TiVo 2004 Annual Report Download - page 43

Table of Contents
Index to Financial Statements
If we fail to manage our growth, it could disrupt our business and impair our ability to generate revenues.
The growth in our subscription base has placed, and will continue to place, a significant strain on our management, operational and financial resources
and systems. Specific risks we face as our business expands include:
Any inability of our systems to accommodate our expected subscription growth may cause service interruptions or delay our introduction of new
services. We internally developed many of the systems we use to provide the TiVo service and perform other processing functions. The ability of these
systems to scale as we rapidly add new subscriptions is unproven. We must continually improve these systems to accommodate subscription growth and add
features and functionality to the TiVo service. Our inability to add software and hardware or to upgrade our technology, systems or network infrastructure
could adversely affect our business, cause service interruptions or delay the introduction of new services.
We will need to provide acceptable customer support, and any inability to do so would harm our brand and ability to generate and retain new
subscriptions. Our ability to increase sales, retain current and future subscriptions and strengthen our brand will depend in part upon the quality of our
customer support operations. Some customers require significant support when installing the DVR and becoming acquainted with the features and
functionality of the TiVo service. We have limited experience with widespread deployment of our products and services to a diverse customer base, and we
may not have adequate personnel to provide the levels of support that our customers require. In addition, we have entered into agreements with third parties to
provide this support and will rely on them for a substantial portion of our customer support functions. Our failure to provide adequate customer support for the
TiVo service and DVR will damage our reputation in the digital video recorder and consumer electronics marketplace and strain our relationships with
customers and consumer electronics manufacturers. This could prevent us from gaining new or retaining existing subscriptions and could cause harm to our
reputation and brand.
We will need to improve our operational and financial systems to support our expected growth, and any inability to do so will adversely affect our
billing and reporting. To manage the expected growth of our operations, we will need to improve our operational and financial systems, procedures and
controls. Our current and planned systems, procedures and controls may not be adequate to support our future operations and expected growth. For example,
we replaced our accounting and billing system at the beginning of August 2000. Delays or problems associated with any improvement or expansion of our
operational and financial systems and controls could adversely affect our relationships with our customers and cause harm to our reputation and brand. Delays
or problems associated with any improvement or expansion of our operational and financial systems and controls could also result in errors in our financial
and other reporting.
We must manage product transitions successfully in order to remain competitive.
The introduction of a new product or product line is a complex task, involving significant expenditures in research and development, training,
promotion and sales channel development, and management of existing product inventories to reduce the cost associated with returns and slow moving
inventory. As new products are introduced, we intend to monitor closely the inventory of products to be replaced, and to phase out their manufacture in a
controlled manner. However, we cannot assure you that we will be able to execute product transitions in this manner or that product transitions will be
executed without harming our operating results. Failure to develop products with required features and performance levels or any delay in bringing a new
product to market could significantly reduce our revenues and harm our competitive position.
The lifetime subscriptions to the TiVo service that we currently offer commit us to providing services for an indefinite period. The revenue we
generate from these subscriptions may be insufficient to cover future costs.
We currently offer product lifetime subscriptions that commit us to provide service for as long as the DVR is in service. We receive the product lifetime
subscription fee for the TiVo service in advance and amortize it as subscription revenue over four years, which is our estimate of the service life of the DVR.
If these product lifetime subscriptions use the DVR for longer than anticipated, we will incur costs such as telecommunications and customer support costs
without a corresponding revenue stream and therefore will be required to fund ongoing costs of service from other sources. As of January 31, 2005, we had
65,000 product lifetime subscriptions, or approximately 2.2% of our total installed subscription base, that had exceeded the four-year period we use to
recognize product lifetime subscription revenues. If the useful life of the recorder were shorter or longer than four-years, we would recognize revenues earlier
or later. Our product is still relatively new, and as we gather more user information, we might revise this estimated life.
We share a substantial portion of the revenue we generate from subscription fees with some of our retail customers and consumer electronics
companies. We may be unable to generate enough revenue to cover these obligations.
In some of our agreements, we have agreed to share a substantial portion of our subscription and other fees with some of our retail customers and
consumer electronics manufacturing companies in exchange for manufacturing, distribution and marketing support, and discounts on key components for
DVRs. These agreements require us to share substantial portions of the subscription and other fees attributable to the same subscription with multiple
companies. These agreements also require us to share a portion of our
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