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Talkin’ About a TiVolution

Self-proclaimed “TiVotees” are the first to tell you that, at the very least, TiVo will permanently alter the way you watch television. At most, it will forever change TV. What will TiVo do for you?

For a company struggling to nail its key selling point, TiVo makes a profoundly bold claim: 96% of its subscribers say they will never give up their TiVo service.

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Does that kind of loyalty for an expensive, hard-to-install, souped-up VCR that — as far as any nonsubscriber can discern — lets a person do little more than pause live TV really exist?

Oh yes. TiVo, it seems, is not just a cool new gadget — it’s TV crack. Subscribers are less inclined to say that they like TiVo than they are to get a sly grin on their face and confess that they’re addicted and will never again watch TV without it. Ever.

“What usually happens to people who have TiVo is, when they go on a business trip, for example, they’ll reach for the remote, and after a few seconds, they’ll realize it’s not doing what they want it to,” says Marc Chametzky, who bought the TiVo box and service three years ago, shortly after TiVo hit the market. Chametzky also created one of the earliest of several TiVo-fan Web sites in existence, Marc’s TiVo Experience.

“I’ve heard lots of stories of celebrities who refuse to go on the road without taking TiVo,” Chametzky says, adding wistfully that if he could, he would never watch TV without TiVo.

TiVo, at its heart, consists of little more than an internal hard drive that records television shows and a port for sending and receiving scheduling information through a simple telephone-line exchange made during off-peak hours. And yet, describing TiVo in purely technical terms is akin to saying that a PC houses a processor capable of rapidly performing many calculations as well as sending and receiving digital information. All true statements, indeed, but none that offer much meaning.

TiVo — along with other digital video recorders (DVRs, or personal video recorders, as they’re sometimes called) from Sonicblue, Microsoft, and others — gives viewers the ability to pick and choose the shows they want to watch, when they want to watch them. And that’s just the beginning.

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For starters, these systems pick up where the promise of VCRs left off. You want to record a show when you’re not around? Instead of setting some damn clock that insists on flashing 12:00, just scroll through the on-screen listings and select your show, and thy will shall be done. And you can forget about having to buy, store, and organize clunky videotapes.

At their most advanced, these systems deliver a tailor-made block of favorite shows to a user without that person having to do much more than give a thumbs-up or thumbs-down to a particular show. Commercials are easily skipped, phone calls can last as long as they need to, and bathroom breaks are available at any time. But perhaps the Holy Grail of DVRs is that the common lament of “nothing’s on” becomes a nostalgic expression of an earlier era.

Why TiVo?

The number of people adopting DVR technology remains small, less than 1 million. But TiVo already owns nearly half of that market share. The company recently reported that in the first quarter of this year, its subscriber base hit 422,000, an increase of 42,000 from the previous quarter and a number that sailed well past the 30,000 mark analysts were forecasting.

In terms of its financials, TiVo is holding its own in an increasingly competitive DVR arena. The company reported 2002 first-quarter revenue of $9.9 million, three times higher than the same quarter in 2001 and a 46% increase over the previous quarter. And The Street.com reports that TiVo is on schedule to reach a cash-flow break-even point by the end of this year.

TiVo’s brand is also emerging as the dominant name, at least anecdotally, among competing DVRs, namely Sonicblue’s ReplayTV and Microsoft’s UltimateTV. For example, TiVo has enjoyed several recent mentions — even a cameo appearance — in popular television shows, including Friends. Several Web communities have cropped up around TiVo as well. Beyond Marc Chametzky’s fan site, there’s the TiVo Community Forum, which has more than 15,000 registered members and 515,000 posted comments.

A partnership with DirectTV, Hughes’s satellite-TV service that offers subscribers a combination DirectTV-TiVo receiver, has helped TiVo gain some significant market momentum. Last quarter, for instance, DirectTV customers accounted for 45% of TiVo’s new subscribers. But that cash cow is now threatened by the consummation of a proposed merger between Hughes and EchoStar Communications, which already produces a DVR system.

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The DirectTV partnership notwithstanding, TiVo’s sales have enjoyed a recent boost thanks to lower prices. When TiVo units started selling for less than $100 — and in some cases, less than $50 — this past Christmas, the company registered up to 100,000 new subscribers. The latest TiVo models, however, retail for a price closer to $400. In addition to the price of the unit, the TiVo scheduling service levies a monthly fee of $12.95 or a one-time fee of $249.

TiVo’s Threat

TiVo poses two serious threats to mainstream media: On the one hand, hackers have put on an impressive demonstration of doing for TV what Napster did for music. On the other hand, TiVo hastens the already declining relevance of television commercials by giving users the ability to easily skip over a block of prime-time ads.

Salon.com reports that on June 7, 2001, four hackers released software called ExactStream that allows TiVo users to take compressed copies of television shows and swap them via the Internet. In fact, a Napster-like controversy is already brewing over ReplayTV’s newest model, which offers a feature that blocks commercials with the touch of a button and allows users to send shows to other ReplayTV users, meaning a non-HBO subscriber could enjoy a nice lineup of shows including The Sopranos, Six Feet Under, and Sex and the City.

Aside from potential legal land mines, the ramifications of TiVo for the advertising industry were on prominent display during this year’s Super Bowl. The day after the big game, TiVo released subscriber data showing which commercials got skipped and which ones escaped the fate of the fast-forward button, adding an audience metric that goes way beyond Nielsen ratings. Whether viewed as a crisis or an opportunity, advertising pros took notice.

Speaking to Fast Company in April, Laurie Coots, chief marketing officer at TBWA\Chiat\Day said, “As more people subscribe to TiVo, you’ll see more efforts to have brand character portrayed appropriately in programming. I’m not talking about obvious product placement. I’m talking about infiltrating the story line.” (Imagine what would this would do to The Osbournes: “Sharon, you must have had a bloody [bleep]ing V8 this morning!”)

At this point, the threat that TiVo and similar systems pose to broadcasters and advertisers resembles more of a smattering of storm clouds lingering in the distant horizon rather than a destructive tornado bearing down at 100 MPH. While DVRs are no doubt moving beyond a narrow circle of early adopters, sign-up rates remain relatively low while prices stay relatively high.

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Of course, Napster creator Shawn Fanning also used to be just another kid from Massachusetts who showed a knack for computers and a love of music.

Ryan Underwood (runderwood@fastcompany.com) works on the Fast Company Web team.