The Tivo Nobody's Talking About...

Everyone is currently reacting to the news of Tivo's latest customer numbers--over 3 million units subscribed. And at the rate they are going, I am currently estimating they will exceed 4.3 million units by the end of the third quarter (Oct 2005).

Oh sure, there are some perceived negatives in Tivo's current customer makeup. Most notably, everyone is interpreting DirecTV's potential phase out of their agreement (early 2007) as a major negative. In reality, however, it might be the biggest plus of all.

Tivo's current 3 million units breakout into 3 separate categories, which I classify as: DirecTivo, FirstSub, and MultiSub. Each generates a different amount of revenue: $5, $13, and $7 respectively. Reportedly, DirectTivo Units (Dunits) account for 2 million of the current mix. Pulling my own number out of the air, I break the remaining 1 million units 70-30. 700,000 FirstSubs and 300,000 MultiSubs. Granted, that's a random split, but I base it on the idea that there is a fairly high multi-unit sales through among the so-called "Tivoted" (I own 3 units, for example).

So here is the breakdown: 2 million units pulling in $5 a month, 700,000 bringing in $13, and 300,000 accounting for $7; I put the basic monthly revenue at $21.2 million (and thus, an ARPU--average revenue per unit--of $7).

Even putting the skids to the DirecTV agreement, at a minimum, it will take much of this year to wind down the sales channel and start gearing up DirecTV's own replacement unit. So for yucks, I threw together a little spreadsheet full of assumptions that scale down Dunit sales over the next 9 months, and holds future Tivo subs at their current rate (but split 70-30 between Firsts and Multis).

Here's the bottomline:

	         SrvRev 	 Units 	         ARPU 	 Mo Srvc Rev 

 3 months 	  $72,990,000 	 3,620,000 	 6.72 	 $24,330,000 

 6 months	 $157,765,000 	 4,050,000 	 6.98 	 $26,294,167 

 9 months 	 $251,700,000 	 4,325,000 	 7.24 	 $27,966,667 

What's most interesting about that? To me, it's the ARPU; as the Dunits decrease in proportion to Tivo's own subs, it starts to rise. And that's what really got me thinking...but first, for the record, here's my totally madeup projected breakout of units:

              	 1stQtr 	 2ndQtr               3rdQtr 
 dtv 	          2,380,000 	 2,570,000 	 2,605,000 
 first-sub 	 865,000 	 1,030,000 	 1,195,000 
 multi-sub 	 375,000 	   450,000 	   525,000 

So where's the good news in all this? Sure, I am predicting they'll be at 4.3 million units, but 2.6 million are Dunits. The good news is that Tivo will be sitting on an infrastructure supporting approximately 5 million devices, built and paid for in part by DirecTV. Assuming Tivo simply maintains it current sales rate of new subscriptions, coupled with a fairly regular rate of attrition from terminating Dunits (they cannot all be replaced at once, after all!?!?!), they will start "replacing" low-value Dunits (worth $5 a month in revenue) with higher-value units sporting a BLENDED ARPU of approximately $11 (at least, that is what I am coming up with). Another way to put it: Those 2.6 million Dunits are the equivalent of 1.2 million Tivo subs, which is pretty much the current growth rate. To me, that suggests that Tivo could sustain the gradual elimination of Dunits TODAY, and the current rate of sales would hold total revenue steady.

[Dream sequence] Squint really, really hard, and look ahead one year: Visualize a Tivo with NO DirecTV units AT ALL. Instead, they would have 2.9 million subscribed units (split 70-30 between FirstSubs and MultiSubs), producing a blended ARPU of $11 each, resulting in monthly service revenue of $32.6 million! [Wake up!] Wow, they could actually have a smaller installed base, but more revenue for development! Sweet.

Qualification: Despite the obvious "rigor" of this analysis, it does ignore such inconsequentials as the impact of hardware costs and (potential subsidies), as well as the percentage of "Lifetime Sub" units out there now (and their percentage of current sales).