Read the TiVo case attached and answer the questions based only on the case provided. 1. Based on your reading of the TiVo’s DVR case, which companies in the TV industry ecosystem did Ti

TiVo’S DVR AND THE U.S. TELEVISION INDUSTRY ECOSYSTEM1

TiVo was founded in 1997 (as Teleworld, Inc.) by Michael Ramsay and Jim Barton to develop and commercialize media-related digital technologies capable of enhancing the TV viewing experience. At the time, television as a form of media was comparable with ‘trains as a form of transportation’ (Carlson, 2006). A person who wants to ride a train must adhere to schedules created by train company executives. So too was the case with television, with program schedules created by programming executives at different broadcast and cable networks.

TV industry ecosystem before DVR introduction (prior to 1997)

Before TiVo developed its technology in 1997, the TV industry ecosystem was multi-sided, i.e., the ecosystem had multiple entrenched groups of incumbents, each constituting different sides of the market (Figure 1a). Television viewers, who appreciated access to interesting programs/content, constituted one side of the market. Content providers – cable channels (e.g., Disney, ESPN, Discovery), broadcast networks (NBC, CBS, ABC and Fox) and movie studios (e.g., Universal, Sony) – constituted another side and attempted to gain access to these viewers by offering potentially interesting content. Yet another side was constituted by advertisers who attempted to increase their reach by purchasing commercial spots on popular channels and programs.

Content distributors – cable and broadband providers (e.g., Comcast, AT&T, Cox) and satellite providers (e.g., DirecTV, Dish Network) – offered the primary distribution platform to connect these different sides. These content distributors collated programming to offer various bundles of content that viewers could subscribe to according to their preferences. To do so, they relied on technologies and products supplied by hardware manufacturers (e.g., set-top box manufacturers such as Scientific Atlanta and

1 Arun Kumaraswamy (Temple University, Fox School of Business, PA), Shahzad Ansari (Cambridge University, Judge Business School, UK), and Raghu Garud (Pennsylvania State University, Smeal College of Business, PA) prepared this case as the basis for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative situation. A complete list of references for key facts presented in this case are available on request. Copyright © 2013, Arun Kumaraswamy Shahzad Ansari, Raghu Garud, All rights reserved.

Motorola, and consumer electronics firms such as Sony and Philips).

Other members in the TV industry ecosystem included measurement and market research firms (such as Nielsen) that kept track of which programs were popular with television viewers so that content providers, content distributors and advertisers could fine-tune their offerings. Overseeing all members of the industry ecosystem was the Federal Communications Commission (FCC), the regulatory body which ensured that content or distribution/access was not controlled by a few powerful firms.

It was this industry ecosystem that TiVo attempted to enter with its DVR. TiVo’s DVR box contained a hard drive that made it possible for television viewers to record television programs if they subscribed to TiVo’s service that included an up-to-date electronic program guide, and replay/watch these recorded programs at their convenience. The DVR technology also potentially enabled two-way connectivity, promising television viewers a truly interactive experience. In addition, viewers could fast-forward through commercials to have a more seamless TV viewing experience.

TiVo’s innovation represented a significant departure from the traditional television-broadcasting model based on ‘the logic of linear flow’ that rested on strategic program schedules to capture viewers’ attention, and on an advertising revenue model that sought to leverage it. Consequently, broadcast networks and content providers would not be able to generate lucrative revenue streams by selling commercials during popular programs or during prime time. Advertisers would now have to find new ways of reaching viewers. Ratings and measurement services such as Nielsen also would be impacted, as viewers were no longer required to watch programs at scheduled times. Equally importantly, the DVR would compromise the hitherto direct access to and influence on viewers that content distributors (i.e., cable and satellite providers) enjoyed through their distribution platforms. In other words, by ‘temporal decoupling’ of content provision from its consumption, and by allowing viewers to time-shift programming and skip commercials, TiVo’s DVR potentially would disrupt the relationships and revenue models in place within the TV industry ecosystem. Indeed, TiVo’s business model envisioned revenues from content distributors (through technology services and licensing of its DVR technology) and from content providers, content distributors and advertisers (through

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interactive advertisements and commerce, and through the provision of ratings and measurement of viewers’ behaviors and preferences), in addition to those from television viewers (through the sales of DVR boxes and DVR service subscription fees).

