Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2000
Commission file number 000-27141
----------------
TIVO INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0463167
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
2160 Gold Street, PO Box 2160, Alviso, CA 95002
(Address of principal executive offices) (Zip Code)
(408) 519-9100
(Registrant's telephone number including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE PER SHARE
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
As of March 9, 2001 there were 43,718,966 shares of registrant's common
stock outstanding, and the aggregate market value of such shares held by non-
affiliates of the registrant (based upon the closing sale price of such shares
on the NASDAQ National Market on March 9, 2001) was approximately $106.9
million. Shares of the registrant's common stock held by each executive
officer, director and holder of five percent or more of the registrant's common
stock outstanding as of March 9, 2001 have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I................................................................... 3
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 21
Item 3. Legal Proceedings............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders........... 22
PART II.................................................................. 23
Item 5. Market For The Registrant's Common Equity and Related
Stockholder Matters........................................... 23
Item 6. Selected Financial Data....................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 26
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 44
Item 8. Financial Statements and Supplementary Data................... 45
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................... 73
PART III................................................................. 73
Item 10. Directors and Executive Officers of the Company............... 73
Item 11. Executive Compensation........................................ 73
Item 12. Security Ownership of Certain Beneficial Owners and 73
Management....................................................
Item 13. Certain Relationships and Related Transactions................ 73
PART IV.................................................................. 74
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 74
8-K...........................................................
Signatures.............................................................. 77
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (The "Annual Report") contains certain
forward-looking statements within the meaning of section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934 as amended. These statements relate to, among other
things, our future financial position, services, business development,
strategy and our management's plans and objectives for future operations.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as, "believe," "may," "will," "intend,"
"expect," "estimate," "continue," "ongoing," "predict," "potential," and
"anticipate" or similar expressions or the negative of those terms or
expressions. These statements involve known and unknown risks, uncertainties
and other factors, which may cause our actual results, performance or
achievements to differ materially from those expressed or implied by such
forward-looking statements. Such factors include, among others, the
information contained under the captions "Part I, Item 1. Business," and
"Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Annual Report. The reader is
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date of this Annual
Report. The reader is strongly urged to read the information set forth under
the captions "Part I, Item 1, Business," and "Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
in particular "Factors That May Affect Future Operating Results," for a more
detailed description of these significant risks and uncertainties.
PART I
ITEM 1. BUSINESS
General Development of Business
TiVo is a pioneer in the personal television industry. We have created a
unique personal television service that allows viewers to watch what they want
when they want. The TiVo Service creates a richer and more enjoyable television
experience by offering viewers greater control, choice and convenience. We
believe that the TiVo Service also allows television programmers and
advertisers to reach a broader audience by making shows more accessible and
easier to record and to target their programming and advertising to specific
viewers. The TiVo Service is a subscription-based service enabled by a personal
video recorder designed and developed by TiVo.
TiVo was incorporated in August 1997 as a Delaware corporation with
facilities in California. On August 21, 2000, TiVo (UK) Ltd., a wholly owned
subsidiary of TiVo, was incorporated in the United Kingdom. We have developed a
subscription-based personal television service, TiVo Service, that provides
viewers with the ability to pause, rewind and play back live or recorded
television broadcasts, as well as to search for, watch and record programs. The
TiVo Service also provides television listings, daily suggestions and special
viewing packages. The TiVo Service relies on three key components: the personal
video recorder, the TiVo remote control and the TiVo Broadcast Center. We
conduct our operations through one reportable segment.
We commenced our retail launch in the second half of 1999. Philips Business
Electronics B.V. ("Philips"), Sony Corporation of America ("Sony"), Hughes
Electronics Corporation ("Hughes") and Thomson Mulitmedia S.A. in the United
Kingdom ("Thomson UK") currently manufacture and sell the personal video
recorder enabling the TiVo Service. In addition, with the exception of Hughes,
all of our manufacturing partners also market the devices allowing TiVo to
focus our resources on promoting and enhancing the TiVo Service. DIRECTV,
Inc.("DIRECTV"), a unit of Hughes, provides marketing resources that allows
TiVo to target DIRECTV subscribers and provides sales support in the retail
channel.
On September 13, 2000, TiVo closed an Investment Agreement with America
Online, Inc., ("AOL"), for $200 million. The AOL investment is part of a three-
year strategic Production Integration and Marketing
3
Agreement between AOL and TiVo, in which TiVo will become an AOL TV programming
partner offering AOL TV subscribers access to features of the TiVo Service.
Industry Background
The television is a truly ubiquitous consumer product. According to the
market research firm Nielsen Media Research, 98.0 million, or more than 98% of
all U.S. households, owned at least one television at the end of 1998. Nielsen
also reports that in 1998, U.S. households owned, on average, 2.4 televisions
and spent an average of 7 hours and 15 minutes per day viewing television.
According to Forrester Research, by 2004, 14 million households will use
personal video recorders to control their television viewing.
The reach and popularity of television has been facilitated by the emergence
of new technologies and delivery systems for television programming. These new
technologies have enhanced the clarity, color and sound of television and, as a
result, have increased the entertainment value of watching television. In
addition, new delivery systems, including cable and satellite systems, now
offer a large number of programming choices and specialized programming such as
pay-per-view promotions. According to Cable Ad Bureau, 78.1 million U.S.
households spent $34.4 billion to receive subscription-based cable television
services in 1999. CAB estimated a growth rate of 12% for 2000. In addition,
according to Intertec Publishing Corporation, 14.5 million U.S. households
received subscription-based satellite television services in 1999. New services
and features such as Internet access, personal video recorders and high-
definition TV broadcasts are forecasted to increase subscriber numbers to 25
million by 2005.
These statistics have not been lost on advertisers, who have made television
their largest, most popular medium for reaching consumers. McCann-Erickson,
Inc., a market research firm, estimates that $47.4 billion was spent on
television advertising in 1998. This represents over 23% of total advertising
spending.
As the reach and popularity of television has grown, so too has the amount
of programming available to viewers. Cable and home satellite television
systems have dramatically increased the number of networks and channels
available to today's television viewer. According to the Television & Cable
Fact Book, in 1998, over 60% of U.S. cable subscribers had access to more than
53 channels, compared to less than 10% in 1985. The explosive growth in
available channels has led to an overwhelmingly diverse selection of
programming and content. This is due in large part to the emergence of
specialized television channels and networks, which are formed around a given
subject, theme or category of interest. For example, channels have been created
to deliver programming to targeted groups, such as women or children, or to
deliver specialized content, such as news, cartoons, classic movies, golf,
comedy or educational programming. Subscription-based premium channels, such as
HBO and Showtime, also offer specialized programming, including major motion
pictures, made-for-television movies and sporting events. Clearly, there is
more television programming to choose from now than ever before.
The Need for Personal Television
From the introduction of color television and remote controls to the
proliferation of cable and satellite programming and home theater systems,
improvements in the television experience have been aimed at meeting viewer
demand for richer programming and a more enjoyable viewing experience. However,
the dramatic increase in the volume and diversity of television programming has
fragmented viewing audiences and created new challenges for viewers, television
programmers, network operators and advertisers.
Challenges Faced by Viewers. TiVo believes that today's television viewer
wants greater control, choice and convenience when watching television. Today's
television viewers:
. are unable to easily navigate through hundreds of channels and thousands
of programs;
. are unable to easily identify programs of interest;
. are limited to either watching shows at the time they are broadcast or
recording shows by using a VCR; and
. are often forced to miss portions of shows due to interruptions.
4
Challenges Faced by Television Programmers. Although the television has
become a ubiquitous product, the dramatic increase in the volume and diversity
of channels and programming has drawbacks for networks and other television
programmers. The major networks have been particularly affected by the
proliferation of channels and specialized programming and are suffering from:
. brand dilution and declining viewer loyalty;
. greater fragmentation of their audience base; and
. the inability to effectively evaluate viewing habits, preferences and
demand.
The TV International Sourcebook for 1999 reports that networks have steadily
lost market share to other content providers, from 60% market share in 1993 to
approximately 45% in 1998. As television becomes more fragmented and the
competition for viewers increases, networks and other television programmers
must find new ways to attract viewers and increase viewer loyalty.
Challenges Faced by Advertisers. Similarly, TiVo believes that today's
television advertisers face new challenges as they seek greater effectiveness
and efficiency in targeting specific viewers and establishing brand identity
and loyalty. For example, advertisers must:
. spend increasing amounts of time and money to target desired demographic
groups;
. spread their advertising budgets over an ever-expanding number of
channels and programs; and
. find new ways to identify, monitor and respond to viewers' programming
and advertising preferences.
As viewer fragmentation has increased, so too has the cost of advertising.
Prime time advertisements on the major television networks are more expensive
today than ever before, yet ratings and market share for these networks are
declining. According to the Television Bureau of Advertising and Nielsen Media
Research, the average cost of a 30-second night-time commercial has increased
from $92,700 in 1993 to $121,300 in 1998. Like television programmers,
advertisers must find new ways to reach their targeted audience and to
establish brand identity and loyalty among viewers.
Challenges Faced by Cable and Satellite Network Operators. As a result of
increased competition, cable and satellite network operators have begun placing
greater emphasis on acquiring and retaining subscribers and finding ways to
increase the monthly revenue they receive from these subscribers. In order to
successfully accomplish this, they must:
. improve customer satisfaction;
. enhance programming choice; and
. provide new features and functionality, such as electronic commerce.
TiVo Solution
TiVo has created a personal television service that we believe meets the
challenges faced by viewers, television programmers, advertisers and network
operators. The TiVo Service provides viewers with greater control, easier
navigation and a wider range of viewing options when watching television than
what was formerly available. The TiVo Service creates a richer and more
enjoyable viewing experience by allowing viewers to watch what they want when
they want. The TiVo Service also creates a new platform that enables television
programmers, advertisers, and network operators to deliver television
programming, advertising and in-home commerce. TiVo believes that our service
allows television programmers and advertisers to reach a broader audience by
making shows more accessible and easier to record and to target their
programming and advertising to specific viewers. The TiVo Service is a
subscription-based service enabled by a personal video recorder designed and
developed by TiVo. The personal video recorder is a device that includes a hard
disk drive for recording shows and accessing the content available on the TiVo
Service.
5
The TiVo Service has many features that distinguish it from traditional
television viewing, including:
Locate and Record Multiple Shows Quickly and Easily. The TiVo Service offers
a variety of easy-to-use navigation and recording features that allow viewers
to easily locate and record their favorite shows. Viewers can record and play
back a single show or schedule a customized line-up of several shows to be
recorded without entering specialized codes, setting a timer or using a video
tape. With the Season Pass feature, the TiVo Service automatically records all
episodes of viewers' favorite shows.
