TiVo’s Churn: A Closer Look

One stockholder’s take…

In its Q4 earnings release last week, TiVo stated that its churn had increased to 1.2%/month, up from about 0.9%. We took a closer look at this number and found some interesting results. When we did our financial analysis for ZNF in December, we devoted Appendix A to deriving real churn numbers from the data TiVo has provided. Recall that we found the churn for recurring subscribers to be about 1.38%/month. Also recall that “Lifetime” subscribers do not churn until 1) the end of the four-year period TiVo uses to amortize their revenue, and 2) the box has not contacted the TiVo service for six months. We discovered that Lifetime subscribers exhibited a “bulk churn” (i.e., an immediate churn at the end of the four-year period) of about 19%, and an ongoing churn of the fully-amortized subs of about 1.2% per month. (Both the recurring and Lifetime churn can be bigger than the total churn number TiVo provides because TiVo includes the entire body of lifetime subscribers, including those not fully amortized.)

At the end of Q3, TiVo had 138,000 fully-amortized Lifetime subscribers. At the end of Q4, that number was 166,000. But in the four-year-ago period, TiVo added approximately 50,000 Lifetime subscribers, meaning that without churn, the fully amortized number would have been 188,000. Thus, there were about 22,000 lifetime subscriptions cancelled in Q4. This result requires a significant bump in both bulk and ongoing churn of the Lifetime subscribers (we’re using 27% and 2.2%, but the numbers are interdependent and could therefore be any combination that results in the same total churn).

That leaves 40,000 cancellations of recurring subscribers which, when divided by about 955,000 (average) recurring subs during the quarter, gives us a churn of recurring subscribers of about 1.4%/month – nearly unchanged from the average over the trailing twelve month period.

These results are significant for two reasons:

1. The increase in churn seen in Q4 was the result of Lifetime subscribers (who pay nothing to TiVo), not the recurring subscribers (who pay a monthly fee). This result is surprising and seemingly counterintuitive, but could be explained by the fact that TiVo’s oldest subscribers (who, at the time they subscribed were taking the lifetime option at a rate of about 2:1 over recurring fees) are most likely part of the early-adopter crowd, and that crowd is now moving to HD.

2. The financial consequences of losing Lifetime subscribers is actually positive – these subs no longer provide any revenue except as advertising targets, and the cost of servicing them is greater than that revenue. As long as they are being replaced by recurring-fee subscribers, TiVo’s ARPU and margins will benefit. If you have to have churn, this is the kind to have.

Once again, we see the positive results from TiVo CEO Tom Rogers’ introduction of minimum service commitments and the elimination of the Lifetime service option. While these moves have unquestionably slowed subscriber growth rates, they continue to pay dividends in terms of the financial health of the company.