The original vision

Founders Mike Ramsay and Jim Jermoluk had grand visions of a home media server that would handle one’s music and video assets for home entertainment. As they set out to create this product they realized it was an extremely ambitious undertaking and they stood a better chance of success if they could scale things back to a single component of the home media server. They finally settled on the killer app of a PVR (”personal video recorder” - their term for the DVR). Having raised angel investment under the original premise they had to go back and explain to their investors why they were stripping things down to a simpler offering. The investors were skeptical because it sounded like a glorified VCR but eventually acquiesced under Ramsay’s persuasion that users would be able to do things like pause live TV and record one show while watching another. TiVo was born and they started hiring engineers to build their product.

The challenges

TiVo was able to attract brilliant engineers early on because what they were doing had never been done before and was a difficult and intriguing problem to solve: making a rugged, cheap consumer device that could do video storage and manipulation and had a dead-simple user interface to record television programs of interest. Ramsay explains the two breakthrough innovations that made it valuable: “How to do simultaneous record and playback, pause and fast-forward and rewind and stuff like that cheaply and efficiently was the key attribute. In fact, that idea of how you implemented that through a device called a media switch and sort of managed all that flow of data - that became part of the Time Warp patent, which was one of our most important patents.”

The second breakthrough was the ability to expose local program guide information to the box in a way that you could reliably record the programs you wanted and not miss the beginning or end of the shows. With 65,000 different program schedules due to all the different permutations of zip codes, cable companies and service flavors, it was a tricky proposition to reliably deliver the program guide information. They had to embed a modem in the unit and have it dial back to a central server to retrieve the program schedule. As challenging as these problems were to solve, once they mastered it they had a significant barrier to competitors.

They also learned a lesson while the product was still young that they needed to have a “safe mode” in which a unit that had been corrupted with a bad software update could automatically “phone home” and re-download a fresh install of the software and reformat itself. They had an incident where a handful of units in the field went bad and they had to manually get things working again. Had this occurred after there were five or even one million units in the field it would have been a catastrophe and most likely meant the end of the company.

Show me the money

TiVo raised more money in funding than most of the companies in the FAW series made on their exit. Over the course of multiple funding rounds with VC’s and a massive $200MM round from AOL, TiVo raised half a billion dollars in funding. Ramsay said, “I would say that one of the reasons that TiVo is thriving today is that we were well-capitalized. We were able to power our way through the downturn- that early 2000 period when Replay went away. We were capitalized enough that we knew we could ride through it. While we had to make a few adjustments to the company, there was never a question that we were going to survive. We knew we were going to survive.”

Not that JumpBox is extraordinarily well-funded at this point but we do finally have a comfortable buffer of money in the bank and I would agree that this takes a huge psychological burden off the people involved. In the very early days we were skating on a home equity line I had done on my house moving small chunks of money each time we had a payroll. Each payday hurt as you’d see your debt going up. Having investors put their belief in you and share some of the risk does miracles for your mental well being and also helps validate what you’re doing to others when it’s difficult to convey the value of a technology they don’t yet understand.

David and Golliath

The press ate up the notion that a tiny tech startup was turning the revenue model of large media conglomerates on its ear by empowering consumers with the ability to skip commercials. They also liked the head-to-head combat of Replay vs. TiVo. The press-worthiness of these two aspects earned them a lot of attention. Even the bad reviews they would get from some of the more demanding technical folks were still added visibility. The “Purple Cow” hook that captivated everyone was the ability to pause live TV. TiVo cleverly packaged the capability of its unit in a fashion that dazzled consumers- this marketing genius was critical to its success.

You don’t have to outrun the bear…

There’s a relevant parable (albeit a bit gruesome) of two campers in the woods who are preparing to go to sleep when they hear the noises of a bear rummaging around their campsite. One camper freezes and exclaims “what are we going to do?” while the other calmly puts his running shoes on. “Don’t be silly, you can’t outrun a bear!” says the freaked-out camper. “I don’t need to outrun the bear,” says the calm guy. The bear in the TiVo story was Hollywood and the skittish camper was Replay TV.

Replay and TiVo were locked in a head-to-head battle for delivering essentially the same product. The reason Replay failed and TiVo ultimately succeeded was that Reply was bear food for Hollywood while TiVo skillfully navigated the boundary of what they could get away with in terms of commercial-skipping technology. Replay built in an automated method to skip commercials while TiVo knew that this would infuriate the companies that depended on selling TV commercials. TiVo kept it to a manual “30sec skip” feature. Replay became the “bait” and the networks punished them with lawsuits. Ramsay said, “Replay probably did us a fabulous favor when they stepped across the line. There’s a line in the sand that those media companies think about. You don’t know where it is, but if you step over it, they’re going to get you. Replay stepped over it by doing automatic commercial skipping. You didn’t even have to fast-forward through the commercials. They just found out where they were and they eliminated them. And they let you share programs over the Internet. That crossed the line. They got sued. They were the bad guy; therefore, we were the good guy.”

Tivo ultimately made friends with the networks and took investment from Disney, Viacom, Discovery Communications, NBC, Showtime, HBO and Time Warner. TiVo IPO’d in 1999 and continues to hold the dominant position of selling the world’s most popular DVR.

This entry was posted by Sean Tierney on Monday, May 14th, 2007 at 12:16 pm and is filed under Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.