Control Live Television. Using the TiVo Service and the personal video
recorder, viewers have more control over live television. For example, viewers
can utilize advanced viewing commands, such as pause, rewind, fast forward and
frame-by-frame. When a viewer pauses live television, the personal video
recorder continues to record the program that the viewer is watching. The
viewer can then resume viewing in normal mode, fast forward to catch up to the
live telecast, or execute any of the other advanced viewing commands. Prior to
the introduction of TiVo, the ability to control live television in this manner
was not available.
Viewing Preferences and Suggested Programming. The TiVo Service allows
viewers to create viewing preferences around particular shows or categories of
interest. Using the Thumbs Up and Thumbs Down buttons on the TiVo remote,
viewers can express their preferences for a particular type of show. These
preferences accumulate over time and are stored locally on the personal video
recorder. Based on the viewer's stored preferences, TiVo recommends programming
that viewers are likely to enjoy and, when storage space is available, the TiVo
Service will automatically record shows that are most likely to match viewers'
individual preferences.
Specialized Content. The TiVo Service also enables a variety of specialized
content. For example, the TiVo Service allows television programmers to develop
and deliver Network Showcases that feature selected programming, such as an
upcoming movie, special event or mini-series, on easy-to-use interactive
screens. Currently, Network Showcases available on the TiVo Service include
directories of simplified recording options for groups of related shows of
particular programmers. In the future, television programmers could use the
TiVo Service to directly offer viewers special programming packages and pay-
per-view promotions such as movies, sporting events, news headlines and other
programming. Subscribers to the TiVo Service also have access to TiVolution
Magazine, which features theme-based collections of shows compiled by TiVo's
editorial staff.
To further enhance the TiVo Service, we create and produce a weekly program
that highlights upcoming shows and events called "TiVo Takes". Produced by TiVo
Studios, the show offers great benefits to both viewers and partners through
the use of Ipreview encoded interactive menus. While viewing the TiVo Takes
program, viewers can schedule recordings with one touch of the remote. Viewers
can also record every episode of an entire season with TiVo's exclusive Season
Pass. Advertisers also have the option to run billboard interactive
advertisements and interstitials throughout the program.
Menu-Driven Navigation and Viewer Interface. The TiVo Service employs a
menu-driven interface and easy-to-use navigation system. TiVo Central, the main
screen of the TiVo Service, allows viewers to access their customized lineup of
shows, Network Showcases, TiVolution Magazine and other TiVo Services and
features. The Pick Programs to Record feature, located on the TiVo Central
screen, allows viewers to search for shows to record by subject, title, channel
or time of showing. Using the on-air guide, viewers can quickly and efficiently
browse through a schedule of up to two weeks of available television
programming and descriptions for each show.
Benefits of the TiVo Service
For viewers, television programmers, advertisers and network operators, the
TiVo Service offers several benefits over traditional television viewing.
6
Benefits to Viewers. TiVo believes that our service offers an enhanced
television viewing experience. Key benefits offered to viewers include the
following:
Greater Control, Choice and Convenience. The TiVo Service provides viewers
with greater control, choice and convenience in watching television. Using the
search and navigation features and variety of recording options, viewers can:
. automatically record all episodes of their favorite shows;
. quickly and easily create a customized lineup of shows to be recorded up
to two weeks in advance;
. pause, rewind and fast-forward live television;
. skip through programming that they do not want to see; and
. access their customized lineup of recorded shows and other specialized
content.
Making Sense of Available Content. The TiVo Service assists viewers in
navigating through the hundreds of channels and thousands of programs available
for viewing. Using the TiVo Service, viewers can browse pre-set categories of
programming, such as sports or action/adventure, and select a desired show for
viewing or recording simply by entering the title, channel or time. With the
TiVo Service, viewers can easily organize their television viewing around shows
they want to watch and receive suggestions for programming that they are likely
to enjoy.
Programming that Matches Viewers' Preferences. The TiVo Service ranks and
recommends programming according to viewers' preferences. This functionality
not only gives viewers access to programming that meets their personal tastes,
but also displays programming, based on viewer preferences, that they might
otherwise never have known was being broadcast.
Benefits to Television Programmers. TiVo believes our TiVo Service offers
television programmers a new and exciting way to reach the viewing audience.
Key benefits offered to television programmers include the following:
Enhanced Viewer Loyalty and Retention. By making it easy for viewers to find
and record the shows they want to watch, the TiVo Service enables programmers
to make their shows accessible to a broader audience. TiVo believes that these
easy to use features, especially the Season Pass feature, will increase the
likelihood that viewers will continue viewing new episodes of a particular
series or show. Viewers also can easily play back the shows they have recorded
long after they have aired, enhancing viewer retention and loyalty.
More Effective Promotions and Previews. The TiVo Service provides television
programmers with an opportunity to create more effective promotions and
previews such as Network Showcases for selected programming and pay-per-view
events. TiVo developed a service, called Ipreview, that consists of active
previews and promotions that allow a viewer to easily record featured
programming at the touch of a button. TiVo believes these promotions will be
effective in attracting viewers and increasing a network's brand presence
because they allow viewers to "impulse record" featured programming and to
watch these programs at a more convenient time. TiVo also believes that by
taking advantage of these features, television programmers have a greater
opportunity to reach a larger viewing audience.
New Platform for Content Delivery. TiVo anticipates that television
programmers will embrace the TiVo Service as a new way to reach audiences with
programming, products and services and as a way to enable couch commerce. For
example, the TiVo Service can enable television programmers to allow viewers to
order and automatically record special programming packages, including bundled
episodes of previously run shows and pay-per-view promotions. TiVo anticipates
that viewers would be able to simply "point and click" to order movies, sports
events, programming packages, games and other products and services.
7
Audience Measurement. TiVo has partnered with ASI Entertainment and Nielsen
Media Research to create the National In-Home TV Lab. The Lab is designed to
help the television industry and advertisers understand the impact of how
television viewers are going to embrace and use emerging technologies,
particularly the personal television services. We believe that research from
the Lab will provide the television industry with accurate audience data and
will help programmers and advertisers speak more effectively to their
audiences.
Benefits to Advertisers. TiVo believes that our TiVo Service will offer
advertisers a new platform with more efficient and effective ways to reach
their targeted audience. Key benefits offered to advertisers include the
following:
Targeting Consumers. In the future, the TiVo Service will allow advertisers
to offer advertising that is related to the viewing preferences stored on the
personal video recorder. For example, working with our network partners TiVo
could download and store several commercials on the personal video recorder and
select which of these commercials to show based on the viewer's preferences.
For example, an automobile advertiser may want to advertise one of several
models during the airing of a particular program, depending on each viewer's
preferences. If the viewer's preferences suggest that the viewer is an outdoor
enthusiast, the commercial might feature a sport utility vehicle.
Platform for New Advertising Opportunities. The TiVo Service provides
advertisers with a new platform to offer advertisements to viewers. For
example, advertisers may be able to combine new advertising with recorded shows
and special promotions to reach new and existing viewers. TiVo also intends to
offer advertisers a new service that will allow viewers to get more information
about and possibly purchase a featured product or service using the TiVo
remote. In this way, TiVo expects to create an interactive on-air shopping
experience for the viewer.
Benefits to Cable and Satellite Network Operators. The TiVo Service provides
a unique platform for network operators to reduce subscriber turnover and
create new sources of revenue. Key benefits offered to cable and satellite
network operators include the following:
Ability to Differentiate Services. The TiVo Service allows network operators
to differentiate and enhance their service offerings by making available
programming more accessible to viewers, and enhancing viewer loyalty by
offering subscribers the ability to customize their viewing experience.
Platform for New Service Opportunities. The TiVo Service can also provide
new sources of revenue for network operators. In 2000, TiVo introduced "TiVo
Direct", an innovative, new marketing and merchandising product. This new
content product is comprised of 30 minutes of video advertising and marketing
programming pre-loaded into the hard drive before a personal video recorder
enabled with TiVo Service is shipped from the factory. This content is produced
by an advertiser. It may include advertisements for purchase of advertiser
merchandise or other goods and services selected by the advertiser. The content
resides on the hard drive and is displayed prominently on the Now Showing
screen until the consumer deletes it.
TiVo Strategy
TiVo's objective is to establish the TiVo Service as the platform for
delivering richer television programming, advertising and in-home commerce. The
key elements of our strategy are:
Establish the TiVo Service as the Market Leader in Personal Television. TiVo
is a pioneer in the personal television industry. As the personal television
industry develops, we intend to aggressively grow our subscriber base, create
specialized content to enhance the value of the TiVo Service and develop new
ways to deliver effective targeted advertising. TiVo also intends to augment
these efforts through strategic partnerships with cable and satellite network
operators, television programmers, advertisers and consumer electronics
manufacturers. TiVo believes that establishing and maintaining a market
leadership position in personal television is critical to establishing new
sources of revenues and the overall growth of our business.
8
Establish and Promote the TiVo Brand. TiVo believes that establishing the
TiVo brand is critical to attracting subscribers, advertisers and strategic
partners. We have dedicated substantial resources to promoting our brand
through multiple advertising and marketing channels, participation in trade
shows, sponsoring events, merchandising and by leveraging existing and future
strategic partnerships.
Leverage Partnerships to Accelerate Market Acceptance. TiVo believes that
leveraging the market presence, brand recognition and distribution resources of
established television industry participants will help us establish broad
consumer awareness and acceptance of the TiVo Service and personal television.
TiVo intends to continue to establish partnerships with leading television
industry participants to expand our subscriber base, provide content and
develop and distribute a wide variety of devices that enable the TiVo Service.
Such partnerships may include:
Network Operators and Other Content Distributors. TiVo intends to continue
to establish partnerships with an increasing number of network operators,
including cable and satellite operators. TiVo believes that agreements with
these companies will provide access to a large and established base of viewers
who are likely to purchase the TiVo Service. Relationships with these companies
will also provide opportunities to develop additional devices that enable the
TiVo Service and provide specialized programming to viewers. For example,
TiVo's agreement with DIRECTV provides for a variety of assisted and joint
marketing activities targeting DIRECTV's installed base of subscribers.
Networks and Other Television Programmers. TiVo intends to continue to
establish partnerships with an increasing number of television programmers,
including broadcast and premium-service providers. TiVo believes that
partnerships with these companies can increase the amount and diversity of
customized content available on the TiVo Service and provide a significant
opportunity to offer specialized programming to viewers. Partnerships with
these companies also provide TiVo with opportunities to develop new interactive
services. Currently, TiVo has relationships with HBO, HGTV and Discovery
Communications. Many of these relationships provide for the delivery of Network
Showcases and other specialized programming to viewers.
Consumer Electronics Manufacturers. TiVo intends to continue to establish
partnerships with consumer electronic and other device manufacturers for the
development, manufacture and marketing of devices that enable the TiVo Service.
