Why did the iPod win and TiVo lose?

April 27, 2011, 9:00 AM UTC

By Kevin Kelleher, contributor

FORTUNE — A decade ago, two products were introduced that would change the way we consume media. One of them allowed us to carry hundreds, even thousands of songs around in our pocket so we could listen to whatever we wanted whenever we wanted. It was called the iPod.

The other device allowed us to record dozens of television shows on a digital hard drive, allowing us to watch whatever we wanted whenever we wanted. It was called TiVo (TIVO).

At the time, both had a lot in common. Apple (AAPL) wasn’t the first to introduce an mp3 player and had to compete with Creative Labs’ Nomad Jukebox. TiVo launched its digital video recorder in 1999, the same year ReplayTV and Microsoft (MSFT) launched similar products.

Soon, both products established small, but rabidly loyal fan bases that spread good word of mouth. Both were powered by software that was not only easy to use, but remarkably intuitive. Both products were hailed in 2004 as new technologies that would disrupt stodgy, complacent old media giants.

And that’s where the similarity ends. Today, the fate of the iPod and the TiVo recorder couldn’t be more different. The iPod mp3 player grew up to become the iPod Touch (and the iPhone, which is an iPod Touch with phone service). Apple has moved onto to the next front in its battle for digital dominance, taking on Google’s (GOOG) Android ecosystem in both the smartphone and tablet categories.

And TiVo? The good news is that TiVo won an appeals court ruling last week in its patent lawsuit against Echostar’s Dish Network (DISH). The bad news is that this is pretty much the only good news: TiVo is a company about patents and not so much about getting innovative products to consumers.

The divergent fates are evident in Apple’s and TiVo’s financial statements. Revenue from the iPod and iPod Touches totaled $1.6 billion in Apple’s most recent quarter (while iPhone revenue topped $12 billion). Tivo’s revenue declined 19% to $55.8 million in its most recent quarter, largely because it continues to lose subscribers.

TiVo lost a net 556,000 subscribers in its last fiscal year, causing its total subscribers to decline by 21% to to 2.05 million. In a filing with the SEC, the company said it believes the decline “was largely due to continued pressure on subscription gross additions resulting from increased competition from DVRs distributed by cable and satellite.”

Cable and satellite providers have offered cheaper, dumbed-down versions of TiVo boxes for years, with the result of digital video recorders becoming mainstream devices without the most innovative pioneer, TiVo, sharing in the success of the market it helped create. The iPod dominated the mp3 market, and helped shape its evolution into newer markets, like smartphones.

So why did the iPod succeed while the TiVo box floundered? There are a few key reasons.

For one, Apple simply has more wherewithal to push the iPod. In April 2005, Apple had a $10 billion market cap, dwarfing TiVo’s $700 million value. Apple buttressed the iPod’s word of mouth with an aggressive, seductive ad campaign. And it had built a strong, global brand as well as a core constituency of hard-core customers for its computing products. TiVo had none of these advantages.

So when Apple critics initially dismissed the iPod as an overpriced mp3 player that would lose share to cheaper rivals, Apple proved them wrong. The iPod was by far the best designed player on the market, just as TiVo was the best DVR on the market, but Apple’s brand, fan base and  marketing skills enticed millions into paying the premium.

Meanwhile, cable companies like Comcast (CMCSA) were marketing their own DVRs to their customers. The cable company interfaces were (and still mostly are) clunky, and while consumers liked the freedom to record shows for later, they simply couldn’t be persuaded to pay more for a superior alternative like TiVo.

Apple also had iTunes, its proprietary software that let iPod users purchase and manage their music collections. iTunes was much more than this, however: It was pitched to music labels as a viable response to music piracy — certainly much better than any solution the industry had come up with. This helped Apple win over not just consumers, but the providers of digital music.

TiVo had no such allure to television programmers. Instead, its software made it a snap for people to skip ahead 30 seconds — a little feature that scared TV executives into thinking the TV commercial was an endangered species. Few DVRs offered by cable companies allowed users to skip commercials without a complex reprogramming of their remotes.

So TiVo is left with a superior DVR technology, and a shelf full of patents for many of its features. If TiVo does prevail in its lawsuits against Dish, it could bring in as much as $3 billion in a settlement. And it could give the company a war chest to take on other pay-television providers who sell Tivo knockoffs to their subscribers.

For TiVo, that would be a happy enough ending. But it would fall far short of the disruptive potential the company held just a few short years ago. And watching Apple move into the digital set-top box market with Apple TV must be a bitter pill to swallow. Had fate turned out a little differently, TiVo might be a successful company with big new products –say, a smartphone that could compete with the iPhone.

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