since January, TiVo has lost a key partnership and reshuffled its executive ranks as well- financed competitors have gained market share. TiVo has never had a profitable quarter, and its stock has fallen 37% since the beginning of the year.

“They’ve really taken a beating,” said Alan Bezoza, cable analyst with Friedman, Billings, Ramsey & Co., an investment firm based in Arlington, Va. “Clearly their long-term fundamentals are deteriorating.”

TiVo, founded in 1997, helped introduce a new category of consumer electronics: hard-disk-based video recorders that allow viewers to pause and rewind live television as well as tailor recording schedules to their personal tastes.

A Box -- and a Verb

Among its fans, “TiVo” quickly gained currency as a verb like “Xerox” and later “Google.” Outgoing Federal Communications Commission Chairman Michael K. Powell spoke for many when he called TiVo “God’s machine.”

More than 3 million households have TiVo’s particular brand of religion. Another 3 million more have similar but less expensive recorders provided by cable and satellite companies. Those companies, once thought to be TiVo’s strongest potential allies, are now its biggest threat -- with the deep pockets and wide subscriber bases that TiVo lacks.

Its only ally in this field of giants, DirecTV Group Inc., appeared to turn its back on TiVo by declaring in January that it planned to start distributing a rival digital video recorder this year. Days after that announcement, TiVo co-founder Mike Ramsay said he would step down as chief executive but remain chairman. Then TiVo President Martin Yudkovitz resigned amid grumblings about the company’s inability to seal a distribution deal with cable powerhouse Comcast Corp.

“TiVo is a little guy. We’re loved, but we have no power,” said board member Komisar. “We try to deliver the control of entertainment back to the consumer. But to do that, we have to cut across the domains of very powerful, very complex businesses -- all of whom have really sharp elbows and the ability to say no to us.”

Despite that, Komisar and other TiVo executives say they believe the company can stick it out. They point to the 94% of U.S. households without a digital video recorder as a wide-open market. They also believe that the company can survive just fine on subscription revenue; TiVo charges $12.95 a month.

TiVo has always had a precarious existence. When Ramsay and Jim Barton founded the company, few understood its concept of pausing live TV, recording shows on a hard drive and fast-forwarding through commercials. Ramsay recalled that people thought it was just a fancy videocassette recorder.

“People spent a lifetime putting up with the limitations of TV,” said TiVo Executive Vice President Brodie Keast. “It was TV by appointment. And while consumers said they often felt it conflicted with their lives, they didn’t see it as a problem that needed solving.”

Competitive Pressures

Eventually, Ramsay and Barton broke through the initial skepticism and got enough funding to start selling boxes in 1999. By then, TiVo wasn’t alone. ReplayTV, another Silicon Valley company that had simultaneously developed a digital video recorder, released a product days before TiVo did.

The two jostled for the attention of consumers and investors.

ReplayTV relied on sales of its hardware to make money. TiVo took a different route and offered a subscription option that let buyers pay either a monthly fee or a single lifetime fee. TiVo used the fees to lower the upfront price of the box, making it seem substantially less costly. The gambit paid off -- consumers took to the lower price, handing TiVo the first round.

Then in 2001, Microsoft Corp. introduced UltimateTV, a device that boasted numerous features not available on TiVo’s box, such as a second TV tuner that allowed users to watch one channel while recording another. TiVo seemed hopelessly outgunned.

Consumers once again rode to TiVo’s rescue by embracing its simple design over Microsoft’s feature-rich but complex device. Microsoft stopped marketing UltimateTV a year later.

TiVo survived a second round with ReplayTV in 2002. Determined to offer a superior device, ReplayTV relaunched with two new features: the ability to skip commercials without having to fast-forward through them and the ability to send recorded TV shows to other ReplayTV owners over the Internet.

Although that won ReplayTV customers, it also attracted lawsuits from Hollywood studios, which contended that the company was violating copyright laws by letting viewers share shows.

Already burdened by debt, ReplayTV’s owner, Sonicblue Inc., filed for bankruptcy protection in 2003 and sold the division to D&M; Holdings Inc.’s Digital Networks North America, which agreed to remove the program-sharing feature from new models.

TiVo avoided ReplayTV’s fate. Its fast-forward button lets users zip through commercials but not skip them altogether.

“That met customer needs while still being respectful of [the TV networks’] business models,” Keast said. “The question for us was, did we want to spend money on a fight we know we’d lose? Or did we want to live to fight another day?”

The Next Battle

Now TiVo is facing what is perhaps its greatest challenge yet.

Cable and satellite TV companies are starting to roll out competing digital video recorders built into their set-top boxes.

Unlike ReplayTV or Microsoft, cable companies have the means to install boxes into millions of homes easily and fairly quickly. In addition, cable companies are luring subscribers by giving away the boxes and charging a lower monthly fee than TiVo does.

