Case study: Tivo
Tivo delivers broadcasted content, makes house software and large storage devices, and provides software features to skip the advertisement. In deciding where to position itself in the value chain, TiVo management initially focused on software and service. To entice brand-name CE firms to manufacture and distribute TiVo, the company subsidized CE manufacturers up to $200 per box. After TiVo discontinued CE subsidies in 2002 in an effort to conserve cash, management discovered that there was not enough profit in the TiVo Series2 box for CE manufacturers to make their required margins. TiVo reduced the number of parts, outsourced to a very efficient contracting firm, and started selling boxes. In addition to the retailer deals, TiVo worked with manufacturers to gain broader distribution for the TiVo technology.
Porter’s Five Forces Analysis
The Threat of new entrants is high. TiVo confronted a rash of new entrants. Biggest part of the technology, such as PC, hard drives, MPEG is available to anyone. For hardware, capital requirements are high and TiVo is defending its intellectual property patents aggressively to compete with new entrants. While patents have contributed to keep TiVo’s advantage, litigation has been costly and time-consuming. Besides, TiVo also focused on innovating new technology and features. For software, capital requirements are low and therefore the threat of new entrants is higher than for hardware though the reputation of TiVo remained strong in the consumer markets.

The Power of buyers is low. The U.S. markets for TVS, TV-related devices, and TV services were large, with around 105 million households owning a TV in 2005 and the DVR penetration increase very fast recently these years. Under the current purchase scenario, switching cost is high for many consumers because of a combined initial hardware investment and software subscription service. But, if consumer can bear the money loss, the switching cost will be lower due to various types of DVR product and service provided by other companies. Plus, TiVo subscribers do not have apparent product differentiation and a majority of consumers are not aware of this drawback.

The Power of suppliers is strong because there are a few manufacturers could supply essential parts. Besides, satellite and cable TV have direct access to large customer bases. There are some powerful companies who have unique products or have broadcast companies to help them with distribution. Switching cost is not so high due to a number of suppliers, especially in the foreign markets.

Threat of substitutes is high. The personal computer has becoming popular and every home at least has one. Microsoft was entering the fray, with Home Media Center software that allowed a PC to provide DVR functionality, as well as Internet protocol TV (IPTV) technology that sought to deliver on-demand content over the Web. It was possible to buy software packages that required a monthly subscription fee of about $5 in order to receive an EPG. Finally, consumers could buy PCs configured with Microsoft’s Windows XP Media Center designed to offer DVR capabilities. Hewlett-Packard and Gateway, for example, made Media Center PCs priced from $1,000 to $2,000. The Sony Vaio also included DVR capability. With quickly decreasing prices and no additional cost, PC can be substitute of DVRs.

Competitive rivalry is high. Several direct competitors competing in this market who alliance with large corporations. In addition to cable and satellite DVR offerings, there were several other types of DVR producers. These included stand-alone DVR providers, technology component suppliers and PC manufacturers. Effective product differentiation has lowered in recent years. For example, Replay TV was the only major competitor in the stand-alone DVR product category. Founded at about the same time as TiVo, Replay TV sold the DVRs most often compared with TiVo’s, with some reviewers preferring TiVo’s features and some preferring Replay TV’s.

TiVo’s has pioneer position in the product category and its products are easy to use with numerous innovative features. The existing TiVo users were ardent fans. According to some polls, up to 97% of TiVo users were “very satisfied” and said that they would recommend TiVo to a friend. The high level of customer satisfaction makes the brand equity. Besides, TiVo has multiple potential revenue streams such as Eastern European and Asian markets. Partnered with many large established players, TiVo could develop quickly in the worldwide markets.

The disadvantage is that the company is separated from customers by partners. With the advent of HD television, a set-up box is required for the cable. Without the help of providers, TiVo could not have mass potential customers. Under this circumstance, Motorola and Scientific Atlanta (Cisco) is TiVo’s biggest competitors. And providers such as DirecTV, Time Warner, and Dish Network contribute to the growth of those competitors. Moreover, the product of TiVo is expensive and people should pay additional service fee. There is no network effect in the DVR business because customers can have a variety choices and it doesn’t matter what others are using. However, the network effects are important in this market, especially for TiVo. More customers would prefer to install the product if the company can cut its price and perfect the function, therefore generating strong network effects.

From my perspective, I would choose content distribution. The three options have their merits and drawbacks, but the advantages far overweigh disadvantages in the third option. By using the Internet, TiVo, in effect, could bypass the existing methods of distribution. Broadband connectivity and home networking are increasing rapidly. For the third option, consumers can deliver content to the living room, and have the opportunity to define their own personal network. In the future, they just search for a program that would like to watch instead of knowing where content comes from. This is the future value proposition of this industry and TiVo. The company should focus on customer and relationship and outsource the infrastructure and product innovation. By doing so, the product could generate strong network effect for the outstanding feature and effective information transfer, therefore expanding market share and making more profits.