According to TiVo CFO David Courtney, TiVo was born like most technology start-ups: as a very big idea — to revolutionize the way we watch and experience TV — with very few resources. Courtney, who met founder Mike Ramsay while working in investment banking, was there from the beginning. “In 1999 we were a few business guys and 38 engineers. We had no product, no service, and no customers,” he recalled during a recent Musser-Schoemaker Leadership Lecture at Wharton. Six years later, the company boasts 400 employees, 3 million subscribers, and is making deals with media heavyweights like DIRECTV and most recently, Comcast. But perhaps its greatest asset is a cadre of evangelical users who do more than any marketing campaign to spread the word of TiVo.

“What TiVo is about,” said Courtney, “is time shifting — allowing people to watch what they want, when they want.” For the non-initiated, wrapping one’s head around this concept is not easy, and it appears that Courtney understands this: He makes a point of doing a product demo whenever he speaks to audiences. “When you turn on your TV, you get this,” he said, pointing to what seemed more like an Internet home page than a TV screen. The user interface shows several options. One is to watch live TV, which Courtney noted people rarely choose. Most people end up watching programs they found and recorded using TiVo, he said. For example, you can search for shows by favorite actor or director, or by genre. A key-word option allows for more esoteric searches like “cooking and chocolate” or “sports and cricket.” Another popular feature is Season Pass, which allows users to record an entire season of a specific show.

Courtney explained that ease of use was paramount when designing the product, known generically as a digital video recorder (DVR). “During development, I brought home the remote and gave it to my three-year-old. In about a week she was giving demos to other people, including her grandparents.” If those two demographics could get it, he said, then anybody could. “It’s about lifestyle,” he added, “not technology.” Adi Kishore, a senior analyst with the Yankee Group, credits TiVo for achieving what is considered the holy grail in the consumer technology business — a user interface that is easy to navigate. “It’s just incredibly difficult to design something that most people can use easily,” he said. “TiVo is one of the very, very few companies that has succeeded in doing that.”

Indeed, users have been known to wax poetic about their TiVos. Comparing TiVo to a competing product, user Mark Frauenfelder wrote on a popular blog site: “If TiVo were a beverage, it would be a tall glass of Jamaican ginger beer with chipped ice and a lime wedge, while the Explorer 800 [DVR] would be a paper cup of warm, fake lemonade stirred with [a] finger . . . .”

Trouble in TV Land

With this kind of praise, you would expect TiVo to have caught on like wildfire. But it hasn’t, said Kishore. “There has not been a huge market opportunity for the stand-alone DVRs. . . . People don’t understand what [TiVo] does. The benefits seem unclear.” And after all, he added, “It’s just TV.” While most TiVo users would argue his final point (just TV!), TiVo has struggled. “We pioneered the category,” Courtney noted, alluding to the initial learning curve associated with new technologies.

Having received $750 million in investment capital, the company has yet to turn a profit. Noting that its subscriber-based model — people paying small amounts monthly over a long period of time — hinders short-term profits, Courtney said the company expects to be profitable in the fourth quarter of this year. Like many small companies, TiVo has used its nimbleness to explore partnerships and deals with larger companies. What has worked for TiVo, noted Kishore, is integrating its capabilities into other devices, particularly cable and set-top boxes. In 2000, TiVo signed a deal to create a set-top box for DIRECTV. Now 60% of its subscribers come from the DIRECTV channel. With the end of the contract looming in 2007 (and DIRECTV likely to work with NDS, another maker of digital recording technology) TiVo has had to scramble for another way to provide access to new customers. In March, Comcast announced a deal to make TiVo services available to customers in the majority of its markets around the country.

Contradicting rumors that the Comcast deal could be the death-knell for the company — i.e. that TiVo could be swallowed up by the cable giant — Kishore characterized the 10- to 15-year deal set to launch mid-2006 as “very good” for TiVo. “With DIRECTV potentially going away in 2007, TiVo needed a big deal. This gives them access to Comcast’s 21.5 million subscribers, which may grow to 23 million if the deal with Adelphia goes through. Comcast is going to be TiVo’s bread and butter.” Although Comcast and other cable and satellite TV companies are developing their own “basic” versions of the DVR, TiVo will likely be the upgrade or premium service.

“When you look at the cable set-top boxes, for example the one Comcast has now, they are no match for TiVo — not even close,” said Kishore. “Comcast recognizes that the majority of their customers will go with their existing DVR product. But for the subscribers who want a truly premium product (the ‘Apple’ of DVRs), they will have that in their arsenal as well.”

TiVo Becomes a Verb

Looking ahead, Courtney said the biggest challenge will be differentiation in an increasingly crowded and commoditized DVR sector. “We are the brand leader, and that is both good and bad.” Having people say “I TiVo my shows” indicates great brand awareness, he explained, “but we have to be vigilant about our lexicon and how we use the name TiVo.” The concern, of course, is that it would become the generic, and customers would sign up for the “TiVo-like” product.

Some positive trends affecting the company include the rise in DVR use from 10 million today to an expected 60 million in 2009, the fact that digital cable is the fastest growing source of high-definition content, and the shift toward portability, which, said Courtney, is a development TiVo plans to capitalize on. “We started in the living room, and eventually we will make this technology portable.” Laptops and cell phones are among the potential mediums for TiVo.

Of course, the people who have joined the “TiVolution” are perhaps the biggest weapon in the company’s marketing arsenal. Above average in education and income level, TiVo’s users are a coveted audience for advertisers. Known by many consumers as a way to skip commercials, TiVo ironically has begun making money by selling advertising. Instead of traditional commercials, TiVo sells spots that appear when movies or TV are paused. Each time the “pause” button is pressed, a new advertisement appears on the bottom third of the screen, usually announcing contests or special deals. Courtney showed one for a car manufacturer, presented in “Candid Camera” style and featuring Tiger Woods. Courtney noted that audiences are responding very well to these innovative ads. “We’re not limited to the typical 30-second or 60-second spot,” he said. “Advertisers are free to be creative.” Though ad revenue is still quite small, TiVo has doubled its number of advertisers every year for the past few years.

TiVo’s passionate and evangelical subscriber base is now being rewarded for referring others to the service by earning TiVo “points,” which can be used to purchase products like iPods. They receive TiVo newsletters and chat with one another on TiVo discussion boards. A recent contest had them carrying a plush toy version of the TiVo logo on vacation with them, earning points by posting photos of themselves and their TiVos on vacation. And TiVo employees are equally loyal: on the back of Courtney’s business card is his own “TiVolution,” listing his favorite TV shows from childhood to present.