Initial attempts to secure buy-in (1997-1998)

TiVo realized the disruptive nature of its DVR technology and accordingly attempted to secure buy- in from TV industry ecosystem incumbents. For instance, it secured potential backing from several media companies such as AOL Time Warner, DirecTV, CBS and Disney, all early investors in the company. Also, TiVo sought to reassure and strengthen its links with incumbents by hiring an experienced programming executive who had worked at CNN. In addition, TiVo offered new interactive programming and advertising tools such as ‘Showcases’2 that enabled content providers and advertising partners to target and reach viewers despite their newfound ability to fast-forward or skip commercials.

Some members of the TV industry ecosystem were persuaded by the potential benefits offered by TiVo’s technology. For example, NBC Cable’s President Thomas Rogers noted that TiVo’s set-top box (unlike its competitor Replay TV’s) ‘did not zap commercials but just fast-forwarded through them, thereby allowing cable and broadcast channels to potentially use the technology to deliver more targeted interactive advertising to viewers’ (Dickson, 1999). However, other members of the industry ecosystem continued to view TiVo as a threat. For instance, when Barry Diller, USA Networks chairman, was asked to invest in TiVo, he reportedly responded: ‘Let me see if I understand this. All the other companies are investing in you so they can preside over their own demise?’ (Chen, 2001).

In addition, the Advanced Television Copyright Coalition, a consortium of content providers and distributors, demanded that DVR companies such as TiVo negotiate and license the content that viewers recorded for time-shifting. Included in this consortium were firms that had invested in TiVo (such as CBS, Time Warner, Disney and Discovery). Capturing the tensions inherent in these relationships and the disruptive influence of TiVo’s offering on members of the TV industry ecosystem, one TiVo

2 Showcases are infomercials and previews of movies, programs or products/services that may be longer than a typical commercial spot and offered exclusively to TiVo subscribers on demand.

executive was reported to have observed, ‘Early on, the networks and advertisers couldn’t decide whether to sue us or buy the company’ (Wathieu and Zoglio, 2005).

A struggle to build critical mass (1999-2001)

Apart from managing its uneasy relationships with incumbents in the TV industry ecosystem, TiVo had to entice a critical mass of television viewers to purchase its standalone DVR box and associated service offering, in addition to paying for their cable or satellite service subscription. Only if it built a critical mass of subscribers would TiVo be able to offer its potential partners the benefits (e.g., interactive and targeted access to a representative sample of viewers) it promised. However, these viewers would become TiVo’s subscribers only if it could offer adequate value, such as the ability to fast- forward commercials and, more generally, improve their television viewing experience without compromising their access to diverse content. But, to do so, TiVo first had to stitch together a value net that required the cooperation of incumbents in the TV industry ecosystem, many of whom perceived the company’s DVR technology as a disruptive influence.

To ensure that television viewers had easy access to its DVR, the company entered into agreements with Philips Electronics and Sony to manufacture and distribute its DVR boxes in 1999. It also entered into a mass distribution agreement with DirecTV, a satellite television provider and TiVo investor. DirecTV agreed to distribute set-top boxes to its satellite TV subscribers that integrated TiVo’s technology and service. Through this partnership, TiVo had the potential to gain rapid access to a potentially large installed base of subscribers, and increase its own visibility at a relatively low cost.

Another challenge that TiVo confronted was that strategic initiatives taken to appease one side of the multi-sided TV industry ecosystem generated conflict with another. For instance, with just over 30,000 subscribers in July 2000, TiVo launched an aggressive $150 million marketing campaign to attract television viewers to its DVR box and service. One TiVo commercial showed a television network executive being thrown out of a window with a person stating, ‘Who needs them?’ and a message in bold letters saying, ‘Program your own network. TiVo, TV your way.’ According to the Gartner group (2005), ‘This [TiVo’s campaign] angered the networks with whom TiVo was trying to partner, but did not help consumers understand what the TiVo

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service did.’ Indeed, several networks including CBS (an early investor in TiVo) refused to air TiVo’s commercials that portrayed them in a bad light.

