As widely reported on many blogs in the TiVo world, TiVo raised monthly service fees for new customers. Pretty much every blog post about this has been unhappy with the rate increase, and it stands to reason: customers have to either pay more now, or they have to commit for a longer time span.
But since we all love TiVo, and we want the company to remain healthy, I thought I’d take a look at the issue in a different light. Is this really a huge price increase and therefore unfair? Or is it more of a shift in the economics of getting a TiVo? I think it’s some of both.
An important and less-covered aspect of the price increase is the rebate increase that accompanied this change. The rebate goes up, and in one case the price also went down. So the upfront cost to consumers (after rebate) now starts at zero. That’s the same tactic that lots of companies in similar businesses take, like DirecTV, Verizon, and even car dealerships (they make money on the scheduled maintenance, and not so much on the initial purchase). The point? Consumers see a very lower barrier to entry, and the company makes money off them each month.
It’s pretty obvious at this point that TiVo loses money on the hardware, and hopes to make it up in the monthly fees. Yes, they have some other revenue sources, but really the core revenue generator is the TiVo service.
And there’s another reason that TiVo would rather appear to shift the costs from the initial purchase to the continuing service fees: non-compliance with rebates. People often wonder why companies bother with rebates when there would be considerably less paperwork and hassle if the company would just push the discount down through the distributors and into the retail outlet. But then everyone would get one. If they force people through a few hoops for the rebate, then they make a lot of extra cash for everyone who forgets or doesn’t bother. In fact, the only quarter in which TiVo, the company, actually showed a profit was when people failed to claim their rebates in the numbers that TiVo expected.
Since TiVo is losing money on the hardware, they really need to keep the hardware in service long enough to recoup their investment. That’s why they offer discounts for longer contracts and that’s why they have early-cancellation penalties. They’re copying the cell phone model. There was a time when DirecTV TiVos were $99 each, and if your drive failed, you were better off getting a new one than fixing the old one. Now they need to give customers an incentive to stick with an older box, maybe without networking, maybe without two tuners, rather than just dumping the older unit for the next free-after-rebate box. And that’s by getting them to commit to service for longer and longer periods.
So now TiVo’s best deal is a flat fee of $299, paid upfront, for three years of service. That’s really not a bad deal, on either side. They lock the customer in for three years, and they can claim that they have service plans as low as $8.31 per month. They receive $370 for a dual tuner unit plus three years of service, worst case. This assumes that the rebate gets redeemed and that the box remains in service the whole time. If the rebate doesn’t get redeemed or the unit gets subscribed in one-year increments, then the revenue really skyrockets – $249 plus $199 per year, for a total of $846. So there’s an almost $500 span of the amount of revenue they can bring in.
In any event, what most of us TiVo lovers want is for TiVo to succeed. We want to see more fabulous products like the Series3 HD TiVo for cable (finally). We couldn’t even imagine using a generic DVR interface, or losing TiVo Central Online. So any effort to get TiVo in the black is really in our best interests.
More discussion and links in our WeaKnees TiVo forum.
