Partner or Compete? How TV Monopolies Benefit From Competition In The DVR Industry

September 28th, 2006 Davis Posted in Media, TV, HDTV DVDs, Disclosure - I own stock in co. mentioned, TiVo |

TiVo may be the brand name in the DVR space, but it’s no secret that they’ve faced a lot of competition from cable and satellite providers. Despite all of the doom and gloom that we’ve heard though, over the past few years, instead of fighting the cable and satellite operators head on, we’ve instead seen TiVo partner with these competitors and they now have licensing agreements with DirecTV, Comcast, Cox & the National Cable Television Cooperative (NCTC). Collectively, these relationships represent over 65 million potential homes that TiVo could find themselves in and with the DVR marketplace exploding in the growth, TiVo is well positioned to leverage these relationships to help accellerate their own expansion plans.

As cool as TiVo is though, they aren’t the only game in town. Some have argued that the cable and satellite providers are a threat to TiVo’s business model, but over the last few years we’ve seen a much different trend begining to develop in the television industry. While the MSOs are the most visible providers of set top boxes, they’ve actually had quite a bit of trouble building their own reliable DVRs and have turned to a number of different companies to meet their set top box needs.

On the surface a DVR seems like something that would be pretty simple to build. You would think that all you really need is a small computer and a large hard drive and you should be good to go, but in reality these machines take complex middleware, finicky hardware arrangements and important patent rights in order for consumers to enjoy the luxury of being able to time shift their television. As the MSOs have moved forward with their own expansion plans in this area, one thing they are figuring out is that it’s not an easy process.

Earlier this year, DirecTV was supposed to drop their relationship with TiVo after signing an agreement with NDS Group to provide their own high definition box, but after experiencing countless delays on their HDTV Frankenstein box and after seeing their competitor Dish absorb a devasting body shot in their patent loss to TiVo, DirecTV rethought their strategy and extended their relationship with TiVo for another 3 years. While industry watchers have attributed the move as a defensive play on DirecTV’s part, I believe that this move was part of a larger trend in the set top box industry. As the cable and satellite companies are finding out how unwieldy the DVR can really be, they’ve abandoned the go it alone strategy and are now turning to multiple solutions for their customers.

This does two things for the DVR industry. First, it offers more choices to consumers. Rather then forcing consumers to live in a world where they have to accept the terrible Gemstar TV Guide menu, consumers may one day be able to pick which software they want to run and decide how much it’s worth paying for. Whether it’s Microsoft’s foundation software, OpenTV’s participation TV or TiVo’s upcoming operating system download that is rumored to be in beta testing right now, despite all of the talk about cable and satellite doing it alone, it’s interesting to note that there are already four different software solutions for the Motorola set top boxes that have been unveiled over the last two years.

The second effect that these partnerships are having in the DVR industry though is that by partnering with so many firms, the cable and satellite companies have been able to better negotiate contracts then had they choose just one vendor to give exclusivity to.

To date we have largely seen this trend contained to the software part of the set top box business, but recently there have been signs that the MSOs are trying to bulk up their offerings on the hardware side as well. So far Motorola and Scientific Altlanta (who was later bought by Cisco) have been the largest hardware beneciaries from the growth of the DVR industry, but Pace Micro Technologies has recently been making a splash of their own.

Less then a month after signing an agreement with DirecTV to provide next generation HDTV boxes to their subscribers, Pace Micro Technologies has now begun shipping their standard definition set top boxes to Comcast as well. This marks the first time that Comcast has moved beyond Motorola for their hardware needs and is an important trend to keep an eye on. Thus far the Motorola set top boxes have received pretty lackluster reviews and they’ve been plauged with hardware and software issues, but by bringing Pace Micro on board, Comcast will not only have a new solution to offer consumers, but will also be able to leverage this relationship to force Motorola to improve the quality of their hardware and to think more critically about their pricing negotiations. While analysts may point to the threat that the cable and satellite industry poses to the DVR industry, I believe that as the MSO’s open up, the real competition will come from the various DVR players all fighting for the same cable and satellite subscribers.

While you can’t call up Comcast today and customize your DVR, I believe that in the future consumers will choose who the real winners in this industry will be and will be given the option of not only choosing whether they want Microsoft’s Foundation technology or TiVo’s Home networking solution, but will also be able to customize their hardware choices by adding on things like DVD players, burners and HDTV DVD support. The industry still has a long ways to go, but as the DVR becomes an integral part of the digital home, I believe that the cable and satellite industry will abandon the monopolistic practices of the past and will end up benefiting more from the intense competition in this consumer electronics space.