Although TiVo’s marketing campaign emphasized time-shifting and fast-forwarding of commercials as key benefits to its subscribers, its business model also anticipated revenue streams from applying its technology to benefit advertisers and content providers. TiVo undertook several efforts to develop relationships with advertisers. For instance, TiVo created the Advertising Advisory Board in collaboration with its advertising partners such as Omnicom Media Group and Starcom MediaVest Group. In collaboration with measurement services such as Nielsen Media Research and ASI Entertainment, TiVo also set up the National In- Home TV Lab to gather data on how viewers would use new technologies such as the DVR.

In addition, TiVo nudged its subscribers to watch its Showcase format commercials and automatically suggested shows based on previous viewing preferences. TiVo even went to the extent of offering contests and prizes to entice its subscribers to watch commercials offered by its advertising partners such as Toyota (Lexus), BMW, and Miller Brewing. Noting this tension in TiVo’s business model, Walter Mossberg, Wall Street Journal’s reviewer of consumer technology products, complained that TiVo makes ‘annoying efforts to get you to watch certain shows. TiVo presents you with network showcases which are really just come-ons. TiVo also tries to suggest shows to you, and will record them to your hard disk unless you opt out. That ‘feature’ makes Personal TV less personal…’ (Mossberg, 2001). Addressing these inherent conflicts in its business model, TiVo’s spokesperson noted: ‘We recognize that advertising can’t completely go away…We are trying to figure out which business model works’ (O’Connell, 2001).

Articles in the popular press, however, continued to profile the disruptive nature of DVR technology. The headline of the lead article in the New York Times Magazine (Lewis, 2000) proclaimed ‘The End of the Mass Market’ and explained ‘how new television technology could destroy advertising as we know it.’ In February 2000, Forrester Research analyst Josh Bernoff’s report on PVRs was titled ‘The End of TV (As We Know It).’ It was also noted how TiVo had the ‘potential to change how people watch[ed] TV’ (Greenberg, 2000) and how television viewers rapidly were becoming ‘used to the idea that they never have to watch a commercial again’ (Walker, 1999). Such discourse in the media over TiVo’s role

as a disruptor potentially made it difficult for the company to strike partnerships with established members of the TV industry ecosystem, whose support was critical to its survival.

This media rhetoric was also reflective of increasing competition for a share of what promised to be the very future of television. Microsoft offered a new service called Ultimate TV (a successor to WebTV) in partnership with DirectTV, TiVo’s distribution partner. In 2001, DISH Network, the other major satellite TV provider, offered subscribers its own generic version of the DVR built into its set-top box. In addition, cable set-top box manufacturers Motorola and Scientific Atlanta also began bundling DVR features with their cable set-top boxes.

In sum, TiVo confronted an industry ecosystem that was transforming partly because of its technology, and partly because of expectations spawned by the media and other actors. Reflective of the difficult balancing act TiVo had to perform in dealing with multiple sides and its inability to establish a firm foothold in an increasingly competitive industry ecosystem, its stock fell from nearly $50 to less than $7 in February 2001 (Hamilton, 2001). With just over 151,000 subscribers to its service, the company had to lay off nearly a quarter of its employees and cut capital expenditures by half in an effort to cut costs.

Efforts to stay in the game (2001-2003)

TiVo took several steps to address this situation. After bolstering its financial position through a private placement of convertible debt and warrants in August 2001, the company strengthened its existing partnership with DirecTV to include both distribution and technology development. In November 2001, TiVo also forged an agreement with AT&T Broadband to distribute its DVR and service in the Boston, Denver and Silicon Valley areas. Simultaneously, to attract subscribers to its service, TiVo introduced its second generation Series2 DVR in January 2002. It also introduced an array of new services such as the Home Media option that enabled its new DVRs to play music and see photos on a PC connected to the home network, stream content between several DVRs and remotely schedule recordings over the Internet. Most important, in May 2001, TiVo gained legitimacy as well as the ability to protect its intellectual property after it was awarded patents for key DVR-related technologies.

