NEW YORK – TiVo Inc. (TIVO) Tuesday won a contract to supply its digital video recording technology to No. 1 cable television operator Comcast Corp. (CMCSA), in a deal that could dramatically boost TiVo's distribution and quiet doubts about its future.
The surprise deal, valued by one source at between $10 million and $30 million over seven years, appeared to reverse the fortune of TiVo, whose shares vaulted more 50 percent. The stock enjoyed a chorus of upgrades from Wall Street analysts, some of whom said only last week they feared TiVo's growth strategy was misguided.
Alviso, Calif.-based TiVo will license its recording technology to Comcast for use in current and future set-top boxes, and extend TiVo's advertising platform to Comcast's system. Unlike TiVo's current distribution deals, the company will not build set-top boxes for Comcast.
"I sensed that people did not believe that we would be able to get a comprehensive deal with the largest cable company in the country," TiVo Vice Chairman Tom Rogers, who was involved in the talks, told Reuters. "What the rest of the world didn't think we could accomplish, we did."
TiVo's digital video recorders, or DVRs, save shows to a built-in hard drive, allowing viewers to pause live TV, skip commercials and record dozens of hours of programming. Subscribers to TiVo's service pay up to $13 a month, and cable operators have come up with their own copycat services offered at a discount.
Under the pact, Comcast and TiVo will offer a version of the TiVo service for Comcast's DVR subscribers in mid-to-late 2006. It will be sold as an alternative to Comcast's current DVR service, which costs about $10 a month. Comcast did not specify what it will charge for the TiVo system.
OTHER CABLE DEALS MAY FOLLOW
The seven-year deal, which Comcast can extend eight more years, was valued in the range of $10 million to $30 million, according to a source familiar with it. TiVo had $172 million in total revenue in its fiscal 2005 year ended in January.
"It's hard to fathom why other cable operators won't follow Comcast's lead, given that TiVo is no longer competing to provide hardware," Vintage Research analyst William Kidd said in a note to clients.
Comcast will pay upfront and engineering fees, and also pay TiVo based on the number of Comcast subscribers who sign up for monthly TiVo service. Of Comcast's 21.5 million subscribers, some 8.6 million receive its digital service, which can support DVRs. TiVo will also build into the set-top boxes the ability to sell certain types of advertising to Comcast subscribers.
Cable and satellite TV providers -- such as DirecTV Group (DTV) -- have found that users with DVRs are less likely to switch to another service. As a result, they are rapidly increasing their deployment of DVRs made by TiVo, Scientific-Atlanta (SFA) and Motorola Inc.
It is unlikely that the fees TiVo reaps from Comcast viewers will be as profitable those of "standalone" users who buy a TiVo box at retail. But the partnership adds clout in talks with other players such as Wal-Mart Stores Inc., which does not yet sell TiVo devices.
"It gives them leverage with other cable operators and advertisers" and electronics manufacturers, said analyst Daniel Ernst of Hudson Square Research. "It makes it easier to talk to Wal-Mart and Procter & Gamble and LG Electronics ."
Shares of Comcast, which about one week ago set a $1 billion deal to buy television set-top boxes from Motorola Inc. (MOT), traded at $33.91, off 8 cents a share on Tuesday. TiVo stock climbed to $6.08, up $2.25, but remained well below its all-time high of $78.75 in January 2000.
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