Comcast, the nation’s largest cable company, with 21.5 million households subscribing, charges $9.95 a month and no upfront fee for the device. TiVo, on the other hand, charges $99.99 for a basic recorder (after a $100 rebate) and $12.95 a month for the service.

“The key question for TiVo is, now that DVR is available on virtually every cable system, why do people need to buy TiVos?” said Josh Bernoff, an analyst at Forrester Research.

In a recent Forrester survey, 588 DVR users were asked to rate how much effect their devices had on their TV-watching experience, on a scale of 1 to 5, with 5 being the biggest effect. TiVo owners registered 4.6.

“There are not that many products that make users that happy,” Bernoff said. But users of cable DVRs scored 4.4 -- not far behind.

“It’s the difference between deliriously happy and really, really, really happy,” he said. “The difference between a DVR supplied by a cable company and TiVo is not that great.”

TiVo has been aware of this threat for years. That’s why it has continually been in talks with Comcast and others to distribute its software and services on cable and satellite set-top boxes.

So far, its only success is DirecTV, which signed a deal in 1999 to distribute TiVo to its customers until February 2007. As of Jan. 31, the El Segundo satellite TV company accounted for 62% of TiVo’s 3 million subscribers. But DirecTV last month said it would begin to market its own DVR this year, not just the TiVo box.

TiVo’s vulnerability was further highlighted when Yudkovitz, its president, resigned a few weeks later. The former NBC executive was recruited in 2003 to help TiVo secure licensing and distribution partnerships with cable and satellite companies.

Then word got out last fall that TiVo was close to striking a deal with Comcast. TiVo would piggyback on Comcast’s reach into one-fifth of U.S. households, while Comcast would take advantage of TiVo’s brand.

The deal fell through, with each side pointing a finger at the other. TiVo “reneged,” said a Comcast executive who asked not to be named. TiVo Chairman Ramsay denied backing out of any agreement. A Comcast spokeswoman declined to comment.

The squabble left even longtime TiVo supporters spooked.

“TiVo is really facing a final showdown,” said Gary Arlen, an independent technology consultant and TiVo stockholder. “And it doesn’t look to be a winning battle.”

TiVo executives disagree.

“Since we don’t have a deal with cable now and we’re doing just fine, I’d have to say that we’re not dependent on cable for our success,” Ramsay said.

Instead, the company unveiled a strategy to tightly integrate the TiVo box with broadband Internet through a home network. That would pave the way for TiVo to deliver movies, video clips or music on demand to the TV via the Internet -- whether it’s piped in by cable companies or by phone companies.

TiVo also aims to bring content to other devices, such as laptops, hand-held movie players or cellphones. It took a step in that direction last month by announcing an alliance with an old foe, Microsoft. The deal creates a free service, dubbed TiVoToGo, that lets people transfer recorded TV shows from their TiVo to their laptops or other devices running Microsoft’s Windows operating system.

Those tactics won a mixed response.

“I have TiVo, so from the standpoint of an early technology adopter, I think it’s very interesting,” said Rob Sanderson, an analyst with American Technology Research. “As an analyst trying to determine whether this will help TiVo overcome its challenges, I don’t think it will.

“This will make hard-core TiVo users very happy. But their problem is not preserving that recurring revenue stream. Their problem is in growing that base into the mainstream. This will not help them get those mainstream folks who just care about the basic DVR functions.”

Wooing Advertisers

TiVo also is working hard to recruit advertisers. Though TiVo doesn’t have the reach of traditional TV, it does have the ability to gauge how effective the ads are by tracking how many viewers watch them and for how long. And it can play with the advertising format in ways traditional TV cannot. For example, it can store ads of longer duration, say five or 10 minutes, on the device’s hard drive.

“We’re starting to see some industry acceptance of DVR as an ad vehicle,” said Tim Hanlon, senior vice president of Starcom MediaVest in Chicago, a subsidiary of Paris advertising agency Publicis Groupe. “And TiVo gets full marks for creating some of the most innovative advertising platforms.”

At the same time, TiVo still lacks the broad reach advertisers seek.

“Scale brings you to the table,” Hanlon said. “Right now, they’re a niche company.”

But TiVo has an advantage -- a small army of fans.

Rafofsky has persuaded dozens of people to get TiVo, including his father, his sister, a niece, two stepbrothers, his in-laws and five buddies from high school.

He has received glossy fliers from Comcast, his cable company, advertising cheaper DVRs. Each time, he said, he tosses them in the trash.

“To some degree,” he said, “I’d feel like I’d be selling my soul if I switched.”

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Times staff writer Sallie Hofmeister contributed to this report.