TiVo believes this strategy will accelerate the growth of the market for
personal television. TiVo has a strategic relationship with Philips, who
launched the Philips' branded personal video recorder into the retail channel
in the third quarter of 1999 and who continue to manufacture and distribute
their recorder. Additionally, TiVo has entered into agreements with Sony,
Hughes and Thomson UK to manufacture and distribute their brands of the
personal video recorder enabled with TiVo Service.
Advertisers. TiVo intends to pursue partnerships with advertisers in an
effort to generate new sources of revenue. TiVo believes that garnering
advertiser support for the TiVo Service will accelerate the market acceptance
for personal television. TiVo also believes that our proprietary software and
other technology embedded in the personal video recorder and the TiVo Service
will enable advertisers to reach desired viewers more effectively. Not only
will advertisers be better equipped to reach consumers with specific tastes or
preferences, viewers will receive more information about products in which they
are likely to be interested. Currently, TiVo has relationships with IFILM,
Pfizer and Guthy-Renker.
Offer an Increasing Range of Programming and Features. TiVo intends to
continue to offer new programming and features in order to enhance the value of
the TiVo Service and create new sources of revenue. TiVo's technology allows
for frequent updates and improvements to the programming and features offered
on the TiVo Service. TiVo intends to develop other features, such as sports
highlights, condensed news programs and other specialized programming. TiVo
believes that the TiVo Service allows television programmers and advertisers to
reach a broader audience by making shows more accessible and easier to record
and to target their programming and advertising to specific viewers. Potential
future services include:
Active Promotions. TiVo anticipates that programmers will be able to use the
TiVo Service to allow viewers to easily record a variety of programming such as
movies, sports events, television series and other
9
products and services. For example, TiVo has developed "Ipreview", a service
that allows viewers to schedule and record featured programming using a "point
and click" feature during previews.
Active Ads. TiVo anticipates that advertisers will be able to use special
coding, called "data tags," to allow viewers to interact with commercials. For
example, when viewing a commercial, viewers may be able to click a button on
their remote control to request a longer infomercial about the product, to
request a brochure or ask for the nearest retailer. TiVo is currently
developing a service that allows viewers to get more information about and
possibly purchase featured products or services using the TiVo remote control.
Targeted Ads. TiVo anticipates that advertisers will be able to use the TiVo
Service to reach a broader base of consumers and offer commercials that better
match viewers' interests. For example, based on the viewers' preferences stored
on the personal video recorder, an automobile advertiser can feature a sport
utility vehicle in one household and a minivan in another. This is accomplished
by a software program utilizing data stored on the personal video recorder.
Individual viewing preferences will not be released to advertisers or other
third parties without the viewer's consent.
Encourage the Development of New Devices Enabling the TiVo Service. TiVo has
continued to work in partnership with consumer electronics manufacturers and
others in developing new and complementary products that enable the TiVo
Service, such as televisions, DVD players and satellite television receivers.
This strategy is based on TiVo's belief that the TiVo Service enhances the
value of other television, entertainment and home theater products and
services. In pursuing these relationships, TiVo expects to continue to grant
broad licensing rights to our technology and intends to create a set of
standards that will allow consumer electronics manufacturers to embed the
technology that enables the TiVo Service in home entertainment products. TiVo
anticipates that the broad licensing of our technology will accelerate our
subscriber growth, enhance our market position and strengthen the TiVo brand.
What Viewers Experience Using the TiVo Service
The TiVo Service is designed to appeal to a broad consumer base by being
easy-to-use and intuitive. The TiVo Service gives viewers the ability to
control and personalize television by letting them watch what they want when
they want. Navigation through the TiVo Service's menu-driven interface starts
from the TiVo Central screen.
TiVo Central. TiVo Central is the main screen on the TiVo Service and is the
first screen seen by the viewer when the television is turned on. TiVo Central
can also be accessed from anywhere in the TiVo Service by pushing the TiVo
button on the TiVo remote. Most of the recording and viewing features available
on the TiVo Service can be accessed through this screen.
Now Showing. The Now Showing screen allows viewers to easily choose from
their customized lineup of shows, which have been recorded and are stored on
the personal video recorder. For each show, viewers can get detailed
information, including a description of the show and its recorded time. Viewers
can also see when the program will be deleted from the personal video recorder
and can change the deletion time if desired.
Network Showcases Screen. The Network Showcases screen can be used by
television programmers and advertisers to feature selected programming and
products. Network Showcases are separately categorized by each programmer.
Within their own Network Showcase, programmers can customize the manner in
which they highlight and package shows. In the future, we believe that
programmers will create a unique look and feel for their Network Showcases and
may include promotional video clips and trailers.
Pick Programs to Record. Pick Programs to Record allows viewers to easily
select shows to be recorded. Viewers can choose to select shows by name,
channel or time. In addition, viewers can choose from a list of shows
recommended by the TiVo Service based upon their individual preferences.
10
On-Air Program Guide. The TiVo Service includes an easy-to-use on-air
program guide that allows viewers to browse through available programming and
receive information about upcoming shows. The on-air program guide includes a
brief description of the program and the time and channel for viewing.
TiVolution Magazine. TiVolution Magazine features theme-based collections of
shows and other content compiled by TiVo's editorial staff.
How TiVo Works
The TiVo Service relies on three key components: the personal video
recorder, the TiVo remote control and the TiVo Broadcast Center. Individually,
each of these components serves a vital function in the TiVo Service.
The Personal Video Recorder. The personal video recorder was initially
designed and developed by TiVo and enables the basic functionality of the TiVo
Service. The personal video recorder automatically records live television
while the viewer is watching, which allows the viewer to control live
television. The current versions of the personal video recorder, however,
cannot record a different show while concurrently watching live television. The
personal video recorder works with analog broadcast, cable and digital
satellite systems. Our manufacturing partners produce two categories of
personal video recorders known as stand-alone recorders and DIRECTV Receivers
with TiVo. The stand-alone recorders work with analog broadcast and cable
systems. Three models of the personal video stand-alone recorder are currently
available, one supporting up to 20 hours, another supporting up to 30 hours of
recorded programming and one supporting up to 60 hours of recorded programming.
The DIRECTV Receiver with TiVo is an integrated device that can store up to
35 hours of programming recorded straight from the digital bitstream coming off
the DIRECTV satellite.
After the initial set-up, the personal video recorder will automatically
dial into the TiVo Broadcast Center via a telephone line on a daily basis to
download the program guide data, Network Showcases and other programs or
features of the TiVo Service. Software upgrades to the personal video stand-
alone recorder are also delivered directly to the personal video recorder via
the phone line at no additional charge. The DIRECTV Receivers with TiVo are
updated via satellite link instead of phone lines. The program guide data
downloaded from the TiVo Broadcast Center does not decrease the amount of
programming that can be recorded by the subscriber on the personal video
recorder.
When enabled with the TiVo Service, the personal video recorder stores the
subscribers' viewing preferences. Based on these preferences, the TiVo Service
ranks every show listed in the on-air program guide and then recommends the
highest ranked shows to the viewer. If there is available storage capacity in
the personal video recorder, the personal video recorder may automatically
record the show or shows with the highest ranking.
The TiVo Service uses an advanced disk scheduling technique, which manages
the recording and deletion of programs on the system. This allows viewers to
select programming to record well in advance of airing and receive confirmation
that the selected program will be recorded, even if the length of the
programming selected for recording exceeds the then available storage capacity
on the recorder.
TiVo expects that the vast majority of purchasers of the personal video
recorder will activate the TiVo Service. However, if the TiVo Service is not
enabled or is subsequently cancelled, the personal video recorder provides
viewers with several basic capabilities, including pause, rewind and fast
forward navigation of live or recorded television and the ability to record
selected programs by manually programming the personal video recorder without
the aid of the TiVo Service.
The TiVo Remote Control. The TiVo remote control can operate both the
personal video recorder and the viewer's television. Using the TiVo remote
control, a viewer is able to take advantage of the functionality of the TiVo
Service, including navigation of programming, selection of shows to be recorded
and advanced
11
viewing features. The TiVo remote control also enables viewers to indicate
personal preferences through the use of the Thumbs Up or Thumbs Down buttons.
As the TiVo Service is expanded, the TiVo remote control will accommodate
expanded functionality associated with new features, services, promotions and
programming options.
The TiVo Broadcast Center. The TiVo Broadcast Center is a series of computer
servers that manage all of TiVo's programming and service data. The TiVo
Broadcast Center distributes proprietary services and specialized content such
as TiVo's on-air program guides, Network Showcases, TiVolution Magazine and
other content provided by TiVo and our partners. The TiVo Broadcast Center is
designed to be a platform for future interactive services. Presently, data
contained in the TiVo Broadcast Center is communicated to each personal video
recorder automatically on a daily basis through the subscriber's phone line for
the standalone receivers. Upgrades to the software that enable the TiVo Service
are also provided automatically over this phone line. For the DIRECTV Receiver
with TiVo subscribers, we utilizes satellite and cable bandwidth to transmit
data and communicate information from the TiVo Broadcast Center to the DIRECTV
Receiver with TiVo version of the personal video recorder.
Strategic Partnerships
TiVo's success depends on our ability to quickly build a large subscriber
base, integrate TiVo functionality into a broad range of consumer electronics
products, and develop new services and programming to enhance the TiVo Service.
In order to achieve these goals, TiVo has chosen to aggressively pursue
strategic partnerships with:
. cable and satellite network operators;
. television programmers;
. consumer electronics manufacturers;
. marketing support partners; and
. suppliers of key components of the TiVo technology.
By working with strategic partners to develop a business model that
complements the businesses of other industry stakeholders, TiVo is seeking to
aggressively develop personal television as a major category of home
entertainment.
Through our partnerships, TiVo's personal video recorders and other devices
will be manufactured and distributed through retail and other channels. These
partners will also provide access to a large number of potential subscribers
and the resources to effectively market and promote the TiVo Service. In
addition, these partnerships will allow TiVo to provide our subscribers with
richer content, including Network Showcases, previews and promotions of
upcoming shows and other specialized viewing options on the TiVo Service. Some
of TiVo's major partnerships include:
AOL. In 2000, TiVo closed an Investment Agreement with AOL for $200 million.
The AOL investment is part of a three-year strategic Production Integration and
Marketing Agreement between AOL and TiVo, in which TiVo will become an AOL TV
programming partner offering AOL TV subscribers access to features of the TiVo
Service. Additionally, TiVo signed media insertion orders for 2000 and 2001
with AOL for advertising programs to promote the TiVo Service on AOL Time
Warner properties.
BskyB. TiVo launched the TiVo Service in the United Kingdom in cooperation
with British Sky Broadcast. Consumer electronic manufacturer, Thomson,
manufactures the personal video recorder that enables the TiVo Service under
the Thomson SCENIUM brand. The SCENIUM recorder became available in
October 2000. In an effort to support this partnership, TiVo has established a
presence in the United Kingdom
12
by both incorporating TiVo (UK) Ltd. and establishing an office in Middlesex,
UK. Additionally, the BBC signed an agreement as a network partner to showcase
its content on the TiVo Personal Television Service in the UK.
