Market Insight

TiVo to acquire Digitalsmiths

March 03, 2014

Stelios Kotakis Stelios Kotakis Senior Research Analyst, Service Provider Technology

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Set-top box (STB) and middleware vendor TiVo is to acquire Digitalsmiths, a search and recommendation engine company for $135m in cash, in a transaction expected to be completed during Q1 of 2015. Tivo develops and supplies STBs, middleware and applications for the pay TV market, while Digitalsmiths, through its Seamless Discovery platform, offers user preference and mood-based personalized search and recommendations for connected devices. All Digitalsmiths’ management key members will continue to work under TiVo.

Our Take:

The acquisition is likely to serve several strategic purposes for TiVo. First of all, Digitalsmiths is an attractive business for Tivo purely on financial terms. Digitalsmiths grew solidly at around 75 per cent in 2013, and the business has consistently had a high gross margin which means that the company can serve as an existing revenue stream for TiVo. Secondly, Digitalsmiths can extend TiVo’s subscriber reach and increase the number of operators it has direct deals with. Digitalsmiths currently has deals with seven of the top ten US pay TV operators, including DirecTV, Dish and Time Warner. However, where the acquisition becomes more interesting is perhaps the strategic overlap between the two core businesses.

TiVo has for several years repositioned itself from a hardware plus software company to an application and features company, taking efforts to move towards a more scalable, cloud-based service platform and focus towards running high-value features off a centralised or box-based system. As Tivo has become more platform and function oriented the need for search and recommendation expertise became increasingly apparent. Many modern and advanced STBs especially Multimedia Home Gateways (MHGs) already include recommendation engine functionality integrated as part of their delivered User experience (UX). Digitalsmiths has approached the industry as a specialist in metadata creation and management specifically for search and recommendation, both of technical and contextual metadata. Its go-to-market has been as a software platform and cloud-based service. This ties in very well with Tivo’s strategic planning both on technology level and on business model level. The combined capabilities of the two companies will be able to offer an integrated solution for pay TV operators, content owners and consumer electronics manufacturers promoting advanced user experience with cloud-based search and recommendations adjustable to any single user profile.

However, a more subtle opportunity for Tivo is that Digitalsmiths has become a very successful back-end and B2B brand, providing opportunities ‘under the hood’, while Tivo has maintained a clear consumer-facing brand. This may allow Tivo to offer more products to more operators through white-label software and services, rather than Tivo branded platforms. The other side to this opportunity is that Digitalsmiths search and recommendation features could be made a core and differentiation part of Tivo’s platform, creating a stronger tie-in for operators to buy all Tivo’s offered products in one.

This acquisition also rationalises the relevance of content discovery and search features to present and future pay TV user experience (UX). Pay TV today is no longer a broadcast-only practice with content confined to a few linear channels, but a flexible experience with added content choices as well as content sources including VoD and DVR. Since, there is more content to choose from, searching and discovering programmes has become relatively more complex for the end user - which is a challenge to be addressed. Personalisation based on user-specifications and other factors, also known as a recommendation engine, is one approach to address the challenge. Amongst other features, a recommendation engine  effectively shortlists content choices based on user specifics such as past viewing habits, gender, audience reviews, and age and demographics. Processing of these tasks and performing other relevant functions (for example, searching through hundreds of thousands of video assets and analysing audience responses across multiple large databases) is a computationally intensive task. This reiterates the importance of cloud use in pay TV environments, as this required extra computational power isn’t usually present even in more advanced and modern STBs.

Although, the acquisition rationale is TiVo-specific in many ways as outlined above, the practical use case for searching and discovering content itself extends its relevance to a wider industry use. Therefore, IHS believes that the pay TV solutions market presents a tendency for such kind of integrated offerings and future is likely to see more of similar integrated offerings which could come as a result of mergers, acquisitions or even transformations amongst market players.

North America
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