Can TiVo Go Prime Time?

Keast says that seeing TiVo in action at a friend's house is one of the company's best sales strategies -- but it's one that the company has a hard time controlling. Occasionally, TiVo-ware parties can go awry, as happened earlier this year during the Oscars. TiVo's program guide listed the awards ceremony as running for three hours, and when the show ran long -- nearly an hour and a half long -- many people using TiVo to record the show and watch it later (after serving dinner, for example) found that they had missed some of the most important awards.

It was a frustrating experience for TiVo users, who may not have known that the device has the ability to "pad" up to three extra hours onto a show that might run long. It was also a learning experience for TiVo's executives. "In the future, we'll remind our subscribers that for big live events, they should probably pad them at least a little bit," Keast says.

Step Two: To Get Ubiquity, Distribute Selectively

TiVo executives have rethought how they sell their product's virtues to potential customers. They have also rethought where they sell the product. Initially, TiVo recorders were available at many stores that carried consumer electronics, including "big box" retailers, such as Target and Wal-Mart. "We probably had TiVo overdistributed," Keast says. "Nobody was moving a huge volume on a per-store basis, so they weren't excited about building our business." TiVo was everywhere, but it was getting nowhere.

Earlier this year, the company abandoned ubiquity as an objective and decided to concentrate on one retailer: "Best Buy gets more velocity," says Keast. "And we both have incentives to make things work." TiVo promotes Best Buy on its Web site and on the service, and Best Buy promotes TiVo in its stores. Best Buy salespeople get special training in how to use TiVo. They also get discounts on purchasing a TiVo set. "You can train them until you're blue in the face, but when they use the product, they really understand it," Keast says.

Not every distribution wrinkle has been ironed out, however. Some Best Buys have a legion of well-trained salespeople, but no TiVo recorders in stock. Balancing demand with supply has been a constant challenge. "We had a supply shortage earlier in the year," CEO Ramsay explains. "We are working through that. Then, when we started the Best Buy relationship, the demand was higher than anticipated. They didn't order enough product because, frankly, neither of us knew that there would be so much pent-up demand."

It will be crucial for TiVo to solve such issues if the company hopes to become a staple of the home-entertainment center. It will also require more-inventive marketing. "We're trying to be quick and nimble," Keast says. "Nobody can come up with a quantitative assessment of what it's going to take to grow this market. It's too complex. We need to try lots of things faster than our competitors."

Step Three: Simpler Is Better

Sitting in the company's fantasy living room, Jim Barton, TiVo's cofounder and chief technology officer, recalls the first time he got a computer to store a live TV signal and play it back, in 1998. "That's when we knew it would be cool. We spent 13 incredibly frantic months developing it," Barton says.

Now, when he goes out to restaurants, he's often buttonholed by waiters who have TiVo sets at home and want to suggest new features. "A lot of the time, they want a feature that's already built into the TiVo," he says. That's why simplification is such an important crusade for TiVo these days. That doesn't necessarily mean paring back features. It means making TiVo easier to set up, reducing the number of parts that go into the device, and making the internal architecture less complex.

Barton realizes that he's not a typical TiVo user. His own device has been hacked using open-source tools that let him add a huge 120 gigabyte drive to the 40 gigabyte drive that came standard. For the less technically inclined, one key goal has been to reduce the number of steps required to get a new TiVo hooked up to the user's TV and phone line, at which point the device dials up to a main server to configure itself and download the latest program guide. Ramsay says that the setup time is down to about five minutes, followed by an hour of configuration that the TiVo does by itself through the phone line.

Barton's team is still at work, though, to streamline the internal design of a TiVo box and to reduce the number of components that go into it. "Our ongoing challenge is, How do we get the cost of the hardware down?" he says. "We're always trying to use fewer chips and get the size of the power supply down. Our big goal is to have a disk drive with a single chip, and we're headed in that direction." (Today's TiVos contain three main chips.)

The simplification crusade, combined with the decreasing cost of disk drives, will help TiVo hit what it thinks is a magic price point: $199. "You really need to get to an average selling price of $199 to drive the category," Guenther says. "That's probably the point where volume would really take off."

But there's a chicken-and-egg problem standing in the way of $199 TiVo sets. In order to gain the economies of scale in manufacturing that are necessary to reach a $199 price point, TiVo needs high sales volume. To get that high sales volume, it needs a lower price point. In the days of cheap money from Wall Street, the strategy was obvious: Use investor capital to subsidize hardware sales. That is no longer an option. Hence, the fourth element in TiVo's new strategic program.