TiVo 2013 Annual Report Download - page 77

standalone DVRs to consumers. The BESP of the DVR is established based on the price at which the Company 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 on a relative selling price 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 the Company's 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. The Company continuously monitors 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 the Company's 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, the Company 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 the Company amortized all product lifetime subscriptions over a 60
month period. Effective November 1, 2011, the Company has extended the period it uses to recognize product lifetime subscription revenues
from 60 months to 66 months for product lifetime subscriptions where it has 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. TiVo establishes
allowances for expected subscription cancellations.
Arrangements with MSOs
The Company has two different types of arrangements with MSOs that include technology deployment and engineering services in such
agreements. The Company's 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, the Company recognizes revenue under the general revenue recognition guidance. The
Company determines whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is
reasonably assured. 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 same period as revenue. The Company has 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 element.
In arrangements where the Company does not host the TiVo service and that include engineering services that are essential to the
functionality of the licensed technology or involve significant customization or modification of the software, the Company recognizes 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 the Company believes it is
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. The Company measures 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 continually during the term of the contract, and
revisions are reflected when the changed conditions become known.
In some cases, it may not be possible to separate the various elements within the arrangement due to a lack of VSOE of selling prices for
undelivered elements in the contract or because of the lack of reasonably dependable estimates of total costs. In these situations, provided
that the Company is reasonably assured that no loss will be incurred under the arrangement, the Company recognizes revenues and costs
based on a zero profit model, which results in the recognition of equal amounts of revenues and costs, until the engineering professional
services are complete. Costs incurred in excess of revenues are deferred up to the amount deemed recoverable. Thereafter, any
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