DIRECTV. DIRECTV is promoting TiVo and the TiVo Service to its nine million
subscribers. DIRECTV provides a variety of marketing and sales support,
including commercial air time on the DIRECTV system, access to DIRECTV
subscribers for targeted mailings and placement on its web site and in its on-
air magazine. DIRECTV has also made a portion of the high bandwidth capacity of
DIRECTV's satellite network available to TiVo. We intend to use this capacity
to expand and enrich the TiVo Service offered to DIRECTV subscribers.
In connection with this agreement, DIRECTV also made an equity investment in
TiVo. Additionally, DIRECTV will share in specified revenues that we receive
that relate to subscribers to the TiVo Service who also subscribe to the
DIRECTV satellite service. TiVo has also agreed offset a portion of DIRECTV's
marketing expenses for the DIRECTV Receiver with TiVo.
Discovery Communications. TiVo is working with Discovery to produce weekly
Network Showcases and other programming packages that highlight current and
upcoming Discovery programs. TiVo also granted Discovery preferential placement
on our Network Showcases screen. TiVo will also work with Discovery to enable
Discovery to use our Ipreview Service.
NBC Multimedia. TiVo is working with NBC to produce weekly Network Showcases
and other programming packages that highlight current and upcoming NBC
programs. These NBC programming packages and specials will also be featured in
TiVolution Magazine. TiVo also granted NBC preferential placement on our
Network Showcases screen. TiVo and NBC have agreed to feature each other as
partners on their respective web sites.
In connection with this agreement, NBC also made an equity investment in
TiVo. In addition, NBC will receive certain rights with respect to TiVo's couch
commerce and Internet services if such services are enabled on the TiVo
Service.
Philips. Philips has agreed to manufacture, market and distribute personal
video recorders that enable the TiVo Service. Philips will continue to market
co-branded personal video recorders with TiVo and support the TiVo Service in
retail channels. Philips has also licensed TiVo's technology to develop, market
and promote other products that enable the TiVo Service.
TiVo has agreed to offset a portion of Philips' manufacturing costs by
paying a subsidy to Philips for each personal video recorder that Philips
manufactures and sells. TiVo has also agreed to share a portion of the TiVo
Service subscription revenues it receives from purchasers of the personal video
recorders and other devices manufactured by Philips that enables the TiVo
Service. Philips is also one of our stockholders.
Sony. Sony has also agreed to manufacture, market and distribute personal
video recorders that enable the TiVo Service. Sony will continue to market co-
branded personal video recorders with TiVo and support the TiVo Service in
retail channels.
TiVo has agreed to offset a portion of Sony's manufacturing costs by paying
a subsidy to Sony for each personal video recorder that Sony manufactures and
sells. TiVo has also agreed to share a portion of the TiVo Service subscription
revenues it receives from purchasers of the personal video recorders and other
devices manufactured by Sony that enables the TiVo Service. Sony is also one of
our stockholders.
Quantum. Quantum has agreed to develop and supply the hard disk drives used
in personal video recorders that enable the TiVo Service. Under the agreement,
we or a designated third-party buyer may purchase from Quantum up to an agreed
number of hard disk drives at a discount. In addition, Quantum has agreed to
work with TiVo to customize its hard disk drives for devices that enable the
TiVo Service. Quantum
13
and TiVo have also agreed to work together in promoting TiVo and the TiVo
Service. Quantum has acquired shares of our stock in connection with this
agreement. We have also agreed to share a portion of the TiVo Service
subscription revenues we receive from the subscribers who have purchased
personal video recorders and other devices equipped with Quantum hard disk
drives on which we received a discount from Quantum.
Liberate Technologies. TiVo has agreed to license and incorporate Liberate's
TV Navigator software into future version of our personal television reference
platform, thus integrating Liberate's platform with interactive TV with the
TiVo Service. The Liberate platform includes client and server software that
enable interactive TV services such as accessing web sites via the TV.
Additionally, this license agreement provides a platform for the enhancement of
AOL TV enabled with TiVo Service.
Sales and Marketing
TiVo is building a team of sales and marketing professionals whose efforts
are focused on establishing the TiVo brand, educating consumers on the features
and benefits of the TiVo Service and personal television, and promoting sales
of personal video recorders and other devices that enable the TiVo Service.
TiVo anticipates that retail stores will be the dominant distribution
channel for the personal video recorders and is establishing direct
relationships with potential retail partners. Our marketing team maintains an
ongoing dialogue with viewers via research and other consumer response vehicles
to ensure that TiVo continues to deliver services that match viewers' needs.
TiVo began selling personal video recorders and subscriptions to the TiVo
Service on March 31, 1999 directly to consumers, principally through our web
site and our toll-free telephone number, 1-877-FOR-TIVO. Philips began
distributing co-branded personal video recorders to national retail chains and
regional retail stores and distributors and online e-tailers in the fourth
quarter of 1999.
Philips began selling personal video recorders to retailers and supporting
the retail channel through marketing efforts, in-store display materials and
sales force training. TiVo, with the assistance of DIRECTV, has supported
Philips' efforts by educating retailers about personal video recorders and the
TiVo Service and providing training where necessary. In addition, DIRECTV
incorporated the TiVo logo in certain of its in-store promotional materials in
the first quarter of 2000. Philips and DIRECTV also encourage their existing
and prospective customers to subscribe to the TiVo Service by offering
promotional incentives such as coupons or discounts.
TiVo initiated a marketing campaign in support of the retail launch of the
personal video recorder that utilized print, outdoor, web and television
advertising. TiVo also targeted certain DIRECTV subscribers with direct mail
and bill inserts. The goal of these efforts is to increase awareness of the
personal television category and to promote the TiVo brand as the leader in
this category. TiVo's marketing campaign was augmented by advertising efforts
by Philips and Sony.
Personal video recorders with the TiVo Service are available from Philips
and Sony at stores nationwide and from online retailers such as Best Buy,
Circuit City, Good Guys, Ultimate Electronics and The Wiz. Thomson SCENIUM
brand personal video recorders with the TiVo Service are available at Dixons
and Curry's in the UK.
Privacy Policy
TiVo has adopted a privacy policy, which we make available on our web site
and delivers to each new subscriber to the TiVo Service. This policy was
updated and expanded in September 2000. This policy explains that TiVo collects
certain types of information such as anonymous viewing and diagnostic
information but all viewing information that is linked or associated with an
individual identity will not be disclosed without the viewer's consent.
Information about viewers' preferences and how they use the TiVo Service is
separated from information that identifies a viewer personally, so that the
information becomes anonymous. We may be able to use this
14
anonymous information to tell a broadcaster the percentage of TiVo viewers that
recorded a particular program, but TiVo will not know, nor be able to tell the
broadcaster, which of our viewers did so, unless a viewer decides to provide
that information. TiVo has designed our system to remove personally
identifiable data so that no one at TiVo or anywhere else can identify the
individual viewer. If a specific viewer does not want the way in which they use
their personal video recorder to be part of the anonymous information that TiVo
gathers and shares with other companies, they can ask for a block on the
release of this anonymous data.
TiVo is able to send information to viewers' personal video recorders that
allows TiVo and other companies to customize viewers' television experience.
Neither TiVo nor the company supplying the customizing options will know which
options viewers' personal video recorders select to show. If a viewer does not
want this customizing information sent to their personal video recorder, they
can simply ask for a block on such customized information.
Competition
The market for home entertainment goods and services is intensely
competitive, rapidly evolving and subject to rapid technological change. The
delivery of video and television programming is particularly competitive as new
products and services continue to be introduced and marketed. TiVo believes
that the principal competitive factors in these markets are name recognition,
performance, pricing, ease of use and functionality. Because the personal
television market is new and rapidly evolving, TiVo expects it will face
significant barriers in our efforts to secure broad market acceptance and
intense competition at several different levels.
Established competitors in the consumer electronics market. Personal
television competes in a consumer electronics market that is crowded with
several established products and services, especially products delivering
television programming and other home video entertainment. Personal video
recorders and the TiVo Service compete with products and technologies that have
established markets and proven consumer support, such as VCRs, DVD players and
cable and satellite television systems. In addition, many of the manufacturers
and distributors of these established products have greater brand recognition,
market presence, distribution channels and advertising and marketing budgets,
and more strategic partners than we do. To be successful, TiVo believes it will
need to spend significant resources to develop consumer awareness of TiVo and
the personal television product category.
TiVo's initial success will depend not only on consumers agreeing to
purchase a personal video recorder, but also paying a monthly subscription fee
to receive the TiVo Service. This is a significant cost, and many consumers who
have purchased VCRs, DVDs or other home video entertainment products may be
reluctant to purchase personal television systems and services. The personal
video recorder enabled with the TiVo Service does, however, offer several
advantages over competing home video entertainment products, including:
. an on-air guide to up to 12 days of television programming, updated on a
nightly basis;
. the ability to pause, rewind and fast-forward live television;
. the ability to record every episode of a given show at the click of a
button;
. the ability to recommend television shows to viewers based upon their
particular preferences; and
. specialized content, including Network Showcases and TiVolution Magazine.
Although the personal video recorder is not well-suited as an archival
system for recorded television shows, personal video recorders enabled with the
TiVo Service do contain a feature that allows viewers to off-load recorded
programming to a VCR. While the personal video recorder and TiVo Service allow
viewers to control live television, the current version of the personal video
recorder does not permit viewers to record a show on one channel and watch a
show being broadcast at the same time on another channel.
Internet-related companies and companies offering similar products and
services. TiVo faces competition from Internet service providers and other
Internet companies such as WebTV and X-TV. These
15
competitors are seeking to meld Internet browsing and traditional broadcast,
cable or satellite television programming into a single medium. For example,
WebTV launched UltimateTV during the spring of calendar year 2001. Last year
WebTV and EchoStar Communications released the DishPlayer, which is a product
that combines Internet access with a program guide and the ability to pause
live television. While many of these products offer fewer services than the
TiVo Service, we do not presently offer Internet browsing capability. However,
in September 2000 we signed an agreement with AOL to become an AOL TV
programming partner offering AOL TV subscribers access to features of the TiVo
Service.
TiVo's primary competitor in the personal television market was ReplayTV,
Inc. ReplayTV manufactured and marketed a personal television recorder that
included a hard disk drive and functionality similar to that of our partners
personal video recorders. While ReplayTV's personal video recorder was more
expensive than the personal video recorder enabled with TiVo Service, ReplayTV
did not charge a monthly subscription fee for its service. ReplayTV attracted
fewer than 40,000 customers by the end of 2000. In February 2001, hardware
maker SonicBlue announced its intention to acquire ReplayTV. Exactly how it
will use ReplayTV's assets and intellectual property is unclear at this time.
