Their Teleworld idea was to sell a new kind of hardware, a home server that not only digitally stored incoming electronic information, including audio and video content, but also linked the gamut of digital devices rapidly becoming commonplace in the home: computers, PDAs, and Internet appliances. Concerned that they might be ahead of the market and that customers would be slow to appreciate the ultimate value of their product, Mike and Jim planned to jump-start the business by giving customers the ability to digitize and store several hours of television programming in a set-top box. Their initial product would be, in effect, a souped up VCR with a clever programming guide. Because of the costly electronic storage requirements, it would carry a hefty price tag.
Their strategy made me cringe. Working at companies like GO and WebTV convinced me that there is no margin in the consumer hardware business. It requires an enormous investment, demands massive distribution, and scales slowly. I believed the value of consumer hardware could be derived only from the services it delivered to the consumer and industry partners (in this case, advertisers, programmers, and networks). The business model inherent in such a strategy, though, is uncertain. If you price the hardware high enough to generate acceptable margins, your product's retail price is too costly to quickly develop the volume of users needed to enable a robust service business. On the other hand, unlike with Internet services and software where there is no or nominal marginal expense for each new user, the cost of subsidizing these pricey boxes to make them affordable in order to accelerate adoption could break the bank. Mike and Jim talked about selling hundreds of thousands of set-top boxes, but that wouldn't build a large enough audience for service providers and advertisers. They would have to sell millions of units, and quickly. If they focused on the boxes, I told them, “your legacy may be that you sowed the seeds of a huge market, which the consumer electronics giants and service providers ultimately reaped.” Pioneer new territory, I cautioned, but don't end up with arrows in your backs.
What a buzzkill I was. They were gracious and thanked me for my candor. As we parted, I couldn't imagine how they would succeed in the hardware business they envisioned, and I never expected to hear from them again. Entrepreneurs, in my experience, don't like to be told they're wrong. It isn't in their dispositions to sit and listen to that kind of critique. That's why many ideas in this Valley happen against all common sense. It's good when entrepreneurs are a little bit deaf and blind, but if they're completely deaf and completely blind—and many are—they're unlikely to learn enough from the market and their advisors to make their vision a reality.
To my surprise, Mike called back a week later, and I agreed to meet again. He and Jim hadn't taken my advice wholesale, but they had carefully considered it and revised their plans where they thought their ideas could be improved. Their new idea, which ultimately became TiVo, was much, much bigger.
In essence, they had evolved the business from a hardware-based model to a service-based strategy. The gist of their big idea was what they called “personalized television.” Using the box and its ability to record programming, they now proposed to build a service that would give viewers complete, individualized control over what they viewed on television and when they viewed it. They would price the box lower to foster sales in higher volume, leaping into a financial no-man's-land in a gamble that they could assemble a marketable audience in time for the service revenues to kick in and more than compensate for their losses on the boxes. How would they make money when each box was priced below cost? Volume—that is, a volume of viewers sufficient to fund a money-making service based on subscriptions, advertising, and commerce. The mix among those revenue sources and the balance between how much would come from consumers and how much would come from industry partners would be determined later. Eventually they believed that the stand-alone hardware and its expense would disappear as televisions and other set-top boxes provided the power and digital storage necessary for personalized television. Then TiVo would be a service provider only, with a much stronger financial model.
I listened to their new idea and realized that if they succeeded, the grid between television programming and network time slots would be broken. If the viewer was watching a show that had been time-shifted, commercials would no longer have a captive audience. The viewer could simply skip forward at will. He could watch a show broadcast Sunday mornings during weekday prime time, and vice versa. Advertisers who paid top dollar for prime-time audiences might or might not reach those audiences any more. With TiVo's box, your time was prime time, anytime you watched. Control would move from the broadcast networks to every single member of the audience. Television would never be the same.
There was more, I realized, because TiVo would be interactive. The service required a phone connection for data transmission and customer support, which created a direct path to and from every single viewer. Viewers would be able to communicate with the TiVo service for a myriad of purposes—at first to express opinions about shows or organize their own lineups and, eventually, if anyone cared, to buy the blouse right off an actress's back. As you watched television, your box would learn what you liked and, if you wanted, automatically find and save it for you. Eventually you would receive only relevant advertising and marketing messages, targeted to your interests. These services depended on sophisticated technology at the back end, but users wouldn't have to know about any of that. It would all be transparent to them.
This was a chance to find value in increasingly segmented audiences. An audience of two million might be worth more than an audience of twenty million, because of what was known about those two million people. Better to send an advertisement for Corvettes to a small audience composed entirely of affluent single males than to a large audience composed mostly of working couples with three kids. Best of all, the audiences' personal profiles would be private and secure, allowing viewers to decide when and if they wanted to share personal information. The possibilities raised by this vision were enormous, but many pieces would need to come together to make it work, and many incumbents in the television business might see the impending changes as a threat and resist.
As I sat in the Konditorei during that second meeting with Mike and Jim, my mind was spinning through the possibilities. I thought, “These guys don't need $20 million, they need $200 million just for starters.” This effort would require experienced leaders, a management team capable of forging a complex set of relationships among advertisers, programmers, broadcasters, and content creators. The team risked making enemies of those behemoths unless they could convince them to join the movement. The incumbents could not be ignored, because their roles in the future of television entertainment would remain critical. It all depended on content, and somebody, somewhere, would have to pay for it. It was unlikely that everything would become pay-per-view, and so the role of advertisers would remain powerful, and then both content and advertising would still need to be distributed by networks and broadcasters. This would require shuttle diplomacy, not simply technological prowess.
I couldn't resist their big idea. When they invited me to help make it a reality, I didn't hesitate. Eventually I joined the executive committee of the board of directors.
For two years, Mike and Jim tirelessly evangelized the industry players, and after their initial alarm, the leaders were intrigued enough by this big idea to offer support. Now TiVo needed to raise a large sum in order to finance its race to roll out the technology and build an audience. It was time to go to Wall Street. We were at today's board meeting to bless this next step, the IPO.