Can TiVo Go Prime Time?

Inside the Silicon Valley headquarters of TiVo Inc., there's a fantasy living room where meetings with visitors often begin. The furniture is pristine and the oval coffee table is free of magazines and bags of chips. The only objects on its surface are a telephone and TiVo's distinctive peanut-shaped remote control. The sofa and chairs all face an entertainment center containing a big-screen television that is linked to several TiVo boxes (a few are available; a few are works in progress).

This living room, the company's executives hope, will be a prototype for 100 million living rooms across North America. The VCR will be replaced by TiVo's $399 flagship device, the personal video recorder, or PVR, which allows couch potatoes to more easily record their favorite shows, pause live TV, get suggestions about programs that they might enjoy, and fast-forward through ads. "We don't view our market as being just the early adopters or the $150,000-plus households," says Morgan Guenther, TiVo's president. "If we can make the product easy to use and get the price down to somewhere around $199, this is a mass-market opportunity."

Alas, the real world is messier than TiVo's perfect living room. The company is experiencing firsthand the brutal realities of introducing a disruptive technology into a marketplace filled with obstacles. Customers are usually slower to embrace new products than forecasters predict. Investors, initially flush with excitement, become skeptical and demand immediate results. (TiVo, which has accumulated losses of more than $400 million since it was founded in 1997, has watched its share price fall from a peak of nearly $79 to a valley as low as $3.) Me-too competitors vie for customers who are prepared to buy. (The company is locked in a nasty patent dispute with another entrant in the PVR market, SonicBlue, which makes ReplayTV. That device allows users to trade shows over the Internet.)

And yet ... TiVo has genuine strengths. The company's executive team, led by CEO Mike Ramsay, has been quick to change course in response to changes in the market and on Wall Street. Its engineers have been upgrading the product and refining its performance since its debut in March 1999. The TiVo Series2 launched in February, and the company continues to innovate on virtually every facet of the viewing experience -- even on elements as mundane as the remote control.

Most important, TiVo has struck a chord with customers. The company has amassed a base of devoted users who practically foam at the mouth when they talk about how TiVo has changed their TV-viewing experience. The company's name has become a verb: The phrase "Did you TiVo that show?" is rapidly gaining on "Did you tape that show?" in the pop-culture vernacular. TiVo has garnered favorable mentions on such hit programs as Friends, Sex and the City, and Live With Regis and Kelly. Indeed, the product is so promising that TiVo has become a four-letter word on Madison Avenue, a symbol of dire threats to the television networks and the advertising business.

Right now, TiVo's base of paying customers is about 422,000. Ramsay is on a mission to push that number to 1 million. "At 1 million users, our business model will generate significant free cash flow," he says. "At that point, we'll be able to sustain ourselves and reinvest in future growth. We do think of 1 million as a bit of a magic number."

In short, the TiVo story is about more than TiVo. It is a case study in the promise -- and perils -- of innovation in an unforgiving market. TiVo has a killer product. But can it become a great company? Will it become a big name in the future of technology and pop culture? Or will it go down in business history as yet another casualty of first-mover disadvantage? Will it be to PVRs what Sony Betamax was to VCRs, what the Altair was to personal computers, what Atari was to video games?

"There are lots of cautionary tales," concedes Guenther, "where the inflection point came, the technology went mainstream, and the company that was there first couldn't take advantage of it. We know that we have to focus on execution if we want to stay on top of the market that we created. What does it take to get the mass market to adopt this technology?"

Here is TiVo's four-point program to answer that question.