In an effort to improve the company’s relationships with TV industry ecosystem incumbents, TiVo appointed a former NBC executive as its President in

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May 2003. However, notwithstanding this appointment, TiVo continued to confront resistance, partly driven by the fear that new technologies such as the DVR would disrupt the very foundations of the industry ecosystem. Indeed, the TV industry ecosystem incumbents were especially concerned that new devices such as the DVR that enabled digital copying and transferring of content would promote copyright violations reminiscent of the music industry’s experience with Napster. It is for this reason that, later in mid-2004, The Motion Picture Association of America (MPAA) objected to the FCC about TiVoGuard, a service that allowed TiVo subscribers to transfer recorded content from their DVRs to their PCs.3

Despite resistance from industry ecosystem incumbents, TiVo’s installed base increased to 624,000 in January 2003 and to 1.33 million in January 2004. A major reason for this increase was TiVo’s distribution partnership with DirecTV. However, each subscriber to TiVo’s service obtained through DirecTV contributed just a few dollars in annual revenues. For instance, during 2003, the average revenue per TiVo subscriber obtained through DirecTV was just $2.57 (TiVo 10K report for fiscal year ending January 31, 2005). In contrast, the average revenue per subscriber ‘owned’ by TiVo – i.e., those subscribers who bought stand-alone TiVo DVRs from retail outlets and subscribed to its service – was $8.57. Indeed, at the end of 2003, just over half of TiVo’s installed base comprised subscribers obtained through DirecTV, but these subscribers reportedly contributed less than 10% of TiVo’s annual revenues. Much of the value added by TiVo’s service was thus being captured by TiVo’s distribution partner, whose support was critical for TiVo’s survival.4

Even these meager revenues and the potential to build critical mass rapidly were jeopardized when News Corp. assumed control of DirecTV in 2003.

3 Earlier, Sonicblue, the owner of TiVo’s key competitor Replay TV, had been sued by major movie studios alleging copyright violations because Replay’s DVR allowed users to transmit recorded programs to one another over the Internet. Sonicblue filed for bankruptcy in March 2003 and sold Replay TV to D&M Holdings, Inc., a Japanese consumer electronics holding company. 4 TiVo, however, found it difficult to pursue only the sale of high-margin stand-alone DVR boxes and service because of the high subscriber acquisition costs – an average of $106 for each TiVo-owned subscriber in 2003 vs. nearly zero acquisition costs for subscribers obtained through DirecTV – and the much lower growth in subscriber base that this strategy entailed.

News Corp. also owned NDS, a provider of DVR software/technology, and analysts anticipated that DirecTV would favor NDS’s in-house DVR technology over TiVo’s. To make matters worse, in late 2003, Comcast, Cox and Time Warner – cable providers who were potential distribution partners to TiVo – announced that they would offer their subscribers DVRs based on rival technologies.

As TiVo struggled to gain a foothold in the TV industry ecosystem, incumbents began rearranging the contours of their respective value nets to better cope with the consequences of the new technology. Some partnered with TiVo but remained wary of the disruptive nature of TiVo’s technology. Others, however, became TiVo’s competitors by offering generic DVRs with far fewer capabilities than TiVo’s. In any event, the capabilities of TV industry ecosystem members as well as the ecosystem itself continued to evolve as incumbents adjusted their positions and strategies to address the perceived disruptive influence of TiVo’s DVR technology.

New initiatives beget new conflicts (2004-2005)

Confronting intense competition from generic DVRs offered by satellite TV and cable providers, TiVo initiated fresh efforts to aggressively defend its technology and enhance its service offerings. One problem that TiVo confronted with these initiatives is characteristic of multi-sided platforms and markets – initiatives taken to defend against or ally with one side creates complications for the company’s relationships with other sides. This dilemma made it all the more difficult for TiVo to capitalize fully on these initiatives – each initiative created a potential benefit for TiVo (e.g., attracting more subscribers), but cumulatively the benefits from these initiatives tended to be reduced significantly by conflicts with other potential partners.