Research and Product Development
From TiVo's inception until March 1999, TiVo's research and development
efforts were focused on designing and developing the personal video recorder
and the TiVo remote control, the TiVo Service and the TiVo Broadcast Center.
These activities included both hardware and software development. TiVo's
engineering staff is now focused on research and development in the following
three areas:
Performance engineering. TiVo intends to continue to devote considerable
engineering resources to improve TiVo's essential technologies. TiVo's
engineers and customer support personnel work together to quickly identify and
correct potential performance errors. We also continually work to identify,
develop and implement features that improve performance in areas such as video
and audio quality, speed, ease of use and additional features and
functionality.
Platform engineering. Although TiVo does not intend to manufacture the
personal video recorder or other hardware products, the evolution of hardware
technology that enables the TiVo Service is a crucial element of TiVo's future
success. Our hardware engineers are working with consumer electronics
manufacturers, component suppliers, and data storage suppliers to reduce the
manufacturing cost of the personal video recorder and integrate TiVo
functionality into other consumer electronics goods. In September 2000, we and
AOL signed a strategic agreement under which TiVo would become an AOL TV
programming partner, offering AOL subscribers access to features of the TiVo
Service. Similarly, TiVo intends to integrate the TiVo Service into components
such as cable set-top boxes, televisions and other consumer electronics
products. We intend to work with a broad range of partners to develop our
technology platforms and establish TiVo as the prominent technology in the
personal television market.
Service engineering. TiVo intends to continue to develop the TiVo Service,
offering new features and programming. We have assembled a group of experienced
television and multimedia professionals to create specialized programming for
the TiVo Service. As part of this effort, the programming team is currently in
the process of building software and video development tools that will enable
networks and other content providers to create specialized programming for the
TiVo Service.
Patents and Intellectual Property
TiVo has adopted a proactive patent and trademark strategy designed to
protect all important aspects of our technology and intellectual property. We
have filed thirty-six patent applications and nine provisional patents. TiVo
has also jointly filed a patent application with Quantum. The patent
applications that we have filed are broad in nature and are tied to fundamental
inventions rather than small, unrelated features or applications. These patent
applications cover substantially all of TiVo's technology, including hardware,
16
software, the TiVo Service functionality and appearance, network architecture,
manufacturing and international patent rights. TiVo has also filed patent
applications that cover technologies it intends to incorporate in future
versions of the TiVo Service and hardware. Several of our early patent
applications have been examined and claims allowed by the U.S. Patent and
Trademark Office (PTO). Included in these are a number that are fundamental to
the operation of personal video recorders, as well as forming a foundation for
other important patent applications currently under examination. We anticipate
ongoing progress in establishing a defensible and useful intellectual property
portfolio. There can be no assurance that current applications of our patents
will ever be granted.
TiVo has filed many trademark applications covering substantially all of our
trade dress, logos and slogans, including:
. Active Preview
. Can't Miss TV
. DIRECTIVO
. Instant Replay logo
. Ipreview
. Jump logo
. Life's too short for bad TV
. Network Showcase
. Personal TV
. Personal Video Recorder
. Primetime Anytime
. Season Pass
. See it, want it, get it
. The New Face of Television
. The way TV is meant to be
. Thumbs Down (logo and text)
. Thumbs Up (logo and text)
. TiVo Central
. TiVo (logo, name and character)
. TiVolution
. What you want, when you want it
. You run the show
These applications are currently pending with the U.S. Patent and Trademark
Office. Additionally, we have international trademark applications pending for
our TiVo logo. We have secured the U.S. registration for the TiVo name. We have
licensed the use of our name and logo to some of our strategic partners. See
"Factors That May Affect Future Operating Results--Our success depends on our
ability to secure and protect patents, trademarks and other proprietary
rights."
17
Recent Developments
Change in Fiscal Year
On January 30, 2001, we announced a fiscal year end change from December 31
of each year to January 31 of each year. We believe that the change in fiscal
year will help align the seasonal patterns of demand in our business with our
reporting cycle and better align TiVo's promotional activities with those of
our retail, service and network partners.
Agreements
On January 12, 2001, we announced that Atom Films had signed a one-year
agreement to promote Atom Films on the TiVo Service. Atom will provide films
and animations for TiVo's weekly interactive TV show, TiVo Takes, as well as on
TiVo Direct, the preloaded content appearing in the Now Showing/Now Playing
area on TiVo Central. Taking further advantage of the agreement, we will work
with Atom Films to create original programming with further revenue-generating
opportunities.
On January 30, 2001, we signed an agreement with AOL Time Warner to expand
our existing strategic relationship to include an enhanced mulit-million dollar
marketing and promotional campaign with AOL Time Warner. Under this agreement,
the Second Amendment to the Investment Agreement, TiVo will be promoted across
AOL Time Warner online, print and television media properties, which will focus
on educating consumers about the TiVo Service. Additionally, the Second
Amendment provided for an amendment to the Escrow Agreement. The First
Amendment to the Escrow Agreement authorized release of $43.5 million in
restricted funds, which had been provided by AOL under our previously executed
investment agreement with AOL, which we will use for working capital. In
return, we agreed to reduce the exercise price of certain warrants held by AOL.
TiVo reduced the exercise price of a warrant to purchase 2,308,475 shares of
common stock held by AOL from $23.11 to $7.29 and also reduced the exercise
price of a warrant to purchase 295,428 shares of common stock held by AOL from
$30.00 to $7.29.
On January 30, 2001, we signed a media insertion order with AOL Time Warner
for $21.5 million in advertising programs to promote the TiVo service on AOL
Time Warner properties.
In January 2001, we entered into a Strategic Advertising Agency Partnership
Program with Starcom MediaVest Group. Starcom , Digital @JWT, Omnicom Media
Group and participating clients will sit on TiVo's Advertising Advisory Board.
The Board's objective is to ensure strong communication and creative thinking
between TiVo and our partners to develop new opportunities that will benefit
both advertisers and consumers.
In January 2001, Miller Brewing Company signed a one-year Charter Advertiser
Program agreement. Miller Brewing Company will receive sponsorship
opportunities on the TiVo Service including TiVo Takes and TiVo Direct.
Additionally, Miller will have a seat on the TiVo Advertising Advisory Board
and priority access to our new advertising concepts and basic aggregate
research data associated with TiVo advertising products.
Employees
At March 9, 2001, we employed approximately 320 employees, including 71 in
service operations, 122 in research and development, 62 in sales and marketing
and 65 in general and administration. We also employ, from time to time, a
number of temporary and part-time employees as well as consultants on a
contract basis. At March 9, 2001, we employed 53 such persons. Our future
success will depend in part on our ability to attract, train, retain and
motivate highly qualified employees who are in great demand. We may not be
successful in attracting and retaining such personnel. Our employees are not
represented by a collective bargaining organization and we have never
experienced a work stoppage or strike. Our management considers employee
relations to be good.
18
Executive Officers and Key Employees:
As of March 9, 2001, our executive officers and key employees and their ages
were as follows:
Name Age Position
---- --- --------
Executive Officers
Michael Ramsay...... 51 Chairman of the Board, Chief Executive Officer and
President
James Barton........ 43 Senior Vice President of Research and Development,
Chief Technical Officer
David H. Courtney... 42 Senior Vice President of Finance and Administration
and Chief Financial Officer
Key Employees
Susan Cashen........ 40 Vice President of Corporate Communications
Ta-Wei Chien........ 46 Senior Vice President of Engineering and Operations
Andrew Cresci....... 40 Vice President and General Manager of TiVo (UK)
Morgan P. Guenther.. 47 Senior Vice President of Business and Revenue
Development
Stacy Jolna......... 49 Vice President of Programming and Media Relations
Brodie Keast........ 45 Senior Vice President of Sales and Marketing
Luther Kitahata..... 36 Vice President of Software Engineering
Howard Look......... 34 Vice President of TiVo Studios
Joe Miller.......... 34 Vice President of Sales
Karrin Nicol........ 41 Vice President of Human Resources
Mark A. Roberts..... 40 Vice President of Information Technology and Chief
Information Officer
Robert P. Vallone... 43 Vice President of Service Operations and Customer
Service
Matthew Zinn........ 36 Vice President, General Counsel and Chief Privacy
Officer
Michael Ramsay is a co-founder of TiVo and has served as TiVo's Chairman of
the Board of Directors, Chief Executive Officer and President since our
inception in August 1997. From April 1996 to July 1997, Mr. Ramsay was the
Senior Vice President of the Silicon Desktop Group for Silicon Graphics, a
manufacturer of advanced graphics computers. From August 1994 to April 1996,
Mr. Ramsay was President of Silicon Studio, Inc., a wholly owned subsidiary of
Silicon Graphics, Inc. ("SGI") focused on enabling applications development for
emerging interactive media markets. From July 1991 to August 1994, Mr. Ramsay
served as the Senior Vice President and General Manager of Silicon Graphics'
Visual Systems Group. Mr. Ramsay also held the positions of vice president and
general manager for the Entry Systems Division of SGI. Prior to 1986, Mr.
Ramsay held research & development and engineering management positions at
Hewlett-Packard and Convergent Technologies. Mr. Ramsay holds a B.S. degree in
Electrical Engineering from the University of Edinburgh, Scotland.
James Barton is a co-founder of TiVo and has served as TiVo's Vice President
of Research and Development, Chief Technical Officer and Director since our
inception and is currently Senior Vice President of Research and Development,
Chief Technical Officer and Director. From June 1996 to August 1997, Mr. Barton
was President and Chief Executive Officer of Network Age Software, Inc., a
company that he founded to develop software products targeted at managed
electronic distribution. From November 1994 to May 1996, Mr. Barton served as
Chief Technical Officer of Interactive Digital Solutions Company, a joint
venture of Silicon Graphics and AT&T Network Systems created to develop
interactive television systems. From June 1993 to November 1994, Mr. Barton
served as Vice President and General Manager of the Media Systems Division of
SGI. From January 1990 to May 1991, Mr. Barton served as Vice President and
General Manager for the Systems Software Division of Silicon Graphics. Prior to
joining SGI, Mr. Barton held technical and management positions with Hewlett-
Packard and Bell Laboratories. Mr. Barton holds a B.S. degree in Electrical
Engineering and an M.S. degree in Computer Science from the University of
Colorado at Boulder.
19
David H. Courtney joined TiVo in March 1999 as Chief Financial Officer and
is currently Senior Vice President of Finance and Administration and Chief
Financial Officer. From May 1995 to July 1998, Mr. Courtney served as a
Managing Director at J.P. Morgan, an investment banking firm, where he was
responsible for building and expanding the firm's high technology investment
banking business in the United States. From 1986 to 1995, Mr. Courtney was a
member of the high technology investment banking group at Goldman, Sachs & Co.,
most recently serving as Vice President. Mr. Courtney currently serves as a
director of KQED Television, a non-profit affiliate of the Public Broadcasting
System in San Francisco, California. Mr. Courtney holds a B.A. degree in
Economics from Dartmouth College and an M.B.A. degree from Stanford University.
