While TiVo Falls, Roku Rocks
When TiVo (NASDAQ: TIVO) introduced its digital video recorder in 1999, it promised to transform how television was consumed -- and it did. The device rapidly became a massive hit with users, who loved that they could program TiVo to record entire seasons of shows, learn to record what they might like, and, of course, fast-forward easily through commercials. Similarly, when Roku (NASDAQ: ROKU) created its devices and software for watching streaming video, it made ease-of-use its hallmark.
But over the years, the value of the companies' offerings have diverged. Where Roku continues to grow and add greater functionality to its offerings, TiVo has declined, and though millions of consumers still use its DVRs and program guides, TiVo is a dwindling factor in how we consume video. The companies' choices explain why TiVo has declined while Roku has thrived.
TiVo peaked more than a decade ago and recently announced it would stop making hardware entirely. Instead, it will allow third-party manufacturers to build its branded devices while TiVo focuses on its intellectual property. The board is also seeking an acquirer for the company, based on the value of its IP and existing licensing deals. With shares trading at around $14, TiVo stock is a shadow of its former high-flying self.
Image source: Getty Images.
Beginning of the end
The decline of Tivo can be laid at the feet of one development: Netflix (NASDAQ: NFLX). Founded in 1997 -- the same year as TiVo -- its development of streaming video led to a seismic shift in viewing culture that TiVo failed to adjust to. Tivo essentially had one product and never came out with another.
TiVo failed to license its technology to others until cable and technology companies began developing their own DVRs, at which point TiVo began suing them for patent infringement. Ultimately, industry giants like Charter Communications and Dish Network settled and paid TiVo for licenses, while others, such as Google, Cisco, and ARRIS, entered into cross-licensing agreements.
Last year, TiVo generated a total of $826 million in revenue, mostly from its IP assets, which now includes Rovi's interactive program guide technology. Rovi acquired TiVo in 2016 and took its name. While the TiVo's patent portfolio is solid and has withstood the test of time in the markets and the courts, and the company has introduced new devices like TiVo Stream, which lets users download and stream content they've recorded to mobile devices, they're not enough to make the company's stock a viable investment.
Changing with the times
In contrast, Roku can thank Netflix for its current market position. Netflix originally designed Roku's signature set-top box to stream its content, but Netflix CEO Reed Hastings decided to spin off the unit due to worries that other hardware makers would block Netflix from their devices if the company was directly competing against them. As a result, Roku was freed to pursue streaming content on its own.
While hardware was the initial driving force (Roku sells more streaming video devices than any other company) Roku realized there was little profit to be made in its boxes. The real money was to be found in the advertising it sells on the Roku home screen and in the content that it carries. Moreover, advertising seen on other streaming services may have actually been sold by Roku. Roku demands the right to sell 30% of a content partner's ad inventory if their shows are to be available on Roku devices, according to reporting by Business Insider.
As CEO Anthony Wood told The Verge, "Consumers are shifting to streaming. And as they shift to streaming, advertisers are following them. Building out a big, next-generation TV ad platform is an important part of [Roku's] business."
Past, present, and future
Although Roku is not abandoning its hardware division, shifting its focus to the platform side of the business is important because there are now plenty of streaming devices on the market. It may be the market leader at the moment, but the Amazon.com and Alphabet devices are gaining ground. Roku execs realized their company needed to adapt if it wanted to be more than a one-hit wonder.
In short, Roku looked to the future while TiVo remained tied to the past until it was too late. It's expected that about 50 million people in the U.S. will abandon cable and satellite TV by 2021, up from 20 million today. This shift will give Roku a much wider opportunity to siphon off some of the massive $70 billion television advertising market.
TiVo had a product changed how we watched TV, but it failed to market itself properly and was unwilling to license its technology until it had been taken by others. The advent of streaming video caught it flat-footed, and it never adapted to the new market reality. Now, Amazon is said to be working on a DVR, which could end TiVo once and for all.
Although Roku was born into streaming, it continues to evolve and change within the fast-moving media landscape. That's why Roku is thriving today while TiVo is hoping someone will step forward to bail it out with an acquisition.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