For instance, in early 2004, to protect itself against competition from generic DVRs, TiVo sued Echostar, the parent of satellite TV provider DISH Network, claiming that DISH’s generic in-house DVR technology infringed its patents. Also, to make it easier for cable/satellite TV subscribers to utilize its standalone DVRs, TiVo petitioned the FCC to disallow cable/satellite TV providers from distributing DVR set-top boxes with integrated security. Such integration prevented TiVo from offering DVRs with channel-surfing capabilities that could be used instead of the in-house DVR set-top boxes provided by cable/satellite TV providers. However, in taking these actions, TiVo was potentially alienating critical distribution partners,

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especially given its erstwhile distribution partner DirecTV’s decision to favor its own in-house DVR technology over TiVo’s.

In addition, TiVo tried to make its technology friendlier to the business models of other members of the TV industry ecosystem. Again, in creating potential benefits for one set of industry ecosystem members, TiVo placed itself in potential conflict with others. For instance, in 2004, TiVo offered a new tool called tagging that offered a second chance to advertisers whose commercials were being fast- forwarded by TiVo subscribers. With tagging, advertisers could display a tag or logo with a short message even when TiVo subscribers fast-forwarded a commercial, and the viewer could choose to watch the full commercial by clicking on the tag. Later, TiVo also offered its subscribers the ability to search for commercials on products or services of specific interest to them. These services, while beneficial to advertisers, placed TiVo in potential conflict with Nielsen Media Research, the dominant provider of ratings and market data to the TV industry by further compromising its data collection efforts.5 When asked about the potential for conflict with Nielsen, Davina Kent, TiVo’s VP of national advertising sales, stated,

I think that's happening whether TiVo offers an advertising product or not. Advertisers are already putting pressure on Nielsen and the networks with respect to program ratings and whether it's a viable currency… Our relationships are very love/hate with the networks, but we're open to working with anyone (Kerschbaumer, 2005).

Next, TiVo introduced a number of enhanced features and new services to differentiate its DVR offerings from the generic DVRs distributed by cable/satellite TV providers. For instance, in October 2004, TiVo entered into a partnership with Netflix to develop new services including Video on Demand (VOD) using Netflix’s library of movies. This partnership, however, had the potential to place TiVo in conflict with erstwhile and potential partners. For instance, this partnership threatened to compromise movie studios’ critical revenue streams from rentals. It would also alienate cable networks such as HBO and Starz – some of whom were TiVo investors and

5 Interestingly, TiVo also was collaborating with Nielsen to analyze and market the data gathered from a panel of 10,000-20,000 of its subscribers who permitted the company to monitor their viewing preferences and behaviors (Donahue, 2004).

partners in offering VOD services – that incurred large payments to secure movie distribution rights (Jones, 2004).

Likewise, in June 2005, TiVo introduced TiVoToGo, a mobile service that allowed its subscribers to transfer content from TiVo DVRs to mobile devices running Microsoft’s Windows Mobile software. Later, TiVo began offering its subscribers the ability to download content from their DVRs to iPods. Again, while such mobility of content appealed to its subscribers, it raised potential issues with infringement of content providers’ copyrights. To assuage the concerns of broadcast networks and content providers, TiVo decided to build in protection against copyright infringement, but this initiative had the potential to alienate subscribers by hindering the transfer of recorded content among their mobile devices.

With each new initiative begetting new conflicts, a key short-term concern for TiVo was the potential unraveling of its mass distribution partnership with DirecTV. Finally, in March 2005, TiVo succeeded in forging a licensing and marketing agreement with Comcast, the largest cable TV provider in the U.S. Comcast agreed to offer TiVo service on its cable TV set-top boxes, and to partner with TiVo to develop a new interactive advertisement platform for its cable network. In August 2005, TiVo initiated a marketing trial with Cablevision, a regional cable TV provider and in August 2006, it signed a distribution agreement with Cox Communications, another large cable TV provider.