Susan Cashen joined TiVo in March 2000 as Vice President of Corporate
Communications. From November 1994 to March 2000, Ms. Cashen was employed at
Blanc & Otus, a leading technology public relations firm based in San
Francisco, California and most recently served as Senior Vice President and
Partner from March 1999 to March 2000. Prior to joining Blanc & Otus, Ms.
Cashen managed her own consulting practice. Ms. Cashen holds a B.A. degree in
Russian Studies from Hamilton College.
Ta-Wei Chien has served as Vice President of Engineering and Operations
since February 1998 and is currently Senior Vice President of Engineering and
Operations. From December 1996 to February 1998, Mr. Chien served as Vice
President of Engineering in the Desktop Workstations group at SGI, where he
managed engineering projects for desktop workstations. From April 1991 to
December 1996, Mr. Chien was a director of digital media and VLSI engineering
at SGI. Mr. Chien holds a B.S. degree in Electrical Engineering from National
Taiwan University and an M.S. degree in Electrical Engineering from the
University of California, Los Angeles.
Andrew Cresci has served as Vice President and General Manager of TiVo (UK)
since November 2000. In August 1999 Mr. Cresci co-founded TapCast, a California
based wireless Internet portal. Prior to founding TapCast Mr. Cresci was
Director of Worldwide Marketing for the workstation division at SGI for eight
years. Mr. Cresci holds a B.S. degree in Electronics Engineering from the
University of Bath, England.
Morgan P. Guenther has served as Vice President of Business and Revenue
Development since March 2001. From June 1999 to February 2001 he served as Vice
President of Business Development. From March 1998 to June 1999, Mr. Guenther
was a partner of the law firm of Paul, Hastings, Janofsky & Walker LLP. From
1990 to March 1998, Mr. Guenther was a partner of the law firm of Farella Braun
& Martel. Mr. Guenther also serves on the board of directors of Tier
Technologies, Inc., an information technology consulting company. Mr. Guenther
holds J.D. and B.A. degrees from the University of Colorado and an M.B.A.
degree from the University of San Francisco.
Stacy Jolna has served as Vice President of Programming and Media Relations
since May 1998. Prior to joining TiVo, Mr. Jolna had served as a Vice President
at WebTV Networks Inc., an Internet services company and subsidiary of
Microsoft Corp., since May 1997. From December 1981 to February 1996, Mr. Jolna
was employed by Cable News Network, most recently serving as a Vice President.
Mr. Jolna holds a B.S. degree from State University of New York and an M.S.
degree in Journalism from Boston University.
Brodie Keast has served as Senior Vice President of Sales and Marketing
since March 2001. In December 1999, Mr. Keast joined TiVo as Vice President of
Sales and Marketing. Prior to joining TiVo, Mr. Keast was employed with Quantum
Corporation from 1996 through 1999 most recently serving as Vice President and
General Manager for Quantum's DLT Tape Division. Prior to joining Quantum, he
spent ten years at Apple Computer where he held a number of executive marketing
positions. Mr. Keast holds a B.S. degree in Computer Science from California
State University, Chico.
Luther Kitahata has served as Vice President of Sales since October 2000. He
joined TiVo in 1998 as the Director of Software. Prior to joining TiVo, Mr.
Kitahata was part of the founding team at Navio Communications (now Liberate
Technologies) where he worked in both managerial and engineering capacities
20
from April of 1996 to January 1998. Prior to 1996, Mr. Kitahata was founder and
Director of Engineering of E-Motion, a leading provider of content distribution
and multimedia collaboration systems. Mr. Kitahata holds an M.S. degree and a
B.A. degree with honors in Computer Science from Brown University.
Howard Look has served as Vice President of TiVo Studios since March 2000.
He joined TiVo in February 1998 as Director of Application Software. Prior to
joining TiVo, Mr. Look was Manager and the Director of Applied Engineering at
SGI from 1996 to 1998. Mr. Look holds a B.S degree in Computer Engineering from
Carnegie-Mellon University.
Joe Miller has served as Vice President of Sales since October 2000. From
June 1999 to October 2000, Mr. Miller served as Director of Channel Marketing
for TiVo. Prior to joining TiVo, Mr. Miller was employed with U.S. Satellite
Broadcasting from 1994 to 1999; most recently serving as General Manager of
Retail Sales. Prior to joining U.S. Satellite Broadcasting, Mr. Miller was
National Sales Manager for Cox Satellite Programming. Mr. Miller holds a B.A.
degree in Public Relations from Southwest Texas State University.
Karrin Nicol joined TiVo in July 1999 as Vice President of Human Resources.
From 1987 to 1999, Ms. Nicol was employed with at SGI, most recently as
Director of Human Resources. Prior to that, Ms. Nicol served in various
positions at Fairchild Semiconductor Corporation. Ms. Nicol holds a B.S. degree
in Food and Nutrition from California State University, Chico and a Masters in
Human Resources and Organizational Development from University of San
Francisco.
Mark A. Roberts has served as Chief Information Officer since March 1999 and
Vice President of Information Technology since July 1999. Prior to joining
TiVo, he served as Vice President of Information Technology at Acuson
Corporation, a medical ultrasound company, from March 1996 to March 1999. From
July 1990 to March 1996, Mr. Roberts was Director of Information Systems at
SGI. Mr. Roberts holds a B.S. degree in Economics from Santa Clara University.
Robert P. Vallone has served as Vice President of Service Operations and
Customer Service since March 1999. From November 1998 to April 1999, Mr.
Vallone served as Director of Operations for TiVo. Prior to joining TiVo, Mr.
Vallone served as Director of Engineering at SGI since October 1993. Mr.
Vallone holds a B.S. degree in Experimental Psychology from Cornell University.
Matthew Zinn has served as Vice President, General Counsel and Chief Privacy
Officer since July 2000. From May 1998 to July 2000, Mr. Zinn was the Senior
Attorney, Broadband Law and Policy for the MediaOne Group, a leading global
communications company. From August 1995 to May 1998, Mr. Zinn served as
corporate counsel for Continental Cablevision, the third largest cable
television operator in the United States. From November 1993 to August 1995, he
was an associate with the Washington, D.C., law firm of Cole, Raywid &
Braverman, where he represented cable operators in federal, state and local
matters. Mr. Zinn holds a J.D. degree from the George Washington University
National Law Center and a B.A. degree in Political Science from the University
of Vermont.
ITEM 2. PROPERTIES
In March 2000, TiVo moved our corporate headquarters, which houses our
administrative, sales and marketing, customer service and product development
activities, to a leased facility in Alviso, California. We believe that our new
corporate facilities will be adequate to meet our office space needs for the
next several years as TiVo currently utilizes approximately 75% of the total
office space. We believe that our facilities are well maintained and are in
good operating condition. The lease for this space expires in 2007.
Additionally, we currently lease sales office space in Beverly Hills,
California and in New York, New York, as well as one international location in
Middlesex, United Kingdom. We believe that these facilities are adequate to
meet our sales office space needs for the next year.
21
ITEM 3. LEGAL PROCEEDINGS
StarSight Telecast. On January 18, 2000, a suit was filed against TiVo by
StarSight Telecast Inc, a subsidiary of Gemstar International Group Limited
("StarSight"), in the U.S. District Court for the Northern District of
California alleging willful and deliberate violation of U.S. Patent Number
4,706,121, entitled "TV Schedule System and Process", held by StarSight. The
complaint alleged that TiVo infringed the patent by, among other things,
making, using, selling, offering to sell and/or importing its TV schedule
systems and processes without a license from StarSight. Starsight seeks
unspecified monetary damages as well as an injunction against TiVo's
operations. It also seeks attorneys' fees and costs. We believe that we have
meritorious defenses against this suit and intends to vigorously defend
ourself. On February 25, 2000, TiVo counterclaimed against StarSight, Gemstar
Development Corporation and Gemstar International Group Limited seeking damages
for federal antitrust violations and state unfair business practices claims, as
well as declaratory relief of non-infringement, invalidity and unenforceability
with respect to the patent. We could be forced to incur material expenses
during this defense, and in the event we were to lose this suit our business
would be harmed. See "Factors that May Affect Future Operating Results--
Intellectual property claims against us can be costly and could result in the
loss of significant rights."
TiVo is aware that media companies and other organizations may support
litigation or explore legislative solutions unless the members of the personal
television industry agree to obtain license agreements for the use of certain
programming. We have received letters from Time Warner Inc. and Fox Television
stating that these entities believe TiVo's personal television service exploits
copyrighted networks and programs without the necessary licenses and business
arrangements.
For further discussion of intellectual property risks facing TiVo, see
"Factors that May Affect Future Operating Results--Intellectual property claims
against us can be costly and could result in the loss of significant rights."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information for Common Equity
Our common stock is traded on the Nasdaq National Market under the symbol
TIVO. As of March 9, 2001, we had 262 stockholders of record.
The following table shows the high and low per-share closing prices for our
common stock as reported by the National Association of Security Dealers, Inc.,
on any trading day during the respective quarter:
High Low
------ ------
Fiscal Year 2002
- ----------------
First Quarter as of March 9, 2001................................ $ 7.19 $ 4.19
Fiscal Year 2001
- ----------------
Year Ended January 31, 2001...................................... $ 9.13 $ 6.13
Fiscal Year 2000
- ----------------
Fourth Quarter ended December 31, 2000........................... $19.94 $ 5.38
Third Quarter ended September 30, 2000........................... $33.75 $16.69
Second Quarter ended June 30, 2000............................... $36.19 $15.88
First Quarter ended March 31, 2000............................... $71.50 $30.50
Fiscal Year 1999
- ----------------
Fourth Quarter ended December 31, 1999........................... $51.00 $25.13
Third Quarter ended September 30, 1999........................... $29.94 $29.94
On March 9, 2001, the closing price of our common stock was $4.19 per share.
Dividend Policy
On September 13, 2000, we closed the Investment Agreement with AOL for $200
million. Under the terms of the Investment Agreement between AOL and TiVo,
dated June 6, 2000 and the First Amendment to the Investment Agreement dated
September 11, 2000 (the "Investment Agreement"), between AOL and TiVo, we
issued to AOL shares of Series A redeemable convertible preferred stock with
certain dividend and voting rights. Dividends on the Series A redeemable
convertible preferred stock are calculated by multiplying the Non-Government
Institutional Funds Simple Average Rate by $30.00 per share times the number of
shares of Series A redeemable convertible preferred stock outstanding.
Dividends are payable quarterly as declared by our board of directors.
We expect to continue our current policy of paying no cash dividends to
holders of our common stock for the foreseeable future.
