Merger leaves TiVo in limbo

By DAVID SPEAKMAN

A proposed mega merger flooding the pay-TV industry has some wondering if one high-profile Silicon Valley company will be swept up in the process or left as debris in the deal’s wake.

San Jose-based digital video recorder (DVR) maker TiVo Inc. (Nasdaq: TIVO) saw its share price fall by more than 15 percent to $4.49 a share April 11 after Australia’s News Corporation Ltd. said it would pay $6.6 billion to buy control of the parent company of El Segundo-based satellite television service DirecTV.

That’s because DirecTV may be TiVo’s most important business partner, accounting for a large share of TiVo’s customer base, and News Corp. already owns a competitive DVR technology that investors fear could replace TiVo.

“We estimate that approximately 220,000 of TiVo’s 625,000 subscribers are DirecTV customers,” says David Farina, a New York-based analyst with William Blair & Co.

“In the U.K. markets, News Corp. offers a similar TiVo-like DVR through its Sky-branded [satellite] service,” Farina says.

Some TiVo shareholders worry that News will dump TiVo for it’s own technology. But TiVo says that’s not the case.

“We don’t see anything changing,” says TiVo spokeswoman Rebecca Bear. “It’s business as usual.”

TiVo declined further comment on the DirecTV merger.

William Blair’s Farina says there are many reasons News is unlikely to ditch DirecTV’s partnership with TiVo if the deal to buy DirecTV succeeds.

“First, this deal will take at least a year to get through all the necessary regulatory operational hurdles,” Farina says. “At that point, we estimate there will be about 600,000 or so DirecTV customers who subscribe to the TiVo service.

News Corp. already has said it doesn’t plan any major changes at DirecTV, including its relationship with TiVo, for at least two years. It would not elaborate.

“At that point, we estimate there would be nearly 1 million DirecTV/TiVo customers, or about 10 percent of [DirecTV’s] customer base,” says Farina.

“Second, TiVo is the best brand name in the DVR market and is a value-added service that competes” with digital cable and satellite TV competitors, he says.

Currently TiVo’s market share is second only to DirecTV competitor EchoStar Communications Corp.’s Dish Network of Littleton, Colo., which has an estimated 720,000 DVR customers. Dish developed its own DVR technology.

But most Wall Street analysts point to forthcoming competition from digital cable TV companies rather than News Corporation’s European-based DVR technology as an emerging threat to TiVo.

The consensus is that News may not feel any pressure to drop TiVo or standardize its DVR and other interactive TV operations since both current platforms are in nonoverlapping markets and are money generators.

Farina says TiVo offers a more robust service that is a profitable business for DirecTV.

“We estimate DirecTV makes about $2.50 a month per TiVo subscriber, which is a very high-margin vertical service for the company,” he says. “All the heavy lifting in terms of contract negotiation has been completed, allowing DirecTV to continue collecting highly-profitable [TiVo-generated] revenue.”

Farina says instead of dropping its service, News Corp. may be interested in buying TiVo outright. Other analysts contacted by Biz Ink, acknowleged privately that a TiVo buyout has been dogging the company since it went public in 1999.

“Although a very speculative event, the opportunity does exist,” Farina says.

DirecTV owns about 9 percent of TiVo, of which News Corp. will gain control, making it the second-largest corporate TiVo shareholder next to AOL Time Warner Inc.

“Since TiVo has such tremendous brand recognition and loyalty within its customer base, perhaps [News Corp. CEO Rupert] Murdoch would consider rolling TiVo out to his other companies,” Farina says.