TiVo 2011 Annual Report Download - page 12

We outsource the manufacturing of our products to third-party manufacturers. This outsourcing extends from prototyping to volume manufacturing and
includes activities such as material procurement, final assembly, test, quality control, and shipment to distribution centers. Today the majority of our products
are assembled in Mexico. Our primary distribution center is operated on an outsourced basis in Texas.
The components that make up our products are purchased from various vendors, including key suppliers such as Broadcom, which supplies system
controllers. Some of our components, including system controllers, chassis, remote controls, hard drives, and certain discrete components are currently
supplied by sole source suppliers.
We often require substantial lead time to purchase components and manufacture anticipated quantities of DVRs that enable the TiVo service. This long
lead time requires us to make component purchasing and inventory decisions well in advance of our peak selling periods. We offer our individual end-users
who purchase from TiVo.com a 30-day money back guarantee. We typically do not offer a right of return or significant extended payment terms to our
retailers.
Seasonality
Sales of our TiVo-Owned DVRs and subscriptions to the TiVo service are affected by seasonality. Thus, we generate a significant number of our annual
DVR sales and new TiVo-Owned subscriptions during and immediately after the holiday shopping season with associated increases in revenue. We also incur
significant increases in expenses in the second half of the year related to hardware costs, revenue share and other payments to channel, and sales and
marketing, subscription acquisition costs in anticipation of the holiday shopping season. There is less seasonality associated with our MSO customers.
Competition
We believe that the principal competitive factors in the advanced television market, which includes DVRs and other broadband enabled consumer
electronic devices are brand recognition and awareness, functionality, ease of use, content availability, and pricing. We currently see two primary categories
of competitors for the TiVo-Owned channel: DVRs offered by satellite, cable, and telecommunications operators and advanced television products and DVRs
offered by consumer electronics and software companies.
Competition in the TiVo-Owned Subscription Business. Our retail products compete in the United States against services sold directly by cable,
telecommunications, and satellite operators including DISH (formerly “EchoStar”), DIRECTV, Comcast, Time Warner Cable, Verizon, and AT&T. These
products typically combine pay television reception with DVR functionality; most of these products include multiple tuners, high definition recording, and in
some cases multi-room viewing capability. Some of these products are offered at lower prices but in many cases are bundled with other services provided by
the operator and the price for the DVR and DVR service may not be apparent to the consumer. In addition, these products are usually professionally installed
and may appeal to consumers who do not proactively select a DVR service. Additionally, many U.S. cable operators are currently deploying Video on
Demand technology, which over time could serve as a substitute to our retail products. We are aware of at least one U.S. cable operator, Cablevision, Inc.,
which is deploying remote storage-based DVR products. To the extent that cable operators offer regular television programming as part of their server-based
VOD offerings and DVR technology, consumers may prefer not to acquire an independent set-top based DVR through retail channels.
Our retail products also compete against products with on-demand internet-enabled services offered by consumer electronics companies including:
•Personal computers: Microsoft based PCs and Apple products (among others) enable a variety of entertainment features and services which offer
alternatives to traditional DVR services, primarily via internet delivery of content.
•Broadband capable devices and game consoles: We are seeing a proliferation of broadband enabled devices, such as connected televisions,
“smartphones”, single purpose broadband set-top boxes and gaming consoles that offer broadband delivered content. Though these devices do not offer the
breadth of the TiVo service, they do offer alternative ways to access internet-delivered video content through devices that many consumers may seek to
acquire for other purposes. For example, many consumer electronics companies have television or DVD products that are internet enabled and others have
built dedicated devices for accessing video over the internet such as AppleTV and GoogleTV. Similarly, companies such as Sony and Microsoft have now
enabled the digital delivery of video programming over the internet to their game consoles.
Competition in our MSO business. Our MSO revenues depend upon both our ability to successfully negotiate
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