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended December
31, 2000, December 31, 1999 and December 31, 1998 and for the period from
August 4, 1997 (Inception) to December 31, 1997 have been derived from our
financial statements audited by Arthur Andersen LLP, independent public
accountants. These historical results are not necessarily indicative of the
results of operations to be expected for any future period.
The data set forth below (in thousands, except for per share data) and
should be read in conjunction with Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements included in Item 8. "Financial Statements and
Supplementary Data."
Period from
Year Ended December 31, August 4, 1997
---------------------------- (Inception), to
2000 1999 1998 December 31, 1997
--------- -------- ------- -----------------
(in thousands, except for per share data)
Consolidated Statement of
Operations Data:
Revenues....................... $ 3,571 $ 223 $ -- $ --
Costs and expenses
Cost of services............. 18,382 4,067 -- --
Research and development..... 24,279 9,727 5,614 356
Sales and marketing.......... 102,091 24,502 1,277 28
Sales and marketing-related
parties..................... 53,604 15,172 -- --
General and administrative... 14,346 7,027 2,946 241
Stock-based compensation..... 3,115 1,530 -- --
Other operating expense,
net......................... -- 7,210 -- --
--------- -------- ------- ------
Loss from operations........... (212,246) (69,012) (9,837) (625)
--------- -------- ------- ------
Interest income.............. 7,928 2,913 136 49
Interest expense and other... (522) (466) (20) (19)
--------- -------- ------- ------
Net loss....................... (204,840) (66,565) (9,721) (595)
Less: Series A redeemable
convertible preferred stock
dividend................... (1,514) -- -- --
========= ======== ======= ======
Net loss attributable to common
stock......................... $(206,354) $(66,565) $(9,721) $ (595)
========= ======== ======= ======
Net loss per share
Basic and diluted............ $ (5.55) $ (5.49) $ (3.25) $(0.20)
Weighted average shares...... 37,175 12,129 2,990 2,917
As of December 31,
----------------------------
2000 1999 1998
--------- -------- -------
(in thousands)
Consolidated Balance Sheet
Data:
Cash and cash equivalents...... $ 106,096 $139,687 $ 2,248
Working capital................ 122,973 130,327 1,329
Total assets................... 236,318 152,842 3,543
Long-term portion of
obligations under capital
lease......................... 606 1,141 --
Redeemable convertible
preferred stock............... 3 -- --
Redeemable common stock........ 1 -- --
Total paid-in capital for
redeemable convertible
preferred stock and redeemable
common stock.................. 96,986 -- --
Total stockholders' equity..... 34,849 133,247 2,121
- --------
* Working capital includes restricted cash of $93.2 million as of December 31,
2000 (see Item 8, Note 9).
24
Quarterly Results of Operations
The following table represents certain unaudited consolidated statement of
operations data for our eight most recent quarters ended December 31, 2000. In
management's opinion, this unaudited information has been prepared on the same
basis as the audited annual consolidated financial statements and includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair representation of the unaudited information for the quarters presented.
This information should be read in conjunction with our consolidated financial
statements, including the notes thereto, included elsewhere in this Annual
Report. The results of operations for any quarter are not necessarily
indicative of results that may be expected for any future period. The three
months ended March 31, 1999, June 30, 1999 and September 30, 1999 have been
reclassified in order to conform to current quarter classifications.
Three Months Ended
----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(unaudited, in thousands except per share data)
Revenues................ $ -- $ 8 $ 33 $ 182 $ 424 $ 719 $ 1,002 $ 1,426
Costs and expenses
Cost of services....... 689 636 749 1,993 4,168 4,988 4,019 5,207
Research and
development........... 1,596 1,859 2,327 3,945 4,678 5,679 8,318 5,604
Sales and marketing.... 2,168 1,847 5,323 15,164 9,180 11,384 30,308 51,219
Sales and marketing--
related parties....... -- 382 4,946 9,844 4,547 5,349 18,953 24,755
General and
administrative........ 1,125 1,057 1,757 3,088 2,691 3,631 3,527 4,497
Stock-based
compensation.......... -- 187 501 842 969 919 657 570
Other operating
expense, net.......... (12) 201 4,808 2,213 -- -- -- --
------- ------- -------- -------- -------- -------- -------- --------
Loss from operations.... (5,566) (6,161) (20,378) (36,907) (25,809) (31,231) (64,780) (90,426)
Interest income........ 53 224 614 2,022 1,824 1,907 1,625 2,572
Interest expense and
other................. (2) (176) (281) (7) (70) (112) (252) (88)
------- ------- -------- -------- -------- -------- -------- --------
Net loss................ (5,515) (6,113) (20,045) (34,892) (24,055) (29,436) (63,407) (87,942)
Less: Series A
redeemable
convertible preferred
stock dividend....... -- -- -- -- -- -- (240) (1,274)
------- ------- -------- -------- -------- -------- -------- --------
Net loss attributable to
common stock........... $(5,515) $(6,113) $(20,045) $(34,892) $(24,055) $(29,436) $(63,647) $(89,216)
======= ======= ======== ======== ======== ======== ======== ========
Net loss per share
Basic and diluted...... $ (1.62) $ (1.15) $ (3.44) $ (1.03) $ (.68) $ (.82) $ (1.72) $ (2.19)
Weighted average
shares................ 3,401 5,312 5,833 33,899 35,353 35,743 36,924 40,682
The TiVo Service is enabled through a personal video recorder that is sold
in retail channels like other consumer electronic devices. As a result, we
anticipate that our business will be seasonal and we expect to generate a
significant number of our annual new subscribers during the holiday shopping
season. We also expect to generate a portion of future revenues from television
advertising, which tends to be seasonal and cyclical, reflecting overall
economic conditions as well as budgeting and buying patterns.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 8 of this Form 10-K.
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements include, without limitation,
statements containing the words "believes," "anticipates," "expects," and words
of similar import or the negative of those terms or expressions. Such forward-
looking statements will have known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Actual results could differ materially from those set forth
in such forward-looking statements as a result of the "Factors That May Affect
Future Operating Results" and other risks detailed in the Company's reports
filed with the Securities and Exchange Commission.
Overview
We were incorporated in August 1997, as a Delaware corporation and are
located in Alviso, California. On August 21, 2000, TiVo (UK) Ltd., a wholly
owned subsidiary of TiVo Inc., was incorporated in the United Kingdom. The TiVo
Service is a subscription-based television service that provides viewers with
greater control, easier navigation and a wider range of viewing options when
watching television. The TiVo Service also provides television content
providers and advertisers with a new platform for content delivery, interactive
viewing options and in-home commerce. The TiVo Service is enabled through a
personal video recorder designed and developed by TiVo.
We have generated a limited amount of revenues to date and expect to incur
significant operating expenses over the next several years in connection with
the continued development and expansion of our business. In particular, we
expect our sales and marketing expenses to continue to be a large portion of
total expenses as personal video recorders gain market acceptance in the retail
channel with the consumer and as we establish the TiVo brand and educate and
attract subscribers. We launched the personal video recorder and service into
the retail channel in the second half of 1999. We incurred losses of $204.8
million in 2000 and we expect to continue to incur losses for the foreseeable
future.
We currently generate revenues from two sources, subscription revenue and
non-subscription revenue. Subscriptions to the TiVo Service are available on a
monthly, annual or lifetime basis. The current price for a monthly subscription
to the TiVo Service is $9.95 per month, an annual subscription is $99.00 per
year and a lifetime subscription is $199.00. A lifetime subscription allows
access to the TiVo Service for the life of the personal video recorder.
Subscription fees are paid by the viewer when activating the TiVo Service.
Subscription revenues from lifetime subscriptions are recognized ratably over a
four-year period.
Non-subscription revenue primarily includes Charter Advertising and
Sponsorship revenue from consumer companies and media networks who have
provided content on the TiVo Service.
We began selling personal video recorders and subscriptions to the TiVo
Service on March 31, 1999. We transitioned manufacturing to Philips, one of our
manufacturing partners, in the fourth quarter of 1999. The sales of personal
video recorders in 1999 were not expected to be recurring for TiVo, and were
therefore considered incidental to our business. The sales less the cost of
sales for the personal video recorders sold directly by TiVo for the year ended
December 31, 1999 were recorded as "other operating expense, net."
26
Since the TiVo Service is enabled through a personal video recorder that is
sold in retail channels like other consumer electronic devices, we anticipate
that our business will be seasonal and we expect to generate a significant
number of our annual new subscriptions during the holiday shopping season.
We anticipate that the sources of our revenues will change over time. In the
future, we may generate revenue from other sources such as:
. audience measurement reporting revenue; and
. electronic commerce or couch commerce.
We have agreed to share a substantial portion of our subscription and other
fees with some of our strategic partners in order to promote the TiVo Service
and encourage the manufacture and distribution of the personal video recorders
that enable the TiVo Service. These agreements may require us to share
substantial portions of the subscription and other fees attributable to the
same subscriber with multiple partners. If we reduce our subscription fees in
response to competitive or other market factors, our operating results would be
adversely affected. Our decision to share subscription revenues is based on our
expectation that our partnerships will help us obtain subscribers, broaden
market acceptance of personal television and increase our future revenues. If
these expectations are not met, we may be unable to generate sufficient revenue
to cover our expenses and obligations.
We have agreed to make formula-based payments to Sony, Thomson, Quantum,
Philips and DIRECTV in exchange for key activities and results. Quantum
provided us a discount payment for hard disk drives purchased by our
manufacturing partners for use in the personal video recorder from Quantum. We
have agreed to share a portion of the TiVo Service subscription revenues we
receive from subscribers who have purchased personal video recorders and other
devices equipped with Quantum hard disk drives on which we received a discount
from Quantum. We have agreed to pay to Philips and Sony a per-unit subsidy for
each personal video recorder that they manufacture and sell. The amount of the
payments can vary depending on Philips' and Sony's manufacturing costs and
selling prices. We may make additional subsidy payments in the future to
consumer electronic and other manufacturers in an effort to maintain a
commercially viable retail price for the personal video recorders and other
devices that enable the TiVo Service. Subsidy payments are renegotiated on an
annual basis. We pay DIRECTV a revenue share for our subscription revenues
generated from DIRECTV subscribers in exchange for DIRECTV's marketing efforts.
Payments made to our strategic partners in exchange for these services are
recognized as "sales and marketing--related parties expenses."
In the past, we have issued stock in exchange for services to our strategic
partners. For example, we issued shares of our common stock to DIRECTV in
exchange for marketing support and a note which is reduced as bandwidth
capacity is made available to TiVo on DIRECTV's satellite television system. We
also issued warrants, which were exercised for shares of our common stock to
Quantum in exchange for a discount on hard disk drives used in the personal
video recorders that enable the TiVo Service. We recorded prepaid marketing
expenses resulting from the issuance of this equity to DIRECTV and Quantum.
These prepaid marketing expenses are amortized as services are provided to us
and charged to "sales and marketing--related parties expenses."
