It took switch to software model to make deal happen

TiVo went from pause to fast-forward Monday as it unexpectedly signed a distribution deal with cable giant Comcast, sending its stock soaring 75%.

Most observers had concluded that TiVo, which has been attempting to sign partnerships beyond its existing deal with DirecTV for years, had given up on cable pacts. That perception was fueled by company’s recent focus on growing sale of its hardware and the departure of prexy Marty Yudkovitz, who led efforts to forge such pacts.

But the DVR pioneer was able to make a deal work by changing its approach from being a partner’s only provider, as in its agreement with DirecTV, to offering TiVo as a premium service on top of an existing generic DVR offering.

Financial benefits per sub to TiVo under such a deal won’t be substantial. Comcast is paying TiVo a small upfront fee and a per-sub fee of about $1 or $1.50 that insiders said will be even less than what TiVo receives from DirecTV.

Though details haven’t been worked out for the service, launching in mid- to late 2006, analysts expect Comcast will charge between $2 and $4 on top of its standard $9.95 per month DVR fee for customers to get the superior TiVo software, as well as its home networking and Internet capabilities.

In addition to sub fees, TiVo and Comcast will split revenue from the advertising capabilities the DVR company is currently building into its service. As part of the agreement, TiVo will integrate its advertising capability into Comcast’s generic DVR as well as its own service, giving it much broader reach.

“This provides the basis for us to pursue a scaled advertising business,” said vice chairman Tom Rogers. “That’s the concept Comcast embraced.”

Companies will split revenue from broadband Internet services that TiVo is developing where users can purchase items such as movie tickets online through their DVR.

While Yudkovitz still works as a consultant for TiVo after ankling last month, it is believed Rogers, former prexy of NBC Cable, took the lead in closing the deal with Comcast.

Yudkovitz led TiVo in talks with Comcast and other cable providers for several years in hopes of making TiVo their exclusive DVR provider.

It took the switch to a software model, however, as well as the development of advertising and other incremental revenue opportunities, to make such a deal happen.

“We wanted to get all of our own capabilities, including video-on-demand and high-definition, along with TiVo in one box and that was a long process,” said Marke Hesse, Comcast senior VP of digital television. “We also get to take advantage of their thinking around advertising in an on-demand world.”

Adding on

By offering TiVo as a premium DVR option, rather than an all-or-none proposition, analysts said it will likely have an easier time signing up other cable partners beyond Comcast.

That rebuts the argument of TiVo detractors that it won’t be able to compete as a standalone-only company, since Comcast and, potentially, others will market it as a complementary option.

“Cable distribution squashes the bear story of TiVo getting beaten by generic cable-based competitors,” Stanford Group analyst Frederick W. Moran commented in a note.

Deal will help TiVo jumpstart sub growth next year after it loses its primary sub driver, DirecTV, which will introduce its own DVR later this year.

Analysts cautioned, though, that TiVo will have to sign up significant numbers of cable subs to make up for losses to its own lucrative subs, from whom it makes $12.95 per month.

Some theorized the Comcast deal might signal an evolution in which TiVo will eventually transform into a software-only company and not sell its own DVR hardware.

TiVo shares closed at $6.70 Monday, up nearly 75%, while Comcast stock was down slightly at $33.91.

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