TiVo, however, faced initial technical difficulties in partnering with cable TV providers such as Comcast. A key problem was the existence of incompatible cable TV set-top box technologies manufactured by Motorola and Scientific Atlanta. It took TiVo nearly 18 months to rework its technologies and implement its service on Comcast’s cable TV set-top boxes. Therefore, the first TiVo enabled set-top boxes were rolled out to a limited number of Comcast subscribers only in late 2007 (Yoffie and Slind, 2007).6

6 Fortunately for TiVo, News Corp. relinquished control of DirecTV in 2006 and DirecTV continued to support subscribers who had TiVo service. DirecTV even expanded the agreement to include advertising services, even as it began offering its own in-house DVR boxes. In January 2007, nearly 2.5 years after DirecTV sold its equity stake in TiVo and decided to favor its in-house DVR technology, subscribers obtained through DirecTV still constituted 2.72 million of TiVo’s 4.44 million installed base.

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Refinement of business model and strategy (2005- 2007)

TiVo revamped its leadership with Thomas Rogers, formerly NBC Cable’s President, taking charge as President and CEO in June 2005. Accompanying this change in leadership, TiVo began to refine its business model further. First, TiVo aggressively promoted its stand-alone DVRs and drastically lowered the price of its basic model to just $50. Indeed, soon after reporting its first profitable quarter in August 2005, TiVo’s new CEO suggested that TiVo would forgo profits in the near term by aggressively seeking to build its ‘owned’ installed base. Second, TiVo began reducing its reliance on consumer electronics firms such as Philips, Pioneer and Sony that offered TiVo-enabled DVRs and instead began using contract manufacturers to make TiVo-branded DVRs. By the beginning of 2006, 88% of TiVo’s stand-alone DVR boxes were made by contract manufacturers. Greater control over stand- alone DVR manufacturing/sales and growth of the installed base of ‘TiVo-owned’ subscribers would help the company until its mass distribution agreements began paying off.

With key distribution partnerships in hand and growth in its installed base potentially secured, TiVo’s focus turned towards monetizing its investments by creating a platform for interactive advertising. As part of its agreements with Comcast and Cox, TiVo already had begun collaboratively developing interactive advertising tools for use on cable networks. Beginning in 2006, TiVo also began designing advertising products with key partners such as Interpublic, Omnicom and WPP. In mid-2006, TiVo began offering advertisers research and analysis based on its ability to track viewers’ propensity to watch commercials. In this context, TiVo’s CEO emphasized the unique quality and demographics of the company’s subscriber base, and its ability to track its subscribers’ behaviors and preferences continuously and closely (Yoffie and Slind, 2007).

Simultaneously, TiVo continued to enhance the value subscribers derived from its service offerings. In early 2005, TiVo opened up its technology to third party developers, whose ‘applications’ would be hosted on the company’s servers and made available to its subscribers (CED, 2005). Leveraging open innovation (Chesbrough and Rosenbloom, 2002) enabled TiVo to offer new services more rapidly. In September 2006, it introduced the Series3 HD Digital Media Recorder (DMR). In addition, TiVo partnered with Nero, a German firm, to release a package to turn a Windows PC into a TiVo DVR.

With an ever-increasing amount of available content to choose from, the digital world came to be characterized by an ‘economy of attention,’ where the attention of users had become an increasingly scarce resource (Boullier and Huet, 2008). TiVo aimed to get around this challenge by offering its subscribers new modes of consumption of content, on TV and elsewhere. For instance, TiVo offered a new service, TiVoCast, which enabled its subscribers to watch video over the Internet, and gain access to a variety of content over broadband networks through partnerships with content providers such as Amazon Unbox service, NY Times, CNET and the NBA. In other words, TiVo wanted to become the Google of video content (Grover, 2009).

In sum, TiVo began to shift to a mass-distribution model through its partnerships with key cable TV providers even as it aggressively pursued sales of its stand-alone DVRs. In addition, with increasing acceptance of its technology, it began striking a better balance between serving multiple sides of the TV industry ecosystem. As a consequence, the company progressively transformed itself into a technology/platform provider to its mass distribution and content/advertising partners. Indeed, under its new CEO Rogers, TiVo’s very identity changed from being perceived as a disrupting influence to being accepted as a value adding partner and integral part of the TV industry ecosystem.

Recent developments and update

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