TiVo surprised Wall Street in March by reporting a fourth-quarter loss of only $18.7 million — half what most analysts had forecast — on a revenue increase of 29%. Though its shares jumped 5% on the news, Kaufman Bros. media analyst Todd Mitchell wasn’t buying the rosy spin from TiVo management, nor is he expecting Comcast’s forthcoming TiVo deployment to change the company’s fortunes. We asked Mitchell about his skeptical take on TiVo and why its tie-ins with MSOs may be too little, too late.

Why didn’t TiVo’s upside surprise last quarter impress you?

With TiVo—like any other subscriber-based model, where there’s a large upfront subscriber acquisition cost—there’s an inverse relationship between cash flow and growth. If they beat on the upside and losses were lower than expected, it’s because growth was lower than expected. And since they knew their subscriber acquisition cost, and since that number was not that much different than expected, it shows you that growth was not only lower than we expected on the Street, but lower than they expected internally.

At least one analyst interpreted increased churn in the quarter as purged non-revenue-producing lifetime subscribers. Why don’t you share that upbeat assessment?

If, in fact, they were purging lifetime subs who no longer contribute [revenue], I would think you’d see a stronger gain in ARPU. I think one of the dynamics is—and there’s not one reason for churn, there are several—that you had an upgrade Christmas in the sense that a lot of people bought high-definition televisions. TiVo’s high-definition box was $700. So I think there must have been people who had TiVo on their regular television, bought a new hi-def television and said, "I’ll go with the cable company’s DVR because it’s HD and doesn’t cost me anything upfront."

Will the Comcast offering, being beta-tested now, help?

No. I think that this is very interesting space for investors. TiVo has shown that you add the right software to the set-top box, and you get a better user experience. But TiVo’s business model of selling straight to the consumer is not the correct business model, because the MSO is the gatekeeper, and they own the customer relationship. You’ve seen that they can’t grow their stand-alone box business in a profitable way, and in terms of this MSO offering, here’s what I think. Right now TiVo is clearly better. However there’s a whole series of upgrades coming on Comcast regular boxes and their regular DVRs, in terms of their interface, and that’s going to become a very competitive sector. So I don’t see why it’s so compelling for me to pay extra just for a TiVo interface, when I’ve probably got a lot of the tools differentiating TiVo coming anyway.

So Comcast is just hedging its bets with the TiVo offering?

I expect them to bring their own product up to speed. From Comcast’s perspective, if people want [TiVo], fine. They can say, "We’re Comcast. We’re great. We offer you choice." And, frankly, it’s going to be an overlay on their existing system. It’s going to cost extra. They’re not going to let TiVo use all of its ad products there. You’re not going to be able to stream videos from Amazon, because that would compete with Comcast VOD. It’s not going to have the full features.

So the investment here on the long side is twofold. There’s going to get huge penetration on Comcast and Cox and many other MSOs, and there’s going to be favorable economics there. And that all of these services that they are offering on their stand-alone [boxes] will turn into robust businesses.  You’re only talking about 2 or 3 million DVRs right now on Comcast. You’re not talking about every single one of their subs. And you’re only taking about a buck a month, at most. And unlike DirecTV—which needed to have a DVR when they partnered with TiVo in order to compete with VOD—they marketed the hell out of it. Comcast doesn’t have a huge incentive to push this.

So I’m not so sure that that business has a huge value going forward. And all this other stuff, whether it’s their download from Amazon or their ad platform: They’ve only got a million and a half subs. They don’t have critical mass to build a business around. Meanwhile, look at how many video iPods are being sold. If they are the disaggregator, already other dissaggregators are coming in and taking share. So, I like the TiVo people. I think they’re nice people. But I don’t think that they have the right business model.

Disclosure: Kaufman Bros., L.P. makes a market in TiVo.

Rob Garretson is a business and technology writer based in Gaithersburg, Md.

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