Real Victories Are Won In The Marketplace, Not In The Courtroom

This may sound odd coming from a lawyer, but courtroom victories often have limited value.  In fact, winning legal battles can sometimes do more harm than good.

 In 1999, TiVo invented the DVR, and registered patents to protect its novel ideas.  Initially, TiVo was so successful in bringing its product to market, that the word "TiVo" actually became a verb (a good indicator of massive market acceptance).  If someone said, "I'm going to TiVo that program," you knew that they were digitally recording it so they could watch it later.  By January of 2007, TiVo had about 4.5 million subscribers -- millions of households that had TiVo boxes attached to their television sets, ready to receive all types of digital programming.

Now, only 4 years later, Apple and Sony and Google and Hulu and Roku and Netflix and several other companies are all fighting to be the leader in bringing digital programming to the world's TV's.  Certainly, TiVo is still in that race, but it is struggling to keep up.  TiVo was several years ahead of everyone else and now, when the stakes are becoming meaningful, TiVo is trying to remain relevant.  How did it lose such a huge head start?  

In its most recent quarter, TiVo's revenues are down to $41.3 million, with a net loss of $20.6 million.  It now has about 2.2 million subscribers -- less than half of what it had only 4 years ago and the number is still falling.  In the meantime, Netflix (which started around the same time as TiVo) has close to 17 million subscribers and continues to grow. What happened?

TiVo apparently decided early on that its patents were its most valuable asset - more valuable than a direct relationship with consumers.  This was a critical strategic decision that probably made perfect sense at the time.  TiVo recognized that cable and satellite companies were in the best position to sell or rent DVR's to consumers, so it began licensing its intellectual property to those companies.  But in 2001, Echostar decided it wasn't going to pay a royalty to TiVo.  In January of 2004, TiVo sued Echostar (and its now-former affiliate, Dish Network), and almost 7 years later, the litigation continues.  

And the most ironic (or perhaps saddest) part is that TiVo is winning!   TiVo has prevailed at virtually every stage of the litigation, but Echostar refuses to give up.  Instead, Echostar appeals and raises new issues and makes minor modifications and continues to fight, while all the while the clock is ticking on TiVo's patent rights.  (Echostar did pay TiVo about $100 million at one point in the litigation, but that money is being depleted by operating losses.  With that said, TiVo is not in financial trouble; it has plenty of cash for the time being.)

And while TiVo has enjoyed a lot of legal victories, the fights have not been easy or inexpensive.  In 2009, TiVo filed another patent infringement case against AT&T, and that lawsuit caused Microsoft to file its own infringement action against TiVo!  Then, earlier this year, a portion of the TiVo patents was potentially weakened by rulings in the U.S. Patent and Trademark Office.     

If you had a company that lost $20 million in its last quarter, would you want to be fighting simultaneous legal battles against Echostar and Dish Network and AT&T and Microsoft?  And what impact do you think that would have on your ability to compete effectively against Apple and Sony and Google and Netflix in bringing digital programming to the living rooms of the world?

Just to be clear, my purpose here is not to criticize Tom Rogers and his team.  I understand the importance of protecting intellectual property. (I counsel clients on that topic almost every day.)  Instead, I am pointing out the potential cost to a business when it focuses its resources on winning legal battles.  And I don't just mean its financial resources, but also its time, energy, human resources and the attention of senior management.

Echostar and Dish Network will probably be writing a big check to TiVo some day.  It might be as much as a billion dollars -- who knows?  And TiVo will then have a very healthy balance sheet and rightfully claim victory.   But where will its business be by that time?  If TiVo had viewed itself as a leader in consumer empowerment, and put more of its energy into further innovation of the consumer experience, it might still be leading Netflix, Apple and Google in the digital media business.  But that's not where it finds itself today.

A company's early strategic decisions are vitally important, and now more than ever, it is critical to focus on satisfying your customers.  Netflix decided early on that it was in the business of giving consumers the media experience that they want.  Apple is in the business of giving consumers experiences they don't even know they want until they get them!  Google is in the business of giving consumers access to all the information in the world.  

On the other hand, TiVo made that early decision (before Tom Rogers ever took over) to focus on the value of its intellectual property.  It now appears to be primarily in the business of protecting 10 year old technology that is becoming less relevant every day.  Given the choice, that's not a business I would choose to be in.  I don't think there is much of a future in it, no matter how many legal battles you win.

Recorded Programming Has Not Significantly Altered TV Viewing Habits. Will it ever?

Today's Hollywood Reporter carries an article on the impact of digital video recorders (DVR's) on television viewing habits. The article tracks a study on the topic, and makes a couple of interesting points.

First, although many homes (36%) now have DVR's as a part of the home entertainment system, over 90% of TV viewing is still done in the traditional linear sense. The programs recorded on the DVR are generally treated as alternative programming to be viewed when nothing better is currently available. In other words, viewers still ask "What's on?" and when the answer is "Nothing," then they turn to their DVR.

I'm thinking about what might drive that behavior. Perhaps it is the social aspect of knowing that when you are watching a program at its scheduled time, you're seeing it "first" -- at the earliest possible moment, along with millions of other viewers. It is an experience shared by the fans of that program - each in their own home, but watching together.

When you watch a recording of the same show at a later time, psychologically you know that those millions of other people already know what happened. You are no longer part of the "club;" you don't feel like a true fan of the show. True fans like to be on the cutting edge of the developments in our favorite episodic programs. The DVR takes us out of that club.

When other people are talking about the program at the office the next day, we don't want to be left out of that conversation. In fact, we will probably exclude ourselves from the discussion so we don't hear a "spoiler;" finding out what happened before we get a chance to see it for ourselves. We actually lose a real social touchstone by not having watched the program along with the other fans.

The other point which I found interesting was that even though many programs are available on Hulu or other services, 99% of programming is still watched on the television screen, and not on a computer screen. This doesn't surprise me as truly seamless integration of Internet-based programming into home entertainment systems is just emerging. (I had lunch with Jonathan Handel this week and he told me about a spectacular deal he got on a 1080p with integrated web access. With prices dropping so fast, that technology will surely spread very quickly.)

But when Hulu is just another channel on your television, will the true fans still have a desire to see their favorite programs at the earliest possible moment? Honestly, it's a phenomenon I had not considered before now. I have been assuming that digital technology would eventually eliminate the traditional TV model all together -- that programming would eventually just be produced and released for viewing at each consumers' individual leisure -- one giant YouTube of media. I had actually envisioned traditional broadcasting as a dying medium. In reaching that conclusion, I had completely discounted and ignored the social aspect of broadcast television.

Now, I remember sitting with tens of millions of viewers watching the final episode of MASH, knowing that I was likely part of the largest viewing audience ever. I remember the feeling of knowing that most of the country was simultaneously watching those images and experiencing emotions similar to my own. It was very powerful -- perhaps more powerful than the program itself. Yet, in the face of digital technology, I have been assuming that this "social event" quality of popular programs would be inevitably and easily sacrificed to personal convenience.

Sitting all alone at my computer, in a quiet house in the middle of the night, I am now forced to reconsider. Our actions are motivated first and foremost by our emotions, and perhaps there is an emotional component to broadcast television programming that cannot be recorded on the hard drive of a DVR or computer.