Why TiVo Is Struggling While Netflix Is Thriving

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The good news that came out of TiVo (s tivo) this week was that, encouraged by an initial $105 million patent-infringement ruling against DISH/Echostar (s dish), the company is now suing AT&T (s t) and Verizon with similar complaints. The bad news is that this is what passes for good news at TiVo these days.

Actually, there was worse news. TiVo’s net subscriptions fell by 146,000 as it lost more customers than it signed up — for the ninth straight quarter. According to TV By the Numbers, TiVo now controls less than 10 percent of the DVR market it helped to create. But as much as TiVo may be entitled to the lawsuits’ proceeds, patent claims are a long, costly and not terribly innovative way to make money.

So it’s interesting to compare TiVo’s fate with that of Netflix, another upstart that’s helped to change how we watch video over the past decade. Both improved the video experience and grew by positive word of mouth. Both endured years of stock volatility amid investor skepticism. Both were positioned to weather, if not benefit from, the recession as consumers seeking to spend less watched more video entertainment in their homes.

But the two don’t seem like kindred companies anymore. As TiVo’s customer base has shrank, Netflix’ subscribers have been growing at an annual rate of around 25 percent for the past several quarters. Cheaper, if less sophisticated, DVRs from cable and satellite providers hurt TiVo’s prospects.

And Netflix? In the five years it took TiVo to fight Dish/Echostar in court, Netflix has used its DVD-by-mail business as a base on which to slowly build an online audience -– without interference from cable or satellite TV providers. And while Netflix has long faced a deep-pocketed competitor in Blockbuster (s bbi), it’s done an admirable job of not only holding its own but taking market share away from the retailer.

The key difference in their approaches seems to lie in just how much they’re willing to pay to grow and maintain a customer base. In a way, Netflix’s Watch Now is a very crude on-demand video service, especially when compared with TiVo’s software. Netflix could have made it fancier, but it focused on price competition with Blockbuster.

As a result, Netflix is in a position to keep innovating in streaming video, forging relationships like the one it has with Microsoft’s (s msft) Xbox as well as TiVo itself, and may be seeking similar tie-ups with other companies. The market for streaming broadband content to TVs and other devices is still young and growing slowly. Netflix’s patient approach, coupled with its focus on keeping prices low, is likely to serve it well in the long run.

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