TiVo's Big Moment; The pioneer of the digital video recorder tries to dodge its rivals' arrows.

Byline: Brad Stone

Who were the big winners in last week's scandalous Super Bowl halftime show? Certainly retailers of sunburst nipple rings and TiVo, the maker of digital video recorders (DVRs). The TiVo service, a separate box connected to a television set or integrated inside DirecTV satellite receivers, lets viewers skip ads, watch their favorite programs whenever they feel like it and (thank you, Justin ) pause and rewind live TV. After the game, TiVo reported that 400,000 viewers eagerly rewound to watch Janet Jackson's "wardrobe malfunction"--two times per TiVo-equipped household--making it the most replayed moment since the company started using its ability to track viewing trends. The San Jose, Calif., firm put out a press release reporting the numbers, and everyone from Australian newspapers to the "Today" show picked it up.

The exposure over the exposure comes at a welcome time for the six-year-old DVR pioneer. TiVo now faces the classic innovator's fate, taking arrows in the back from bigger, slower rivals. Despite a good year in which it surpassed 1 million users and operating losses significantly shrank, TiVo stock got spanked in December when Comcast CEO Brian Roberts said the country's largest cable company would roll out DVRs--using Motorola's software, not TiVo's--in all its digital cable boxes "big time" by the end of this year. The other major cable companies, like Time Warner and Cox, are also using DVRs made by Motorola and Scientific-Atlanta. TiVo's problem is that it doesn't appear to exclusively own the technology that is so closely associated with its brand. Even DirecTV's owner, Rupert Murdoch, may stray. One of his subsidiaries, NDS Group, has developed its own DVR too. "If Murdoch eventually decides he wants to use his own stuff, TiVo is going to get orphaned," says David Miller of investment bank Sanders Morris Harris.

Mike Ramsay, the Scottish engineer who heads TiVo, isn't waiting around for the rest of the TV industry to outstrip his company. His strategy for TiVo can be split into two parts: rear-guard action in the courtroom while charging ahead with new technology. In January TiVo sued EchoStar, the owner of satellite TV's Dish Network, which, like the cable guys, offers a basic DVR to customers. TiVo claimed EchoStar was violating a patent that covers the way customers delay when they tune in to their favorite shows (watching "The West Wing" on Sunday morning, say, instead of on Wednesday at 9 p.m.). The case is pending in a Texas court, but it may be only the beginning of TiVo's courtroom adventures. When asked if the cable firms also violate TiVo patents, Ramsay says his company has not examined their DVRs carefully but, "to the extent that we're able to determine, yeah, we [think they] do." He adds that he still wants to work with the cable guys--perhaps offering the TiVo service as another option to their customers--and says he's reluctant to litigate instead of compete. (Time Warner and Comcast spokespersons deny they have infringed on TiVo patents.)

The second part of Ramsay's game plan involves quickly enhancing TiVo's assets. Last month TiVo announced the acquisition of a start-up called Strangeberry, which is developing ways to route video over broadband Internet connections to the TV. And TiVo announced a service, called TiVo to Go, which allows users to transfer programs onto their laptops. Ramsay says future versions of TiVo will serve as a digital hub in the home, the storage center for photos, music and video.

What TiVo needs more than anything is more time to strike deals with the cable companies, get its technology into as many homes as possible and develop a service that can't be copied. That's why last month Ramsay also went back to Wall Street and raised an additional $74 million in an equity offering. What will he do with the new lucre? Pour it into R&D and, as he did last week, cut $50 off the price of TiVo boxes. He's hoping that people who heard about TiVo via the Jackson imbroglio will want to get their hands on one.

CAPTION(S): Thanks, Janet: Sincerely, TiVo Inc.

(text/graph) TiVolution: Personal video recorder