(FORTUNE Magazine) – When Mike Ramsay and Jim Barton co-founded TiVo in 1997, they could only have dreamed that three million people would one day use digital video recorders. But now that it has happened, TiVo is facing a depressing reality: It may become the latest in a long line of technology pioneers that see competitors run away with the riches. It'll join the fellow who wrote the original DOS operating system--no, not Bill Gates--and of course the founders of Netscape, to name just two.

First, the good news. TiVo's service, which gives customers a huge array of recording and viewing options, including the much-noted ability to pause live programs, has attracted a million users. In its most recent quarter TiVo added 209,000 subscribers, more than twice as many as it signed up in the previous quarter. Sales for the first nine months of 2003 totaled nearly $100 million, a 35% year-over-year jump.

But the company has yet to make a profit. Worse, TiVo's overall DVR share is about a third and shrinking, according to Forrester Research. The market has been flooded by cheaper, more efficiently distributed products, including a set-top cable box made by Scientific-Atlanta that doubles as a DVR. The cable-box maker shipped more than 500,000 units in its first year. Cable companies like Time Warner Cable (which, like FORTUNE, is owned by Time Warner) are distributing the boxes to customers free in return for a monthly service charge that ranges from $5 to $9. (Buying a TiVo at retail costs a minimum of $199, plus $13 a month for programming data.) And a host of ultracheap DVRs made by manufacturers like South Korea's LG Electronics are about to hit retail stores.

But TiVo is not planning to go quietly. In January it sued EchoStar, which has deployed a million DVRs to its satellite customers, for patent infringement. Should TiVo prevail, that will help its licensing business. (Sony, Toshiba, and others are paying TiVo for its technology; manufacturers like Scientific-Atlanta and LG are not. They say they're not infringing on TiVo's intellectual property. Courts may provide more clarity.)

Elsewhere TiVo is unveiling a set of product improvements, including its own recordable DVDs, services that allow users to program TiVos from a remote PC, and a hard-drive "key" that allows users to transfer programs from their TiVo to their PC for later viewing. The company also has debuted advertising on its programming guides, which allows viewers to see ads for soon-to-be-released movies and new cars. "We've taken some pretty strong steps to go beyond the DVR," says TiVo's Ramsay. Besides, he says, "we're in such an early phase of this technology, where there is so much upside, that to think DVR technology doesn't go forward from here is wrong."

No doubt. And TiVo has the brand name and intellectual property to stay relevant for a while yet, but as with so many other pioneers, its best shot at survival may be if some heavyweight (in this case, perhaps existing partners DirecTV or Sony) buys the company. --Adam Lashinsky