TiVo Makes Blockbuster Deal

TiVo (TIVO), in its latest effort to differentiate its DVRs from less-expensive generics, has landed a deal with Blockbuster (BBI) to rent and sell its movies and TV shows.

Similar deals already allow TiVo’s subscribers to rent and buy titles from Netflix (NFLX) and Amazon.com (AMZN), download movies from Disney (DIS), watch YouTube videos, listen to Rhapsody music, or order a Domino’s Pizza (DPZ) on their TV sets.

The latest deal, announced early today, will allow TiVo users with high-speed Internet service to rent or buy roughly 10,000 Blockbuster On Demand titles for a similar price charged in its stores. And, unlike Netflix, Blockbuster will offer new videos prior to their release on pay-per-view.

Also, TiVo DVRs will now be for sale at Blockbuster stores and on the video retailer’s website, not only expanding distribution outlets, but in effect marketing TiVo’s service to every Blockbuster customer entering the stores.

Major content deals are crucial for TiVo, who faces increasing competition from cable and satellite providers that have begun offering DVR services with digital cable in one set-top box at no upfront costs and at comparable monthly subscription rates.

Despite TiVo’s superior functionality, the proliferation of cheaper alternatives has shrunk its market share. Aggravating the share loss, DirecTV (DTV), which accounts for 2.8 million or nearly two-thirds of TiVo’s subscriber base, began to offer a second competing HD DVR in 2007, driving large subscriber attrition.

Altough the company signed licensing deals with Comcast (CMCSA) and Cox Radio (CXR) last year, they seem very unlikely to fill the subscriber and revenue gap left by the loss of DirecTV.

To stem subscriber attrition and enhance longer-term ARPU (average revenue per user) - TiVo introduced new pricing plans last year that have lower upfront costs and higher subscription rates. But by subsidizing the DVR cost, TiVo is slowing the progress toward positive EPS. We are maintaining our Hold rating.

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