On September 13, 2000, TiVo closed an Investment Agreement with AOL for
$200 million. The AOL investment is part of a three-year strategic Production
Integration and Marketing Agreement between AOL and TiVo, in which TiVo will
become an AOL TV programming partner offering AOL TV subscribers access to
features of the TiVo Service. In return for AOL's investment, TiVo issued to
AOL a combination of convertible redeemable preferred stock, a portion of
common stock subject to redemption, common stock and initial and performance
warrants. Additionally, TiVo has signed media insertion orders for 2000 and
2001 with AOL for advertising programs to promote the TiVo Service on AOL Time
Warner properties (See Item 8, Note 9).
27
Prior to our initial public offering, we granted stock options to employees,
consultants and directors at prices that were less than the estimated fair
value of our common stock at the date of grant. We recorded deferred
compensation related to these options, which is amortized over the vesting
period of each option as "stock-based compensation."
Results of Operations
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Revenues. Revenues for the year ended December 31, 2000 were $3.6 million,
compared to $223,000 for the year ended December 31, 1999. The increase is
attributable to increased customer subscriptions to the TiVo Service, which
grew by approximately 118,000 new subscribers during 2000, bringing the total
installed subscriber base to approximately 136,000 as of December 31, 2000.
Cost of services. Cost of services consists primarily of telecommunication
and network expenses, employee salaries, call center and other expenses related
to providing the TiVo Service to subscribers. Cost of services for the year
ended December 31, 2000 was $18.4 million compared to $4.1 million for the year
ended December 31, 1999. This increase was primarily attributable to increased
telecommunications and network expenses due to the increase in number of
activations. The increase was $7.3 million for the year ended December 31,
2000. Total salaries and benefits accounted for 16% of the total increase due
to the expansion and staffing of the broadcast operations department and
customer service departments.
Research and development expenses. The Company's research and development
expenses consist primarily of employee salaries and related expenses and
consulting fees relating to the design of the personal video recorder that
enables the TiVo Service. Research and development expenses for the year ended
December 31, 2000 were $24.3 million compared to $9.7 million for the year
ended December 31, 1999. Approximately 49% of the total increase in expenses
was due to the hiring of additional engineers to help support the improvement
and addition of features and functionality of current products as well as the
design of new platforms. Approximately 22% of the total increase was related to
research and development consulting expenses.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of employee salaries and related expenses, media advertising, public relations
activities, special promotions, trade shows and the production of product
related items, including collateral and videos. Sales and marketing expenses
for the year ended December 31, 2000 were $102.1 million compared to $24.5
million for the year ended December 31, 1999. The increase was primarily
attributable to an increase in expenditures for advertising, public relations
and trade shows in connection with the continued retail marketing campaign of
the TiVo Service and the personal video recorder that enables the TiVo Service.
Advertising expenses, including public relations and trade shows, comprised
over 78% of the total increase in sales and marketing expenses from 1999 to
2000. For the year ended December 31, 2000, sales support expense was $7.2
million compared to $1.7 million for the year ended December 31, 1999. Sales
support accounted for 7% of the total increase. We expect our marketing
expenses to continue to be a large portion of our total company expenses for
2001 due to marketing campaigns targeted on consumer education.
Sales and marketing-related parties. Sales and marketing-related parties
expense consist of cash and non-cash charges related primarily to agreements
with AOL, DIRECTV, Philips, Sony, Quantum, and Creative Artists Agency, LLC
("CAA") all of which hold stock in the Company. Sales and marketing-related
parties expense for the year ended December 31, 2000 was $53.6 million compared
to $15.2 million for the year ended December 31, 1999. The increase in sales
and marketing-related parties expense is primarily attributable to the
manufacturing and shipments of personal video recorders and to the related
activations of subscribers to the TiVo Service, which began in March 1999.
Sales and marketing-related parties expense as of December 31, 2000,
consists of cash charges of $44.0 million and non-cash charges of $9.6 million.
The non-cash portion is related to the amortization of
28
warrants or common stock issued for services that we issued to AOL, Quantum,
DIRECTV and Creative Artists Agency, LLC. The total amount of warrant valuation
and common stock issued for services as of December 31, 2000 was $44.4 million.
Of this amount, $22.1 million has not yet been amortized. We amortize the
valuation of the warrants and common stock issued for services on a straight-
line basis over the period that the services are provided.
The cash portion of sales and marketing-related parties expense is comprised
of revenue share and manufacturing subsidy payments to Philips, Sony, Quantum
and DIRECTV. Additionally included are media insertion orders paid to AOL.
Subsidies are formula based payments to our partners in exchange for key
activites and results. The formulas are periodically adjusted based on our
partners' manufacturing costs and selling prices. A portion of the subsidy is
payable after shipment and the balance is payable after the subscription is
activated. Since subsidies are based on the number or units manufactured and
activated, we expect that as the volume of units manufactured increases our
subsidy costs will increase proportionally. We have also agreed to share a
portion of our revenues with some of our strategic partners in order to promote
the TiVo Service and encourage the manufacture and distribution of the personal
video recorders that enable the TiVo Service. Revenue share is calculated as an
agreed upon percentage of revenue for a specified group of TiVo subscribers. We
anticipate that our business will continue to grow and, as such, we expect the
revenue share and manufacturing subsidy amounts to continue to be large for
next year. We are currently working with our partners to try to manage costs
for calendar year 2001.
General and administrative expenses. General and administrative expenses
consist primarily of employee salaries and related expenses for executive,
administrative, accounting, information systems, customer operations personnel,
facility costs, and professional fees. General and administrative expenses for
the year ended December 31, 2000 were $14.3 million compared to $7.0 million
for the year ended December 31, 1999. Over 31% of the increase was primarily
attributable to the hiring of additional personnel and related expenses. Also
contributing to the increase were accounting and legal expenses totaling 19% of
the total increase.
Stock-based compensation. During 1999 and 2000, we granted stock options
with exercise prices that were less than the estimated fair value of the
underlying shares of common stock for accounting purposes on the date of grant.
As a result, stock-based compensation expense is being recognized over the
period that these stock options vest. The stock-based compensation expense was
approximately $3.1 million for the year ended December 31, 2000 and $1.5
million for the years ended December 31, 1999. The unamortized balance of
$3.0 million will be fully amortized by February 2004.
Other operating expenses, net. Other operating expenses, net consists of the
revenues from the sale of personal video recorders sold directly by TiVo, less
the cost of the personal video recorders sold. For the year ended December 31,
2000, other operating expenses, net was zero compared to $7.2 million for the
year ended December 31, 1999. We transitioned manufacturing and selling
personal video recorders in the fourth quarter of 1999 to Philips. The revenues
and costs resulting from the sale of personal video recorders were not expected
to be recurring and are therefore considered incidental to our business and as
such have been classified as other operating expense, net.
Interest income. Interest income resulting from cash and cash equivalents
held in interest bearing accounts and short term investments was $7.9 million
for the year ended December 31, 2000 compared to $2.9 million for the year
ended December 31, 1999, as cash balances have increased largely due to the AOL
investment in 2000.
Interest expense and other. Interest expense and other was $522,000 for the
year ended December 31, 2000. This includes amortization of the value assigned
primarily to the Comdisco for interest expense and convertible debt warrants of
$164,000 and disposal of an asset no longer used of approximately $227,000. For
the year ended December 31, 1999, interest expense and other was $466,000.
29
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998.
Revenues. Revenues for the year ended December 31, 1999 were $223,000,
compared to zero for the year ended December 31, 1998. The increase is
attributable to customer subscriptions to the TiVo Service, which began in
March 1999. As of December 31, 1999, we had approximately 18,000 subscribers.
Cost of services. Cost of services consists primarily of employee salaries,
telephone expenses, call center and other expenses related to providing the
TiVo Service to subscribers. Cost of services for the year ended December 31,
1999 was $4.1 million compared to zero for the year ended December 31, 1998.
This increase was primarily attributable to the hiring of content programming
and customer service personnel. Total salaries and benefits accounted for 45%
of the total cost of services expenses. The establishment of a customer call
center in connection with the retail release of the TiVo Service and the
personal video recorder that enables the TiVo Service comprised 48% of the
total cost of services expenses. Additionally, as subscribers increased there
were other variable costs, such as telephone charges which accounted for 4% of
the total cost of services.
Research and development expenses. The Company's research and development
expenses consist primarily of employee salaries and related expenses and
consulting fees relating to the design of the personal video recorder that
enables the TiVo Service. Research and development expenses for the year ended
December 31, 1999 were $9.7 million compared to $5.6 million for the year ended
December 31, 1998. Increase in salary expenses due to the hiring of additional
engineers to help support the improvement and addition of features and
functionality of current products as well as the design of new platforms
accounted for approximately 72% of the total increase from 1998 to 1999.
Approximately 22% of the total increase was related to research and development
consulting expenses.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of employee salaries and related expenses, media advertising, public relations
activities, special promotions, trade shows and the production of product
related items, including collateral and videos. Sales and marketing expenses
for the year ended December 31, 1999 were $24.5 million compared to $1.3
million for the year ended December 31, 1998. The increase was primarily
attributable to an increase in expenditures for advertising, public relations
and trade shows in connection with the continued retail marketing campaign of
the TiVo Service and the personal video recorder that enables the TiVo Service.
Advertising expenses, including public relations and trade shows, comprised
over 75% of the total increase in sales and marketing expenses from 1998 to
1999. For the year ended December 31, 1999, sales support expense was $1.7
million compared to zero for the year ended December 31, 1998. Sales support
accounted for 7% of the total increase. We expect our marketing expenses to
continue to increase significantly in connection with the continued retail
marketing campaign for the TiVo Service and the personal video recorder that
enables the TiVo Service, which began with the retail launch in the third
quarter of 1999.
Sales and marketing-related parties. Sales and marketing-related parties
expense consist of cash and non-cash charges related primarily to agreements
with DIRECTV, Philips, Quantum, and Creative Artists Agency, LLC ("CAA") all of
which hold stock in the Company. Sales and marketing-related parties expense
for the year ended December 31, 1999 was $15.2 million compared to zero for the
year ended December 31, 1998. The increase in sales and marketing-related
parties expense is attributable to the manufacturing and shipments of personal
video recorders and to the related activations of subscribers to the TiVo
Service, which began in March 1999.
Sales and marketing-related parties expense as of December 30, 1999,
consists of cash expense of $2.5 million and non-cash charges of $12.7 million.
The non-cash portion is related to the amortization of warrants or common stock
issued for services that we issued to Quantum, DIRECTV and Creative Artists
Agency, LLC. The total amount of warrant valuation and common stock issued for
services as of December 31, 1999 was $29.0 million. Of this amount, $16.3
million has not yet been amortized. We amortize the valuation of the warrants
and common stock issued for services on a straight-line basis over the period
that the services are provided.
30
General and administrative expenses. General and administrative e