TiVo 2013 Annual Report Download - page 48

Table of Contents
pricing practices. When determining BESP for a deliverable that is generally not sold separately, these factors are also considered.
TiVo-enabled DVRs and TiVo service
TiVo sells the DVR and service directly to end-users through bundled sales programs through the TiVo website. Under these bundled
programs, the customer receives a DVR and commits to a minimum subscription period of one to three years or product lifetime and has the
option to either pay a monthly fee over the subscription term (monthly program) or to prepay the subscription fee in advance (prepaid
program). After the initial committed subscription term, the customers have various pricing options at which they can renew the subscription.
The VSOE of selling price for the subscription services is established based on standalone sales of the service and varies by service
period. We are not able to obtain VSOE for the DVR element due to infrequent sales of standalone DVRs to consumers. The BESP of the
DVR is established based on the price that we would sell the DVR without any service commitment from the customer. Under these bundled
programs, revenue is allocated between hardware revenue for the DVR and service revenue for the subscription using on a relative basis,
with the DVR revenue recognized upon delivery, up to an amount not contingent on future service delivery, and the subscription revenue
recognized over the term of the service.
Subscription revenues from product lifetime subscriptions are recognized ratably over our estimate of the useful life of a TiVo-enabled
DVR associated with the subscription. The estimates of expected lives are dependent on assumptions with regard to future churn of product
lifetime subscriptions. We continuously monitor the useful life of a TiVo-enabled DVR and the impact of the differences between actual churn
and forecasted churn rates. If subsequent actual experience is not in line with our current assumptions, including higher churn of product
lifetime subscriptions due to the incompatibility of its standard definition TiVo units with high definition programming and increased
competition, we may revise the estimated life which could result in the recognition of revenues from this source over a longer or shorter
period. Prior to November 1, 2011 we amortized all product lifetime subscriptions over a 60 month period. Effective November 1, 2011, we
have extended the period we use to recognize product lifetime subscription revenues from 60 months to 66 months for product lifetime
subscriptions where we have not recognized all of the related deferred revenue as of the reassessment date.
End users have the right to cancel their subscription within 30 days of subscription activation for a full refund. We establish allowances
for expected subscription cancellations.
Arrangements with MSOs
We have two different types of arrangements with MSOs under technology deployment and engineering services agreements. Our
arrangements with MSOs typically include software customization and set up services, limited training, PCS, TiVo-enabled DVRs, non-
DVR STBs, and TiVo service.
In instances where TiVo hosts the TiVo service, we recognize revenue under the general revenue recognition guidance. We determine
whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. Revenue
recognition is deferred until such time as all of the criteria are met. Elements in such arrangements usually include DVRs, non-DVR STBs,
TiVo service hosting, associated maintenance and support and training. Non-refundable payments received for customization and set up
services are deferred and recognized as revenue ratably over the longer of the contractual or customer relationship period. The related cost of
such services is capitalized to the extent it is deemed recoverable and amortized to cost of revenues over the longer of the contractual or
customer relationship period. We have established VSOE of selling prices for training, DVRs, non-DVR STBs, and maintenance and
support, based on the price charged in standalone sales of the element or stated renewal rates in the agreement. The BESP of TiVo service is
determined considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs,
and gross margin objectives. Total arrangement consideration is allocated among individual elements on a relative basis and revenue for
each element is recognized when the basic revenue recognition criteria are met for the respective elements.
In arrangements where TiVo does not host the TiVo service and which include engineering services that are essential to the functionality
of the licensed technology or involve significant customization or modification of the software, we recognize revenue under industry specific
software revenue recognition guidance. Under this guidance, such arrangements are accounted for using the percentage-of-completion
method or a completed-contract method. The percentage-of-completion method is used if we believe we are able to make reasonably
dependable estimates of the extent of progress toward completion and the arrangement as a whole is reasonably expected to be profitable. We
measure progress toward completion using an input method based on the ratio of costs incurred, principally labor, to date to total estimated
costs of the project. These estimates are assessed
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