The following provides a case study analysis of a 2007 Harvard Business School case study on TiVo, the Silicon Valley consumer electronics company best known for its innovative digital video recorders (DVRs) (Yoffie & Slind, 2007). The case concerns the challenges facing TiVo now that it is no longer the only competitor in the DVR market and TiVo’s efforts to craft a winning strategy in a changing environment.
In the Fall of 2007, TiVo, the company that pioneered the DVR (digital video recorder) technology and TV category, and which to this day continues to set the standard for excellence and innovation in DVR technology and related services, is busy crafting a strategy that will transform itself into something more than a consumer electronics company. Notwithstanding its reputation for innovation and despite its loyal and enthusiastic customer base, TiVo is still struggling – after more than seven years in business – to turn an annual profit.
Moreover, in the wake of the collapse of its agreement with Directv, TiVo has recently seen a dramatic decline in its subscriber base to less than 4.2 million from its peak of 4.4 million (Hemingway, 2007, p. 8). For a couple years after it started operations in 2000, TiVo had virtually no competition. By 2007, TiVo’s market share in DVRs has dropped to less than 25% (Yoffie & Slind, 2007, p. 7). Now, under the leadership of CEO Tom Rogers, TiVo is pursuing six different lines of business as it moves to transform itself and position itself to achieve profitability in the face of new competitive threats and a transforming environment and industry.
After seven years of loss-making, and in the face of new competition and a changing environment, TiVo must now craft a strategy which will propel into profitability and a position of sustainable competitive advantage.
P.E.S.T. ANALYSIS Political In the United States (TiVo’s primary market), a variety of political-regulatory factors affect operations. Deregulation in the telecommunications industry over the past twenty years has both increased the number of competitors and changed the structure of the competition. At the same time, the television industry is not bereft of regulatory oversight. The Federal Communications Commission (FCC) has regulatory authority over the industry and has the power to impact a wide variety of factors, including, as TiVo has discovered, whether or not MSOs (multiple service operators) have to distribute STBs (set-top boxes) that support the CableCards that allow TiVo boxes to function as an integrated STB (Yoffie & Slind, 2007, p. 5).
While there has been significant deregulation in the broadcast industry, antitrust regulations are still in force to prevent monopoly and anti-competitive behavior. Regulatory agencies also continue to affect the direction of industry-specific technology standards (e.g., high density formats, digital formats). As a manufacturer of electronics hardware, TiVo is also impacted by environmental regulations (e.g., regulation of pollution and waste-products associated with computer/electronic equipment).
Another regulatory structure affecting TiVo relates to advertising. Although TiVo usually does not directly develop advertisements, it delivers and distributes “advertising solutions” and thus is subject to some regulatory liability in this area. TiVo and its competitors are also affected by patent and intellectual property laws and regulations. These apply both to the electronic equipment (DVRs) and the software developed by companies, as well as to the entertainment and other A/V content that they distribute. The Internet remains a relatively unregulated arena, although with technological convergence and a broad range of competitors and industries moving into Internet-based products and services, pressure for some type of regulation is likely to increase.
TiVo has only just begun to explore opportunities in the international market, however, as it continues to do so, it is likely that it will encounter a broad variety of different regulatory regimes. Regulatory and other political factors are likely to be of particular importance in expansion into non-democratic countries (e.g., China) and into countries known for their bureaucratic red-tape (e.g., China, Mexico). Economic
The DVR industry has not yet become mainstream. Current DVR penetration levels in the United States are estimated to be around 16%, although some predict that it will climb to more than 50% over the next few years (Miller, 2007, p. 21). To date, consumers who have chosen to purchase and/or subscribe to DVR service (whether TiVo or MSO-based) have been concentrated within a distinct socio-economic group. They are significantly more likely to be upper-income or even wealthy than non-DVR users. This factor may partially account for regional differences in DVR adoption rates (with higher adoption rates in areas with higher percentages of upper income consumers). This is an important factor for TiVo and other competitors to consider when expanding internationally; logically, it would seem that the market for DVRs would be lower in lower-income countries with fewer wealthier people.
DVRs and associated subscription fees are definitely discretionary purchases. In times of economic contraction and/or when confronted with personal budget challenges, consumers tend to cut back on discretionary purchases. Strong economic growth and a stable economy, on the other hand, is likely to stimulate rapid growth in DVR household penetration.
A persistent economic concern in the industry as technological convergence continues and more services are offered over the Internet, is how to monetize services delivered over what might otherwise be viewed as a “free” channel (Miller, 2007; Yoffie & Slind, 2007; Vrancia, 2007; Neff, 2007). Advertising support is generally viewed as the solution. However, DVRs have historically been seen as very threatening to the advertising industry, since their technology allows consumers to fast forward through advertisements (Miller, 2007, p. 20). Social
A variety of social trends and factors affect the industry. As previously noted, early DVR adopters have been concentrated with a certain socio-economic group characterized by high levels of education and income as well as younger age. Analysts have also observed that once consumers start using DVRs, they way they watch television changes (e.g., there is a dramatic decrease in “real-time” viewing as consumers switch to watching mainly previously recorded material at their convenience; some DVR users actually watch less TV than they did before; and most viewers do take advantage of the opportunity to skip through traditionally formatted advertisements).
The rapid growth of the Internet and consumers’ growing interest in new Internet based media is an important social trend affecting the industry. Relatedly, the rate and ease with which consumers are able to use new technologies, and come to accept these technologies, is critical to the industry.
Technological advancement is a critical driver in the industry in which TiVo operates. Technological superiority provides a critical factor in competitive advantage in DVRs. Moreover, it is usually through new technological innovations (software and hardware) that competitors are able to clearly differentiate their products/services from those of their rivals. New technologies play a key role in the ongoing/upcoming television/Internet convergence and facilitating consumers’ use of broadband/television products and services (Edwards, 2007, p. 54).
Five Forces Analysis Threat of New Entrants (High) There is a significant threat of new entrants into the still-new DVR market. Probably the most important threats come not from the traditional STB manufacturers (e.g., Motorola, Scientific Atlanta) but rather from competitors outside of the traditional cable/broadcasting field – e.g., computer software giants like Microsoft and telecommunications companies such as Verizon. These competitors have huge financial and technological resources to bring to the industry. There is also a continued threat of smaller, technologically-savvy new entrants who can bargain their way into the industry by using their technological resources to partner with MSOs or other industry players with more financial resources. The threat of new entrants is likely to remain high over the near term, until the industry begins to mature.
Threat of Substitute Products (Medium-High)
There are no products which directly and exactly substitute for DVRs (i.e., in terms of ability to pause live TV, the ability to record two programs at once, etc.). However, there is a broad range of older and newer products and services which generally serve as substitute products. Among the older products are the VCR and the DVD-R, both of which enable viewers to record and playback programs (and FF through advertisements). Television shows and movies on DVDs (rented or purchased) represent another category of substitute product. Among the newer substitute products are downloadable (via computer) programs and movies. Assuming that the primary purpose of the DVR is to entertain and inform, substitute products would include a broad variety of old and new media – live TV, live radio, newspapers, magazines, books, movie theaters, live theater, video games, YouTube, Web-surfing, blogs, chat rooms, and various new media.
Bargaining Power of Suppliers (Low to Medium)
The suppliers for TiVo’s DVR hardware business are commodity suppliers with very little bargaining power. Although TiVo typically does not deal directly with the studios and/or originators of content, it does deal with them indirectly through TiVo’s other content suppliers (e.g., MSOs, Amazon.com, etc.). These suppliers are able to exercise more power and control over TiVo and the other competitors.