TiVo Goes Mainstream With This Big Cable Deal

By Markets Fool.com

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Image source: TiVo.

TiVo has been positioning itself for a fully digital TV market since at least 2012. The pieces of that puzzle are finally coming together, and I'm a happy TiVo shareholder right now.

The latest news comes from mostly rural telecom Frontier Communications . The companies have agreedto pair Frontier's broadband services with a full suite of TiVo's digital media products and services. The whole deal hinges on the TiVo Roamio OTA box, which is the first set-top box to put DVR recording and online streaming capabilities together with over-the-air broadcasts.

Frontier COO (and soon-to-be CEO) Dan McCarthy hailed the TiVo deal as a groundbreaking innovation:

"TiVo's latest generation OTA platform enables us to launch a game-changing new service with delivery of the best of broadcast television, seamlessly integrated with over-the-top video, bundled with Frontier's high-speed data service," McCarthy said in a prepared statement. "We believe this is a model for a cost-effective, far-reaching video service of the future and look forward to it becoming a primary TV offer for our high-speed Internet only customers."

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Did you catch that?
The innovation here isn't the use of TiVo boxes and media management services for an entire cable TV system. This has been done before;while TiVo certainly appreciates that business, this idea is already becoming old hat.

No, the big news here is how Frontier tailored this deal for the benefit of its "high-speed Internet only customers." In other words, Frontier is helping them cut the cord on its lucrative cable channel packages. Customers essentially have Frontier's blessing to replace their traditional TV services with rabbit-ear signals and online streams.

It's a gutsy move for Frontier, and a clean break from old-line industry practices. Cable industry traditionalists might say Frontier is shooting itself in the foot. Those high-margin TV bundles with double or triple play options are the very foundation of the cable industry's basic business model today.

But it's definitely a move in the right direction. The cable-bundle bandwagon can't roll on forever, and Frontier is simply getting ready for the next era of broadcast entertainment. So this deal makes a ton of sense for the company, even if it seems crazy on the surface.

The TiVo connection
For TiVo, it's the first real payoff from several years of game-changing work.

Between 2012 and 2013, the company collected $1.6 billion in litigation settlements around its DVR technology. That money was not handed out to shareholders, nor was it reinvested in more DVR research.

Instead, TiVo doubled down on its media management technologies and started negotiating licensing deals across the globe. The TiVo you see today is not all about DVR hardware, but a shrewd play on next-generation digital entertainment.

TiVo CEO Tom Rogers took some time in the company's most recent earnings call to explain how he thinks about the broadband-only market.

"The operator world is increasingly looking at how does it deal with broadband-only subs that have not been willing to take up video subscriptions from them," Rogers said. "Is there a way that they can relate to them in terms of a video package and our offering there?"

Rogers wants the answer to that question to be a no-brainer "yes." TiVo CFO Naveen Chopra expanded on what to expect from this first foray into cable-less TiVo operations:

"The reality is, it's a new outlet, if you will, for both us and them," Chopra said. "So we probably need to get a little runway behind us before we have a great ability to predict what that adoption will be. Obviously, we're both making a major commitment to it because we think it's going to be very compelling."

In other words, don't hold your breath while waiting for an immediate breakthrough. It's a test market, but nevertheless an important one that will help TiVo hone its plans for similar deals down the road.

What's next?
The Frontier agreement is simply the first example of what I expect to become a TiVo staple over the next couple years. The TV industry is changing, and this company wants to be an important part of that revolution.

The deal could not have happened at a better time for TiVo. Frontier just signed another deal withVerizon, which will more than double the company's customer lists and do wonders for its high-speed broadband ambitions. TiVo gets to tag along on that ride, as Frontier rolls out Roamio OTA hardware and TiVo-branded services to its new Verizon-related markets in Texas, Florida, and California.

The Verizon market buyout should close in mid-2015, which just happens to be when Frontier hopes to have its first TiVo-powered markets ready to go. Great timing, if you ask me.

The article TiVo Goes Mainstream With This Big Cable Deal originally appeared on Fool.com.

Anders Bylund owns shares of TiVo. The Motley Fool recommends Apple and Verizon Communications. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.